[Senate Hearing 107-144]
[From the U.S. Government Publishing Office]
S. Hrg. 107-144 (Pt. 3)
NATIONAL ENERGY ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
TO RECEIVE TESTIMONY ON PROPOSALS RELATED TO REMOVING BARRIERS TO
DISTRIBUTED GENERATION, RENEWABLE ENERGY AND OTHER ADVANCED
TECHNOLOGIES IN ELECTRICITY GENERATION AND TRANSMISSION, INCLUDING
SECTION 301 AND TITLE VI OF S. 597, THE COMPREHENSIVE AND BALANCED
ENERGY POLICY ACT OF 2001; SECTIONS 110, 111, 112, 710, AND 711 OF S.
388, THE NATIONAL ENERGY SECURITY ACT OF 2001; AND S. 933, THE COMBINED
HEAT AND POWER ADVANCEMENT ACT OF 2001 AND TO RECEIVE TESTIMONY ON
PROPOSALS RELATING TO THE HYDROELECTRIC RELICENSING PROCEDURES OF THE
FEDERAL ENERGY REGULATORY COMMISSION, INCLUDING TITLE VII OF S. 388,
TITLE VII OF S. 597; AND S. 71, THE HYDROELECTRIC LICENSING PROCESS
IMPROVEMENT ACT OF 2001
PROPOSALS RELATED TO GLOBAL CLIMATE CHANGE
COMPREHENSIVE ELECTRICITY RESTRUCTURING
__________
JULY 19, 2001
JULY 24, 2001
JULY 25, 2001
JULY 26, 2001
__________
PART 3
Printed for the use of the
Committee on Energy and Natural Resources
______
U.S. GOVERNMENT PRINTING OFFICE
76-057 PDF WASHINGTON : 2001
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida DON NICKLES, Oklahoma
RON WYDEN, Oregon LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California CONRAD BURNS, Montana
CHARLES E. SCHUMER, New York JON KYL, Arizona
MARIA CANTWELL, Washington CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware GORDON SMITH, Oregon
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Brian P. Malnak, Republican Staff Director
James P. Beirne, Republican Chief Counsel
Deborah Estes, Counsel
Mary Katherine Ishee, Counsel
Shirley Neff, Staff Economist
Leon Lowry, Professional Staff Member
Bryan Hannegan, Staff Scientist
Howard Useem, Senior Professional Staff Member
C O N T E N T S
----------
Page
Hearings:
July 19, 2001................................................ 1
July 24, 2001................................................ 109
July 25, 2001................................................ 169
July 26, 2001................................................ 261
STATEMENTS
July 19, 2001
Bettenberg, William, Deputy Director, Office of Police Analysis,
Department of the Interior..................................... 58
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 1
Birnbaum, S. Elizabeth, Director, Government Affairs, American
Rivers......................................................... 78
Boyd, Robert T., Vice President, Enron Wind Corporation.......... 21
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 2
Demeter, Christian P., Chief Executive Officer, Antares Group,
Inc............................................................ 25
Garman, David K., Assistant Secretary, Energy Efficiency and
Renewable Energy, Department of Energy......................... 5
Gray, Gerald J., Vice President for Policy, American Forests..... 90
Hall, Mark, Vice President, External Affairs, Trigen Energy
Corporation.................................................... 29
Keil, Julie, Director of Hydro-Licensing and Water Rights,
Portland General Electric Company.............................. 95
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 12
Robinson, J. Mark, Director, Office of Energy Projects, Federal
Energy Regulatory Commission................................... 68
Starrs, Thomas J., J.D., Ph.D., Senior Partner, Kelso Starrs and
Associates, L.L.C.............................................. 36
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 4
July 24, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 109
Blake, Francis, Deputy Secretary of Energy....................... 113
Burns, Hon. Conrad, U.S. Senator from Montana.................... 127
Campbell, John B., Vice President, AG Processing, Inc., Omaha, NE 138
Cassidy, Frank, President and COO, PSEG Power LLC, Newark, NJ.... 143
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 133
Gebolys, Gene J., President, World Energy Alternatives, LLC,
Chelsea, MA.................................................... 149
Hagel, Hon. Chuck, U.S. Senator from Nebraska.................... 110
Hill, Gardiner, CO2 Program Director, BP.............. 146
Johnson, Hon. Tim, U.S. Senator from South Dakota................ 136
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 132
Lyons, James R., Professor, Yale School of Forestry and
Environmental Studies, New Haven, CT........................... 151
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 111
Risbrudt, Christopher, Acting Associate Deputy Chief for Programs
and Legislation, Forest Service, Department of Agriculture..... 116
July 25, 2001
Ayers, Jeffrey D., Senior Vice President and General Counsel,
Aquila, Inc.................................................... 184
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 169
Blake, Francis, Deputy Secretary of Energy....................... 170
Burns, Hon. Conrad, U.S. Senator from Montana.................... 182
Cook, David N., General Counsel, North American Electric
Reliability Council............................................ 245
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 177
Dushaw, James L., Director, Utility Department, International
Brotherhood of Electrical Workers.............................. 225
English, Glenn, Chief Executive Officer, National Rural Electric
Cooperative Association, Arlington, VA......................... 204
Hamilton, David, Policy Director, Alliance to Save Energy........ 228
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 175
Nugent, William M., Commissioner, Maine Public Utilities
Commission, and President, National Association of Regulatory
Utility Commissioners.......................................... 219
Rouse, James B., Associate Director of Energy Policy, Praxair,
Inc., and Chairman, the Electricity Consumers Resource Council. 235
Rowe, John W., President and Co-Chief Executive Officer, Exelon
Corporation, on behalf of the Edison Electric Institute........ 189
Thilly, Roy, Chief Executive Officer, Wisconsin Public Power,
Inc., on behalf of the American Public Power Association....... 195
Ward, Stephen, Public Advocate, State of Maine, and President,
the National Association of State Utility Consumer Advocates... 240
July 26, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 261
Breathitt, Linda, Commissioner, Federal Energy Regulatory
Commission..................................................... 280
Brownell, Nora Mead, Commissioner, Federal Energy Regulatory
Commission..................................................... 292
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 262
Hebert, Curt, Jr., Chairman, Federal Energy Regulatory Commission 274
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 302
Massey, William L., Commissioner, Federal Energy Regulatory
Commission..................................................... 283
Salisbury, Jennifer, Secretary of Energy, Minerals and Natural
Resources, State of New Mexico, on behalf of the Western
Governors' Association......................................... 263
Wood, Patrick III, Commissioner, Federal Energy Regulatory
Commission..................................................... 288
APPENDIXES
Appendix I
Responses to additional questions................................ 313
Appendix II
Additional material submitted for the record..................... 317
NATIONAL ENERGY ISSUES
----------
THURSDAY, JULY 19, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. We have a two-part hearing today. In the
first half we will discuss legislative proposals to address
some of the barriers that currently inhibit the market
penetration of distributed generation technologies, including
distributed power from renewable energy.
This cluster of clean and efficient technologies includes
fuel cells, wind, photovoltaics, and microturbines. In contrast
to electricity produced at large central powerplants, which
travels over transmission and distribution lines to reach the
ultimate consumer, distributed generation is smaller in scale
and produces electricity at or near the site where it is to be
used.
Distributed power is automatically 7 to 10 percent more
efficient than central station power, because that is how much
electricity is lost in the transmission process. It has become
an increasingly attractive option for customers who demand a
power source with high reliability and who want to control
their peak demand or to use renewable energy.
The second half of the hearing will address hydroelectric
relicensing legislation. Non-Federal hydropower represents 5
percent of all electric power generated in the United States.
It provides a far greater percentage of the electric power
generated in California, in the Pacific Northwest, and in New
England. Relicensing of non-Federal hydropower projects
involves many stakeholders and raises significant energy and
resource protection issues.
Now we have been working with Senator Craig to try to craft
legislation to provide an appropriate balance on these issues.
We look forward to the testimony to help flesh out all the
issues involved.
Let me call on Senator Craig for any opening statement that
he has.
[The prepared statement of Senator Bingaman follows:]
Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
Good morning.
We have a two part hearing today. In the first half we will discuss
legislative proposals to address some of the barriers that currently
inhibit the market penetration of distributed generation technologies,
including distributed power from renewable energy.
This cluster of clean and efficient technologies includes fuel
cells, wind, photovoltaics and microturbines. In contrast to
electricity produced at large central power plants, which travels over
transmission and distribution lines to reach the ultimate consumer,
distributed generation is smaller scale and produces electricity at or
near the site where it will be used.
Distributed power is automatically 7 to 10% more efficient than
central station power because that is how much electricity is lost in
the transmission process. It has become an increasingly attractive
option for customers who demand a power source with 99.999 percent
reliability, want to control their peak demand, or to use renewable
energy.
While some electric utilities view DG as competition, many can see
its benefits. Here's what one CEO of a major electric and gas utility
has to say about distributed generation. ``NiSource believes that as
the PC was to the mainframe, distributed generation will be to
traditional power generation. Distributed generation will create a new
electric industry by mitigating transmission gridlock, diminishing the
need for siting and funding new generating stations, easing the strain
on distribution, providing for premium or back-up support services and
improving the emissions profile of generation portfolios.'' (Gary
Neale, CEO of NiSource, Inc., ``Utilities Benefit from Distributed
Generation'', utilitybusiness.com, January 2001.)
This hearing will also explore the potential for increasing the
contribution renewable energy can make to our energy supply portfolio.
Renewable energy resources are plentiful throughout the United States
as the maps on this chart from the President's National Energy Plan
demonstrate. New Mexico for example has abundant wind, geothermal, and
solar resources which can be particularly important for those who live
far from existing power lines or gas pipelines. I should also note that
eight of the ``Big 12 Wind States'' are represented on this committee.
(ND, SD, MT, NE, WY, OK, CO and NM).
The second half of the hearing will address hydroelectric
relicensing legislation. Non-Federal hydropower represents 5 percent of
all electric power generated in the United States, but provides a far
greater percentage of the electric power generated in California, the
Pacific Northwest, and New England.
Relicensing of non-Federal hydropower projects involves many
stakeholders, and raises significant energy and resource protection
issues. I have been working with Senator Craig to try to craft
legislation that will provide an appropriate balance on these issues,
and I look forward to today's testimony to help further flesh out some
of the issues involved.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Well, Mr. Chairman, thank you very much. I
do appreciate the work that is going on in an effort to address
these important issues. I am, as you know, particularly
interested in the panel that will address the hydro-licensing
reform.
I appreciate your support in helping to resolve the
problems currently and pending through an effort to create an
efficient review of the non-Federal hydroelectric licensing
applications at FERC.
Mr. Chairman, Congress has been reviewing FERC's hydropower
relicensing program for the better part of 4 years. The
Senate's hearing record on this issue is replete with evidence
that FERC's process lacks balance, is costly, cumbersome, and
often convoluted. And a few examples, I think, include a
typical project can take 8 to 10 years, as compared to a gas
fired project that takes 18 months.
Federal resource agencies set environmental conditions
without equal consideration of projects, economies, the energy
benefits, the flood control, the navigation and other values
protected by different Federal statutes. The inability of FERC
to act as a referee to reconcile these conflicting requirements
and a process that often results in higher and higher cost with
major loss in project operational flexibility that adversely
affect the ability to meet critical peak loads has to be a
major concern of this committee.
We have learned with this painstaking review, Mr. Chairman,
that the commission's hydroelectric licensing process does not
produce optimum decisions because of, in the words of some
courts, this rather unorthodox system of shared authority that
is sanctioned by the Federal Power Act is a problem. I have
introduced legislation, as you know, in the 105th, 106th and
now the current Congress to address the problem. The latest
iteration of that legislation is S. 71.
Like its previous forms, it does nothing to erode the
environmental principles established by Congress in the
Electric Consumers Protection Act of 1986. It emphasizes, or, I
should say, reemphasizes, the Federal Power Act's requirement
for balance in government review of licensing applications.
Indeed, Mr. Chairman, S. 71 underscores the requirement
mandated in the Electric Consumers Protection Act that the
Federal Government equally consider all of the issues
associated with hydropower projects throughout the Nation. The
precise language added to section 4(e) of the Federal Power Act
by the Electric Consumers Protection Act reads in part as
follows: ``In deciding whether to issue any license under this
part of any project, the commission, in addition to the power
and development purposes for which licenses are issued, shall
give equal consideration to the purposes of energy,
conservation, the protection mitigation of damage to and
enhancement of fish and wildlife.''
Mr. Chairman, what is often overlooked is that Congress
separated the word power from the word development. Development
purposes under the Federal Power Act include navigation,
irrigation and flood control, words that define issues of
commerce, food production, and safety. What is truly
astonishing, Mr. Chairman, is the fact that, under current
practice and policy, Federal resource agencies have no legal
requirement to consider effects on commerce, food production,
and public safety when developing conditions for hydro
projects.
In my judgment, this is an absurd statutory requirement
that simply cannot stand. Congress must require that Federal
resource agencies consider these issues before developing and
issuing conditions that will be imposed on licensed projects.
Well, Mr. Chairman, I have more to say, and I will add it
to the record. But I think very clearly what we are all wanting
to achieve is accountability. And that has to be the
cornerstone of a responsible government and a responsible
government process. Federal resource agencies must be held
accountable, not only for the protection of fish and wildlife,
but also for public safety and commerce consequences of the
conditions they ultimately impose on hydro projects.
We are going to hear from witnesses this morning on this
issue, both the pros and cons of the issue, and legislation
that I have introduced and the cooperative effort that we are
working under now to try to see if we cannot resolve this to
make the process at least in the whole less costly, more
predictable and, I would trust, more accountable.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Let me ask if Senator Thomas has any opening statement.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Thank you, Mr. Chairman. I will just try
and be very brief. I am very much interested in this hearing
and what you are doing.
Welcome to the Assistant Secretary. Nice to see you, sir.
I think it is a good idea to talk about this approach to
some of our electric needs. I do, however, want to share with
you that I hope we can also focus on that portion of our
electric production that is most important, that brings us the
most, and that is what comes from larger generator plants. And
so I hope we do not get diverted entirely over into these other
things, which are there in the future but are not really--we
need to be talking about the kind of fuels we are going to use
for generation.
If coal is our longest lasting fuel and one that can be
most used there, are we going to be able to use it in this
distributed generation? I do not think so. So we ought to take
a look at that, it seems to me.
We ought to have more research, perhaps, on the ones that
are providing generation now. I mean, you look out there at
wind, and I am all for that. I think we ought to be looking at
it. But here all these are, and here is 40 megawatts, you know,
when we are really knocking about 2,500 is what we really ought
to be having somewhere.
A power grid. We have to be talking more about the power
grid. I think it is up to us to deal with a nationwide one. Who
is going to own it? You mentioned the efficiency of distributed
generation. Perhaps that is the case. Maybe we ought to be
looking at line loss. There is line loss. But I have to tell
you, I think a 2,500 megawatt generator is probably more
efficient than a 15 or 20 in most any circumstances. And so we
have to take a look at those things.
I think we have to look at the re-regulation thing. We have
not talked about that much in terms of distribution and what we
are going to do with electricity.
So I guess my point is, I think this is very important, and
I am very much a part of it. But when we are talking about
resolving the demands for power needs this year, next year,
five years from now, this is not going to be the total answer.
And we also need to be looking at that base supply that I think
is so very important. So I am interested in what you are doing
here.
The Chairman. Well, thank you very much. I appreciate that
statement.
Secretary Garman, you are a regular here. You are here as
much as you used to be when you worked here. But we are very
glad to see you again. Why do you not go right ahead?
STATEMENT OF DAVID K. GARMAN, ASSISTANT SECRETARY, ENERGY
EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY
Mr. Garman. It is a pleasure to be here. Thank you for this
opportunity to testify on legislative provisions designed to
address some of the barriers that exist to the deployment of
distribution generation and renewable energy technologies. The
time is right for us to be thinking about these issues, not
only because energy supplies and price issues are so acute, but
because we have to confront important decisions about an aging
electricity and energy infrastructure.
Half of the installed transformer banks in the United
States are reaching retirement age. More than two-thirds of our
boilers in electrical plants are at least 30 years old and more
than 40 percent are 40 or more years old or older. Electric
energy losses are increasing as we try to push more power
through transmission and distribution systems where, at their
maximum, losses can be 10 times higher than normal.
The decisions we make over the next several years will
strongly influence the energy supply, energy security, economic
strength and environmental future of our country for years to
come.
With regard to the legislation before the committee today,
we are likely to support much of it provided it is part of a
balanced, comprehensive approach that also addresses energy
efficiency, supply, and infrastructure issues, as in the
national energy policy document.
At this time, I would like to address each of the major
provisions under consideration. First, with respect to
renewable energy resource assessments, these are extremely
useful tools that are used by developers, landowners, local
officials to determine their options and renewable resource
potential.
[Chart.]
You can see some representations of very large-scale
efforts here in this chart. And we have to continue, and in
some cases intensify, our efforts in these areas. A suggestion
about the legislation: The requirement in the legislation that
has us do these things on an annual basis could divert
resources from other high-priority efforts.
In the case of solar, wind and geothermal, the resource
really does not change that much from year to year. And
updating these assessments once a decade using 30-year averages
is probably adequate. So we request that the language be
modified to allow the department to undertake these assessments
on an as-needed basis, taking into account market conditions,
cost, available technology to do them, and other relevant
factors.
Second, with respect to Federal renewal purchase
requirements that are in the legislation before us, section 602
of S. 597 would require from 3 to 7.5 percent of the Federal
Government's electric power be purchased from renewable energy
resources. We share the view that the Federal Government offers
significant potential as the Nation's largest electricity buyer
in this area. And we support the establishment of goals.
Just a couple of weeks ago, the Secretary of Energy
announced that the Department, through Bonneville Power
Administration, would sign pre-development agreements for seven
new wind power projects to provide an additional 830 megawatts
of generating capacity in the energy-strapped West. This
initiative would provide us with enough electricity to power
270,000 homes and would represent about 20 percent of increase
in the Nation's wind power supply.
So we are working to make these purchases for ourselves and
our customers of our power marketing administrations. And we
are doing it because it makes good economic and environmental
sense. However, because the choice of purchasing renewable
power does not yet exist in many areas of the country, absolute
percentage purchase requirements, such as those contained in
the bill, could unduly benefit the seller in a Federal power
purchase negotiation.
Therefore, until such time that retail competition and
greater purchaser choice is available, we urge that the
committee express renewable energy use goals rather than
absolute requirements in their legislation. We also recommend
that section 602 be modified to add renewable energy
derivatives, such as renewable energy credits or green tags,
under the definition of renewable energy source.
Third, with respect to residential renewable energy grant
program, as I think is proposed in S. 389, we recognize that
higher initial capital costs are often a barrier to the
purchase of renewable energy systems. But rather than a grant
program, as proposed in the Murkowski bill, we favor the
alternative approach, a tax credit, as recommended in the
national energy policy document.
Fourth, with respect to interconnection standards, the
administration supports the concept of uniform and enforceable
interconnection requirements that will apply to both
distribution and transmission systems. We have been working for
the past couple of years supporting industry through the
Institute of Electrical and Electronic Engineers, or IEEE, to
develop voluntary national interconnection standards.
As we proceed with the consideration of legislation, it is
important to take into account potential jurisdictional issues,
particularly with regard to providing backup service and the
requirement that distributed facility owner-operators pay costs
associated with the interconnection. Those are issues that have
traditionally been under the purview of State utility
regulators. In the legislation, you might want to consider
providing some guidance about how the State utility regulator
can act to determine the reasonableness of cost terms and
conditions related to interconnection standards.
Fifth, net metering. The administration supports the
concept of net metering, but recognizes that these decisions
have also historically fallen under State jurisdiction. As with
interconnection standards, net metering will improve the
economic viability of wind, geothermal, solar and other
renewable and distributed energy projects.
To conclude, because I see the red light, today's energy
system was designed in a regulated environment around central
power stations. It was not designed to send real pricing
signals to consumers, nor was it designed to accommodate
distributed generation or consumer choice. Our shared challenge
is to transform that system into a more efficient one that can
do all of these things and more.
Fortunately, with some of the tools of the information age,
we are starting to envision just how a more open, flexible, and
responsive market might be created. The provisions in the
legislation under consideration today are thoughtful attempts
to address some of the key obstacles to the widespread adoption
of renewable and distributed generation technologies, as cited
in the President's National Energy Policy. And we look forward
to working with the committee and the staff on this
legislation.
I will be pleased to answer any questions that the
committee has either this morning or in the future. Thank you.
[The prepared statement of Secretary Garman follows:]
Prepared Statement of David K. Garman, Assistant Secretary, Energy
Efficiency and Renewable Energy, Department of Energy
Thank you for the opportunity to testify on S. 597, Title VI;
Sections 710 and 711 of S. 389; and S. 933. These legislative
provisions propose to address some of the barriers that exist to the
deployment of distributed generation and renewable technologies.
The President's National Energy Policy (NEP) contains a discussion
of distributed energy technologies particularly relevant to today's
hearing. Interconnection standards, net metering, land-use zoning codes
and other barriers to distributed generation are discussed in chapter
six of the NEP. Other barriers to distributed generation are also
highlighted; including the difficulty of permitting some combined heat
and power projects.
By removing barriers related to interconnection standards, net
metering, purchases of renewable energy, and combined heat and power,
we can increase the efficiency of our electric system by making
distributed energy resources more practical in the marketplace. Because
distributed resources put electricity generation closer to its point of
use, they can help overcome some of the generation, transmission and
distribution problems we are experiencing today in some areas of the
country.
This is a critically important time, not only because energy supply
and price issues are acute, but because demand is growing even as we
confront important investment decisions with respect to an aging
electricity infrastructure. For example:
Half of the installed transformer banks in the U.S. are
reaching retirement age;
More than two-thirds of our boilers and electric power
plants are at least 30 years old, and more than forty percent
are 40 years or older;
Electric energy losses are increasing as we try to push ever
more power through our electric power transmission and
distribution system where, at maximum capacity, losses can be
ten times higher than normal;
By 2009, 6 of the country's 10 electricity regions--serving
about 65 percent of U.S. customers--will fall below the
traditional power industry standard of a 10 percent ``safe
reserve'' capacity margin without substantial increases of new
power generation; and
By 2020, EIA estimates that U.S. electricity requirements
will more than double from today's 700,000 megawatts to
approximately 1,500,000 megawatts.
The decisions we make over the next few years will strongly
influence the energy supply, energy security, economic strength, and
environmental future of our country for years to come. Our goal should
be to replace and expand our domestic energy supplies, develop advanced
and highly efficient systems to deliver this energy, and improve end-
use energy efficiencies. As we revitalize and expand our national
energy infrastructure, renewable and distributed energy technologies
can help reduce transmission system congestion and energy losses by
placing energy generation at or near the point of consumption.
With respect to the specific provisions in legislation before the
Committee today, I would note that they are all thoughtful and well
intentioned. With some modifications, we are likely to support many of
them if they are part of a balanced, comprehensive approach that also
addresses energy efficiency and infrastructure issues as contained in
the National Energy Policy document.
At this time I would like to address each of the major provisions
under consideration.
renewable energy resource assessment [sections 601 of s. 597,
and 711 of s. 389]
Section 601 of S. 597 and Section 711 of S. 389 call for an annual
assessment of renewable energy resources. These sections focus on
development of a renewable resource inventory that would create a
useful tool for project developers, landowners, and state and local
elected and appointed officials to determine their resource potential
as well as future development options.
We have already developed some renewable energy resource
inventories that have been used to site wind farms and other renewable
energy projects. However, the requirement in the legislation that these
be done on an annual basis would divert resources from other high
priority efforts. In the case of solar, wind and geothermal, for
example, the resource does not change appreciably from year to year.
Updating these resource assessments once a decade using 30-year
averages is probably adequate. Biomass, on the other hand, might
benefit from more frequent updates due to changes in annual crop yields
and types.
Also, a solar resource assessment is far different than a
geothermal assessment, which in turn is different than a wind or
biomass assessment. Current approaches to doing these assessments cost
up to $5 million each and take from two to three years to complete. We
hope to employ new technologies to reduce costs and/or enhance the data
collected. We request that the language be modified to allow the
Department to undertake these assessments on an as-needed basis after
periodic reviews, taking into account market conditions, cost,
available technology, and other relevant factors.
federal purchase requirement [section 602 of s. 597]
Section 602 of S. 597 would require from 3 percent to 7.5 percent
of the Federal Government's electric power be purchased from renewable
energy resources.
We share the view that, as the nation's largest single energy user,
the Federal Government offers a significant potential market for
renewable energy products, and the Administration supports the
establishment of goals for this purpose. The existing goal pursuant to
Executive Order 13123 is that 2.5 percent of the federal government's
electricity use should be derived from specified renewable resources by
the year 2005.
Last month, Secretary Abraham announced that the Department of
Energy, through the Bonneville Power Administration, would sign pre-
development agreements for seven new wind power projects to provide an
additional 830 megawatts of generating capacity in the energy-strapped
West. This initiative would produce enough electricity to meet the
needs of nearly 270,000 homes, and it represents an approximately 20
percent increase in the nation's wind power capacity.
Just this week, I signed a letter of intent to purchase renewable
power under the EPA's Green Power Partnership for the National
Renewable Energy Laboratory. It is my hope that more than 7 percent of
the power supplying this facility will be from renewable resources by
the end of the year, the bulk of it coming from new resources. So we
are working to make these purchases for ourselves and for the customers
of our power marketing administrations, and we are doing it because it
makes good business and environmental sense.
However, because the choice to purchase renewable power does not
yet exist in many areas of the country, absolute percentage purchase
requirements such as those contained in section 602 of S. 597 could
unduly benefit the seller in a federal power purchase negotiation.
Therefore, until such time that retail competition and greater consumer
choice is available, we urge that the Committee express renewable
energy use goals rather than absolute requirements in legislation.
Moreover, these goals should be for electricity used, not just
electricity purchased as some federal entities might have the ability
to generate electricity from their own renewable resources on federal
land. Finally, the renewable power purchase costs should be reasonable.
Section 602 limits hydroelectric generation to include only the
capacity achieved from increased efficiency or additions of new
capacity at an existing hydroelectric dam. We believe all hydroelectric
can be properly termed renewable energy. However, if the purpose is to
promote new renewable generation, we recommend modifying the language
in order to avoid precluding Federal power purchases either from an
existing dam that presently has no hydroelectric capability that could
be developed, or hydroelectric power from any new facility that might
be developed.
We also recommend that section 602 be modified to add ``renewable
energy derivatives, such as renewable energy credits or green tags''
under the definition of ``renewable energy source.''
residential renewable energy grant program [section 710 of s. 389]
Residential renewable energy systems dependent on solar or wind are
free of the fuel price volatility problems associated with conventional
energy technologies. However, higher initial capital costs are often a
barrier to wider acceptance and usage of these systems. Section 710 of
S. 389 would establish a Residential Renewable Energy Grants program,
which would provide incentives for the purchase and installation of
residential renewable energy systems.
Because such a grant program would be subject to annual
appropriations, the uncertainty of consistent appropriations would send
confusing signals to the market. Small manufacturers offering
residential renewable energy systems would find it difficult to
anticipate appropriations levels and subsequent demand. Thus, they
would face difficulty planning capital expenditures to ensure that
enough systems would be available in the marketplace.
The alternative approach of a tax credit, as recommended in the
National Energy Policy document, is not subject to the uncertainty of
the annual appropriations process and would send a stronger, more
certain signal to the market. Specifically, we believe that a 15
percent tax credit for residential solar, up to a maximum of $2000, is
a superior approach to a grant program that may or may not be funded on
a consistent basis.
interconnection standards [section 603 of s. 597 and section 4 of s.
933]
The Administration supports the concept of uniform and enforceable
interconnection requirements that will apply to both distribution and
transmission systems.
Distributed electricity generation can offer customer benefits such
as increased reliability, uninterruptible service, energy cost savings,
and on-site efficiencies. However, adding new small grid-connected
generating facilities to an existing electricity grid developed around
centralized generation will require innovative approaches to managing
and operating new distributed energy resources. Customers, vendors and
developers of these new technologies cite interconnection barriers
including technical, institutional and regulatory policies as some of
the principal obstacles separating them from commercial markets.
Current interconnection requirements vary from state to state. In
addition, except in the few states that have enacted legislation or
regulations to address the interconnection of distributed energy
resources with the utility system, interconnection standards can also
vary from utility to utility. A national interconnection standard would
reduce uncertainty, lower costs, and facilitate deployment of modern
distributed generation technologies such as fuel cells, photovoltaics,
wind, and microturbines. It would also remove one of the barriers to
combined heat and power, a technology that has the potential to double
the efficiency of our energy production by utilizing the heat that
would normally be wasted by combustion technologies or fuel cells in
the process of generating electricity.
The Department has been supporting efforts by industry through the
Institute of Electrical and Electronic Engineers (IEEE) to develop
voluntary national interconnection standards. This effort has been in
effect for the past several years and has involved extensive working
group deliberations involving staff from electric utilities as well as
equipment manufacturers and distributed energy project developers. The
technical standard being developed by the IEEE could very well provide
a basis for the rule making process called for in both bills and, at
the minimum, should be referenced to ensure that the progress that has
been made by this group is not lost or duplicated unnecessarily.
In addition, there are potential jurisdictional issues that should
be considered, especially with regard to providing back-up service and
the requirement that the distributed facility owner or operator pay
costs associated with the interconnection. Such service and rate issues
traditionally have been the jurisdiction of State utility regulators.
In this regard, the legislation perhaps should provide clearer guidance
about how the State utility regulator can act to determine the
reasonableness of costs, terms and conditions. We also should be aware
that several States have already established rules which not only
address the technical requirements for interconnection, but also
address in some detail the related business terms and conditions and
allocation of costs. These generally treat small distributed generation
projects very favorably, exempting them, for example, from the costs of
engineering studies or liability insurance. We would not want any
Federal legislation to undo this progress.
net metering [section 604 of s. 597]
The Administration supports the concept of net metering,
recognizing that these decisions have historically fallen under state
jurisdiction. As with interconnection standards, net metering will
improve the economic viability of wind, geothermal, solar and other
renewable and distributed energy projects, help meet our growing
electrical demand and cut power bills for small businesses and families
across the country.
To increase the economic viability of a distributed renewable
energy project, an effective net metering provision should ensure a
fair market price for power generated on site, and remove the burden
for an on-site generator to procure, install and maintain additional
equipment. Section 604 of S. 597 has attempted to address those issues.
We would note, as a technical observation, that the definition of
``net metering service'' is overly specific. In some cases, multiple
meters need to be used to correctly account for time of use charges or
when electronic meters (which do not spin backwards) are in use.
Consequently, we suggest striking the words ``through the same meter
through which purchased electricity is received.''
Additionally, under subsection (a) (2), the Committee might wish to
consider removing fuel cells as part of the definition of a ``renewable
energy resource'' and creating a separate clean energy category. Fuel
cells in and of themselves are not a renewable resource, but rather
fuel cells utilize hydrogen that can come from a variety of sources.
While cost-effectively producing hydrogen in large quantities from
renewable resources is a long-term DOE Hydrogen Program objective, most
fuel cells today use either a reformate or hydrogen extracted from a
fossil fuel such as natural gas. Using fuel cells in combined heat and
power mode increases fuel use efficiency for electric generation from
33 percent efficiency to more than 70 percent efficiency. Thus, you
might want to consider a separate category for other specified high
efficiency residential energy systems such as fuel cells and other
micro combined heat and power.
access to transmission by intermittent generators [section 605 of s.
597]
The Administration supports the goal of ensuring fair access to
transmission by intermittent generators such as wind and solar energy.
I am informed that the Federal Energy Regulatory Commission is actively
looking at this matter, and thus we should avoid being overly
prescriptive in the statute to give FERC needed flexibility to address
this problem.
conclusion
Today's electricity system was designed in a regulated environment
around central power stations. It was not designed to send real pricing
signals to consumers, nor was it designed to accommodate distributed
generation or consumer choice. Our shared challenge is to transform
that system into a more efficient one that can do all that and more.
Fortunately, with some of the tools of the information age, we are
starting to envision just how a more open, flexible, and responsive
market might be created.
The provisions in the legislation under consideration today are
serious and thoughtful attempts to address some of the key obstacles to
the widespread adoption of renewable and distributed generation
technologies cited in the National Energy Policy. We look forward to
working with this Committee and its staff on legislation in this area.
I will be pleased to answer any questions you may have in this regard
both this morning and in the future.
The Chairman. Thank you very much. Let me ask about a
concept that I have become increasingly focused on here just in
the last few weeks, as I have studied this whole set of issues.
And that is a proposal that has been kicking around now for
several years, to try to impose something in the nature of a
fossil fuel efficiency standard so that we would not be picking
as between one source of power versus another.
We would essentially be saying that it is in our national
interest to have power produced efficiently. And whether that
was from a large generating plant that Senator Thomas referred
to that produces 2,500 megawatts or a small plant and whether
it used coal or whether it used natural gas or whether it used
some other source, our interest is seeing that there is more
efficiency.
This chart that you brought the other day and that you have
again, typical electricity losses, I think makes the point very
persuasively that an awful lot of what goes in in the way of
fuel to produce power and heat winds up being lost in
conversion. And it seems to me that we have a real interest as
a Nation in reducing that inefficiency and promoting more
efficiency.
Is this something you have looked at or you have any
position on?
Mr. Garman. Well, I have in the context of climate change.
I remember when former Senator Bennett Johnston was kicking
around a very similar idea. And there are some interesting
notions to it. And it is intriguing in the sense that driving
efficiency upward is a good goal. But there are a couple of
cautions.
One has to be very careful in looking at the intersections
of existing environmental statutes with an efficiency goal. You
could kind of think of it as cafe standards for fossil fuel
powerplants in a way, where you have good performers and bad
performers, but your goal would be to drive the efficiency
level upward.
You have to look very carefully at the interaction with
existing environmental laws. For example, the Clean Air Act
requirement that you drive down the oxides of nitrogen requires
you to use selective catalytic reduction that actually uses a
lot of energy and, similarly, the impact of new source review.
Right now, new source review is an impediment, a regulatory
impediment, to trying to drive efficiency in a plant upward
because you are afraid to make your plant more efficient
without triggering new source review.
The Chairman. Well, would that not be a--I mean, could you
not argue that if we were to adopt a fuel efficiency standard,
that would then bring pressure to bear to change the new source
review process?
Mr. Garman. It easily could, because if you did not, if you
failed to consider the existing environmental laws, if you on
one hand had one law that says we want you to make your plant
more efficient, and you had another law that said we are going
to force you to use selective catalytic reduction, you know,
imposing an energy penalty and making your plant less
efficient, you really squeeze this plant. So you would have to
deal with some of those aspects to be successful.
The Chairman. Okay. I think those are very good comments. I
appreciate those. Let me ask about your comments here about the
Department of Energy support for the IEEE process to develop
uniform technical standards for interconnection. I obviously
favor anything being done on a voluntary basis that we can get
done on a voluntary basis.
I am just wondering, though, when we expect this standard
to be promulgated and implemented. And is there something that
we should be doing in the Congress or in the administration to
see to it that it happens sooner rather than later?
Mr. Garman. We are watching this very carefully. The IEEE
is trying to promulgate this standard during this calendar
year. I think they are going to miss it. I think they will
probably promulgate the standard very early in the next
calendar year.
They are working on a variety of technical requirements and
is an important point. Texas, New York, California, Delaware,
Vermont and others have implemented or are considering a
distributed generation rule. And they are looking to the IEEE
with a view of adopting those standards when it is ready. I
think the States are looking for some uniform guidance in this
area. And they will take advantage of it when it is available.
In terms of--you know, the one thing that we want to be
very careful with in the context of Federal legislation is that
the States have done some very good things on distributed
generation. Some of them have said, we are not going to charge
pre-interconnection study fees for people who want to do
distributed generation, and we are not going to charge stranded
charges for distributed generation.
So we want to be very careful not to undo with Federal
legislation some of the very good things that have been done at
the State level.
The Chairman. Are you confident that the IEEE standard that
is being developed is not going to undo some of those good
things?
Mr. Garman. No, because it is just a technical standard, as
I understand it, in and of itself. It looks at items such as
voltage regulation, distribution, frequency disturbances,
harmonics, and other kinds of technical aspects of the actual
interconnection.
The Chairman. So if the IEEE were able to get a uniform
technical standard, is it your thought that we should look at
having a uniform set of provisions built on the best practices
that have been adopted in the States?
Mr. Garman. At the technical level, perhaps. I am a little
concerned about the one-size-fitting-all aspect. Different
areas and different utilities have different situations. And I
am not certain that a Federal uniform standard that deals with
some of the ancillary nontechnical issues, like cost of service
charges, backup power provisions, and some other things that
probably should be handled at a more local level.
The Chairman. Okay. Thank you very much.
Senator Murkowski.
STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you very much, Senator Bingaman.
And good morning, David. How are you?
Mr. Garman. Good morning, Senator.
Senator Murkowski. Recognizing that the purpose of the
hearing today is to address FERC's hydroelectric licensing
process and those related so-called distributed generation, it
is my opinion that we are going to have to make some changes in
procedure. I gather that over the next decade we are going to
be looking at about 200 existing projects with a capacity of
some 24,000 megawatts come up for relicensing.
There is probably going to be some new projects proposed.
And many of these are going to be out west. As a consequence, I
would appreciate, and perhaps you have already commented--and
if you have, I apologize. But nevertheless, I think it is fair
to say that FERC's licensing and relicensing process needs a
significant and dramatic improvement. It takes too long, costs
too much. Decision making is scattered among different Federal
agencies. And the end result is often a reduction of the
project's ability to produce power when needed.
We were able, through your efforts and others, to get a
five megawatt exemption in our State of Alaska simply because
the cost of pursuing FERC licensing could almost run as high as
a quarter of the project cost, as we saw in Cordoba, I believe.
I am wondering if we could address through FERC some changes
and still maintain the adequate oversight of something like a
one-stop-shopping procedure that would balance the competitive
interests. This has been advocated for some time by both the
Democratic and Republican Chairman of FERC. But I am aware that
it is controversial.
I think Senator Craig, Larry Craig, has introduced such
legislation, which would restore balance by requiring the
Federal resource agencies, the Department of the Interior,
National Marine Fisheries, and the Forest Service, to consider
the economic, as well as the energy, impact on the mandatory
terms they impose on FERC licensed projects. This certainly
seems reasonable to me, because, you know, we have a tremendous
conflict from time to time by these agencies based on their
philosophical role or turf areas or so forth.
We have seen situations in Glacier Bay National Park where
you are familiar with the opportunity to have a small hydro
project in a wilderness or, in effect, have extended diesel
generation provide the necessary power source. And you get into
the merits of, well, now what are you better off with, and are
you breaking a covenant by making exception for carving out
this small hydro. And it is a terrible, terrible, costly,
lengthy process. And we do not seem to be able to get to a
level where somebody can make a decision and move on with it.
And we all support renewable energy as part of the overall
energy mix. But when we consider proposals, I think we have to
be mindful of the consequences. And I wonder what your comments
are on that.
And then I will conclude with a reference to PURPA. Of
course, it was enacted to promote alternative energy generation
without adversely affecting consumers. That was--of course,
hindsight is 20/20. And PURPA probably could not be enacted
today knowing what we know now. Some have seen the opportunity
to take advantage of PURPA and simply finance their project
based on the take or pay clause. And as a consequence, that was
not what it was intended to do.
Accordingly, before we act on these provisions, we want to
be sure that we have full understanding of the potential long-
term consequences for consumers and customers as well. So I
guess among our concerns with witnesses later is to judge the
various proposals on the benefit to the consumers by reducing
price. Do they reduce regulation and do they streamline
regulation?
I would appreciate any comments you might care to make. And
I am holding an article that appeared in the New York Times
today. It says, ``California's new problem is suddenly a
surplus of energy.'' We seem to go from feast to famine around
here.
I guess any forecasts you could care to make, commenting on
whether this is a temporary euphoria or simply a misprint,
would be appreciated.
Mr. Garman. You have raised a number of questions. Let me
start with hydro. And while I was not invited or asked to talk
about the hydro bill, I do have a comment about it. Currently,
hydro produces nine percent of our electricity. Our total
renewable production is around 11 percent.
My goal, of course, is to increase the use of renewable
energy. It would be a terrible thing to see the amount of
renewable energy that we generate decline during our watch. I
could triple wind, double solar. But if the problems associated
with hydro relicensing drove down hydro, we could have a net
loss of renewable energy in this country during my tenure. And
that is the last thing that I want to see.
So I applaud the Congress, as you work, try to work,
through this problem, because it is incredibly important that
we solve it to keep hydro a viable resource.
You alluded to PURPA, which is not a very elegant way of
dealing with the renewable energy issue. A more elegant way,
and the focus of our efforts, frankly, is research and
development to bring down the cost of renewable energy
resources and make them competitive in the marketplace. We have
a tremendous success story with respect to wind. Wind energy in
some areas of the country is competitive head-to-head with gas.
And the focus of our effort will continue to be to focus
research and development in our national lab to bring down the
cost of these technologies so that they can compete head to
head in the marketplace.
And I see the red light. So I had better stop there.
Senator Murkowski. And you are not going to comment on
California?
Mr. Garman. I am not going to be a forecaster because I
would be in a different line of work.
Senator Murkowski. You would be in the fortune-telling
business.
The Chairman. I would just point out, it is not feast to
famine, it is famine to feast.
Mr. Garman. That is fair enough.
The Chairman. Senator Thomas.
Senator Thomas. Thank you. You know, we talk about these
things that you cannot help but wonder, since our job is to, I
think, is to try and set policy so that the private sector will
have a basis in which to operate. You talked about efficiency.
If you go ahead and get some competition, if you have an
electric grid where people can enter to compete, then they are
going to be efficient, because the market will drive that.
So I guess my question basically is, what do you see as the
division between our energy that is placed here on probably our
future things, as opposed to the more immediate needs? And we
are not going to be able to fill the need with the growth in
demand, I do not think, do you, with wind energy?
Mr. Garman. Well, you know, wind has an important role to
play.
Senator Thomas. Sure.
Mr. Garman. But you are right. Currently, the wind
generation and solar together is producing a very tiny fraction
of our total energy.
Senator Thomas. That does not mean it is not important and
that we ought not to do it. But I think we need to--I think we
are sometimes letting ourselves get a little diverted away from
doing the things that we can do now to meet our needs, as we
look at things that are at this point a little in the future.
For example, you talked about the efficiency and the line
loss. Is there not an opportunity to reduce line loss
considerably and perhaps even reduce the need for transmission
lines by making the capacity of those lines much higher? Is
that not a possibility?
Mr. Garman. There are those possibilities. And also, the
possibility of employing new technology, such as the super
conducting cables that we have in place today under the streets
of Detroit in one example, in an R&D program, in a
demonstration program, that we have going on. There are
technologies that can address some of these issues.
Senator Thomas. I guess that--and I am like you, I am all
for these--I always remember somebody saying we never run out
of fuel in our history. We always found something different.
And we will find something different. But I hope we do not
divert our attention entirely from doing what needs to be done
to meet needs as we look at the future.
This distributed--I was just reading something from home
that is kind of interesting, Mr. Chairman. In the new methane
gas fields, they need electricity. And it is very difficult to
build lines in there. So they are using generators in a
distributive way. This lady, she is complaining about the
noise. ``I think my horses are going deaf,'' she says, ``from
all the noise of these generators that are around doing this
small part.'' Kind of interesting.
At any rate, thank you. I hope we can divide our focus to
the future and what we need and not get out of line with doing
the things that have to be done.
Mr. Garman. But if I could just make one point, because
this is an important point. Because so much of our electricity
infrastructure is nearing the time of its retirement, this is
an important time to think about the future. And it is an
important time to think about the way we can refashion our
energy delivery system to allow for a more perfect market and
allow market forces to really come into play.
Right now, market forces are not really allowed to come
into play. We have----
Senator Thomas. In some places.
Mr. Garman. Well, yes. But for instance, there is a big
difference in time of use power. Peak power obviously costs a
lot more than base load power. And yet the bill that consumers
get in most areas of the country, the overwhelming majority of
the country, is one flat rate. If consumers had a market signal
that would allow them to differentiate the cost of peak power
and the cost of non-peak power, they might be inclined to do
some load shifting and some other things that would save them
money.
Senator Thomas. The fact of the matter is, for most
residences the cost is not the power, the cost is the
distribution. You are not going to change--now a large user,
what you are saying is, of course, exactly right. But I am a
little concerned that, you know, you are right about the fact
that we have not upgraded facilities. But largely because we do
not have a policy that encourages people to invest. And if we
continue to act like we do not need these basic facilities,
then we are not going to have the investment in them. And I
think we are going to find ourselves in real problems.
Anyway, thank you.
The Chairman. Senator Hagel.
Senator Hagel. Mr. Chairman, thank you. And I am glad my
distinguished colleague from Wyoming with the write up of the
lady's horses. We have the same problem in Nebraska. It is a
real problem.
It is nice to see you again, Mr. Secretary.
Mr. Garman. Good to see you, Senator.
Senator Hagel. Picking up a bit on what Senator Thomas was
talking about, could you develop a bit what you see as long-
term possibilities in the sense of, as you have laid out this
morning in your testimony, potential for renewables? But
Senator Thomas was getting into an area that I think is pretty
important. How much tax incentive, government incentive,
dynamic will be required in the out-years to develop
renewables, such as solar and wind? Are we kidding ourselves a
little bit here on it is all kind of interesting and new and
fresh, and we must pursue it absolutely?
But have you lined out at all over the next 25 years asking
the ultimate question when and if these renewable sources of
energy, of power production, will be able to stand on their own
in fact in the marketplace, as the Senator from Wyoming talked
about? Develop that a bit for us.
Mr. Garman. Okay. And it is a very complicated question
because there is no one or two policies that we can pursue
that, by themselves, will make a huge impact in renewable
energy. We actually have to do a lot of things. Some of you may
have seen, for instance, the solar house on the mall not too
long ago. That solar house was destined for a place, an
electric cooperative, in Loudoun County, where there was an
interconnection standard and that metering allowed.
Suddenly here is a homeowner that found it to be in his
economic self-interest, because there were--a lot of the other
aspects were in place. We will not know what the real potential
for renewable energy generation is until we understand fully
and have taken steps on interconnection and net metering in
part, because that is really, I believe, going to be the thing
that helps bring them into fruition.
And, of course, you know, we are understandably--I have
watched this committee in the past try to make the decisions
about electricity and transmission generation and restructuring
the electricity supply system. And as Senator Thomas pointed
out, there has been very little incentive to invest in some of
these things until some of these basic decisions are made.
So it is--you know, I cannot give you a number and say we
will--I can tell you that our R&D efforts are designed to bring
down the costs in anticipation of the time where we have a
distribution system that is more friendly to renewable systems
and distributed generation system. But I cannot tell you how
much they are going to come into the marketplace until that
system is fixed.
Senator Hagel. Will you be coming forward with proposals?
You mentioned in your testimony here ``distributed generation
is a new concept and has therefore faced a number of regulatory
and institutional barriers.'' Will we see from the Department
of Energy your suggestions, policies, to deal with those in
order to get to what you have just laid out on the untapped
potential for these new renewable resources?
Mr. Garman. We are studying that. But again, we are also
going to school a little bit on the States, as I mentioned
earlier, New York, California, Delaware, Vermont, Texas, and
others. We are looking particularly closely at Texas.
Senator Hagel. Is that an accident or----
Mr. Garman. No. Actually, Texas has been working on its
restructuring. It has done some groundbreaking work on
renewables. Most of the new wind generation that has been put
into place in the past year has been done in Texas. So,
frankly, we are looking at Texas very closely and some of the
things that they have done. And I will tell you that the
Department has actually reached out to some of the talent that
was a part of that and brought them in-house.
Senator Hagel. Well, Texas had a pretty good governor, I
think----
Mr. Garman. Yes, sir, I agree with that.
Senator Hagel [continuing]. At one time. Your projections
of growth in the renewable areas, you mention specifically
biomass, landfill gas, geothermal, wind power, would you
develop that a bit in where you see the Department of Energy
going with trying to frame those in a way that connect the
reality of the development and what you will do in the way of
coming forward with policy recommendations?
Mr. Garman. I do not want to be in a position of trying to
tell the committee that we are going to be in a position
anywhere in the foreseeable future where fossil fuels do not
provide the overwhelming majority of our energy. That is not
what I am--I do not want to leave you with that impression,
because those are the realities that we face. We are working
mainly through research and development to bring down the cost,
to let these things come into the marketplace on their own
accord.
Again, I cannot give you a good estimate. And my crystal
ball--any more than I can predict what the energy prices in
California are going to be. And it is our goal within my
office, of course, to increase the power generated from
renewable energy resources. And, frankly, I am given about $400
million a year to do that. And most of that effort goes toward
research and development to bring down costs and make those
things available in the marketplace, and that is our goal.
Senator Hagel. It is considerably more than Senator
Murkowski gave you when you worked up here. Best regards to the
secretary. Thank you.
Mr. Garman. Yes, sir.
Senator Murkowski. Mr. Chairman, if you would yield, I have
had the opportunity to visit Texas, some of their wind
facilities. And as has been pointed out, they have a State
provision that requires, I think, 5 to 6 percent of their
energy to come from renewables. So what the utilities have done
is simply accepted that.
But the return on investment does not suggest that it is a
money maker. They have subsidize it with their other source
power. In other words, there are cheaper sources of power. But
they have made a conscientious commitment to proceed with 5
percent or 6 percent alternative. And it is primarily in wind
power. It works, but the cost return to the utilities is
something that is subsidized within the rate structure. And
that is just the way it is.
So the point is, there is no free ride here just because
the wind is free, or the hot air around here.
The Chairman. Senator Smith.
Senator Smith. Thank you, Mr. Chairman. I would like to
give special welcome to Julie Keil from Portland, Oregon, who
is with the Portland General Electric Company. She works on
hydro relicensing and water rights. And I am glad that she is
here to testify.
Mr. Secretary, I apologize, I was not here during your
testimony, but I wonder if you spoke to the future of wind
power. The reason I ask this question is where I live in
eastern Oregon there is a lot of wind. And Florida Power and
Light is putting in a huge wind system there. But on the Oregon
side, it has all been halted due to a ground squirrel. Are you
finding that----
The Chairman. Ground squirrel?
Senator Smith. The ground squirrel, yes.
The Chairman. Do you need more ground----
Senator Smith. Well, I guess the bottom line is, are you
having difficulty getting windmills development sited around
the country?
Mr. Garman. There have been instances, and you mentioned
Oregon. I know that there is one instance where a wilderness
study area has precluded development of a very promising wind
site in Oregon. It is something that we are beginning to work
very closely with the Department of the Interior on. There are
tremendous geothermal resources, for instance, in Nevada, all
on public lands. There are tremendous wind resources around the
country on public lands. And gaining access to do the necessary
study and validation is proving to be pretty difficult. And one
of the recommendations in the President's national energy
policy is to try to work cooperatively with the Department of
the Interior and break through some of those issues.
Senator Smith. Do you see wind as a renewable?
Mr. Garman. Yes, sir.
Senator Smith. And what is the resistance? What is
developing against that now? I cite the ground squirrel in my
State, but what are the other resistances to wind?
Mr. Garman. There have been in the past, particularly in
California, concerns about birds. But I think a lot of these
have been addressed. Candidly, we actually did some research,
worked with the Audubon Society and were able to demonstrate
that the wind resource was not as damaging to aviary
populations as had been thought at one time.
Wind has advantages and disadvantages. One of the
advantages is you can get a lot of it up relatively cheaply and
quickly. One of the disadvantages is that it is an intermittent
resource. And whenever you have an intermittent resource, you
have issues with both transmission and others that come into
play, as with any intermittent resource. So it has advantages
and disadvantages.
It is, of course, immune from fuel price changes. And wind
has actually, in some areas of the country over the past year,
become the cheapest available. But when natural gas prices came
back down, wind was no longer in that position. So there are
advantages and disadvantages that can be exploited.
Senator Smith. Are you aware of a situation in the Pacific
Northwest with the Bonneville Power Administration and their
desire to have bonding authority increased so as to improve
transmission lines?
Mr. Garman. Not as much as I need to be to answer the
question that I think is coming.
Senator Smith. Just so you put on your radar screen, there
is a lot of new production going in right now. It is wind. It
is also natural gas. But, frankly, there is a big bottleneck in
terms of just wheeling this to markets. And so the need for
this bonding authority is critical. And it is being bottled up
in the Congress by the Appropriations Committee, who wants to
evaluate it annually and make it subject to annual
appropriations. And no one is going to invest in such a system.
And, frankly, it is of little value to put in new
production, if you cannot get the power to the markets that
need it. And so I really think the Department of Energy needs
to talk to OMB fast, because this is really dumb what is
happening right now.
And I know there are objections to public power, but this
is an old issue in some parts of our country, and in my part
especially. It is not going to go away, and we need to make
sure that the power that is produced, either privately or
publicly, can get to markets. And I hope that we will have the
support of the administration on this, because we can put in
lots of renewables in Oregon, but it does not do any good if we
are running over the old lines.
And I will tell you my suspicion, that there is opposition
to this in some private sectors, who are able to game the
system, to drive up prices, because there is a bottleneck. And
we ought not to be creating that artificial situation.
I wonder if the administration will support classifying
hydropower as a renewable.
Mr. Garman. We consider hydropower a renewable resource.
Absolutely.
Senator Smith. No plans to tear out Snake River dams?
Mr. Garman. I think that would come under the jurisdiction
of the Department of the Interior.
Senator Smith. It would.
Mr. Garman. But no plans in the Department of Energy, I can
assure you of that.
Senator Smith. The Star Program, are you familiar with
that? It would certify buildings and appliances and----
Mr. Garman. Energy Star, yes. In fact, this afternoon we
are welcoming Canada into the Energy Star Program.
Senator Smith. You will be pushing that----
Mr. Garman. Yes, sir.
Senator Smith [continuing]. As the Government? Thank you.
I recently toured a plant, a cold storage plant, in
Portland, Oregon, that is generating remarkable efficiencies of
40 to 50 percent above industry averages. And they have worked
with Portland General Electric to do this. And I would
encourage your consideration of any Federal policies that could
encourage marketers to do those kinds of things. We have to
start valuing the saving of a kilowatt as much as the use of a
kilowatt.
I look forward to hearing what Julie has to say about that
and commend it to your attention, as well.
Thank you, Mr. Chairman.
Senator Murkowski. May I ask my colleague from Oregon a
question? You know, we had a discussion that I observed the
other day regarding the sucker fish. And you brought up a
squirrely issue relative to the squirrels having some objection
to wind power. And I never quite got the connotation of whether
the squirrely aspect was related to those who objected. But I
wonder if you could bridge the gap to explain what the wind has
to do with the squirrels.
Senator Smith. I wish you could explain that to me.
Senator Murkowski. You brought it up. I am just curious.
Senator Smith. I went home, and this big wind project is
probably 20 miles from my home in eastern Oregon. You can
literally see it from my home. And I suppose if there is any
objection to windmill farms is that some people do not find
them very attractive.
But there is, under the Oregon Endangered Species Act, a
listing of the ground squirrel. So I do not know that they know
the difference between the Washington and the Oregon border,
but all of the production has gone to the Washington side now
because of the listing of the ground squirrel and apparently
the effect of the windmill on the ground squirrel.
Senator Murkowski. Maybe you could put bark on the tower so
the squirrel could climb up.
Senator Smith. Well, I think it has to do with the
vibration of the blades and how that might affect the ground
squirrel. So that is what I am told.
Senator Murkowski. I appreciate but do not understand the
explanation.
[Laughter.]
The Chairman. Senator Craig, did you have questions for
Secretary Garman?
Senator Craig. I do not. Dave, I am sorry I missed your
testimony. I had to run out. I am back. I will only add that
what the Senator from Oregon has talked about, about Bonneville
Power bonding, is critical, not only for Oregon, Washington,
Idaho and Montana, but we spent a lot of time bailing
California out in the last while by sending a lot of energy to
them over some of these lines. And they have returned energy
during their surplus times, believe it or not. There once was
that situation.
The point is it is a regional situation that needs to be
addressed in the overall energy package. And I am as concerned,
as is the Senator from Oregon, that we have an OMB that somehow
has not communicated with the White House that there is a
concerted energy effort underway by the part of this
administration and by this government. Thank you.
Senator Smith. I think they are asking that it be increased
by $2 billion of bonding authority. This is all money that I
guess to be accounted a certain way that is of concern to OMB.
Senator Murkowski. Counted and paid back.
Senator Smith. It is all paid back by rate payers. But the
truth of the matter is you cannot plan to these kinds of
capital expenditures if they are subject to annual review.
The Chairman. But you are willing to cap it.
Senator Smith. Oh, of course. Absolutely. But I would just
follow up, if I may, Mr. Chairman, on Senator Craig and just
say that I really think this is important for the
administration to get right. They need to be seen on the west
coast as helping on energy issues. And I want to highlight that
I think some take advantage of the bottleneck on wheeling of
energy. And that is wrong. And we need to make sure that we
have the infrastructure there that can keep power flowing and
keep it affordable and available.
And for some reason, it is being held up, and I do not like
it.
Mr. Garman. Senator, I will follow up with Valerie of your
staff this afternoon on this issue.
Senator Smith. Thank you.
The Chairman. Well, thank you very much for your testimony.
It is very useful.
And we will move on to the second panel at this point.
Mr. Garman. Thank you, Mr. Chairman.
The Chairman. Oh, I am sorry. I did not see Senator Graham
come in here. Go right ahead, Senator Graham. Did you have
questions of Secretary Garman?
Senator Graham. No questions and no opening statement.
The Chairman. Okay. Well, then we will move to the second
panel.
Let me go ahead and introduce this panel. We have Mr.
Robert Boyd, who is the vice president at Enron Wind
Corporation. We appreciate you being here very much.
We have Mr. Demeter, is that correct?
Mr. Demeter, Mr. Chairman.
The Chairman. Demeter, excuse me. Mr. Demeter, who is the
chief executive officer with Antares Group, Inc.; Mr. Mark
Hall, who is the vice president for external affairs with
Trigen Energy Corporation; and Mr. Thomas Starrs, who is the
senior partner with Kelso Starrs and Associates in Vashon, is
that right, Vashon, Washington?
Thank you all very much for being here. Why do we not--if
each of you could--we will introduce your entire statement into
the record. If you could take about five minutes each and tell
us the main points you think we need to understand about what
you are testifying about.
Mr. Boyd.
STATEMENT OF ROBERT T. BOYD, VICE PRESIDENT,
ENRON WIND CORPORATION
Mr. Boyd. Thank you, Mr. Chairman. I appreciate the
opportunity to be here today.
The Chairman. Would you pull that microphone right in front
of you? That way you do not have to lean over.
Mr. Boyd. Okay. I just want to be able to see my notes.
The Chairman. Thank you.
Mr. Boyd. I am from California, and I am happy to hear the
power situation is improving. And it is nice to lights and air
conditioning for a change.
The Chairman. Good.
Mr. Boyd. My company, Enron Wind Corp., is a wholly owned
subsidiary of Enron Corporation of Houston, Texas. And we
manufacture wind turbines, and we build wind powerplants, and
we operate and maintain them. I was happy to hear that there is
so much interest in wind, and I hope that I can shed some light
on some of the questions that you all had.
Wind energy is really the most rapidly growing renewable.
And the reason for that is because we have been driving the
cost down. In the early eighties, it was over 25 cents a
kilowatt hour. Now we are down between, well, 4 to 6 cents
without a tax credit in a very good site. So we have done a
good job of getting our cost down.
A lot of that is due to having a wind production tax
credit, which has been helpful in getting our costs close to
the conventional technologies. The other thing has been the
good efforts of the Department of Energy. They have helped
considerably in some of the research and development efforts.
And they have a fine lab out in Colorado that has equipment
that most manufacturers would not have that can do testing. So
appreciate their efforts.
Wind is going to grow here. I think we probably will double
this year the amount of wind in the United States. And over the
next five years worldwide wind is estimated to grow by about
40,000 megawatts, which is considerable.
Why wind energy?
The Chairman. After this year, how many megawatts of power
will we be producing from wind energy in this country?
Mr. Boyd. I think that we will be close to 5,000.
California, for example, about 2 percent of our electricity
comes from wind. And now that is spreading to other parts of
the country.
I think it has been alluded to that wind does not have any
fuel. And as such, we can give a fixed price contract for 20
years or whatever to the power buyer. And what that is then is
a hedge against price increases in different fossil fuels. And
it helps somebody plan.
Also, you know, it takes away the price volatility and
potential of tax increases. There can--and I look at taxes like
some of the air quality credits and things that you have to
have in different parts of the country.
Another area that is benefitting from wind energy is the
agricultural sector in the United States. And the reason for
this is that wind is primarily in a lot of the unsettled or
unpopulated parts of the country. And a landowner that has wind
on its property is going to get a significant amount of money,
if he has many turbines. It can amount to about $4,000 for each
turbine. And that is considerably more than he would make on a
per acre basis for his crops.
The other thing is the property tax benefits that these
rural communities derive. There is one county in Texas,
Culbertson County, I think, that gets about 25 percent of their
tax revenues from two wind projects in their county.
What are some of the things that can help wind and bring
down some of the barriers that we face? The wind production tax
credit has been the most successful. Yesterday in the Ways and
Means Committee there was a billion passed out that has a 5-
year extension of that credit. And we would appreciate your
support when it comes over here to the Senate.
The second thing is, you were talking about a Federal
purchase requirement in your bill. We would like to see that
broadened to a renewable portfolio standard. This is the type
of thing that has been used in Texas. And what this does is
allow a seller of power to offer a certain amount of renewable
energy. And they can do it either by putting in a plant, they
can buy the power from a renewable plant, or they can buy a
credit from somebody that has more renewables than they need.
This is, as I say, what Texas has been doing. They are
going to put in about 800 megawatts of wind this year, which
represents about an $800 million investment in the State of
Texas primarily in rural lands.
Transmission has been talked about here today. And this is
a key issue for all electric generation. There is a recent EPRI
study that said that between $10 million and $30 million are
going to be needed just in the West alone in the next 10 years
to keep the system stable. And we look at wind as--or not
wind--but transmission as being similar to the Federal highway
system. And we should be addressing it, perhaps, in that way to
make sure that we have adequate transmission around this
county.
Public benefits fund. We would encourage that, too.
California's program has resulted in a lot of projects ready to
be developed. Unfortunately, the market situation out there
right now does not let us finance them. The assessment of
renewable resources, the Secretary addressed, and we think that
is a very valuable program.
Also, small wind turbines are also important. I think it
was Mr. Thomas who mentioned the diesel generator sets in the
gas fields. In Oklahoma, they have actually used small wind
turbines to do the same thing with batteries.
One other thing on the transmission, too, that I forgot to
mention is that FERC had a decision a week or so ago creating
four regional RTOs around the country. And we would support
that. We think that is a good thing to do.
I have been personally somewhat disappointed to see what
has been happening in the West with each area going their own
way, because we are an interdependent system out there, and we
trade power all over the West. And it makes sense that we have
the RTO as a western RTO.
And I guess I had better conclude, because I got the red
light. We would love to see the United States move towards a
more competitive marketplace, and not only in the wholesale
level, as we have done, but on the retail level as well. We
want to see customers have a choice. And we believe that when
they do that they will choose renewables.
Thank you.
[The prepared statement of Mr. Boyd follows:]
Prepared Statement of Robert T. Boyd, Vice President,
Enron Wind Corporation
introduction
Enron Wind Corp. (Enron Wind) is pleased to offer testimony on
removing barriers to wind energy development in the United States.
Enron Wind is a wholly owned subsidiary of Enron Corp. The company
has been in business for over two decades and has installed over 4500
wind turbines comprising more than 1,600MW of electric generation
capacity. As a manufacturer of wind turbines, our current product line
ranges from 600kW to 1.5MW with new 3.2MW onshore and 3.6MW offshore
models under development. During 2001 our U.S. facility in California
will manufacture 300 1.5MW turbines which will be deployed in Texas,
Wisconsin, New York and Pennsylvania.
status of wind energy
Wind Energy has become the most rapidly growing renewable
technology because it has moved rapidly down the cost curve from over
25 cents/kWh in the early 1980's to between 4 and 6 cents today in good
sites without a tax credit. The major factors on the federal level
driving down the cost of wind have been the creation of a U.S. market
by using the Wind Production Tax Credit (PTC) to help equalize costs
with conventional generation technologies and technological advances
made possible through DOE cost-shared research and development and
deployment programs. State renewable power requirements have also
helped wind energy growth. The American Wind Energy Association
estimates that installed wind capacity will almost double in the U.S.
this year. BMT Consult ApS estimates that close to 40,000MW of wind
will be installed throughout the world between 2001 through 2005.
why wind energy?
Wind energy is close to becoming competitive with conventional
fuels. With additional R&D funding and the continuation of the
Production Tax Credit for the next five years wind should become price
competitive with conventional generation technologies. One primary
advantage of wind technology is that because it burns no fuel long term
fixed price contracts can be offered. This is a hedge against both fuel
price volatility and potential pollution or CO2 taxes. We
have certainly learned the value of fuel diversity during the energy
crisis and we should put that lesson into practice by adding non-fuel
dependent technologies like wind into our electric generation mix. A
balanced portfolio approach helps mitigate risk.
The agriculture sector has been impacted significantly during the
energy crisis and the value of wind energy should not be overlooked in
the rural farming communities. Some of the best wind resources are
found in sparsely populated areas used for farming and ranching. The
landowners benefit by receiving significant land rent payments which
far outstrip the value of agricultural income on a per acre basis. The
host Counties also receive additional property tax revenues with very
little increase in the services they must provide.
recognition of the barriers to wind energy
We appreciate the chairman and ranking member's consideration for
renewables in drafting their bills. Energy policy is a very complex
issue in the U.S., but renewables must be a part of our long-term
strategy to satisfy U.S. energy needs. The issues we have highlighted
below are those we view to be most significant in the future
development of wind energy.
1. Wind Production Tax Credit (PTC)
By far the most important issue for wind energy is the extension of
the Wind Production Tax Credit which has been included in your bills.
The PTC has helped wind become more competitive with conventional
generation technologies while we continue to reduce our costs. The PTC
is vital to the long-term success of wind energy. This program has been
the most effective tool in increasing the use of wind energy in the
country. The extension of the PTC is a priority for this year as it
expires on December 31, 2001.
2. Renewable Portfolio Standard
A federal purchase requirement is also a part of S. 597. The
federal government can play a leadership role as a consumer of clean
renewable energy. There has been a particular interest from the
military in using renewables on their bases for energy security
reasons. We would like to see the purchase requirement expanded to a
nationwide Renewable Portfolio Standard (RPS) which would require all
power sellers to have some percentage of their electricity be
renewable. This is a quasi-market based program which offers choices to
the sellers in how they satisfy the requirement. Power sellers would
have the option of owning renewables, buying and reselling renewable
power or buying tradable credits from renewable sellers. There are
several states with this type of program. Under the Texas RPS program,
over 800MW of wind will be added this year. This will be an $800
Million investment in rural Texas.
3. Transmission
Transmission is a key issue for all electric generation, including
wind power. Transmission upgrades and new lines are needed throughout
the country. EPRI recently released a study which concludes that $10 to
$30 billion needs to be invested in the western states transmission
grid over the next 10 years just to bring the system to a stable
condition. Wind energy, like hydro facilities and mine mouth coal
plants, is often found in areas remote from load centers. We must have
adequate access to transmission facilities on a non-discriminatory
basis to reach the markets where wind power is needed. Transmission of
electricity is much like the interstate highway system for the
transportation of goods. We need a national electric grid just as we
need a national highway system to get goods to market. FERC's decision
last week to create four Regional Transmission Organizations (RTOs) is
vital to the development of that national grid. We strongly urge
Congress to support the FERC's RTO plans.
Intermittent resources such as wind have some difficulty accurately
scheduling their deliveries and penalties can result from transmission
providers for not meeting schedule. Wind generators are working to
develop methods to better forecast delivery schedules, but we are not
there yet. Your prohibition of such penalties is vital to future wind
energy development.
4. Public Benefits Fund
We support the proposed Public Benefit Fund for renewables. Some
states have adopted this type of program, which has been successful in
bringing more renewables on line. The cost for renewables is spread
over all the electricity purchasers in proportion of how much they use.
Projects then bid for funding which is awarded to the lowest cost bids.
California's program has resulted in a significant amount of new
renewable projects under development. Federal funding would ensure that
all states have the opportunity to participate in renewable
development.
5. Assessment of Renewable Energy Sources
The Department of Energy has done wind resource assessment in the
past. It has proven valuable in siting wind projects around the
country. We believe there are similar DOE programs for most renewable
resources. The key to their being successful is adequate funding.
conclusion
The U.S. has begun to move toward a competitive electricity market.
Many states have already opened the door to competition, some with
better results than others. There are many ways this committee and the
Congress can help steer this emerging competitive market. We would hope
to see competition not only at the wholesale level but at the retail
level as well. The retail customer should be able to choose his
supplier and product, which should include renewables. We appreciate
your consideration of the renewable issues that the bills before this
committee have already addressed. We request that you also consider
some of the other issues we have raised in this testimony.
The Chairman. Thank you very much.
Mr. Demeter, why don't you go right ahead?
STATEMENT OF CHRISTIAN P. DEMETER, CHIEF EXECUTIVE OFFICER,
ANTARES GROUP, INC.
Mr. Demeter. Thank you. Mr. Chairman, members of the
committee, I thank you for the opportunity to address you today
on legislative proposals related to removing barriers to
distributed generation, renewable energy, and other advanced
technologies.
In general, I am encouraged by the proposed actions
contained in the legislation that we are discussing here today.
Congress, working with the administration, can enhance
competition in energy markets now by removing market barriers
to renewables, allowing them to compete fairly. This is why I
am supportive of legislative language in title 3 of S. 597,
which calls for a review of existing regulations and standards
that act as barriers to market entry for emerging energy
technologies.
Renewable energy technologies, such as biomass, geothermal,
wind, solar, and hydro, have met important measures of success
relative to declines in the cost of electricity production.
Other factors out of control of the renewables energy industry,
such as changing market conditions, the ability of competing
technologies to also improve, and existing barriers to market
entry, account to much of the difficulty in expanding market
share.
Although commercial success of renewables in terms of
market penetration has perhaps not lived up to expectations, in
fact, performance of these technologies is higher, and costs
have been lower than expected in this document, Resources for
the Future, a study that was released a couple years ago.
Title 4 of S. 597 contains other provisions which would
help to enhance market acceptance of renewables and distributed
generated systems. Section 601 calls for an assessment of
renewable energy resources available in the United States. This
information is important to both policy makers and to private
developers. Accurate knowledge of the quality, quantity, and
location of these resources is important to public decision
making.
The private sector may also fail to carry out the optimal
amount of energy investment because of lack of knowledge about
resources. I know from my own personal business experience that
it was only 2 years ago that the Department of Energy's Energy
Information Administration included biomass supply curves in
their national energy modeling system. We helped them develop
that data.
Section 602 of S. 597 seeks to advance provisions of
Executive Order 13123 to encourage Federal procurement of
renewable energy. Although that executive order set a positive
tone, section 602 would do much more by mandating Federal
procurement. The United States has done this in the past to
stimulate the demand for transistors and to expand the supply
of uranium. The advantage to this approach is that the
government can include the cost in the budget so the commitment
to the program can be reviewed annually.
We are working on a project currently in central New York
which can take waste biomass to produce low sulfur diesel
fuels, a home heating oil substitute, or a liquid turbine fuel
for the production of electricity. In fact, General Electric is
working with us on the latter. A Federal contract to buy
electricity from renewable resources such as this would help us
to seed that market.
A policy to encourage renewable energy use at Federal
facilities, as outlined in this section, would overcome many of
the weaknesses of the existing executive order and compensate
for some of the past adverse effects of barriers to entry for
renewables.
S. 933 is particularly important legislation, as we attempt
to enhance competition in energy markets and electricity
markets. Antares Group is currently working with a project
developer on a combined heating power project using a
proprietary distributed generation technology. As we proceed
with the development of this project, we are encountering many
of the issues described in S. 933.
To avoid high standby or backup charges by the utility, our
project would incur from a 30- to 50-percent charge in addition
of added capital expense in order to create a redundancy in the
system. If after this increased cost for redundancy is incurred
and the utility company charges us an exit fee for leaving the
grid, our project quickly becomes uneconomic as we could no
longer afford to provide our on-site customer with less
expensive heat and power.
Should we choose to stay on the grid and the project
developer wants to make a business of expanding a market for
this new DG technology, we face the potential for site-by-site
interconnection studies, which can quickly become costly. A
consistent interconnect standard would further develop
distributed generation and combined heat and power
technologies, be they renewable based or not.
It would also make more sense to be able to negotiate
reasonable standby charges and not to have our customers
charged onerous exit fees. Although this bill does not
completely correct these problems, the potential exists through
this legislation to encourage States and municipal authorities
to not impose excessive fees on small generators.
Section 604 of S. 597, net metering, and section 111 of S.
388, innovative financing, contain language which will help
consumers of electricity become competitors in the electric
supply business, thereby enhancing competition further. My
company recently installed a small 12 kilowatt distributed
solar cell array on a county office building in Maryland to
convert sunlight to power. The system reduces county energy
costs by about $2,500 a year and emits no pollution.
The county government, the U.S. Department of Energy, and
the States of Maryland and Virginia provided funds for a total
cost of about $78,000 for the system. While the fuel is free,
the high up-front capital costs would have killed this deal
without the Federal support. But rather than providing outright
grants of Federal funds for these systems, I think a more
efficient method would be to develop innovative financial
mechanisms and allow customers who generate electricity to sell
electricity to the grid at market rates in times of peak
demand.
In conclusion, I support the proposed legislative changes
be discussed here today. They are key components to ensuring
market acceptance of renewable energy and a viable renewable
energy industry.
Thank you, Mr. Chairman, members of the committee. I would
be happy to answer any of your questions.
The Chairman. Thank you very much.
[The prepared statement of Mr. Demeter follows:]
Prepared Statement of Christian P. Demeter, Chief Executive Officer,
Antares Group, Inc.
Mr. Chairman and members of the Committee, thank you for the
opportunity to address you today on legislative proposals related to
removing barriers to distributed generation, renewable energy and other
advanced technologies in electricity generation and transmission,
referred to in S. 388, S. 597, and S. 933. My name is Christian
Demeter, and I am Chief Executive Officer of the Antares Group
Incorporated in Landover, Maryland. I work daily with engineers,
economists, scientists, and lawyers taking a systematic approach to
solving energy problems. I founded Antares Group nine years ago with
the objective of assisting private-sector developers in commercializing
advanced energy technologies, renewable and otherwise, and advising
state and Federal clients on where and how emerging technologies can
enter the market.
My interest in energy dates back to 1973 and the first oil embargo.
I clearly recall the difficulties then of utilities meeting peak demand
in summer months, intermittent threats of gasoline or home heating oil
shortages, closing of aluminum plants in the Northwest, and the
inability of new homeowners to get natural gas connections. At that
time, the nation responded by embarking on a significant set of energy
policies. It seems now we are facing similar challenges in the energy
sector. In general, I am encouraged by the proposed actions contained
in the legislation we are discussing today.
My remarks emphasize the need for Congress to pass legislation to
ensure that private and public investments made in renewable energy R&D
are successfully commercialized in the marketplace. Much of this
legislation emphasizes the need to reduce institutional barriers and
thus costs of renewable technologies in the marketplace. Competition
among all energy technologies is good if society is the ultimate
beneficiary of reduced costs. Congress working with the Administration
can enhance competition in energy markets now by removing market
barriers to renewables allowing them to compete fairly. This is why I
am supportive of the language in Title III of S. 597 which calls for a
review of existing regulations and standards that act as barriers to
market entry for emerging energy technologies and for recommendations
for changes in laws or regulations which may impede market development.
Renewable energy technologies such as biomass, geothermal, wind and
solar, have met important measures of success relative to declines in
cost of electricity production. Other factors out of the control of the
renewable energy industry such as changing market conditions, the
ability of competing technologies to also improve, and existing
barriers to market entry, account for much of the difficulty in
expanding market share. A recent study performed by the not-for-profit
research organization, Resources for the Future (RfF), found that
although commercial success of renewables in terms of market
penetration has not lived up to expectations, in fact, performance of
these technologies is higher and costs have been lower than expected.
To their credit, the competitive energy sources such as mature fossil
technologies continue to innovate and thus produce a moving and
declining cost baseline. Fossil technologies have also benefitted from
energy policy in the form of deregulation in the oil and natural gas
pipeline and railroad industries.
Title IV of S. 597 contains other provisions which would help to
enhance market acceptance of renewables and distributed generation (DG)
systems. Sec. 601 calls for an assessment of renewable energy resources
available within the United States. The language is substantially
similar to Sec. 112. of S. 388. This information made publicly
available is important to both policymaker and developer. In most
cases, the sunlight, wind, water, and even biomass on public lands are
public resources. Accurate knowledge of the quality, quantity, and
location of these resources is important to public decision making. The
private sector may also fail to carry out optimal energy investment
because of lack of knowledge about resources. I know from my own
business experience that it was only two years ago that the Department
of Energy's Energy Information Administration began incorporating
biomass supply curves into their National Energy Modeling System
because they previously did not have the data. My company developed the
data for them under contract to the National Renewable Energy
Laboratory.
Sec. 602. of S. 597 seeks to advance provisions of Executive Order
13123 issued in June 1999, to encourage Federal procurement of
renewable energy. Although agencies were encouraged to purchase
electricity generated from renewable energy, that electricity would
have to be priced at or below existing alternatives. Thus although E.O.
13123 sets a positive tone, Sec. 602 would do much more by mandating
Federal procurement. Through long-term contracts, government can
guarantee companies a market of any size. The United States has done
this in the past to stimulate the demand for transistors and to expand
the supply of uranium. The advantage to this approach is that the
government can include the costs in the budget so the commitment to
such a program can be reviewed annually. We are working on a project in
central New York which can take waste biomass, i.e., wood chips, paper
mill sludge, segregated municipal solid wastes; and convert them to a
platform chemical called levulinic acid which can be combined with
ethanol to produce an ultra-low sulfur diesel fuel, a home heating oil
substitute, or a liquid turbine fuel for electricity production.
General Electric Company is working with us on the turbine fuel's
market potential. A Federal contract to buy electricity from renewable
sources such as this would help seed the market. Although I oppose
mandating private purchases of electricity generated from renewable
sources, a policy to encourage renewable energy use at Federal
facilities as outlined in Sec. 602 would overcome the weakness of the
E.O. 13123 and compensate for the past adverse effects of barriers to
entry for renewables.
S. 933 and a related item, Sec. 603, Interconnection Standards of
S. 597, is particularly important legislation as we attempt to enhance
competition in electricity markets. Antares Group is currently working
with a project developer on a combined heat and power (CHP) project
using a proprietary distributed generation technology. To my knowledge,
not even the DOE is currently funding such technology. The technology
is similar to steam turbine technology, but it can convert lower-
temperature and pressure steam into electricity more economically than
currently available technologies. The project will have a total cost of
about six million dollars and generate both heat and power at about 10
MWe equivalent.
As we proceed with developing this project, we are encountering
many of the issues described in S. 933. To avoid high standby or backup
charges by the utility, our project will incur $2-$3 million of
additional capital expense in redundant systems. If we were to incur
the cost of redundancy to avoid high standby charges then leave the
grid, we could not reduce our customer's cost of heat and power as much
as planned. If after this increased cost for redundancy were incurred
and the utility company charged an exit fee for leaving the grid, our
project becomes uneconomic as we could no longer afford to provide our
on-site customer less expensive heat and power. Should we choose to
stay on the grid and the project developer wants to make a business of
expanding the market for this new DG technology, we face the potential
for site-by-site interconnection studies which can quickly become
costly.
A consistent interconnect standard would further develop DG and CHP
technologies, be they renewable based or not. It would also make more
sense to be able to negotiate reasonable standby charges, not have our
customers charged onerous exit fees particularly after stranded costs
have already been recovered in electricity rates. Although this bill
does not completely correct these problems, the potential exists,
through this legislation, to encourage states and municipal authorities
to not impose excessive fees on small generators.
Sec. 604 of S. 597 (net metering) and Sec. 111 of S. 388
(innovative financing) contain language which will help consumers of
electricity become competitors in the electric supply business thereby
enhancing competition further. For example, my company recently
installed a small 12kW distributed solar cell array on a county office
building in Maryland to convert sunlight to power. This is the
equivalent of about three average home systems. The system reduces
county energy costs by about $2,500 per year and emits no pollution.
The county government which owns the building paid half the cost of the
system. The U.S. Department of Energy and the States of Maryland and
Virginia provided additional funds for a total project cost of about
$78,000 or about $6,500 per kW. While the fuel is free, the high up-
front capital costs would have killed the deal without the Federal
support - in this case, it would take almost 40 years to payback based
solely on capital costs. Rather than providing outright grants of
Federal funds for these systems, a more efficient method would be to
develop innovative financial mechanisms and allow customers who
generate electricity to then sell electricity to the grid at market
rates in times of peak demand.
In conclusion, I support the proposed legislative changes being
discussed here today and appreciate this Committee's attention to
addressing our Nation's energy needs while we also move toward more
competitive electricity markets. Along with Federal funding of long-
term R&D, Federal energy policies discussed here today are key
components to ensuring market acceptance of renewable energy
technologies and a vibrant renewable energy industry.
Thank you, Mr. Chairman and members of the Committee for this
opportunity to present these views. I look forward to answering your
questions.
The Chairman. Mr. Hall, why don't you go right ahead?
STATEMENT OF MARK HALL, VICE PRESIDENT, EXTERNAL AFFAIRS,
TRIGEN ENERGY CORPORATION
Mr. Hall. Good morning. Thank you, Mr. Chairman and members
of the committee, for having me here this morning to testify
predominantly in support of S. 933 that is before the committee
and also to address other legislative proposals to address
barriers to combined heat and power and distributed generation.
My company is Trigen Energy Corporation. We are based in
New York, but we have operations in 22 States and the District
of Columbia. And more than half of those projects would be
characterized as distributed generation or combined heat and
power projects, and in some cases both.
CHP, which is combined heat and power, CHP and modern
distributed generation provide significant economic and
environmental benefits. And to the point that was raised
earlier, there has been quite a lot of analysis by both the
private sector and the U.S. Environmental Protection Agency and
the U.S. Department of Energy that backs up the very
significant environmental benefits, as well as the economic
benefits that can be derived from more widespread deployment of
combined heat and power and distributed generation.
In addition, the point that was raised earlier about being
in the here and now versus thinking about that which might come
in the future, combined heat and power and distributed
generation is very much in the here and now. And although we
certainly do face a shortfall of electric capacity in the near
term and in the future, it is going to be much more efficient,
to the extent that we are going to continue to rely very
heavily on fossil fuels, to leverage modern technologies that
can produce both electricity and thermal energy much more
efficiently than just producing electricity alone.
To answer the question that was not directed to me earlier,
but to the Secretary, a 2,500 megawatt powerplant will never be
as sufficient as a smaller scale combined heat and powerplant
and modern distributed generation that recovers the heat simply
because all fossil-based electric generation produces excess
heat. And if we can find ways to use that, then we reduce the
need to burn fossil burn someplace else in the economy where
the heat is needed.
And with the lone exceptions of hydroelectric and solar
energy, which are going to be topics widely discussed today,
all other forms of generation will have that leftover heat. And
so the issue is, as we are going to continue to be reliant on
fossil fuels into the near term certainly, and to a large
extent the large term, we need to find ways that we can most
efficiently use our fossil fuel resources. And if we can use
our fossil fuel resources more efficiently, then we should be
able to reduce our overall cost.
That brings us to those things that do not relate directly
to fuel cost and technology that do stand in the way of the
more widespread deployment of these technologies. And
interconnection is high on the list of those issues that need
to be addressed and need to be addressed in a thoughtful way at
the Federal level that is symbiotic with those activities that
need to be taken at the State level.
I think interconnection is a very well-known and very well-
researched barrier to distributed generation and
interconnection. There is a DOE report that was published in
May 2000 entitled Making Connections that memorializes an array
of instances where interconnection barriers--where developers
have come up against interconnection barriers in various
projects. It documents cost, lost environmental benefits, et
cetera. And to the extent that this committee has not seen that
DOE report, a request could be made of DOE or we could
certainly make it available to you as well.
I think it is also important to recognize that S. 933 is
the result of a pretty lengthy process of ongoing dialogue that
included not only members of this committee and members of the
Senate, but a lot of interested stakeholders in this issue. And
as it was characterized to me, there was a search high and low
to find someone that could represent an opposing viewpoint
today on the need for a uniform interconnection standard.
And I do not think that you will hear from one today,
because I think we have struck the right balance in this
language that will allow everybody to get what they need at
both the distribution and the transmission level, and also to
assure that backup power, which is sort of the hand-in-glove
partner on interconnection, that backup power is also made
available to those entities that are going to be
interconnecting with the transmission and distribution system.
To reiterate a comment made earlier, S. 933 focuses on
technical interconnection standards. It does not address the
process for interconnection. That is left appropriately at the
State level, where local conditions should dictate the
appropriate process.
I would also just like to highlight that we are also very
supportive of the provisions in a couple of the other bills
that are before the committee this morning, the subject of this
hearing, S. 597, section 301, and section 112 of S. 388, both
which require the cataloging of additional barriers, many of
which you have heard about and many of which are discussed in
more detail in my testimony that you have before you.
I would like to close by thanking you again for your
interest in these issues. And I am certainly available to
answer any questions.
The Chairman. Thank you very much.
[The prepared statement of Mr. Hall follows:]
Prepared Statement of Mark Hall, Vice President, External Affairs,
Trigen Energy Corporation
Mr. Chairman and members of the Committee, thank you for allowing
me to testify before you today on Senate Bill 933 and other legislative
proposals to remove barriers to combined heat and power (CHP) and other
forms of distributed generation (DG). My name is Mark Hall, and I am
the Vice President of External Affairs for Trigen Energy Corporation,
based in White Plains, NY. Trigen owns and operates some of the most
efficient power plants in the world. We accomplish this by deploying
CHP, DG and leveraging other modern technologies in innovative ways.
Trigen currently owns, operates or otherwise manages fifty-one
plants located in twenty-two states, and the District of Columbia.
Trigen is the proud recipient of many prestigious awards recognizing
our innovation, leadership in the energy industry and commitment to
environmental protection. This includes two awards from U.S agencies:
the Energy Star Award from the U.S. EPA in recognition of our
leadership in CHP projects and the Climate Protection Award from the
U.S. EPA for corporate leadership in reducing greenhouse gas emissions.
But more important than awards recognizing our environmental
stewardship is the fact that we would not be selected to design, build
own or operate on-site CHP projects for our customers if we were not
able to provide substantial economic and reliability benefits in
addition to outstanding environmental performance. The nearby
University of Maryland College Park is an excellent example. Trigen and
a partner were selected by the University to build and operate a new
state-of-the-art CHP facility for the campus as well as to manage the
on-site utilities while working with the campus staff to improve
overall efficiency. The project is expected to save the University of
Maryland system $6 million dollars per year while reducing regional
nitrogen-oxide emissions by 9,800 tons per year and carbon dioxide
emissions by 3.5 million tons over the 20 year life of the contract. We
were the recipient of the 1999 Project Award from the National Council
for Public-Private Partnerships because of our ability leverage
technology in ways that were both economically and environmentally
beneficial to all parties.
Despite these economic and environmental benefits, there are a
variety of institutional and regulatory barriers that prevent CHP from
achieving its full potential. These barriers inappropriately reduce the
economic viability of CHP projects, slow their development and
implementation and in some cases simply make them impossible to
complete. S. 933 is an attempt to remove the interconnection and backup
power barriers and allow Trigen and other companies to increase the
beneficial application of CHP. Although S. 933 covers some of the
issues, there are additional factors that must be addressed to fully
remove the barriers. The cataloguing and systematic treatment of these
barriers as suggested in S. 597 Sec. 301 A & B and S. 388 Sec. 112 are
also critically important.
Mr. Chairman, Trigen's plants and employees are at work every day
showing how efficient energy production is both good for business and
good for the environment. By removing the barriers to utilizing CHP and
other highly efficient DG, Congress can reward investors, benefit
consumers, strengthen our economy and clean up our air.
The issues you have asked this panel to address are of critical
importance to all of us. Energy sector competition is already upon us,
with the States leading the way. The Federal government must rise to
the task of addressing the barriers to competition that inherently lend
themselves to national legislation, matters that cannot be responsibly
dealt with in a piecemeal, State-by-State manner.
S. 933 is the result of many months of thoughtful work that
reflects the benefit of numerous parties working together to arrive at
consensus language that addresses the need for a uniform nationwide
interconnect standard. S. 933 marks a critical step in efforts to
improve the environment and electricity markets by encouraging the
deployment of CHP and other DG. I would like to point out that H.R.
1945 is the companion bill to S. 933 from the House of Representatives.
Trigen offers its full support of both.
In addition to addressing why there is a critical need for uniform
nationwide interconnection standards, I would also like to highlight
five other issues that must be addressed if we want to remove the most
formidable barriers to deploying CHP and other highly efficient DG
technologies. They are: Backup power as related to PURPA repeal,
clarifying tax depreciation schedules, establishment of investment tax
credits, rethinking new source review and establishing output-based
standards. First, I will address interconnect standards and the
immediate need for S. 933.
interconnection
The National Energy Policy proposal recently released by the White
House, like similar proposals of the last Administration, recognizes
the economic and environmental benefits of CHP and other highly
efficient DG systems. One formidable barrier to taking advantage of
those benefits is the lack of uniform nationwide interconnection
standards.
The current process for determining the appropriate technical
requirements for the interconnection of new energy projects with the
distribution or transmission system is often unnecessarily lengthy and
expensive and the specific requirements can vary arbitrarily from state
to state, utility to utility, site to site. Incumbent utilities that
may not want to face competition may attempt to cloak anti-competitive
behavior in the guise of technical disagreement over interconnection.
We recognize that it is essential for interconnections to be safe and
reliable, but interconnection standards can be both safe and reliable,
and uniform. Bringing uniformity to interconnection through a uniform
nationwide technical standard will reduce uncertainty, lower costs, and
facilitate deployment of modern CHP technology, across the country.
Interconnection language must be sufficiently broad to help all
generators connect to the distribution and/or transmission grids. S.
933 provides for interconnections at both levels. The language does not
pick winners and losers, but maximizes flexibility for determining
whether the facility is connected to the transmission grid or the
distribution grid. In addition, it is important that the language does
not unnecessarily infringe upon States' rights to manage their
respective distribution grids. The benefits of uniformity require that
the standards apply to all states.
I think it is important to give you an example of the
interconnection problem. Trigen has a great deal of experience
interconnecting various sized generators with the distribution and
transmission grid. We have done it literally dozens of times.
Technically, it is a pretty straightforward task but in practice it can
be a slow painful process that raises costs and delays projects that
otherwise could be delivering important economic and environmental
benefits. In 1998, Trigen approached a utility to request
interconnection for a 703 kW generator to be installed in a downtown
office building. The small system would supply the building's electric
load and air conditioning. Yet, two years later, we were still
negotiating with the utility over so-called ``technical'' issues.
Months after receiving our initial request for interconnection, the
utility asked that Trigen design a different, specialized
interconnection. Trigen completed the new design at a significant
additional cost. The utility rejected the design. In response, Trigen
offered to use guidelines developed by Consolidated Edison in New York
City, even though the ConEd guidelines were disproportionately
burdensome and expensive given the very small size of the installation.
The utility agreed, but after Trigen complied with these requirements,
the utility imposed further ``technical'' restrictions on Trigen's
ability to operate the facility. It took over two years to resolve this
issue. The barrier related costs of completion were over $88,000.
One would strongly suspect that this was anti-competitive behavior
masquerading as technical disagreement which successfully prevented the
unit from operating for two years. This is but one of countless
examples. In fact, DOE published a report in May of 2000 entitled
Making Connections that memorialized this example and numerous others
from across the country. S. 933 would address many of the
interconnection barriers highlighted in that report. Passage of S. 933
will help manufacturers of CHP and DG technology achieve a plug and
play economy of scale, lower costs and encourage investment in CHP and
DG technology.
the shortcomings of s. 597 regarding interconnect
Like S. 933, S. 597 recognizes the need for a uniform interconnect
standard. However, S. 597 falls short of addressing the entire scope of
that need. S. 597 calls only for a standard for interconnect to the
distribution grid. Failure to address transmission interconnect would
result in an enormous lost opportunity to ensure all the same benefits
S. 597 seeks to achieve at the distribution level. Stream-lining
interconnect at the transmission level will be one more encouragement
to investing in larger scale DG like on-site CHP plants whose
efficiencies can bring immediate large scale reductions in fuel
consumption and emissions.
In addition, S. 597 does not include a provision addressing the
right to back-up power at just and reasonable rates. Most CHP and DG
assets require back-up power as insurance to the DG/CHP customer that
they will have electricity in the event the DG/CHP asset has scheduled
or unscheduled down time. Without a guaranty of affordable back-up
power many DG/CHP projects will never get off the ground. I will
address this issue in more detail below.
Finally, S. 597 includes limiting language that the DG asset must
be designed to serve retail customers ``at or near the point of
consumption''. S. 933 does not include any such limitation. If we want
to encourage the deployment of highly efficient CHP and DG assets we
should not place any limitation on what customers are served or where
it can be located in order to take advantage of uniformity.
backup power and the prospective repeal of purpa's ``must-sell''
provision
Hand-in-glove with the issue of interconnection standards is the
availability of reasonably-priced back-up power. Historically, back-up
power was guaranteed at just and reasonable rates to facilities that
met either the Qualifying Facility or Small Power Production Facility
definitions under PURPA. However, as technology and markets have
evolved, the need for back-up power at rates that are just, reasonable
and not unduly discriminatory is important to a wide-range of projects
that might not meet these historic definitions, regardless of whether
the project is interconnected to the transmission or distribution grid.
S. 933 remains respectful of state authority by allowing States to
determine the just and reasonable rate for back-up power at the
distribution level. The Bill also ensures that until there are open
markets where a facility can competitively purchase backup power, the
local utility must provide such backup power at nondiscriminatory
rates.
CHP and other DG systems rely on the ability to purchase backup
power from the grid in the event that they temporarily fail to operate
or must shut down for maintenance. Under current PURPA laws the local
utility ``must sell'' backup power to qualified stand alone CHP
facilities. Many proposed restructuring bills would repeal both the
``must buy'' and the ``must sell'' requirements of Section 210 of
PURPA. The ``Right to Back-up Power'' provision of S. 933 is a safety
measure that will ensure back-up power at just and reasonable rates if
the ``must sell'' provision of PURPA is repealed and there is no open
access to purchase of electricity in a given state. Elimination of
PURPA's ``must sell'' requirement without the protection of the right
to back-up power will leave new entrants and existing DG at the mercy
of the local utility, subject to discriminatory pricing or outright
denial of back-up power.
tax depreciation schedules
The current tax code, based on an somewhat obsolete view of the
energy industry, currently does not allow depreciation of CHP and DG
technologies in ways that reflect those assets physical and economic
lives. This inappropriate treatment can discourage investments in CHP
and DG technology. For example, the IRS allows a gas turbine located
inside a building for on-site generation use to be depreciated over a
39-year period while the same gas turbine used for transportation
(e.g., on an airplane) depreciates in one quarter of the time. The
moving parts of the turbine used for electricity and heating may be
replaced as many as five times while the owner continues to depreciate
the original investment. Shortening the time over which this equipment
depreciates would remove an impediment to investment in what is
otherwise an efficient and environmentally beneficial technology.
New and small turbines have different physical properties and will
generally operate under quite different conditions than large turbine
units employed by traditional electric utilities and, consequently,
will have different service lives. Further, the competitive marketplace
will force energy suppliers to replace or ``upgrade'' standing
equipment before it fails, since installation of more efficient
technology offers lower costs to customers and the opportunity to hold
or capture market share for competitive energy suppliers. We expect
that energy generation equipment will come and go in the marketplace in
a manner that strongly resembles that of modern computers assets which
outlive their economic lives long before they cease to work properly.
Congress should direct the Internal Revenue Service (IRS) to set a
depreciation schedule of seven (7) years for industrial and utility
facilities and ten (10) years on Building CHP (BCHP) assets, which
reflects the true technical and economic life of most systems. I have
attached to this testimony, recommended modifications to the Internal
Revenue Code from the U.S. Combined Heat and Power Association
(Attachment A).* Trigen is a member of the USCHPA and supports all of
its recommendations.
---------------------------------------------------------------------------
* Attachments A and B have been retained in committee files.
---------------------------------------------------------------------------
combined heat and power investment tax credit
Tax credits are typically offered by the Federal government to
obtain public benefits by prompting private parties to make capital
investments that they would not so readily make otherwise or to
overcome other short-term barriers to otherwise feasible activities. As
such, an investment tax credit (ITC) is a good short-term mechanism to
promote CHP systems, which offer very significant public and private
economic and environmental benefits, but can often be more difficult
for the private sector to deploy than electric-only projects because of
the complexity inherent in assembling a ``thermal load'' or set of
heating/cooling customers.
Congress should direct the IRS to provide a ten (10) percent ITC
for met thermal energy distribution systems at district energy CHP
facilities. I have attached to this testimony, recommended
modifications to the Internal Revenue Code form the US Combined Heat
and Power Association (Attachment A). Trigen supports all of its
recommendations.
new source review
The new source permitting program known as New Source Review (NSR)
was developed over 20 years ago to reduce air pollutant emissions. At
the time the focus was on reducing smokestack emissions and NSR focuses
primarily on requirements for end-of-pipe, add-on control technologies.
Add-on controls reduce emissions but add cost and reduce efficiency.
Over the last 20 years, we have learned that a much better approach
to pollution control is to entirely avoid the generation of pollution
through lower emitting processes and reduce their impact through
increased efficiency. Pollution prevention (P2) and increased
efficiency reduce emissions while also reducing capital and operating
costs. They result in processes that are cleaner and cheaper with lower
demand on all natural resources. This is clearly the direction that we
need to move in order to achieve a vital economy and a healthy
environment and CHP is perhaps the best example of this opportunity.
Unfortunately, NSR does not give any credit for efficiency and
gives little or no credit for pollution prevention. It is constantly
driving projects away from these positive approaches and back to the
old sidetrack of add-on controls. It discourages the application of
existing P2 technologies and the development of new technologies. U.S.
companies have learned that they should not invest in the development
of cleaner and higher efficiency technologies because they will not be
able to permit them. This is a multidimensional loss to the U.S.
economy. In contrast, our foreign competitors have made great strides
in these areas, which are reflected in their high efficiency use of
energy.
As an example, several of our recent projects have been based on a
particular small gas turbine generator. As an electric generator only,
the turbine is less than 30 percent efficient. However, our CHP
applications using that same piece of equipment are anywhere from 80 to
over 90 percent efficient. Put another way, we provide more than three
times as much energy to the customer from the system for the same
amount of emissions and energy input.
It is only common sense that our regulatory system should recognize
this energy and environmental benefit. But it doesn't. In the eyes of
NSR, there is no difference between the two systems. Since NSR is a
cost-based system, it is requiring us to duplicate capital investment
to use add-on controls where we have already provided a reduction
through efficiency. In many cases, the project ``won't pencil'' if we
have to pay twice, and a beneficial project is cancelled.
This fundamental flaw of NSR is only one of several ways in which
the regulation has outlived its usefulness. The program relies on a
variety of highly technical standards to determine which new or
existing units will be required to apply emission controls. Over the
years, these standards have become more and more arcane and
contentious. The very high cost and uncertainty involved in the
application of NSR to both new and existing units has created a huge
disincentive for operators to maintain and improve the performance of
these units. By holding out for the maximum possible improvement at all
times, the program has discouraged even the normal improvement that
should happen without regulation. By excluding the effects of pollution
prevention and efficiency, it has excluded the best possible solutions
from consideration and left us with proliferating lawsuits as the only
result.
Because CHP, by definition, produces two types of energy output
(steam & electricity) from one fuel input, its treatment under NSR is
especially difficult. The system sometimes tries to force us to combine
our facilities with those of our clients in ways that are commercially
impossible. In other cases it deprives us of credit for emission
reductions that are legally verifiable and creditable.
Output-based regulation, which relates the emissions to the useful
energy produced is another regulatory concept that would help to
address these problems. There has been growing acceptance of this
approach as a way to send the proper signals through environmental
regulation. Unfortunately, it seems to be difficult to integrate this
approach into the structure of NSR.
We have been working with the EPA for more than three years to find
appropriate ways to achieve the universally recognized benefits of CHP
within the NSR structure. I am sorry to report that our progress to
date has been limited. In large part this is due to the fundamental
structure of the program. In the end, we are forced to conclude that,
at least for the generation of heat and power, the NSR program is a
grandfathered regulation that has outlived its usefulness and needs to
be replaced with a more modern and efficient regulatory structure. We
believe that a properly designed cap and trade program that provides
guaranteed emission reductions over the entire sector would provide
better environmental results and encourage new, more efficient
technology. I have attached a copy of a multi-pollutant strategy
(Attachment B) that Trigen and four other energy companies have
developed as a substitute for NSR as it applies to heat and power
generation.
output-based standards
Currently, efficiency is measured by an input-based standard that
measures fuel consumption as opposed to energy output. Under this
approach, the efficiency of CHP is not recognized. By way of example,
for every one unit of fuel consumed by a CHP plant two units of energy
are produced--steam and electricity. CHP is twice to three times more
efficient than a typical central generation plant that only produces
one unit of energy for every one unit of fuel consumed because it is
not capturing the heat off the combustion process.
The establishment of output-based standards would allow facilities
to count their fuel to end use energy efficiency toward their
environmental compliance requirements. Output-based standards encourage
efficient and inherently cleaner plants. Trigen has been an active
participant in numerous venues established to develop output-based
standards. Trigen seeks establishment of progressive regulations that
replace BACT and LAER with a cap and trade program coupled with a
universal allowance allocation of pounds of pollution per megawatt hour
of electricity produced and pounds per megawatt hour of thermal energy
produced.
conclusion
Given the inevitability of competition in the electricity market,
and both national and global trends that will guide the future of
energy production in this country, I believe that emerging technologies
are serving and will serve an indispensable purpose in meeting goals of
energy efficiency and environmental demands. I urge this committee to
pass S. 933 and to take a proactive stance on addressing the other
concerns I have raised here today. We would also like to reiterate our
support for Sec. 301 A & B of S. 597 and Sec. 112 of S. 388. I thank
the committee for the opportunity to appear before you. Thank you, Mr.
Chairman.
The Chairman. Mr. Starrs.
STATEMENT OF THOMAS J. STARRS, J.D., Ph.D., SENIOR PARTNER,
KELSO STARRS AND ASSOCIATES, L.L.C.
Mr. Starrs. Thank you, Mr. Chairman, members of the
committee. My name is Tom Starrs. I am a partner in the energy
and environmental consulting firm of Kelso Starrs and
Associates.
My business focuses on the design, analysis, and
implementation of legal and regulatory incentives for the
development of renewable energy technologies, particular solar
and wind energy. I also serve on the board of directors of both
the American Solar Energy Society, which is a national,
nonprofit membership organization dedicated to the advancing
the use of renewable energy, and the Schott Applied Power
Corporation, which is one of the largest distributors of
renewable energy equipment in the United States. I very much
appreciate the opportunity to testify before you this morning.
I am going to focus my testimony on a few details of the
bills that are currently before this committee, specifically
interconnection standards, net metering, and business
practices. Starting with interconnection standards, we have
heard quite a bit about this already from the other witnesses,
so I will not belabor this. But this is perhaps the most
significant barrier to the broader commercialization of
distributed technologies.
The problem, the absence of national technical standards
for the interconnection of these facilities, arises because
utilities historically have had substantial discretion over
interconnection requirements and have often used that
discretion to develop requirements that varied considerably
from one utility to the next without any appropriate technical
or economic justification.
These utility-specific requirements were of relatively
little concern for the developers of large-scale generating
facilities whose projects were big enough that they could
justify the cost of hiring consulting engineers and attorneys
to negotiate project-specific requirements for their
facilities. However, for smaller systems, just as residential,
rooftop, solar electric systems, or farm-scale wind energy
systems, these costs are an absolute deal breaker.
The solution to this problem as we have already heard
today, is the adoption of national standards developed by
appropriate authorities, such as the Institute of Electrical
and Electronics Engineers, or IEEE, the Underwriters
Laboratories, or UL, and the National Fire Protection
Association, which writes the national electrical code.
The States are already pursuing this approach. As figure 1,
which is attached to my testimony, indicates, over 20 States
have passed laws or enacted regulations requiring the
development of standardized interconnection requirements for at
least some categories of distributed generation facilities. I
am delighted to see that this is the approach adopted in both
S. 597 and S. 933.
Section 603 of S. 597 requires the FERC to establish
safety, reliability and power quality rules for distributed
generation facilities. It also--and I think this is
particularly important--states that the FERC may prescribe
different rules for different classes of facilities, which I
think is essential for recognizing the distinction between
residential and small commercial-scale facilities for which we
should be striving to achieve as close as we can to plug and
play-type simplicity, and larger commercial- or industrial-
scale facilities for which some project-specific engineering
may be appropriate. Section 4 of S. 933 similarly calls for the
FERC to develop reasonable and appropriate technical standards
for interconnection.
With respect to net metering--Mr. Garman mentioned this
morning, and a couple of the other witnesses have mentioned it
as well--net metering is a simple, inexpensive and easily
administered mechanism for encouraging the use of small-scale
distributed generation. Net metering allows utility customers
to spin their meter backwards when they produce more
electricity than they need to power their own lights and
appliances.
Under existing Federal law, the PURPA law, utilities are
already required to interconnect with certain distributed
generation facilities and to purchase the excess electricity
produced by those facilities. But under PURPA, the utility
purchases that excess electricity at an administratively
determined avoided cost price, which is usually a fraction of
the retail price the consumer pays for power.
Net metering provides a modest economic incentive for
eligible facilities by crediting them for this excess
electricity at the retail rate. Now metering policies have been
tremendously popular at the State level. Just 5 years ago, only
fourteen States allowed net metering, and most of those
requirements were adopted pursuant to State implementation of
the Federal PURPA law.
Today, the total stands at 34 States which 4 new States,
Arkansas, Georgia, Hawaii, and Wyoming, enacting net metering
laws just this year. And figure 2, which is attached to my
testimony, shows how much inroads we have made on the net
metering issue with respect to the penetration among the
States.
In most cases, these laws were enacted by legislation.
Although in a few cases, net metering policies have been
adopted by regulation and, in most cases, with broad bipartisan
support. In my home State of Washington, for example, the 1998
net metering law passed unanimously in a then Republican-
controlled legislature and was signed into law by a Democratic
governor.
Of the bills currently before the committee, only S. 597
currently includes a net metering provisions. Section 604 of S.
597 requires utilities and other retail electric suppliers to
offer net metering services to customers using renewable energy
resources with a maximum generating capacity of 100 kilowatts
for residential customers and 250 kilowatts for commercial
customers.
I want to mention one other element of the net metering
language in S. 597. It includes a provision prohibiting
utilities and other retail electric suppliers from
discriminating against net metering customers by imposing
additional fees or charges or otherwise treating them
differently from non-net metering customers in the same
customer class.
This is an important provision that should be retained
because it prevents suppliers from imposing charges that would
circumvent the intent of net metering, which of course is to
encourage these facilities.
The third area I want to touch on today is the area of
business practices. None of the proposals before the committee
address this fundamental barrier to the interconnection of
distributed facilities, the failure to adopt simplified
interconnection agreements and routine procedures for
processing interconnection requests. Again, the goal should be
plug and play simplicity, at least for the smaller scale
facilities, in order to eliminate unnecessary delays and
inappropriate expenses.
For guidance on this subject, I would urge the committee to
consider language in a bill introduced in the House by
Congressman Jay Inslee, H.R. 954, entitled the Home Energy
Generation Act. Mr. Inslee's bill also includes net metering
and interconnection requirements but goes further in requiring
the FERC to develop ``consumer friendly contracts'' for the
interconnection of distributed generating facilities up to 250
kilowatts. A comparable provision would be an appropriate
addition to any bill coming out of this committee.
Thank you very much.
[The prepared statement of Mr. Starrs follows:]
Prepared Statement of Thomas J. Starrs, J.D., Ph.D., Senior Partner,
Kelso Starrs and Associates, L.L.C.
Mr. Chairman, members of the committee, ladies and gentlemen: My
name is Thomas Starrs. I am a senior partner in the energy and
environmental consulting firm of Kelso Starrs & Associates LLC, based
on Vashon Island, Washington. My consulting practice focuses on the
design, analysis and implementation of legal and regulatory incentives
for the development of renewable energy technologies, with a focus on
solar and wind energy. I also serve on the Board of Directors of both
the American Solar Energy Society, a national non-profit membership
organization dedicated to advancing the use of renewable energy; and
the Schott Applied Power Corporation, one of the largest distributors
of renewable energy equipment in the United States. I am the author of
over thirty publications regarding renewable energy and distributed
energy policy. In addition, I have made invited presentations on energy
policy to numerous national organizations, and to legislative
committees, public utility commissions, and state energy offices in
over a dozen states. This is my first time testifying before the U.S.
Senate. The opinions I offer here are my own and not necessarily those
of any of the organizations with which I am associated. I very much
appreciate the opportunity to testify this morning on this important
element of our nation's energy future.
overview of distributed generation
Continuing technology innovation is creating new market
opportunities for decentralized or `distributed' power generation. The
distributed generation paradigm emerged in the early 1990s out of
research suggesting that the use of small-scale electric generating
facilities dispersed or ``distributed'' throughout the utility network
provided technical and economic benefits to the electricity system that
were not available from traditional central-station generation.
A number of studies--including several sponsored by utilities--have
identified direct, measurable economic benefits of having generation
sources located close to the end user.\1\ Distributed generation
reduces energy losses in transmission and distribution lines, provides
voltage support, reduces reactive power losses, defers substation
upgrades, defers the need for new transmission and distribution
capacity, increases reliability of electricity supply and reduces the
demand for spinning reserve capacity.\2\ In fact, several studies have
concluded that under many circumstances (particularly where the
utility's distribution system is operating near capacity) non-
traditional distributed benefits are comparable in scale to traditional
energy and capacity benefits.\3\
---------------------------------------------------------------------------
\1\ See D. Shugar, Photovoltaics in the Utility Distribution
System: The Evaluation of System and Distributed Benefits, Pacific Gas
& Electric (July 1991); R. Lambeth & T. Lepley, Distributed
Photovoltaic Evaluation by Arizona Public Service, 23rd IEEE PV
Specialists Conference (May 1993).
\2\ Howard J. Wenger, Thomas E. Hoff & Brian K. Farmer, Measuring
the Value of Distributed Photovoltaic Generation: Final Results of the
Kerman Grid-Support Project, Conference Proceedings, First World
Conference on Photovoltaic Energy Conversion (December 1994), p. 793.
\3\ See E. Prabhu, Finding High Value for Grid-Connected PV:
Southern California Edison's Innovative Solar Neighborhood Program,
American Solar Energy Society Annual Conference (1995); J. Oppenheim,
PV Value Analysis: Progress Report on PV-COMPACT Coordinating Council's
Consensus Research Agenda, American Solar Energy Society Annual
Conference (1995); H. Wenger, T. Hoff & B. Farmer, Measuring the Value
of Distributed Photovoltaic Generation: Final Results of the Kerman
Grid-Support Project, First World Conference on Photovoltaic Energy
Conversion (1994); D. Keane, Grid-Support Photovoltaics: Summary of
Case Studies, Pacific Gas & Electric (1994).
---------------------------------------------------------------------------
The increasing availability of distributed technologies will
provide residential, commercial and industrial customers with
economically viable options for using locally-available energy
resources to meet their own electricity needs. In addition, I believe
the public interest is best served by encouraging the use of solar
energy, wind energy, and other environmentally-preferred renewable
energy resources in distributed applications.
Where the distributed technology is fueled by a renewable resource,
it offers the additional benefit of displacing fossil-fuel generation
or other generation technologies with greater environmental impacts.
Solar and wind energy are the quintessential distributed resources,
allowing homeowners, businesses and industries to capture additional
economic value from two natural resources that flow freely and nearly
ubiquitously over the Earth. The use of solar and wind energy requires
no mining or processing of natural resources, no shipping or pipelining
of a fuel, no combustion, and no pollution control. Rather, these
resources require only the technology needed to capture and convert the
available sun or wind into electricity or other forms of useable
energy. Solar electric and wind energy technologies can be located
anywhere the sun shines or the wind blows, and can be used to generate
power on any scale, from watts to megawatts.
From its modest start in the research and development departments
of utilities a decade ago, distributed generation has emerged as one of
the most-discussed aspects of the electricity industry. Electric and
gas utilities are investing in distributed technologies; venture
capital is pouring into companies focusing on distributed generation;
and utility regulators are exploring the policy implications of
integrating distributed generation into existing electric utility
systems.
advantages and disadvantages of distributed generation
A recent report from the Worldwatch Institute lists eight benefits
of distributed generation (which it refers to as ``micropower''
technologies). The following table describing these benefits is from
the Worldwatch paper, with an additional column I prepared explaining
their applicability to solar and wind energy.
EIGHT HIDDEN BENEFITS OF MICROPOWER
------------------------------------------------------------------------
Applicability to
Benefit Description solar and wind
------------------------------------------------------------------------
Modularity.................. By adding or Solar and wind
removing units, technologies are
micropower system among the most
size can be modular, available
adjusted to match from watts to
demand. megawatts
------------------------------------------------------------------------
Short Lead Time............. Small-scale power Solar and wind
can be planned, systems have
sited and built shorter lead times
more quickly than than any other
larger systems, generating
reducing the risks technologies
of overshooting
demand, longer
construction
periods, and
technological
obsolescence.
------------------------------------------------------------------------
Fuel Diversity and Reduced Micropower's more As non-depletable
Price Volatility. diverse, renewables- renewable
based mix of energy resources, solar
sources lessens and wind energy are
exposure to fossil freely available
fuel price and cannot be
fluctuations. exhausted,
eliminating their
vulnerability to
fuel price
fluctuations
------------------------------------------------------------------------
``Load-Growth Insurance'' Some types of small- Solar energy is well
and Load Matching. scale power, such correlated with
as cogeneration and electricity demand,
end-use efficiency, particularly for
expand with growing summer-peaking
loads; the flow of utilities whose
other resources, peak is driven by
like solar and air conditioning
wind, can correlate demand
closely with
electricity demand.
------------------------------------------------------------------------
Reliability and Resilience.. Small plants are Solar and wind
unlikely to all energy systems use
fail modular components
simultaneously; that are easy to
they have shorter repair and replace,
outages, are epsier and can be
to repair, and are dispersed over the
more geographically landscape
dispersed.
------------------------------------------------------------------------
Avoided Plant and Grid Small-scale power Solar energy systems
Construction, and Grid can displace can be sited in
Losses. construction of new locations designed
plants, reduce grid to maximize these
losses, and delay benefits
or avoid adding new
grid capacity or
connections.
------------------------------------------------------------------------
Local and Community Choice Micropower provides Solar and wind
and Control. local choice and energy development
control and the is usually the
option of relying preferred choice of
on local fuels and local communities,
spurring community and small-scale
economic applications often
development. can be permitted
without
environmental
impact review
------------------------------------------------------------------------
Avoided Emissions and Other Small-scale power Solar and wind
Environmental Impacts. generally emits energy systems
lower amounts of produce no
particulates, emissions and have
sulfur dioxide and a minimal
nitrogen oxides, environmental
heavy metals and impact
carbon dioxide, and
has a lower
cumulative
environmental
impact on land and
water supply and
quality.
------------------------------------------------------------------------
Source: Seth Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
No. 151 (Worldwatch Institute, July 2000), p. 33 first two columns);
third column by the author.
By contrast, there are relatively few disadvantages of distributed
generation. The principal one is that distributed generation remains
more expensive than central-station generation. For example, while
installed cost of new central-station generating facilities is between
$500 and $1,000 per kW, the cost of combustion-based distributed
technologies ranges from $600 to $1,500 per kW, and the cost of cleaner
non-combustion technologies such as solar cells, wind turbines, and
fuel cells range from $900 to $10,000 per kW.\4\ It appears likely,
however, that with mass production the cost of many distributed
technologies will drop significantly, making them more competitive with
central-station generation.
---------------------------------------------------------------------------
\4\ S. Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
No. 151 (July 2000), pp. 19 & 24.
---------------------------------------------------------------------------
The second disadvantage of distributed generation is that most
fossil-fueled distributed technologies are not currently as clean as
their central-station counterparts, which means that distributed
generation does not necessarily represent an improvement in the
environmental characteristics of the electricity industry. According to
the U.S. Environmental Protection Agency, the electricity industry in
the mid-1990s was responsible for approximately:
72% of sulfur dioxide (SO2) emissions;
33% of nitrogen oxide (NOX) emissions;
32% of particulate matter (PM) emissions;
23% of emissions of mercury, a toxic heavy metal, and
36% of all human-caused emissions of carbon dioxide, the
most dominant `greenhouse' gas.\5\
---------------------------------------------------------------------------
\5\ Comments of the U.S. Environmental Protection Agency to the
Federal Energy Regulatory Commission, Promoting Wholesale Competition
Through Open Access Non-Discriminatory Transmission Services by Public
Utilities, August 7, 1995, p. 7.
---------------------------------------------------------------------------
Innovations in larger-scale generating facilities, such as
combined-cycle gas turbines (CCGTs), have resulted in substantial
reduction in emissions per kilowatt-hour from these facilities. Unless
and until distributed technologies can match the environmental
performance of these larger-scale facilities, increased use of
distributed generation may not provide any incremental improvement in
the environmental characteristics of the electricity industry. For
example, recent studies prepared for the California Air Resources Board
and the Energy Foundation \6\ indicate that the diesel-fueled internal
combustion engines used in some distributed applications are 60-100
times more polluting than CCGTs. Even fuel cells, when powered by
hydrogen extracted from natural gas, may offer little if any
environmental advantage over CCGTs.
---------------------------------------------------------------------------
\6\ See Air Pollution Emission Impacts Associated with Economic
Market Potential of Distributed Generation in California, Prepared for
the California Air Resources Board and the California Environmental
Protection Agency by Joseph Iannucci et al., Distributed Utility
Associates (June 2000); and Can We Have Our Cake and Eat It Too?:
Creating Distributed Generation Policy to Improve Air Quality, Prepared
for the Energy Foundation by James Lents, Center for Environmental
Research and Technology, University of California, Riverside
(Distribution Draft November 2000).
---------------------------------------------------------------------------
It is important for policymakers to understand that not all
distributed technologies are equal from an environmental perspective,
and that among distributed generating technologies, only solar
photovoltaic and wind energy systems currently offer clear
environmental benefits compared to other newer, more efficient
generating resources. Policymakers should recognize and account for the
significant differences in the environmental characteristics of various
distributed technologies in determining to what extent these
technologies deserve support. Rules encouraging the use of distributed
technologies without regard for their environmental performance may do
a disservice to the public. As a result, public policies should favor
those distributed technologies that offer significant environmental
benefits relative to other generating technologies.
the public interest in a distributed energy future
The transition to a distributed energy future is likely to result
in an electricity system that is less polluting and more efficient,
reliable, and resilient.
Distributed technologies are the electrical equivalent of the
personal computer. Computing power used to be concentrated in large-
scale mainframe computers with access via ``dumb'' terminals at the
end-user's location. The last two decades have seen a near-complete
transition to microcomputers or minicomputers, each able to operate
independently but also frequently linked to other computers to create
electronic networks of information. Similarly, the generation of
electric power has been concentrated in large-scale central-station
facilities with the power transmitted, for the most part
unidirectionally, to end-users. Increased reliance on distributed
generation ultimately will result in a complex web of generating
sources, with power flowing in multiple directions through the
distribution system. Although for the foreseeable future this
transition will not be complete, in that distributed generation will
supplement rather than replace existing central-station generation,
some industry analysts believe that new central-station plants on the
order of 1,000 MW (typical of large nuclear and coal-fired power
plants) will soon be unheard of.
Much of the promise of the transition to a distributed energy
future stems from potential improvements in the efficiency of energy
conversion and in the environmental performance of the energy supply
system. On-site generation allows the capture of waste heat, increasing
the overall systems efficiencies of many combustion and non-combustion
distributed technologies, including fuel cells, to as much as 80-90
percent. In addition, some distributed technologies--with the
exceptions noted earlier--offer substantial environmental benefits
relative to existing energy conversion technologies. The Worldwatch
Institute notes that micropower technologies that rely on cogeneration
and cleaner fuels--either renewable energy or the cleanest of the
fossil fuels, natural gas--have 50 to 100 percent fewer emissions, on a
per-kilowatt basis, of particulates, nitrogen and sulfur oxides,
mercury, and carbon dioxide than traditional fossil-fuel generation.\7\
---------------------------------------------------------------------------
\7\ Micropower, pp. 36-37.
---------------------------------------------------------------------------
The threat of human-caused climate change alone is reason enough to
encourage the structural changes necessary to support a distributed
energy system. Under a business-as-usual approach, the construction of
new generating facilities would triple the carbon emissions from the
electricity sector in developing nations alone. Widespread adoption of
distributed renewable generation could reduce these projected emissions
by 42 percent.\8\
---------------------------------------------------------------------------
\8\ Micropower, p. 37.
---------------------------------------------------------------------------
A distributed energy future also will help to resolve reliability
and power quality concerns. Electricity reliability problems recently
have reached crisis proportions, turning energy issues into front-page
headlines for the first time in over two decades. Transmission
constraints and capacity shortages in some regions have resulted in
power disturbances and outages. An outage in Chicago during the summer
of 1999 cut power to 2,300 businesses, including the entire Board of
Trade on a mid-week afternoon.\9\ Supply problems in San Diego
contributed to a doubling and even tripling of electricity prices
during the summer of 2000.\10\ These problems increasingly are seen not
as isolated instances, but as indications of a power supply system that
has eroded as demand has grown.
---------------------------------------------------------------------------
\9\ Micropower, p. 38.
\10\ Testimony of San Diego Mayor Susan Golding to the Board of
Governors of the California Independent Systems Operator (ISO)
Regarding Wholesale Electricity Rate Price Caps (August 1, 2000).
---------------------------------------------------------------------------
Contributing to reliability and power quality concerns are the
increasing demands placed on the electricity system by the digital
economy. Utilities traditionally sought to provide ``three 9's'' of
reliability--99.9 percent availability, equivalent to about eight hours
per year of outages. However, the proliferation of computers and other
electronic equipment that is highly sensitive to even momentary
disruptions in power has created a demand for ``six 9's'' or even
``nine 9's'' of reliability. The existing distribution system is unable
to provide this level of performance, forcing e-commerce companies and
other participants in the digital economy to look elsewhere for their
reliability needs. Among the options to which they turn is distributed
generation, where innovations in power electronics, storage systems,
and communications networks have enabled distributed technologies to
meet the most stringent needs for power quality and reliability.
barriers to increased use of distributed generation
A recent report prepared for the National Renewable Energy
Laboratory describes the barriers to distributed generation encountered
in 65 different case studies, ranging from a 300 Watt solar electric
system to a 26 MW gas turbine project.\11\ I was one of the authors of
that report. In it, we identified and described a wide range of
technical, business practice, and regulatory barriers encountered by
the developers and owners of the distributed generation facilities.
---------------------------------------------------------------------------
\11\ B. Alderfer, M. Eldridge and T. Starrs, Making Connections:
Case Studies of Interconnection Barriers and Their Impact on
Distributed Power Projects, National Renewable Energy Laboratory,
Publication NREL/SR-200-28053 (May 2000).
---------------------------------------------------------------------------
Technical barriers arise from utility requirements intended to
ensure engineering and operational compatibility between the utility
grid and the distributed generator. Most of these requirements focus on
the utilities' safety, power quality, and power reliability concerns.
For solar and wind energy systems, the most prominent technical barrier
is the failure to adopt uniform technical standards for interconnection
to the utility system. Although applicable standards for solar
photovoltaic systems have been approved by the Institute of Electrical
and Electronics Engineers (IEEE 929-2000), the Underwriters
Laboratories (UL 1741), and the National Fire Protection Association
(NEC Article 690), these standards have yet to be adopted in most
states.
Business practice barriers consist of contractual and procedural
requirements for interconnection of distributed generation facilities.
Among the most common complaints of owners and developers of
distributed generation facilities is the absence of simple,
standardized procedures among local jurisdictions and utilities for
processing permitting and interconnection requests. According to the
NREL study, more than 25% of the case studies cited project delays
greater than four months. Many facility owners and developers also
objected to application and interconnection fees that were seen as
arbitrary and disproportionate. In one extreme case, the owner of a
single-module solar electric system expected to produce approximately
$40 per year worth of electricity was asked to pay up to $400 in
application and processing/inspection fees, thereby offsetting ten
years' worth of anticipated energy savings.\12\
---------------------------------------------------------------------------
\12\ Making Connections Report, Case #26, pp. 77-78.
---------------------------------------------------------------------------
Regulatory barriers include rate and tariff issues, including the
imposition by utility regulators of backup or standby charges on
distributed generation facilities; distribution wheeling charges for
the delivery of power to wholesale or retail customers other than the
utility itself; exit fees to discourage efforts to reduce dependence on
utility power through self-generation or even demand-side management;
and administratively determined buyback rates that do not reflect the
economic benefits of distributed generation or clean power generation.
For example, solar energy advocates had to appeal to the California
Public Utilities Commission to prevent a utility from imposing a
standby charge on net metering customers that would have offset nearly
90 percent of the anticipated energy savings from a 1 kilowatt solar
electric system.\13\
---------------------------------------------------------------------------
\13\ Making Connections Report, p. 24.
---------------------------------------------------------------------------
Another fundamental barrier to a distributed energy future is the
apparent absence among U.S. policymakers of the political will needed
to support the infrastructure investments necessary to enable the
widespread adoption of distributed technologies. Upgrades to the
distribution system are essential for proper integration of distributed
technologies into existing electricity networks. However, many
utilities, instead of embracing the opportunity to create the
electrical equivalent of an ``open architecture'' system, hesitate to
make the necessary utility investments, perhaps fearing the loss of
physical or economic control over the electricity system. Similarly,
many utility regulators appear reluctant to allocate the costs of
bolstering the distribution system among all customers, perhaps fearing
the lack of public support for such expenditures. Although these issues
are just starting to be addressed among the states, early evidence
suggests that much of the cost of making the transition to a
distributed energy future will be shouldered by private developers of
distributed generation facilities, even while the benefits of a
renewed, more resilient distribution system accrue to the public.
comments on proposals currently before the committee
Today's witnesses have been asked to focus their testimony on
certain sections of five bills currently before this Committee: S. 597,
S. 388, S. 933, S. 388 and S. 71. In the interest of time, I have
further narrowed my testimony to the sections of these bills that are
likely to shape the future development of markets for distributed
generating technologies. The three topics I will discuss in some detail
are the development of interconnection standards for distributed
generating technologies, net metering, and business practices.
Interconnection Standards
One of the most significant barriers to the broader
commercialization of distributed technologies is the absence of
uniform, national technical standards for the interconnection of
distributed generating facilities. The problem arises because utilities
historically have had substantial discretion over interconnection
requirements, and have often used that discretion to develop
requirements that vary considerably from one utility to the next
without appropriate technical or economic justification. These utility-
specific requirements were of relatively little concern for the
developers of larger-scale generating facilities, whose projects were
big enough that they could justify the cost of hiring consulting
engineers and attorneys to negotiate project-specific interconnection
requirements for their facilities. For smaller systems such as
residential `rooftop' solar electric systems or farm-scale wind energy
systems, these costs are an absolute deal-breaker.
Utilities play a tremendously important role in our society by
maintaining the safety and reliability of the grid, and as a result
they have legitimate concerns about the interconnection of non-utility
generating equipment to their networks. On the other hand, utilities
face a conflict of interest because they have an economic incentive to
discourage customers from generating their own electricity: the more
customers self-generate, the less those customers are buying from the
utility.
The solution to this problem is the adoption of national standards
developed by appropriate authorities, such as the Institute of
Electrical and Electronics Engineers (IEEE), Underwriters Laboratories
(UL), and the National Fire Protection Association (which writes the
National Electrical Code, or NEC). The states are already pursuing this
approach: As figure 1 indicates, over 20 states have passed laws or
enacted regulations requiring the development of standardized
interconnection requirements for at least some categories of
distributed generating facilities.
I am delighted to see this approach adopted in both S. 597 and S.
933. Section 603 of S. 597 requires the Federal Energy Regulatory
Commission (FERC) to establish safety, reliability and power quality
rules for distributed generating facilities. It also specifically
states that the FERC may prescribe different rules for different
classes of facilities, which I think is essential for recognizing the
distinction between residential- and small commercial-scale facilities,
for which we should be striving to achieve `plug-and-play' simplicity;
and larger commercial- or industrial-scale facilities, for which some
project-specific engineering may be appropriate. Section 4 of S.933
similarly calls for the FERC to develop ``reasonable and appropriate''
technical standards for the interconnection of distributed generating
facilities. I commend Senator Bingaman and Senator Jeffords, as well as
their co-sponsors, for recognizing the importance of this issue in
their bills.
Net Metering
Net metering is a simple, inexpensive, and easily-administered
mechanism for encouraging the use of small-scale distributed
generation. Net metering allows utility customers to spin their meter
backwards when they produce more electricity than they need for their
own lights and appliances.
Under existing federal law (the Public Utility Regulatory Policies
Act of 1978), utilities are required to interconnect with certain
distributed generating facilities, and to purchase the excess
electricity produced by those facilities. But under PURPA, the utility
purchases that excess electricity at an administratively-determined
`avoided cost' price, which is usually a fraction of the retail price
the customer pays for power. Net metering provides a modest economic
incentive for eligible facilities by crediting them for this excess
electricity at the retail rate.
Net metering policies have been tremendously popular at the state
level. Just five years ago, only 14 states allowed net metering, and
most of those requirements were adopted pursuant to state
implementation of the federal PURPA law. Today the total stands at 34
states, with four new states--Arkansas, Georgia, Hawaii and Wyoming--
enacting net metering laws just this year (see figure 2). In most
cases, these laws were enacted by legislation (although in a few cases
net metering policies were adopted by regulation), and in most cases
with broad bipartisan support. In my home state of Washington, for
example, the 1998 net metering law passed unanimously in a then-
Republican controlled legislature and was signed into law by a
Democratic Governor.
Of the bills currently before this Committee, only S. 597 currently
includes a net metering provision. Section 604 of S. 597 requires
utilities and other retail electric suppliers to offer net metering
service to customers with eligible on-site generating facilities,
defined as those using renewable energy resources with a maximum
generating capacity of 100 kilowatts for residential customers, and 250
kilowatts for commercial customers.
I respectfully suggest that this Committee revisit the question of
these system size limits, which I believe are too large in the case of
residential customers, and too small in the case of commercial
customers. For residential customers, a size limit of 10 kilowatts
should be more than adequate for all but the largest homes. For
commercial customers, on the other hand, a limit of 1,000 kilowatts (or
1 megawatt) would be more appropriate. California expanded its net
metering law to include facilities up to 1 megawatt earlier this year,
and the response has been tremendous, with a number of utility
customers pursuing the installation of larger-scale facilities. This
size limit also enables the use of utility-scale wind turbines (which
typically are sized around 1 megawatt) in distributed applications,
allowing large customers to capture some of the economies of scale
associated with these larger wind turbines, where they have the wind
resources available to support the use of these turbines.
Three other elements of the net metering language in S. 597 deserve
mention:
First, it includes a provision prohibiting utilities and other
retail electric suppliers from discriminating against net metering
customers by imposing additional fees or charges, or otherwise treating
them differently from non-net metering customers in the same customer
class. This is an important provision that should be retained because
it prevents suppliers from imposing charges that would circumvent the
intent of net metering.
Second, it includes a provision requiring utilities and other
retail electric suppliers to provide a carryover credit for any excess
generation during a billing period, with the kilowatt-hour credit
appearing on the bill for the following billing period. This provision
is particularly valuable for resources such as solar and wind energy,
which are subject to seasonal variations that may cause customers to
produce more than they need to offset their own use in some months, and
less than they need in other months.
Third, it spells out specific technical requirements for
interconnection of net metering facilities, based on IEEE and UL
standards and NEC requirements, which dovetails nicely with the
requirement in the bill that interconnection standards be developed for
all distributed technologies. These requirements are consistent with
those already in place in over a dozen states.
Business Practices
None of the proposals before the Committee address another
fundamental barrier to the interconnection of distributed generating
facilities: the failure to adopt simplified interconnection agreements
and routine procedures for processing interconnection requests. Again,
particularly for small-scale facilities, the goal should be to attain
``plug and play'' simplicity that eliminates unnecessary delays and
inappropriate expenses. Unfortunately, many utility customers across
the country have had the experience of contacting their local utility
seeking information on interconnection procedures, only to be ignored
or rebuffed or otherwise discouraged. In response, some states have
explicitly required the development of simplified agreements and
specific timelines for the processing of interconnection requests.
For guidance on this subject, I would urge the Committee to
consider language in a bill introduced in the House by Congressman Jay
Inslee, H.R. 954, titled the ``Home Energy Generation Act.'' Mr.
Inslee's bill also includes net metering and interconnection
requirements, but goes further in requiring the FERC to develop
``consumer-friendly contracts'' for the interconnection of distributed
generating facilities up to 250 kilowatts (see Section 215(i)). A
comparable provision would be an appropriate addition to any bill
coming out of this Committee.
Conclusions
Twenty years ago, the telecommunications industry in the U.S. was a
cumbersome, heavily regulated business dominated by regulated
monopolies that demonstrated little appetite for innovation. Today, the
telecommunications industry is highly competitive and highly
innovative, with consumers able to choose among a remarkable array of
products offered by many different manufacturers. One of the key
elements in that transformation was overcoming the telephone utilities'
institutional resistance to interconnecting facilities and equipment
from competing providers into the wireline network under fair, non-
discriminatory terms and conditions.
The electricity industry in the U.S. is in the early stages of a
similar transformation. The traditional paradigm of large, central-
station generating plants feeding a network of high-voltage
transmission lines and local distribution systems in a geographic
region, all owned by a single, vertically-integrated company, will
evolve in the coming decades to a complex web of interconnected
facilities for generating and storing electricity, owned by many
different companies and even individuals. The utilities' role will
shift to the management of electricity flowing in every direction
through the network. Fortunately, this transition has the potential to
provide substantial benefits for all Americans, including a more
efficient, more responsive, more reliable, and more environmentally-
benign electricity system. But our nation's ability to make this
transition efficiently and smoothly is threatened by the same
reluctance on the utilities' part--except that it is the electric
utilities this time--to integrating these facilities into their
distribution networks. The bills cuurently before this Committee can
help overcome this reluctance and encourage the utilities to embrace
this new era.
I would like to thank Senator Bingaman and the others members of
the Committee for expressing interest in distributed technologies and
in demonstrating leadership by proposing specific initiatives to
encourage the development of viable, competitive markets for these
technologies.
Thank you for the invitation to appear before you today. I would be
happy to answer any questions the Committee may have.
The Chairman. Well, thank you very much. I think all of
this is very good testimony.
Let me ask the same question I asked Secretary Garman a few
minutes ago. And that is, on the issue of fossil fuel
efficiency, that is a concept, I know, that has been kicking
around Washington for a long time and think tanks for a while.
I would be interested in knowing whether any of you have
looked at this, whether you think it would make sense for us to
consider adopting a fossil fuel efficiency standard in order to
try to ensure that the fossil fuels used in power generation in
this country are, to the extent possible, used efficiently and
that we incentivize investment in more efficient power
production at every stage as we move forward.
If any of you have thoughts about that, I would be anxious
to hear them. Mr. Hall?
Mr. Hall. Thank you, Mr. Chairman. I think the underlying
premise of the fossil fuel efficiency standard is to come up
with another way of thinking about energy production, its
pollution prevention characteristics and the way that that
relates to environmental regulations. So like what Mr. Garman
said this morning, I think it is very important that we retain
the connection between a fossil fuel efficiency standard or
some other form of modernized environmental regulation along
the lines of what I have included in my testimony this morning
to replace new source review with a program that recognizes
that there are better ways to address our environmental
permitting of energy facilities in the country, that the
addition of a fossil fuel efficiency standard without
addressing the underlying environmental regulatory issues would
add an additional layer of regulation, as opposed to
simplifying our overall regulatory approach, which I think the
fossil fuel efficiency standard is intended to do, similar to
the proposal that you see in my testimony from the Clean Power
Group.
So my only comment is, to the extent that this committee
would be able to address the underlying environmental
provisions, that would be great. I do not believe that you are
in a position to do that. So I would not encourage you to
pursue the fossil fuel efficiency standard without the ability
to address new source review at the same time.
The Chairman. Anybody else have a thought? Mr. Demeter?
Mr. Demeter. Mr. Chairman, I think it is an intriguing
idea. I agree very much that we have to deal with new source
review issues. Several projects which I am involved in, working
with power companies to co-fire biomass fuels with coal, have
dragged a bit because of the threat for new source reviews,
these modifications being looked at perhaps major
modifications.
Even though we are not increasing the capacity of these
boilers, and in fact we are reducing emissions, the NSR has
been a barrier to this particular renewable energy and this
particular conversion technology. So NSR is integral here.
It also brings up another issue in terms of how renewable
energy might be considered in this. I would have to look at
exactly how you would calculate the energy in and the energy
out. Perhaps on the energy out side you would give credits to
some of the renewable energy production involved in the
equation.
And also, I think that it would be, again, just off the top
of my head, worth at looking at how there might be interference
with existing allowance markets, sulfur dioxide NOX
emission traits. There might be an impact there on how those
markets operate. It would require a little more thought at this
point.
The Chairman. Okay. On wind projects, Mr. Boyd, let me ask
you, is there something needed? Should we be legislating some
change in Federal law with regard to use of Federal lands for
wind farms or wind power generation? I have anecdotes repeated
to me in New Mexico where people have been looking for sites to
locate wind farms and have felt that the delay in getting
authority or permits to use Federal land were such that they
really did not consider that option and instead went to private
land. Have you encountered that problem at all, or do you think
that is a problem worth worrying about?
Mr. Boyd. My company has not really encountered the
problem, but I know of some other companies that have. I think
the biggest problem is that you trigger a NEPA review, which is
at minimum a year and sometimes longer, depending on the agency
that you are dealing with and how good they are at permitting.
But certainly it is something worth looking at. I think
that we have a lot of Federal lands that could bring income
into the treasury, if they were used for wind energy.
The Chairman. Okay. Mr. Starrs, let me just ask you a final
question. The previous administration set a goal for the solar
industry, to have a million solar roofs installed by 2020. Do
you know if there anything going on to try to achieve that goal
at the current time, or has this sort of gone by the board?
What is your view on that?
Mr. Starrs. Well, I know that under the prior
administration there were a number of regional partnerships set
up across the country. And I know that those regional
partnerships are still in place. And there has been a lot of
good work that has come out of the efforts at the Federal level
in conjunction with these regional partnerships to support
local and regional efforts to develop solar.
I do not think that there has been any particularly strong
statement of support by the current administration with respect
to continuing the funding of that program. So I do not think
there is a lot going on right now.
Senator Craig.
Senator Craig. Thank you, Mr. Chairman. I will be brief.
But I want to thank all of you gentlemen for your
testimony. I think our business here is to get the basket of
energy full again. And that means with all different types of
resource. And our business should not be to pick and choose but
to create the flexibility to allow that to happen in the
marketplace where there is a disadvantage or a disincentive to
try to stop that.
Mr. Boyd, I understand, or I think I understand, having
talked with folks of your company and others that are in the
business of wind, that this tax credit on a 5-year increment is
critical, is it not?
Mr. Boyd. Yes, sir.
Senator Craig. Anything less than that probably deters the
installation of wind.
Mr. Boyd. Well, what happens is that we have to go out in
the market to finance projects. And you know how skittish the
financial community can be. And if we have short-term increases
or extension when we do go out, people get nervous that the
project will not get done in time for the credit. So they are
unwilling to lend. So a longer extension, the 5-year program,
we feel would be very helpful.
Senator Craig. Are most of your projects now of the new and
larger turbine design?
Mr. Boyd. Yes. Our turbine, current-sized turbine, that we
are building is a 1.5 megawatt. We will be putting 300 of those
in, primarily in Texas, Pennsylvania, New York, and Wisconsin.
Senator Craig. The wind also blows in Idaho.
Mr. Boyd. I know. I lived in Idaho for 8 years.
Senator Craig. Well, if you lived over in that southeastern
toe of the boot that I see represented on that particular
diagram, it seems there might be some opportunities there.
Mr. Boyd. Yes. We are looking at Idaho.
Senator Craig. Thank you.
Gentlemen, thank you all.
The Chairman. Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. I regret
I was not here for the first part of the testimony today. But I
really appreciate this hearing. I agree with Senator Craig that
we have to produce more. I do not necessarily agree that we
just let the market decide what we do here. I think in some
respects, especially with respect to----
Senator Craig. That is not really a constructive idea, the
market.
Senator Dorgan. Well, that cranky little Judge Judy makes
$7.4 million a year on television. And the Chief Justice of the
Supreme Court makes $180,000. So much for the market.
Senator Craig. Then you and I are miscast.
[Laughter.]
Senator Dorgan. I think the market is a wonderful allocator
of goods and services, but there are perversions in the market
that require sometimes corrections and adjustments and
incentives and stimulus. And I think with respect to renewable
sources of energy and limitless sources of energy, I think we
need to have public policies to stimulate it beyond market
forces, stimulate it and give it an opportunity and an seed bed
and some nurturing.
And so again, while the market--I did not mention $255
million for a shortstop in major league baseball in the market
analysis. But wind energy is something that we are working on
in North Dakota. And the charts from the Department of Energy
say that we are number one in wind energy potential. North
Dakota is the Saudi Arabia of wind.
[Laughter.]
Well, that is what they say, especially when I am home, I
might suggest.
[Laughter.]
And we are very anxious to make good use of the wind energy
potential, but limit it by transmission capabilities. And so we
have to marry the opportunities that exist in some of these
areas with the ability to transport the energy where the energy
is needed. And I was interest in some of the discussions about
wind energy. Mr. Boyd, I know that your company is very
involved and very active around the country in these areas.
But I think distributed generation, biomass, wind energy, a
whole series of technologies that have always kind of been
relegated as an afterthought by some. I think they can provide
significant new sources of energy for our country. And I think
the testimony that all of you have given is important
testimony.
We need to produce a piece of legislation that does use the
market in an effective way and that always provide stimulus
beyond the marketplace and other areas so that we have a
balanced energy package. And we need to produce more fossil
fuel and renewables and efficiencies. And a whole series of
things need to come together in a balanced energy package. And
your contribution, I think, in this hearing called by the
chairman is a very significant contribution.
Might I just ask one question? The issue of transmission, I
assume all of you recognize that from a number of sources of
energy that you describe in your testimony, the ability to
transport that energy to where it is needed, except with
respect to the testimony of Mr. Hall, I believe, which I find
interesting.
The chairman and I, and also Senator Craig, sat in a
briefing on that subject within the last week or so. And I
think you make some good points about the loss of efficiency
and so on and some things we can do in that area in the power
heat generation.
But again, can you just again respond on the issue of the
transmission capability? Mr. Boyd, you know. I mean, you are
involved in wind. You know North Dakota is number one in the
country, right?
Mr. Boyd. Yes, sir.
Senator Dorgan. And so you are not there because of
transmission problems. Why are you not building wind turbines
on the prairies of North Dakota?
Mr. Boyd. Because we cannot get the power out of the State
into the markets that need it. It is pretty simple.
Senator Dorgan. But were it not for that, you would be
there building some wind turbines and some blades.
Mr. Boyd. Yes, because, you know, wind energy, the better
the wind, the cheaper the cost. So we would certainly be there.
Senator Dorgan. Can you give us just a description of how
the new, more efficient wind turbine technology has improved
our capability and brought down costs?
Mr. Boyd. Well, the major way it has is just the increase
in size. It turns out that the economics for wind are such that
the cost that you pay to get larger is less than what you can
generate from the turbines. So you make more revenues from
larger turbines. And the cost is not in the same ratio.
The second thing is that we have a power electronic system,
which allows you to have variable speed. And that way you can
get more power out of the turbine. We used to absorb a lot more
of the forces into the frame of the machine. Now we are able to
take those through and generate power.
Senator Dorgan. Mr. Chairman, could I just good naturedly
observe that there is no solar energy in these rooms. We always
keep the drapes closed, presumably for television coverage. And
even when there are no television cameras present, in every
hearing room in the U.S. Senate we, who participate, have this
gray pallor because we continue to have the drapes closed. And
I hope that perhaps we can reform that as well.
The Chairman. Well, I think that is a very good suggestion.
We have talked about that once before. Why do we not try to fix
that? We will try to fix that.
Thank you very much.
Senator Smith.
Senator Smith. Thank you, Mr. Chairman. I wonder if any of
you can comment upon the administration's proposal of offering
up to $1,500 for residential solar power, whether you think
that would be helpful and stimulating, solar power as a
renewable.
Mr. Starrs. Senator Smith, I can respond to that. The short
answer is yes, that it would be helpful. And as Senator Dorgan
just noted, I think that these kinds of modest incentives have
played a role in the past in encouraging the development of
some of these cleaner, locally available energy generating
technologies. And solar is certainly no exception.
In fact, comparable incentives that have already been
adopted at the State level in some States are driving very,
very substantial increases in the market for solar energy
systems. California in particular has a rebate program in place
that has spurred tremendous growth in the market there. And as
we speak, there are solar electric systems going in in
residences and businesses all over the State of California at a
rate that is really unprecedented.
Senator Smith. Mr. Boyd, can you talk to me about the
windmill farms you are doing? What have you done to mitigate
vibration and impact on wildlife and birds?
Mr. Boyd. Well, the major thing that we have done is do
biological studies before we put in a project to make sure that
we are not going to affect the population of animals and birds
that are in the area. That did not happen in some of the early
projects in California. And we learned from that mistake.
Senator Smith. And in doing that, you are doing that in
private land.
Mr. Boyd. Yes.
Senator Smith. But you think the environmental impact is de
minimis or----
Mr. Boyd. Yes, I really do. I think the major impact of
wind turbines is probably visual, as you mentioned. In terms of
affecting the land, these larger turbines, you do not have very
many of them on a piece of land. Wind turbines are kind of land
intrusive more than land intensive.
Senator Smith. That is all, Mr. Chairman.
The Chairman. Thank you very much.
Senator Carper.
Senator Carper. Welcome. Thanks for joining us today. I am
a new member of the committee. Some of these folks have been
here for years; I have been here for days. And some of what you
talked about, frankly, I do not fully understand. And I am
going to ask us to go back, a couple of you, and ask you to
give me a primer on some of what you have been taking about.
Mr. Boyd, I missed your testimony entirely. I have another
committee that is meeting at the same time. Could you just
start off by taking a minute or so and just tell me, among the
things that you said, I know a lot was important, but just hit
me with some of the highlights, please.
Mr. Boyd. Well, the wind is the fastest growing renewable
technology in the world today. And that is primarily because
the price has been driven down so it is as close to being
competitive with other generation technologies. The growth that
we will see will probably double, almost double, in the United
States this year. Over the next 5 years, we will see about
$40,000 megawatts go in around the world. Europe is much
farther ahead in terms of deploying wind energy than we are
here in the United States.
Senator Carper. Why is that?
Mr. Boyd. Because they have given a lot of incentives to
wind energy. Germany, for example, has what they call a feed
law. They pay 90 percent of the retail rate to people to put in
wind. Other countries have different types, but pretty good
incentive programs.
The have decided that wind is a technology that they want
to supply. I think in the case of Denmark now they are about 20
percent is wind energy.
Senator Carper. What kind of potential do you see in our
country for utilizing wind energy?
Mr. Boyd. Well, it is unlimited. I mean, in terms of
resource, we could easily duplicate what the power generation
capacity of the United States is right now. That is not likely
to happen, because wind will just be a part of the mix; it is
not going to take over the world.
Senator Carper. In terms of what we should be doing in this
country, in this body, to encourage the harnessing of wind
energy, just, again, what further should we do?
Mr. Boyd. Well, I think I mentioned two things in my
testimony. Number one is we have a wind production tax credit,
which is very valuable to us in terms of getting our costs
down.
Senator Carper. How would that work?
Mr. Boyd. For each kilowatt hour of win energy, you get a
tax credit of 1.5 cents. So this lowers the effective cost of
wind energy when you sell it.
Senator Carper. Would that credit have had to have been
higher 5 or 10 years ago, in order to make wind competitive?
Mr. Boyd. I am sorry, the question again?
Senator Carper. Would that credit have had to have been
higher 5 or 10 years ago, in order for wind to be competitive?
Mr. Boyd. Actually, the credit was in the Energy Policy Act
of 1992. That is when it started. And there was a time where it
went away, and then it was reinstated. And it could have been
higher. I think it would have been helpful if it was higher at
the time. But, looking at the other side, I think that the
technology had time to catch up with the market. So I do not
think that it hurt us that badly.
Senator Carper. Okay. Thank you.
Anybody else want to comment in response to any of the
questions I asked Mr. Boyd?
Mr. Starrs. I would just like to mention one issue that has
not really come up much, Senator Carper, and that is that, as
Senator Dorgan mentioned, there may be reasons to encourage or
discourage certain technologies. And one of the things that we
have not really emphasized adequately, I think, is the
importance of fuel diversity.
Although we have somewhat diverse electricity resource base
in this country today, the fact is that almost all of the new
generating capacity coming on line is fueled by natural gas.
And I think the evidence from the last 6 months or so
adequately illustrates the fact that natural gas prices and
other fossil fuel prices can be highly volatile.
And one of the reasons that I think it does make good
public policy sense to encourage the development of renewable
technology, such as solar and wind energy, is that they are
really immune from those sorts of supply price volatility
issues. And even if they are at the margin incrementally more
expensive--and as we have already heard, wind may not be. But
even if they are, I think there is a strong public interest in
encouraging the broader diversification of our energy resource
base.
Senator Carper. Thank you.
Now for the primer for me. Probably everybody in the room,
Mr. Chairman, understands what these fellows were talking about
when they talked about interconnection standards and
distributed generating facilities and net metering policies. I
may be the only person who does not fully understand those
terms.
But for my benefit, alone perhaps, for my benefit alone,
give me a primer on what we mean by interconnection standards.
How are they relevant to this discussion? What should I
understand about them, distributed generating facilities and
net metering policies, those three?
Mr. Starrs. Mr. Carper, let me jump in because I actually
had a bit of testimony that I did not get to address in this
context. And I think I am going to explain by offering what I
hope is a useful analogy to the telecommunications industry.
Twenty years ago, the telecommunications industry was a
cumbersome, heavily regulated business dominated by regulated
monopolies that had little appetite for innovation. Today, the
telecom industry is highly competitive and highly innovative
with consumers able to choose among a remarkable array of
products from many different manufacturers. And one of the key
elements in that transformation was overcoming the telephone
utilities' traditional reluctance to allow competing companies
to interconnect their equipment under fair and reasonable terms
and conditions.
The same kind of transformation is happening in the
electricity industry today. The traditional paradigm of large
central station generating plants feeding a network of high
voltage transmission lines and local distribution systems,
which are all owned, have been owned, by a single vertically
integrated company is changing.
And it is going to evolve in the coming decades to a
complex web of interconnected facilities for the generation and
storage of electricity that are owned by many different people,
including residences, residential customers, and businesses,
with the utilities role shifting to one of basically managing
the flow of energy through the network.
I believe that this transition has the potential to provide
substantial benefits for all Americans, including greater
efficiency, more responsiveness, more resilience, and a more
environmentally benign electricity system.
But probably the single biggest obstacle to that, to moving
towards this new energy system, is the same reluctance on the
utilities' part, except this time it is the electric utilities,
to integrate these facilities into their distribution networks.
And that is the basis for our interest in having the Senate and
the Congress address this issue of interconnection standards.
Senator Carper. That was helpful. That was helpful.
Mr. Hall.
Mr. Hall. If I could just add one additional element to
that, which is that, unlike in the telecommunication debate,
where there were not lots and lots of different companies that
were controlling access to the distribution and transmission
system in this case, the way that we have historically
addressed interconnection, or those that wanted to
interconnect, was a utility-by-utility activity.
And there are certainly many cases of utilities that have
been very open and willing to allow people to interconnect
where they saw that there was value for them. But there is just
as many cases, if perhaps not more, where they felt that the
ability to disagree or the perceived disagreement over
technical elements of the physical interconnection were used to
drive the costs up for people that wanted to connect such that
it became uneconomic to go forward with that project.
Senator Carper. Okay. Mr. Chairman, is there going to be
another round for this panel, or is this it?
The Chairman. Well, we have two additional panels. And so I
think this is it.
Senator Carper. All right. Thank you very much.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
And, again, thank you, panelists, for being here today. And
I apologize, too, for missing the earlier part of the hearing,
given another markup in a committee that I serve on. I have
read through some of your testimonies, and obviously some of
you have mentioned in here the very fortunate focus of our new
economy and the closeness of distributed power marrying up very
well in the sense of having that power be uninterrupted power
and close to the source. It ties in very well with a lot of the
computing advances we have made.
I did not see too much in--I saw mentioned in Mr. Starrs's
testimony about hydrogen fuel cells. I do not know if you could
comment on--I mean, a lot of the comments on developing
standards, a uniform standard, at the national level have been
focused on wind and solar and other comments. But any comments
on the hydrogen fuel cells as it relates to us coming up with
the standard processing for metering?
Mr. Starrs. I will touch on that, Senator Cantwell. Fuel
cells is a technology with tremendous promise. And I think that
has been reflected in some of the recent efforts in the States
to encourage these new energy technologies. For example, many
of the recent net metering laws, which I mentioned earlier,
and, by the way, which also tend to include interconnection
standards, have made fuel cells an eligible technology. So
there are maybe a dozen or so States right now----
Senator Cantwell. Which States?
Mr. Starrs. Well, they include Washington and Oregon. I
cannot give you a complete list, but I am most familiar with
ones in the Northwest, where I do most of my work. And so in
those States fuel cells are eligible for these streamlined
interconnection procedures that we have been discussing.
Senator Cantwell. Any of the other panelists want to
comment?
Mr. Demeter. I would just add, Senator Cantwell, that, yes,
fuel cells would be a technology that would benefit from all
the issues that we have been discussing today. They tend to be
a little more expensive as a conversion device than some
others. So they require, I think, a little more Federal
investment in the R&D side, as well as other policies.
And when you mention hydrogen fuel cells, it is not only
hydrogen gas that we are talking about here, but it is anything
that carries hydrogen with it. Ethanol, for example, can be
used. Another chemical derived from biomass, ethyl-levlionate,
can be used as sources in these fuel cells. But the fuel cell
device itself would benefit from much of what we have talked
about today.
Mr. Hall. And if I could just add, the language in S. 933
for interconnection is really a technology agnostic or
technology neutral standard for interconnecting any kind of
technology to the distribution or transmission system. So in
the case of the interconnection and the provision of backup
power, it is not necessary to differentiate between one
technology and another.
Senator Cantwell. As we go through this process of marking
up legislation, and there is riot of bills here, including the
chairman's--and thank you, Mr. Starrs, for your detailed
description about the positive aspects of a variety of pieces
of legislation on this--we obviously have industry standard
organizations like the IEEE and UL and NEC. And then we have
FERC. And obviously, we are in these various pieces of
legislation directing or saying let us direct FERC to move
faster.
So what do you think is the relationship in us moving
forward on these in the sense of not an over-reliance on FERC,
but not--it sounds like we will not get there unless we have
some national standard. And yet these standard bodies probably
have been the best--I am assuming. I would like your comment on
that--have been the best in actually coming up with and
eliminating the concerns and problems so that State standards
could be established.
So do these bills have the right balance in that equation?
Mr. Starrs. That is a very good question, Senator. And I
think it is a delicate balance to allocate the jurisdiction,
the authority, between the FERC and the States on these topics.
As we have heard from various speakers this morning, including
Mr. Garman, there have been a number of States that really have
demonstrated very substantial leadership on this topic and have
really stepped out to the forefront and have established
policies that are very encouraging while still being fair and
balanced to these new technologies.
So----
Senator Cantwell. But in--I am sorry to interrupt.
Mr. Starrs. Sure.
Senator Cantwell. But in those cases, these standard-
setting bodies probably have led the way and legislatures have
been adopting them correct, as opposed to legislators really
getting into the details----
Mr. Starrs. Absolutely.
Senator Cantwell [continuing]. Or a utility commission
getting into the details. I am assuming that they have----
Mr. Starrs. That has generally been the case. Although I
will note that sort of the most important of the proceedings of
the IEEE--IEEE is currently in the process of developing a
standard called IEEE 1547, which is a broad standard for all
distributed technologies. And that standard is not yet in
place.
So the States that have had to--well, who have been
interested in stepping out in this issue, have not been able to
rely on an IEEE standard with respect to these broader
technologies. Now there is another IEEE standard called IEEE
929 that is in place for, this is a technical issue, but for
what are called invertor-based technologies, which include
solar electric, some small wind systems, fuel cells, some gas
turbines, and so on.
And that IEEE 929 standard has been called out in many of
these State laws as the basis for the technical standards that
have been adopted there.
So, some of the States have incorporated those national
standards explicitly by reference. Others have not. I think the
main issue is that we have a good start among the States in
adopting these national standards, or the work that has been
done by these national authorities. But I think that some of
the manufacturers of equipment in this room and elsewhere would
agree that it is still very cumbersome to have sort of the
piecemeal adoption of different requirements in different
States. And that is the main driver, the main interest, in
having national standards.
And so an equipment manufacturer can build something in
Ohio or in Oregon or wherever and know with confidence that
that equipment is eligible to be interconnected in any State in
the country without having to go through a lot of State-
specific or, even worse, utility-specific hoops.
Mr. Hall. If I could just add to that, I think it is
important to recognize that, first, IEEE is a voluntary,
develops standards on a voluntary basis. And that process
normally is a long process. I have not personally been involved
with the IEEE process, but there--well, I do have someone from
my company that has been involved in it. A lot of these
standards often can take many, many years to evolve.
And but for the investment by the Department of Energy in
accelerating the development process of this particular
standard, we would be much further away than we are right now.
Correct me if I wrong, Tom, but the places where we do have
standards that have been established in places like Texas and
New York, those have been driven by the commissions,
commission-driven stakeholder processes that do not rely on
these sort of voluntary standard setting bodies. So it is in
those cases that they have actually been driven by State
legislatures or State commissions or some other legislative or
regulatory body to make sure that they could move forward in a
timely fashion.
And it is for that reason that I think we really do strike
the right balance here between what we need FERC to do, which
is to be in a position to affirmatively say we are going to
have uniform interconnection standards, we are either going to
get it out of IEEE or we are going to get it out of another
process that is equitable and open, but addresses the issues
that we need to address so that we can move on. Otherwise we
could be held hostage to a voluntary process that could take a
very, very long time, some of those processes which evolve very
slowly under normal circumstances.
Senator Cantwell. Thank you.
I see my time has expired, Mr. Chairman.
The Chairman. Thank you very much. Why do we not go ahead
and dismiss this panel? The second part of this hearing is on
hydroelectric relicensing. Let us take about 5 minutes here
while we bring forward the witnesses from panel three and panel
four and ask them all to sit here at the front table. And we
will commence again here in 5 minutes.
[Recess.]
The Chairman. Why do we not go ahead here? If the witnesses
could take their seats, I would appreciate it.
This portion of the hearing, as I indicated, is on
hydroelectric relicensing. Our first two witnesses are from the
administration. One is Mr. William Bettenberg, who is the
Deputy Director of the Office of Policy Analysis in the
Department of the Interior. And the second is Mr. Mark
Robinson, who is the Director of the Office of Energy Projects
with the Federal Energy Regulatory Commission.
We appreciate you being here very much. And why do you not
go ahead and begin? And then we will introduce the other three
witnesses once you have completed your testimony.
Mr. Bettenberg, why do you not start? If you would take one
of those microphones and put it right in front of you, that
would be a help.
STATEMENT OF WILLIAM BETTENBERG, DEPUTY DIRECTOR, OFFICE OF
POLICE ANALYSIS, DEPARTMENT OF THE INTERIOR
Mr. Bettenberg. Thank you, Mr. Chairman. It is a pleasure
to be here today to present a statement on behalf of the
Department of the Interior. I have been working with Secretary
Norton on energy issues for more than 5 months now and can
assure you that she takes very seriously her charge to
efficiently and effectively balance national interests and
natural resource and environmental preservation with energy
needs, and to do so through timely, cooperative, and efficient
processes.
You have my statement for the record. Let me simply
highlight several sections of it.
The committee has held several hearings on the hydropower
licensing process, and many of you are quite familiar with it.
For the sake of newer members, I thought I might simply point
out, on page 2 of my statement I identify the primary roles of
the Interior Department under the Federal Power Act. Basically
under section 4(e) we set standards related to protecting lands
and resources that Interior administers. Under section 18 we
share with NOAA authority for setting conditions for fish
passage. And then under section 10(j) we make other
recommendations.
On pages 3 and 4 we have summarized some results of a study
that we did a few months back regarding processing times. And I
would note that while applications are due 2 years in advance
of license expiration, the average license process takes about
4\1/2\ years. There is clearly room for improvement there.
Out of 157 licenses issued over the past 6 years, it turns
out that Interior and NOAA established conditions on about one-
quarter of them. So there are about three-quarters that do not
include Interior conditions. This included 4(e) authorities in
only 9 cases.
Interestingly, whether Interior establishes conditions or
not, there is essentially no difference in the amount of time
taken in the licensing process. FERC reached this same
conclusion in their 603 report.
On pages 4 through 6 the statement describes the
interagency task force process and highlights commitments in
that forum to improve the licensing process. We think these
represent very substantial improvements on the part of all of
the agencies that were involved in that. I would like to note
here that I suspect that Mr. Craig's prodding and proposed
legislation had a lot to do with Interior and the other
agencies paying much closer attention to problems with the
licensing process and working to improve it.
On pages 7 and 8 the statement identifies key steps in the
Department's undertaking or examining to continue to improve
the process. I would like to draw your attention to three of
those steps.
At the top of page 7 we point out that Interior and
Commerce have committed to filing preliminary conditions within
60 days after FERC says the project is ready for environmental
analysis, a modified condition 60 days after the close of the
comment period on the draft IS. Interior agencies are available
to work iteratively with applicants and others throughout the
process.
At the top of page 8 I cite the commitment to develop an
interagency consistency mechanism. This recommendation is
included in the President's national energy policy. For step 7
on page 8, I note that Interior is currently reviewing
mechanisms and criteria for its exercise of conditioning
authority. This will include examination of higher level review
mechanisms and consideration of various factors to be
considered in making conditioning decisions.
On pages 8 through 11 the statement reviews some key
aspects of the bills under consideration. Let me just highlight
three of those. S. 597, as well as the Tauzin bill marked up by
the Energy and Commerce Committee 2 days ago, provided that
parties can propose an alternative set of conditions and sets
criteria for their acceptance. We find this useful, but point
to the need to have some deadlines for this filing and to limit
it to the applicants. Also with the filing, we need to include
substantial evidence to back it up.
On pages 9 and 10 we commend on the core process provisions
of S. 71 and S. 388. Basically, we have concerns with the
timetables in those processes and a few other issues as well.
On coordinated environmental reviews in S. 71 and S. 388, we
think those are promising, but need to overcome some problems
with FERC's ex parte rules in order to be cooperators in their
need for process while protecting our standing in their
proceedings.
Finally, on the last two pages we provide five additional
areas where we think legislation could be helpful. These cover
settlements, studies, deadlines, basin-wide assessments, and
Indian trust responsibilities. We are available to work with
the committee on these bills and legislation generally in
search of improvements to the licensing process.
Mr. Chairman, that concludes my summary. I will be pleased
to respond to questions.
The Chairman. Thank you very much.
[The prepared statement of Mr. Bettenberg follows:]
Prepared Statement of William Bettenberg, Deputy Director, Office of
Policy Analysis, Department of the Interior
Good morning. My name is William Bettenberg. I am Deputy Director
of the Office of Policy Analysis in the Department of the Interior and
currently serve as the Hydropower Coordinator for the Department, as
well. On behalf of Secretary Norton, I wish to reaffirm the commitment
of the Department of the Interior (Department or Interior) to improve
and streamline the hydropower licensing process. The Secretary takes
very seriously her charge to efficiently and effectively balance
national interests in natural resource and environmental preservation
with energy needs, and to do so through timely, cooperative, and
efficient processes. I will present the views of the Department on
hydropower issues and legislation, and I have also been asked to speak
to the practices of the U.S.D.A. Forest Service (USDA/FS) today.
In this review, I will address S. 597, the Comprehensive and
Balanced Energy Policy Act of 2001, S. 388, the National Energy
Security Act of 2001, and S. 71, the Hydroelectric Licensing Process
Improvement Act of 2001, all as they relate to hydropower. Because of
its relevance, I will also refer to the Energy Advancement and
Conservation Act of 2001 as marked up by the House Energy and Commerce
Committee on Tuesday.
The President's National Energy Policy (NEP) supports actions to
streamline and improve the hydropower licensing process. I am pleased
to report to you on the status of the progress being made by the
resource agencies in effecting such improvements, to share with you the
positions of the resource agencies on the legislation being considered
by this Committee, and to suggest several additional legislative steps
that could improve the licensing process. To begin, I will provide the
Committee with some background on hydropower and a description of the
responsibilities of resource agencies in the hydropower licensing
process to place the issues in context.
a. background
Hydropower represents about 7 percent of annual generation and is
almost always the lowest-priced source of electricity when compared to
any other means of producing electricity. While subject to the vagaries
of river flows and droughts, hydrogeneration plays a unique role in
meeting power demands. While often presenting serious problems for fish
migration and spawning, hydropower avoids production of air pollutants
and a variety of other concerns compared to the use of other energy
resources.
About 45 percent of hydropower generation is administered by the
Department's Bureau of Reclamation, the Corps of Engineers (Corps), and
other Federal agencies. Non-federal projects account for the remaining
55 percent of hydropower generation and about 4 percent of the nation's
total electricity supply. The use of navigable rivers for non-federal
hydropower is conditioned through licenses issued by the Federal Energy
Regulatory Commission (FERC). These licenses also contain conditions
set by Interior bureaus and the USDA/FS to address effects of the
hydropower projects on Federal and Indian lands, by the U.S. Fish and
Wildlife Service (FWS) and the National Oceanic and Atmospheric
Administration (NOAA) with regard to fish passage, by the Corps with
regard to navigation, and by States with regard to water quality. The
process for obtaining a license can be time consuming and contentious.
The licensing process, however, is itself complex. From the standpoint
of the resource agencies--Interior, Agriculture and Commerce--it is
important to ensure that appropriate safeguards are put in place,
particularly given the fact that hydropower licenses authorize the use
of public resources for 30 to 50 years. We believe substantial advances
have been made recently in improving the process; more can be done and
we are working together on that.
Federal Power Act
The resource agencies have the important assignment under the
Federal Power Act (FPA) to participate directly in the hydropower
licensing process. Our participation is intended not to interfere with
licensing, but to ensure that key resources for which the resource
agencies are responsible are protected when navigable waterways are
used for hydropower generation.
Since enactment of the FPA in 1920, it has been the responsibility
of the Departments of the Interior and Agriculture to establish
conditions for non-Federal hydropower licenses as necessary to protect
the lands and resources that we administer. These lands include Federal
reservations such as Indian lands, National Wildlife Refuges, Bureau of
Reclamation projects, National Forests, some units of the National Park
System, and certain lands and projects managed by the Bureau of Land
Management. This responsibility includes protecting the structural
integrity of Department of the Interior dams and canals, meeting trust
responsibilities on behalf of Indian tribes and individuals, and
otherwise assuring compatibility with the purpose for which the Federal
reservation was made. These conditions are set pursuant to section 4(e)
of the FPA.
Also, since 1920, FWS and NOAA (or their predecessor agencies) have
had responsibility for establishing the terms for safe passage of fish
at licensed hydropower facilities. This authority is somewhat analogous
to conditions set by the Corps to ensure passage of boats for
navigation. Most hydropower facilities received their original licenses
roughly 30 to 50 years ago; many of those facilities had actually been
put in place many decades before then, long before the advent of
national concern for environmental resources including fish, or
widespread recognition of the cumulative impact of dams on fish
resources. Of the dams licensed by FERC, only 9.5 percent include
upstream fish passage; only 13 percent included downstream fish passage
other than over the spillways or through the turbines.\1\ This
responsibility for establishing conditions for fishways is carried out
under section 18 of the FPA.
---------------------------------------------------------------------------
\1\ Environmental Mitigation at Hydroelectric Projects, Volume II,
Idaho National Engineering Laboratory, January 1994, DOE/ID--10360(V2).
---------------------------------------------------------------------------
These agencies also make recommendations to FERC for other
environmental protections which they believe should be considered for
inclusion in hydropower licenses. These include additional
recommendations for protection, mitigation, and enhancement of fish and
wildlife resources, as well as recommendations related to recreation,
cultural resources, and irrigation. This is done under sections 10(a)
and (j) of the FPA.
Hydropower License Conditions Frequency, Timeliness, and Contested
Cases
The licensing process has often been complex and resource intensive
for all parties, including energy producers, property owners,
recreationists, fisherman, and conservationists. Recently, the
Department examined all licenses issued between 1994 and 2000, and
found that the average processing time, from the time an application is
filed with FERC to the time a license is issued, is just over four and
a half years. A copy of that analysis is attached to this testimony.
There are many steps that contribute to this lengthy process:
The average time from filing by the applicant to acceptance
of the application by the Commission is about one year;
The average time from acceptance of the application by the
Commission to the declaration by the Commission that the
project is Ready for Environmental Analysis (REA) is about 11
months; and
The average time to conduct the environmental analysis and
issue the license is a little over 2.5 years following issuance
of the REA notice.
Even after the license is issued, there are often motions
for rehearing with the Commission, and sometimes even
challenges in court.
Ninety-one percent of new licenses at existing projects covered by
the Department's analysis (144 of 155) were issued after the existing
license expired, and 61 percent were issued more than one year after
the expiration date. Clearly, there is room for improvement in this
process.
Many of the recent reform proposals have focused on federal agency
conditions. While attention to the conditioning process is warranted,
we believe that it may be too narrowly focused. Departmental conditions
are issued less frequently and contested less frequently than may be
commonly supposed. For the 157 new and existing projects licensed from
1995 through 2000, the Department established section 4(e) conditions
for only 9 projects--about six percent of the projects licensed by FERC
during that period.\2\ Section 18 fishway conditions were established
by FWS or NOAA for 32 projects, or 20 percent of the 157 projects
licensed. When these Interior numbers (both section 4(e) and 18) are
combined with those for NOAA, they still only account for about 25
percent of the projects licensed during the period studied.
---------------------------------------------------------------------------
\2\ Note that this differs from the 10 cited in the attached
letter; the difference is that a proposed National Park Service 4(e)
condition was converted to a settlement term.
---------------------------------------------------------------------------
Interestingly, the process of Interior bureaus and NOAA
establishing conditions does not appear to have lengthened the overall
licensing process. The Department's analysis found that there was no
significant difference between the time it took to process license
applications for which mandatory conditions under Sections 4(e) and 18
of the FPA were established, and the time to process those for which
prescription authority was not exercised. FERC corroborated this
conclusion in their May 8th Section 603 report.\3\
---------------------------------------------------------------------------
\3\ Report on Hydroelectric Licensing Policies, Procedures, and
Regulations, Comprehensive Review and Recommendations Pursuant to
Section 603 of the Energy Act of 2000, prepared by the staff of the
Federal Energy Regulatory Commission, May 2001 (cited hereafter as FERC
603 report), p. 38.
---------------------------------------------------------------------------
Also interesting is that of the 157 licenses issued during this
period, 57--slightly more than one-third--were contested by the
applicants; only 13 of those contested included Interior and NOAA
conditions. The 13 challenges to Interior and NOAA conditions represent
8 percent of the licenses issued. There were no contests of USDA/FS
conditions at FERC during this period. Our understanding is that no
relicensing applicant has rejected a license due to the setting of
conditions by the resource agencies.
What these numbers point to is that the length of the hydropower
licensing process and the extent of contested licenses are less a
function of the processes by which the resource agencies establish
conditions, or even the nature of those conditions themselves, than
they are a more pervasive artifact of the overall hydropower licensing
process. The net needs to be cast more broadly to effectively
streamline the process.
Recent Progress on Improving the Hydropower Licensing Process
In 1998, the Federal agencies responsible for key parts of the
Nation's hydropower licensing process created the Interagency Task
Force to Improve Hydroelectric Licensing Processes (ITF) to develop
practical ways to improve the licensing process across all the
agencies. The ITF was a coordinated effort between FERC, the
Departments of Interior, Commerce, and Agriculture, the Environmental
Protection Agency, and the Council on Environmental Quality. To ensure
review and comment on the ITF work products by all stakeholders, the
ITF convened an advisory committee comprised of industry, non-
governmental organizations, tribes, and local, State, and Federal
agencies. Numerous recommendations were developed and commitments made
in a series of agency guidance documents that are posted on the
www.doi.gov/hydro website. Most significantly, the commitments include:
(1) the commitment of the Commission to alert the public and other
agencies of proposed hydropower licensing actions to expedite issuance
of notices and improve overall communication among Federal agencies;
(2) the commitment of the Commission and resource agencies to
changes that will facilitate better coordination among Federal agencies
and enable all interested parties to understand and more efficiently
work within the National Environmental Policy Act (NEPA) process;
(3) the commitment of the Commission and resource agencies to
provide basic guidelines on how to identify resource issues, identify
and conduct necessary studies during the pre-filing stage, resolve
disputes over studies, and address issues related to post-filing
studies, making the licensing process more efficient and eliminating
disputes early in the process. For example, the resource agencies have
committed to identifying in any study request the nexus between study
requests and licensing conditions and recommendations, on the one hand,
and project operations and resource impacts on the other. In addition,
in developing its conditions and prescriptions, the Departments have
committed to reviewing alternatives including those submitted by the
license applicant, and selecting the least cost alternative which meets
the Department's management goals;
(4) the commitment of the Commission and resource agencies to
streamline the process by which they coordinate section 7 consultation
under the Endangered Species Act and integrate it into the licensing
process in order to facilitate timely licensing actions;
(5) the commitment of the Departments of the Interior and Commerce
to the publication of review procedures for their exercise of mandatory
conditions under sections 4(e) and 18 of the FPA, and the Commission's
commitment to identify and follow consistent procedures in implementing
recommendations that it receives under section 10(j) of the Federal
Power Act; and
(6) the Commission's and resource agencies' guidance and
recommendations for all participants in the newly evolving alternative
licensing process.
In the coming year we expect to realize further reductions in
processing time as a result of continuing administrative reforms.
Recent initiatives such as those stemming from the ITF have affirmed a
commitment to collaborative processes, to setting and meeting
deadlines, and to providing timely notifications. The Commission has
already reported a noticeable reduction in the number of Additional
Information Requests which they have had to issue.\4\ The Department
and NOAA are committed to adhering to set deadlines for establishing
their conditions under sections 4(e) and 18; preliminary requirements
are provided within 60 days of FERC's REA notice, and any needed
modifications are provided within 60 days of the close of the Draft
NEPA document comment period. All reserve the authority to make final
modifications when the final Environmental Impact Statement (EIS) is
completed and reviewed, but changes at this point are rare.
---------------------------------------------------------------------------
\4\ Personal communication with FERC staff.
---------------------------------------------------------------------------
Both the Department and NOAA also now require that the conditions
be the least-cost means of achieving the objectives. FWS and NOAA are
also working on a fishway policy that will provide clearer guidance for
the prescription process and improve consistency between the
Departments of the Interior and Commerce. We are optimistic that the
implementation of these and other administrative reforms will
facilitate the licensing process.
The established expiration dates for licenses make the licensing
workload predictable. Over the next decade, about 220 FERC hydropower
licenses will expire. These projects have a combined capacity of about
22,000 megawatts, or 20 percent of the Nation's installed hydropower
capacity. The relicensing process is focused primarily on bringing the
30 to 50 year old projects into balance with current national
standards. It also serves to remind operators to consider upgrades to
their generating capacity. Compliance with current standards comes at a
price, though the effect on generation is not as large as one might
expect. FERC's estimate of the average annual generation loss due to
new conditions established through licensing is 1.59 percent.\5\ This
is substantially less than the annual variation in generation caused by
changes in hydrologic conditions. This year's extreme drought in the
Northwest is expected to adversely affect generation in that region by
25 percent, and national hydroelectricity production by 4 percent.
---------------------------------------------------------------------------
\5\ FERC 603 Report, p. 50.
---------------------------------------------------------------------------
b. implementation of the president's national energy policy
The Administration's National Energy Policy report included
recommendations for hydropower reform. The Report recommended that the
President encourage FERC, and direct Federal resource agencies, to
pursue administrative and legislative reforms to make the licensing
process more clear and efficient, while preserving environmental goals.
More specifically, the NEP report called for federal resource agencies
to reach interagency agreement on conflicting mandatory license
conditions before they submit their conditions to FERC for inclusion in
a license, and for FERC to adopt appropriate deadlines for its own
actions during the licensing process.\6\
---------------------------------------------------------------------------
\6\ President's National Energy Policy Report, May 2001, p. 5-18.
---------------------------------------------------------------------------
The Department intends to implement the National Policy Group's
recommendations by taking the following steps to continue to streamline
the Department's actions and increase the consistency of decision-
making and transparency of process for establishing hydropower
licensing conditions:
1. The Department will continue implementation of an accelerated
decision and documentation schedule for establishment of mandatory
conditions and prescriptions. The Departments of the Interior and
Commerce have implemented the commitments made in the ITF including,
particularly, implementation of deadlines for filing preliminary and
modified conditions and prescriptions with FERC: within 60 days of
FERC's REA Notice and within 60 days after the close of the Draft NEPA
comment period, respectively. These deadlines expedite the Department's
timing for developing conditions and dovetail with FERC's existing
regulations and NEPA process. These commitments also include better and
more consistent documentation of the basis for the conditions. These
commitments are just beginning to be applied in individual proceedings.
Interior has been conducting a review of guidance on these and other
recently implemented measures to identify additional steps to
streamline licensing decisions and to make those decisions and the
decision process more transparent.
2. The Department will continue implementation of public input
processes. Departmental procedures contain provisions for participants
in the licensing process and the general public to comment on
departmental conditions, and require the Department to set forth the
rationale for the preliminary conditions and prescriptions. They also
provide for the review and signature of modified conditions and
prescriptions at a level at least as high as the State director,
regional director, or regional administrator. This approach encourages
greater collaboration among agencies and licensees earlier in the
process, thereby avoiding needless delays and costly litigation.
3. The Department will increase consistency and transparency in
fishway prescriptions. A joint Fishway Policy of the Departments of the
Interior and Commerce was proposed to standardize general agency
practices and procedures for developing fishway prescriptions. This
proposed policy was intended to help facilitate consultation among the
Departments, license applicants, and other interested parties in
developing fishway prescriptions, and to ensure a consistent and
effective fishway prescription process. The proposed policy outlines an
interactive, collaborative process for arriving at fishway
prescriptions. By providing clear guidance on how the fishway
prescription process works, it was intended that the policy would
improve predictability, ensure uniformity, and reduce uncertainty for
applicants. The public comment period on the proposed Fishway Policy
closed in February 2001. The agencies are in the process of reviewing
and responding to the comments received. Particular attention in this
review is being paid to the definitions of ``fish'' and ``fishway.''
The proposed definitions generated substantial comment and controversy.
4. The Department will continue to work with other agencies and
process participants to identify additional opportunities for
streamlining and process improvements. The Department will identify
additional opportunities for streamlining and improving license
processes with other agencies as well as continue efforts to identify
improvements through collaborative, multi-stakeholder forums such as
the National Review Group convened by the Electric Power Research
Institute (EPRI). Representatives from industry, environmental
organizations, FERC, and the three resource agencies are currently
participating in an EPRI-sponsored forum examining some of the more
difficult process issues.
5. The resource agencies will develop an interagency consistency
mechanism. Pursuant to the NEP, Interior will work with other resource
agencies to develop a streamlined, interagency, issue-resolution
process to resolve any inconsistencies that might develop between
agencies in making recommendations or in establishing conditions. I
expect that we will get this completed yet this year.
6. Interior will issue more specific guidance and a hydropower
licensing handbook to its bureaus and field offices to standardize and
expedite its processes for establishing conditions and making
recommendations. Initial training of management and field staff in new
processes and commitments from the ITF process was just completed this
spring. These will be reinforced with regular training sessions,
specific departmental guidance, and a hydropower licensing handbook to
better standardize the process, document considerations and expedite
decisions throughout the Department. These are expected to be completed
and implemented before the end of the year.
7. Interior will examine alternative review mechanisms and criteria
for its exercise of conditioning authority. Two issues that have
received substantial comment involve the extent of the factors to be
taken into account in establishing mandatory conditions and
opportunities to contest those conditions. In the first case, the
question is how project economics and other factors should be taken
into account in the decision process. All three resource agencies now
require that the least-cost alternative condition or prescription that
achieves the agencies' objectives be adopted. Our bureaus also report
that they take project scale and economics into account when
establishing their conditions. This latter element is less transparent,
however, and is being reviewed. Recent administrative changes and the
anticipated fishway policy also provide an iterative process for
consideration of alternative conditions and prescriptions proposed by
project applicants and others, and consideration of those
recommendations at the regional director level. This approach is also
being reviewed and alternatives will be considered. For instance, it
has long been the practice of USDA/FS to provide iterative comment and
appeal opportunities regarding its mandatory conditions through both
the FERC process and its own NEPA appeals process. As we see it, there
are many alternative approaches to be considered in addressing these
issues that would be consistent with agency responsibilities and good
environmental practice, and they will be examined. We have had
preliminary discussions about them, but have substantial work ahead of
us.
c. discussion of legislative proposals
There are a number of bills before this Committee and a bill marked
up by the House Committee on Energy and Commerce on Tuesday dealing
with hydropower licensing. Also, I should note that the issues
identified below may not be an exhaustive list of all of the concerns
of the agencies with provisions of various bills. Rather than take them
up sequentially and in detail, I would like to address them more
topically. Our sense is that members of Congress may be converging in
their approaches. We would like to work constructively with both Houses
and members on both sides of the aisle to produce legislation that will
improve the hydropower licensing process.
1. Alternative Conditions: All of the bills share one thing in
common--they have as a major element a means of petitioning the
resource agencies to modify their proposed conditions. Indeed,this is
the core element of the bills. Both Sec. 701 of S. 597, and Sec. 201 of
the House bill accomplish this, with minor variations in wording, by
providing opportunity for a petitioner to propose an alternative set of
conditions. Generally, if the alternative is at least as effective in
meeting the objectives as that proposed by a resource agency, and less
costly, then it must be adopted. Implicitly in S. 597 and H.R. 2458 and
explicitly in S. 71 and S. 388, the basis of the decision must be
documented. The House bill also provides a requirement to establish by
regulation a means of resolving disputes if the decision on the
petitioners' proposal is contested.
We do not believe this approach can substitute for the give and
take between applicants, agency resource personnel and others in
attempting to examine alternatives and to fine tune the establishment
of conditions, including reassessing goals, while proposals are being
formulated. Once conditions are proposed by the resource agencies,
however, we find the approaches in these bills to provide a reasonable
balance between agency actions and an applicant's ingenuity, and they
allow sufficient flexibility to craft a well-considered and expeditious
review process. We would like to work with the Committee on wording--
for instance, we believe proposal of the alternative condition should
be limited to the applicant--but can generally endorse this approach.
We also believe that there should be a time requirement for
presentation of the alternative condition. Under the Department's and
NOAA's current policies, draft conditions are due within 60 days of
FERC's issuance of the REA notice and proposed final conditions are due
within 60 days of the close of the comment period on a draft NEPA
document. None of these bills specify a time period for filing
alternative proposals, suggesting that alternatives can be proposed
possibly after the NEPA process and long after the resource agencies
have provided their conditions and prescriptions. All stakeholders
should be consistent in early and full disclosure of alternative
preliminary terms and conditions, both pre- and post-filing of
licensing, and one party should not be given special approval or
exemption to file alternatives late. Also, to help maintain an
expedited process, we have attempted to nest the process for
establishing conditions within the timetable established by the FERC
regulatory process. Any proposed alternative conditions process should
attempt to similarly minimize the amount of delay in FERC's process.
Sec. 4 of S. 71 and the comparable section of S. 388 use a
different approach, setting a requirement that conditions be
established three months before an application for a license is
submitted and establishing an expedited appeals process before an
administrative law judge. If the administrative law judge doesn't
render a decision within 6 months, the condition is converted into a
section 10(j) recommendation. If the administrative law judge upholds
the agency decision, it appears that it can still be overturned by
FERC, though under more stringent criteria. This section also requires
that all conditions be subjected to ``substantiated'' scientific review
and establishes an extensive list of reviewable criteria that must be
considered on the record in setting conditions.
We think it would be extremely difficult, costly, and problematic
to develop appropriate preliminary conditions, weigh and document the
consideration of all of the factors set out in amended Sec. 32, subject
the conditions to scientific peer review, and publish them three months
before an application is filed. Currently, as documented earlier in
this statement, it takes FERC approximately two years after the filing
of a license application to conclude that the application is complete
and that it is ready for environmental analysis. The filing of a final
license applications formally commences the licensing proceeding, as
well as FERC's preparation of environmental review of the application.
Accordingly the final license applications contain the complete project
proposal, from which the agencies measure the impacts of the proposed
project on resources of concern. The Department's conditions are based
upon the need to mitigate against such impacts. Among other things,
many of the studies required to make condition and prescription
determinations may not have been completed by the time of filing. We
are also concerned that none of the factors to be weighed include
protection of the resources for which the reservation was made or the
need for fish passage.
Also, the caseload and backlogs of the administrative law judges in
Interior, at least, lead us to believe that it would be unlikely that
review decisions could routinely be issued within 6 months. Indeed, the
provision may create an incentive for the applicant to effect delay in
the appeals process for the purpose of defeating the possibility of
conditions. The effect is likely to be that all or most conditions are
downgraded to the status of Sec. 10(j) recommendations.
Additionally, the peer review requirement raises an additional
concern in the case of Indian trust property held by the United States,
and could conflict with the Secretary's role as a trustee. This is
particularly problematic when the issue involves cultural resources or
financial conditions.
2. Coordinated Environmental Review Process: Amended Sec. 33 of S.
71 calls for a single environmental review process. Subject to several
reservations, we support such a single review process. Generally, the
Department and NOAA rely on FERC's NEPA process, though somewhat
reluctantly. We have not been willing to join that process as a
cooperator because we would lose our right to intervene to contest a
FERC license decision (among other things, this has particular
relevance to decisions affecting Indian reservations). USDA/FS conducts
its own NEPA review, but would be willing to use FERC's NEPA process if
they could be treated as a cooperator in the development of the EIS
without losing their right to intervene. In both cases, the agencies
would want to assure that issues important to their decisions are
covered in the single NEPA analysis.
The executive branch agencies routinely conduct joint NEPA reviews
for the purpose of assessing the effect of various alternatives before
making decisions. FERC's interpretation of its ex parte communication
requirements as an independent regulatory agency, however, has led FERC
to insist that becoming a cooperator in their NEPA review comes at the
cost of losing intervention rights. None of the resource agencies has
been willing to pay this price. However, the resource agencies believe
the intervention issue could and should be remedied so that a single,
cooperative NEPA review could be conducted. We are willing to work with
the Committee on language for that purpose. We would also like
clarification in amended Sec. 33(b) that the broadly stated
``environmental review'' references reviews under NEPA, and would not
be construed to eliminate the right of the agencies to conduct
environmental studies and assessments as they develop their Sec. 4(e)
and 18 conditions, and 10(j) recommendations.
3. Disposition of Hydroelectric Charges: Sec. 702 of S. 597 changes
the disposition of charges collected from licensees for the
government's cost of administering hydropower licensing programs and
for the occupation of government lands. Collected revenues would go
directly to the agencies to reimburse them for their expenses or to
protect and improve certain environmental resources in the reservation
areas covered under Sec. 4(e). The administration is reviewing this
provision, and it may have scoring implications.
4. Relicensing Study: Sec. 703 of S. 597 directs FERC, in
consultation with the Departments of Commerce, Interior, and
Agriculture, to study all licenses issued since 1994, analyzing: the
length of time that FERC has taken to issue new licenses, the
additional cost to the licensees attributable to new license
conditions, the change in generating capacity attributable to
conditions, the environmental benefits achieved by conditions, and
litigation arising from conditions. The Department recently offered to
conduct a somewhat similar study jointly with FERC (see attachment,
page 9).* The length and complexity of the licensing process make it a
challenge to analyze and to determine the causes of specific outcomes.
For this reason, we suggested applying an analytic technique known as
``event history analysis'' to the problem. We believe that this study
would benefit from having all four agencies (FERC, Commerce, Interior,
and Agriculture), as well as EPA, intimately involved in its execution.
We find ``consultation'' as practiced by FERC as an independent agency
to be much less inclusive than we expect of ourselves when we consult
with other parties as executive branch agencies. Hence, we recommend
amending section 703 to provide for the study to be done ``jointly''
rather than ``in consultation.''
---------------------------------------------------------------------------
* The attachment has been retained in committee files.
---------------------------------------------------------------------------
5. FERC Data: Sec. 202 of the House bill would require FERC to
revise its data collection procedures to provide much improved
information about the licensing process. We suspect this section
resulted from consideration of a recent report of the General
Accounting Office indicating that systematic data for management
decision-making on the licensing process was not available. We at
Interior have been frustrated similarly by the lack of consistent time-
series and other analytic data that would help us better understand the
causes of process delays and uncertain schedules, and would welcome
this requirement. We would suggest, however, that the requirement be
bolstered by requiring that the data be made available to the public
and the resource agencies routinely and regularly. It would also be
useful to seek public and interagency comment on the most useful data
to maintain.
d. interior proposals
Although we acknowledge the complexity of the process, the
Department is optimistic about the prospects for improvement. We are
encouraged by the administrative reforms now being implemented by FERC
and the resource agencies. We expect the cumulative effect of these
initiatives to significantly improve the timeliness of the licensing
process, the quality and cost-effectiveness of the decisions made
through that process, and the promptness with which mitigation is
implemented. Although the recent Interagency Task Force did not address
all of the issues of concern, we believe that remaining issues are
amenable to resolution through administrative reform. However, we have
identified areas which warrant consideration for legislative action.
Settlements: One of the great reforms of the past decade for the
relicensing process was FERC's establishment of an alternative
licensing process designed to bring participants together well before
the license filing deadline to develop project conditions in a
cooperative manner. While resource intensive at the front-end,
substantial time and cost savings often result once the application is
filed, and appeals and litigation are substantially reduced. The
Department has participated in several landmark settlements within both
the traditional and alternative processes and is committed to resolving
complex licensing matters through settlement. Several recent FERC
decisions, however, have created a high level of uncertainty as to
which parts of an agreement become enforceable terms of the issued
license. Because FERC maintains that its enforcement jurisdiction
extends only to the licensee, it will not enforce any settlement
provision that binds parties other than the licensee, such as
provisions governing dispute resolution and management committees. This
has impacted the Department's ability to effectuate meaningful
settlements. Industry and NGOs share the view that uncertainty as to
which elements of a settlement will ultimately be included as
enforceable license terms is a deterrent to successful negotiations. We
believe that it would be helpful if Congress authorized and required
FERC to enforce settlement provisions entered into voluntarily by the
parties. Doing so will help ensure the enforceability of settlements,
thereby providing certainty, reducing litigation and streamlining the
FERC licensing process.
Studies: One of the more contentious and difficult to resolve
issues is the extent and nature of the studies required to be completed
by license applicants. FERC, States, and the resource agencies rely on
the information generated by these studies to make decisions regarding
potential license conditions. Unfortunately, licensees often fail to
complete required studies in a timely manner or, alternatively, their
timely studies fail to contain necessary data. In either case, delays
in the process result. Applicants, on the other hand, complain that the
studies can be expensive and that FERC and the resource agencies ask
for more information than is necessary. In addition, FERC and the
resource agencies also occasionally disagree about what studies need to
be completed. In an attempt to address these conflicts, the Department,
through the ITF process, has agreed on criteria designed to minimize
its study requirements and ensure that they are based only on
information needed for the decisions at hand. Still, issues remain. The
Department would welcome a dialogue with Committee staff on whether a
fair and expeditious approach could be developed--legislatively or
administratively--that would reduce the level of contention surrounding
this issue, while assuring that adequate information is provided in a
least-cost, but timely manner.
Deadlines: To ensure that the Department exercises its conditioning
authorities without delaying the licensing process, the Department has
adopted and is implementing tight schedules for submitting it
conditions that coincide with deadlines contained in FERC's
regulations. Through those regulations, FERC imposes strict deadlines
on all participants in the licensing process except itself. The result
is that both licensees and resource agencies are forced to provide
information to FERC in a timely manner, only to wait indefinitely for
FERC to respond. FERC's lack of deadlines is particularly problematic
for resource agencies because, in many instances, FERC's eventual
response triggers another set of deadlines to which agencies must
respond. In these instances, because resource agencies are unable to
predict FERC's actions, they are at a disadvantage in attempting to
anticipate the timing of actions they may need to take in the future.
The Department is of the view that the establishment of both deadlines
and clearer process schedules for FERC would help streamline the
licensing processes by establishing expected completion dates for
various steps in the process, as well as help the resource agencies
allocate resources. This proposal is entirely consistent with the
National Energy Policy which recommended that FERC should be encouraged
to adopt appropriate deadlines for its own actions.
Basin-wide Assessments: FERC has a general policy encouraging the
use of basin-wide assessments for the purpose of relicensing multiple
projects in the same river basin. This policy is not applied in most
cases, however. Instead, FERC typically treats each individual project
licensing in a serial fashion according to the order in which
individual project licenses expire. The resource agencies believe that
there is opportunity for both efficiency and resource protection gains
in the licensing process from basin-wide permitting. Studies can be
consolidated and conditions, if needed, may be amenable to a more
distributed approach. The resource agencies view is that Congress
should require a basin-wide approach unless FERC can demonstrate that
it is clearly not in the public interest to employ such an approach as
compared to processing each license in the river basin individually.
This might reasonably be limited to basins where the project licenses
expire within 7 years of one another, with allowance for extension of
the earlier licenses to the termination date of the later licenses. Our
review of the data indicates that this would cover all of the licensed
facilities in most river basins.
Indian Trust Responsibility: Finally, executive branch agencies
separately address the manner in which their decisions affect Federal
trust and treaty responsibilities to Indians. Normally, this is done in
NEPA analyses and records of decision. It is our view that this
practice should apply to FERC decisions, and that Congress should
require FERC to include in its FPA process specific and separate
consideration of project effects on trust property, and its trust
responsibility.
Mr. Chairman, this concludes my prepared remarks. Again, we are
available to work with the Committee on legislation to improve the
licensing process. I will be happy to answer any questions you or other
Committee members may have.
The Chairman. Mr. Robinson, why don't you go right ahead?
STATEMENT OF J. MARK ROBINSON, DIRECTOR, OFFICE OF ENERGY
PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION
Mr. Robinson. Thank you, Mr. Chairman, Senators. My name is
Mark Robinson, and I am Director of the Office of Energy
Projects at the commission. I have provided written testimony,
so I will be very brief this morning. I will touch on S. 597,
S. 388 and S. 571.
First of all, you have to understand that the licensing
process at the Commission is a result of the laws that we work
under the regulations and the policies that the Commission
sets. The resulting licensing process is one of distributed
decision making. There are fully five different entities that
can set conditions that are not subject to review by the
Commission that must be placed in those licenses.
As a result of that, it puts the Commission staff in the
role of trying to facilitate agreements, negotiate
understandings that can be logically incorporated into a
license and make sense, a license that can be issued and we can
conclude that it is in the public interest. We do a good job of
that. We have been doing a good job of that, but it is not
easy. It takes time, and it costs money. No one would say that
negotiating those types of agreements across the types of
issues that we have to address in licensing is a quick or cheap
process.
As a result, in looking at the legislation that is being
considered by yourselves, I look for two elements to see
whether or not it would address the primary criticism of
licensing process, basically that it takes too long and it
costs too much. Those two elements that I am looking for go to
are there time frames placed upon the agencies involved in the
process for concluding their actions and giving their
recommendations, their conditions, to the Commission.
The second element is, are those conditions that everyone
has the opportunity to provide to the Commission all held to
the same standard? Are they driven by the same considerations?
In other words, are they broadly considered? Are they public
interest determinations across those conditions, or are they
driven by just a single purpose?
If the legislation goes to those points, I think that will
go a long way to addressing the criticism that we receive of
taking too long and costing too much. Turning directly to the
three pieces of legislation that we have here, if I look at S.
597, the Comprehensive and Balanced Energy Policy Act, it
provides for a new process, another process.
It looks at how we can get alternative conditions in place,
something that goes on right now through the normal process, I
should say, but this would formalize it and give us some
additional process that we would have to go through.
It does not set time constraints on any of the agencies.
And it does not require that those conditions be viewed in the
same way that we have to at the commission in the broad public
interest aspect. So it would not, I think, address the
criticism. It takes too long and costs too much.
If I look at S. 71 and S. 388, it does in fact put
constraints upon all the agencies involved to provide their
information on a time frame. And also, it requires those
agencies to take a broad look at those conditions in
determining whether or not they are, in fact, appropriate, that
it does meet that criteria that I spoke to earlier and would
address it takes too long and costs too much.
In closing, I would like to say that all three pieces of
legislation go well beyond what I have discussed here. It is in
my testimony. But I would like to repeat something that our
Chairman said recently. We have as an objective to issue
licenses that fully protect the environment. We try to maximize
the production of power that we can get from those projects.
And certainly in today's environment, that is understandable.
And we try to do it at minimum cost.
We will continue to do that regardless of what regulatory
model that we act under, be it the distributed decision-making
process that we have now or some other one. But it is extremely
hard. And we are, I believe, doing our best to try to do it
efficiently and quickly.
Thank you very much.
The Chairman. Thank you very much.
[The prepared statements of Mr. Robinson and Mr. Hebert
follow:]
Prepared Statement of J. Mark Robinson, Director, Office of Energy
Projects, Federal Energy Regulatory Commission
Mr. Chairman and Members of the Committee:
My name is Mark Robinson, and I am the Director of the Office of
Energy Projects at the Federal Energy Regulatory Commission. I
appreciate the opportunity to appear before you to discuss proposed
legislation relating to the Commission's hydropower licensing program.
As a member of the Commission's staff, the views I express in this
testimony are my own, and not those of the Commission or of any
individual Commissioner.
My testimony today will provide a brief overview of the hydropower
licensing program. I will then focus on three proposed pieces of
legislation: S. 597, the Comprehensive and Balanced Energy Policy Act
of 2001; S. 388, the National Energy Security Act of 2001; and S. 71,
the Hydroelectric Licensing Process Improvement Act of 2001. Because S.
71 is incorporated in its entirety in S. 388, I will address the
subject matter of S. 71 during my discussion of S. 388.
1. the commission's licensing program
The Commission currently regulates over 1,600 hydropower projects
at over 2,000 dams pursuant to Part I of the Federal Power Act (FPA).
Non-federal hydropower projects are required to obtain Commission
authorization if they are on lands or waters subject to Congress'
authority. Those projects represent more than half of the Nation's
approximately 100 gigawatts of hydroelectric capacity and over 5
percent of all electric power generated in the United States.
Hydropower is an essential part of the Nation's energy mix and offers
the benefits of an emission-free, renewable energy source.
The Commission's hydropower work generally falls into three
categories of activities. First, the Commission licenses and relicenses
projects. Relicensing involves projects that originally were licensed
30 to 50 years ago. The Commission's second role is to manage
hydropower projects during their license term. This post-licensing
workload has grown in significance as new licenses are issued and as
environmental standards become more demanding. Finally, the Commission
oversees the safety of licensed hydropower dams. This program is widely
recognized for its leadership in dam safety.
The Commission is in the second year of a 10-year period (CY2000 to
CY2010) during which 218 applications for hydropower relicenses are due
to be filed. The Commission has already received 84 of these relicense
applications. This group of projects has a combined capacity of
approximately 22,000 megawatts (MW), or 20 percent of the Nation's
installed hydroelectric capacity. Approximately forty percent of these
218 projects will have filed their relicense applications by the
beginning of 2002.
Over the last three decades, the enactment of numerous
environmental, land use, and other laws, and new interpretations of
certain provisions of the FPA, have significantly affected the
Commission's ability to control the timing of licensing and the
conditions of a license. Under the standards of the FPA, projects can
be authorized if, in the Commission's judgment, they are ``best adapted
to a comprehensive plan'' for improving or developing a waterway for
beneficial public purposes, including power generation, irrigation,
flood control, navigation, fish and wildlife, municipal water supply,
and recreation. The Electric Consumers Protection Act of 1986 (ECPA)
amended the FPA to require the Commission to give ``equal
consideration'' to developmental and non-developmental values.
While the Commission's responsibility under the FPA is to strike an
appropriate balance among the many competing developmental and
environmental interests, various statutory requirements give other
agencies a powerful role in the licensing process. Among others, those
requirements include:
Section 4(e) of the FPA, which authorizes federal resource
agencies such as the Departments of Agriculture and the
Interior to impose mandatory conditions on projects located on
Federal reservations they supervise.
Section 18 of the FPA, which authorizes the Departments of
Commerce and the Interior to impose mandatory fishway
prescriptions.
Section 10(j) of the FPA, which in essence establishes a
presumption for inclusion of Federal and State fish and
wildlife agencies' recommendations to protect fish and
wildlife.
Section 401 of the Clean Water Act, which authorizes States
to impose mandatory conditions as part of the State water
quality certification process.
The Coastal Zone Management Act, which requires that
projects affecting coastal resources be consistent with State
management programs.
The Endangered Species Act, which directs the Departments of
the Interior and Commerce to propose measures to protect
threatened and endangered species.
The National Historic Preservation Act, which requires
Commission consultation with Federal and State authorities to
protect historic sites.
There have been three important court decisions concerning the
roles of the Commission and the resource agencies under these statutes.
In PUD No. 1 of Jefferson County v. Washington Department of
Ecology, 511 U.S. 700 (1994) (Jefferson County), the Supreme
Court held that a State acting under the CWA could regulate not
only water quality (such as the physical and chemical
composition of the water), but water quantity (that is, the
amount of water released by a project), as well as State-
designated water uses (fishing, boating, etc.). It is important
to note that the Court specifically acknowledged that its
decision did not address the interaction of the CWA and the
FPA, since no license had been issued for the project in
question. Its decision therefore did not discuss which
regulatory scheme would prevail in the event of a direct and
critical conflict.
In American Rivers [I] v. FERC, 129 F.3d 99 (2nd Cir. 1997),
the Court held that the Commission lacked authority to
determine whether conditions submitted by State agencies
pursuant to Section 401 of the Clean Water Act were beyond the
scope of that section. The court held that challenges to such
conditions were to be resolved instead by the courts.
Finally, in American Rivers [II] v. FERC, 187 F.3d 1007 (9th
Cir. 1999), the Court ruled that the Commission lacked
authority in individual cases to determine whether
prescriptions submitted under color of Section 18 of the FPA
were in fact fishways. As in the Second Circuit case, the Court
held that challenges to a fishway prescription were to be
resolved by the courts, not the Commission. (On December 22,
2000, the Departments of the Interior and Commerce issued a
joint Notice of Proposed Interagency Policy on the Prescription
of Fishways. The Commission staff filed comments noting that
the unilaterally-developed policy would define the term
``fishway'' in an extremely broad manner that in staff's view
is inconsistent with the definition of that term enacted by
Congress in the Energy Policy Act of 1992).
As a result of these judicial rulings, if the Commission were to
conclude that one or more mandatory conditions would render a project
inconsistent with the public interest, its only recourse would be to
deny the license application. Not only is this a blunt instrument, but
in most relicense proceedings denial is not a viable alternative.
2. the commission's licensing process
The Commission currently uses two different processes in licensing:
the ``traditional'' process and the ``alternative'' process. Under the
alternative process, pre-filing consultation and environmental review
can be integrated and proceed concurrently, in a collaborative manner,
thereby dramatically shortening the processing time for an application.
Earlier this year, Commission staff submitted a report of the
hydropower program to Congress, as required by Section 603 of the
Energy Act of 2000 (the Section 603 Report). In the report, the staff
found that using the traditional process takes approximately 23 months
longer than the alternative licensing process.
Further, for the traditional process, the average cost of
application preparation is $109/kW, and the cost for protection,
mitigation, and enhancement measures is $264/kW. In contrast, for the
alternative licensing process, the average costs for application
preparation and protection, mitigation and enhancement measures are
$39/kW and $58/kW, respectively--substantially lower than for the
traditional process.
The Commission has worked to improve the licensing process by
making its regulations more clear and specific, enhancing opportunities
for stakeholder participation, and providing flexibility to license
applicants and others to design collaborative efforts that meet the
needs of all participants. In addition, Commission staff routinely
holds ``outreach'' meetings throughout the country to inform all
stakeholders about the licensing process, and has taken an active role
in facilitating settlements and introducing alternative dispute
resolution procedures. The staff has also participated in Interagency
training on hydropower licensing, and in the which shares ``lessons
learned'' in the hydropower licensing process.
3. the proposed legislation
A. S. 597
S. 597 contains three provisions regarding the relicensing of
hydroelectric projects, which I will discuss in turn.
i. Section 701 would amend FPA Section 4(e) to provide that, where
a licensee proposes an alternative to a mandatory condition proposed by
the Secretary with supervision over a reservation on which a hydropower
project is located, the Secretary shall accept the alternative
condition, if the Secretary determines that the alternative would
provide equal or greater protection than the original condition, is
based on sound science, and will either cost less than the original
condition or will result in a smaller loss of generating capacity than
would the original condition.
I support the idea of greater interaction between the resource
agencies and licensees in the development of environmental measures,
which Section 701 could encourage. However, given that this section
leaves to the resource agencies the discretion as to whether to accept
an alternative condition proposed by a licensee, I am uncertain that
this measure would have much impact. The resource agencies already
possess the ability to change their mandatory conditions if the
applicant convinces them that an alternative is preferable.
In addition, this proposal appears too limited to the extent that
it only requires consideration of measures from applicants that provide
``equal or greater protection'' than the condition deemed necessary by
the resource agencies. This would mean that the agencies would not have
to consider, for example, an alternative that cut costs by 90 percent
or that sharply increased capacity, but had 99 percent of the
environmental protection. Also, the proposal does not provide for
consideration of a measure's effect on other project purposes such as
flood control, irrigation, and recreation.
Finally, while as a general matter I support proposals to increase
communications among interested parties to a licensing proceeding, I am
concerned that, individually and especially in the aggregate, such
processes may add burdensome, time-consuming steps to the licensing
process, increasing its costliness and further delaying Commission
action.
ii. Section 702 would amend the FPA to provide that the Commission
pass on directly to federal resource agencies that portion of the
annual charges collected by the Commission that is attributable to the
costs incurred by those agencies in administering Part I of the FPA.
Commission staff included in the Section 603 report a
recommendation similar to Section 702. Chairman Hebert has supported
that recommendation, and I do so as well. Ensuring that Federal
agencies recover appropriated funds spent for the licensing process
would support the federal agencies' participation in that process.
However, I am concerned that, as drafted, the bill would allow the
Federal resource agencies to use annual charge funds not only to
administer Part I of the FPA, but also for environmental enhancements,
including measures that have no nexus to the project. This greatly
expands the current scope of the annual charges provision, which I
believe is intended to cover administrative costs, not to pay for
environmental measures.
iii. Section 703 provides that, within six months of the date of
enactment of the legislation, the Commission shall submit to Congress a
study, prepared in consultation with the Secretaries of Commerce, the
Interior, and Agriculture, analyzing the length of time for issuing new
licenses, the additional cost to licensees attributable to new license
conditions, the change in generating capacity attributable to new
license conditions; the environmental benefits achieved by new license
conditions; and litigation arising from relicensing proceedings.
Commission staff is always prepared to submit to Congress whatever
information Congress deems necessary. I note, however, that the first
three items are discussed in the recent Section 603 report. With regard
to the environmental benefits achieved by new license conditions,
Commission staff has begun reviewing methods for determining the
effectiveness of license conditions. There does not appear to be a
general agreement as to how to quantify environmental benefits (and,
indeed, the value of particular benefits may vary from project to
project), it would be difficult, if not impossible, to develop useful
figures regarding the benefits of individual license conditions.
Litigation arising from relicensing proceedings (which occurs in only a
minority of cases) tends to be based on the facts of each case, and may
not lead to general conclusions. Thus, I am uncertain that the proposed
additional study will yield useful results.
B. S. 388 (including S. 71)
i. Section 724 of S. 388 would amend the FPA with the respect to
mandatory license conditions submitted by the Secretaries of the
Interior and Commerce under Sections 4(e) and 18 of that Act, and by
Federal agencies supervising lands on which project works are located.
The bill would require them to take into consideration various factors,
including the impacts of proposed conditions on economic and power
values, electric generation capacity and system reliability, air
quality, drinking water, flood control, irrigation, navigation, or
recreation water supply, compatibility with other license conditions,
and means to ensure that conditions address only direct project
environmental impacts at the lowest project cost. The Departments would
be required to provide written documentation for their conditions,
submit them to scientific review, and provide administrative review of
proposed conditions.
Section 724 would also provide for the Commission to establish a
deadline for the submittal of mandatory conditions in each case, to be
no later than one year after the Commission issues notice that a
license application is ready for environmental review. If an agency
fails to submit a final condition by the deadline, the agency loses the
authority to recommend or establish license conditions. The Commission
must conduct an economic analysis of conditions proposed by consulting
agencies, and, upon request of license applicants, must make a written
determination whether such conditions are in the public interest, were
subjected to scientific review, relate to direct project impacts, are
reasonable and supported by substantial evidence, and are consistent
with the FPA and other license conditions.
I support the purpose of the bill, which is to promote sensible and
timely decisions by all agencies involved in licensing matters.
Reasoned decision-making with respect to mandatory conditions must be
the responsibility of the resource agencies, given the Commission's
very limited discretion with respect to such conditions. As Congress
considers any legislation, however, it should be careful to ensure that
any procedures that could add time or expense to the process are
justified by improved outcomes.
Several portions of Section 724 of S. 388 are consistent with the
recommendations in the Section 603 Report. For instance, having the
resource agencies consider economic as well as environmental impacts
would lead to better-informed determinations on what mandatory
conditions are in the public interest. The Commission is required to
take into account a range of public interest factors for matters within
its discretion. The requirement for resource agencies to document their
decision making is essential for due process. See Bangor Hydroelectric
Co. v. FERC, 78 F.3d 659 (D.C. Cir. 1996). Establishing reasonable
deadlines for submission of conditions (as the Commission's regulations
now provide) could help make the licensing process more timely. These
sensible requirements should make licensing more timely and efficient,
while supporting well-reasoned licensing decisions.
As Commission staff recommended in the Section 603 report, I
believe that the best way to rationalize the hydropower licensing
process would be to retain the authority of Federal resource agencies
to impose mandatory license conditions, but to make that authority
subject to a statutory reservation of Commission authority to reject or
modify the conditions based on inconsistency with the Commission's
overall public interest determination.
In addition, Commission staff recommended that Congress provide
that the Commission license be the only federal authorization required
to operate the project, e.g., special use authorizations for projects
on Forest Service lands and similar authorizations would be eliminated.
A single administrative process would be established by the Commission
to address all Federal agency issues in a licensing case, with
schedules and deadlines established by the Commission, and with one
administrative record compiled by the Commission in consultation with
the other Federal agencies. The Commission would prepare a single NEPA
document. The Federal agencies would not be required to adopt the
Commission's conclusions, but would have to provide for the record
their own analysis and conclusions based on the evidentiary record. The
agencies' analyses and conclusions would be included in the record of
the Commission's order acting on the application, and judicial review
would be obtained by seeking rehearing of the Commission's order.
These measures, if enacted, could shorten the license process, give
greater certainty to licensees and other participants, and ensure that
the FPA's public interest standards are used in developing all parts of
a license.
Staff recommended that, should Congress not allow the Commission to
determine whether mandatory conditions imposed by other Federal
agencies are in the public interest, Congress could nonetheless improve
the mandatory conditioning process by requiring resource agencies to
consider the full panoply of public interest values, support their
conditions on the record, and provide a clear administrative appeal
process. The Section 603 Report supports this by noting that the costs
for protection, mitigation, and enhancement measures for licenses
containing Section 4(e) and 18 mandatory conditions ($590/kW) were 2.7
times the costs for licenses that did not contain those conditions
($218/kW). The Commission staff does not routinely highlight
disagreements with mandatory conditions. However, the report concluded
that, in the 12 percent of cases where staff did so, many of the
resource agencies' conditions were substantially more expensive than
conditions that staff thought adequate to protect environmental
resources. Requiring agencies to better document and support mandatory
conditions could help ameliorate this problem.
ii. Section 725 of S. 388 provides that the Commission shall be the
lead agency for environmental review under the NEPA, and that other
Federal agencies will not perform additional environmental review.
As noted above, Commission staff has recommended that the
Commission prepare the sole NEPA document in licensing proceedings. At
the same time, I do not want to eliminate the ability of individual
agencies to perform the environmental review that they need to support
their portion of the licensing process in a timely fashion.
iii. Section 726 of S. 388 would require the Commission to prepare
and submit to Congress a study of the feasibility of establishing a
separate licensing procedure for small hydroelectric projects. As a
general matter, Commission staff does not support differing regulation
based on the size of hydroelectric projects. A project with a small
capacity can have a significant impact both at the project site and
beyond its immediate environs. Pursuant to the mandates of the Federal
Power Act, the Commission evaluates that impact, and, in rendering a
licensing decision, gives equal consideration to development interests
and environmental resources in determining whether, and with what
requirements, to authorize hydropower development. The Commission's
current licensing ``exemption'' program for projects 5-MW or less,
pursuant to Sections 405 and 408 of the Public Utility Regulatory
Policies Act of 1978, has demonstrated the difficulty of establishing
diminished requirements for this group of projects. Of course, we are
prepared to study this matter and report back to Congress.
4. conclusion
Commission staff is well aware of the importance of hydropower, and
of the significant role the Commission plays in licensing and
overseeing crucial hydropower projects. We also recognize that the
hydropower licensing process can be long and costly. The Commission and
its staff will do everything we can to improve that process. At the
same time, we are prepared to work with Congress and other agencies to
craft legislative solutions. Together, we can develop the efficient,
comprehensive licensing process that our Nation's energy needs demand.
Thank you. I will be pleased to answer any questions you may have.
______
Prepared Statement of Curt L. Hebert, Jr., Chairman, Federal Energy
Regulatory Commission
Thank you for the opportunity to provide a statement for the record
on recent bills designed to remove barriers to distributed generation,
renewable energy, and other advanced technologies in electricity
generation and transmission. I appreciate this opportunity to share my
views on this important topic.
Specifically, my testimony provides comments on: sections 110 and
112 of S. 388 and section 301 of S. 597 dealing with federal agency
reviews and reports; section 603 of S. 597 and the entirety of S. 933
concerning interconnection standards; section 604 of S. 597 regarding
net metering for renewable energy and fuel cells; and section 605 of S.
597 concerning transmission service to intermittent generators.
i. federal agency reviews and reports
A. Annual Reports on Availability and Capacity of Generation
I support efforts to monitor more effectively the adequacy of our
nation's electricity generation resources. Section 110(a) of S. 388
would require the Secretary of Energy, in consultation with the
Commission and other entities, to provide an annual report to the
President and Congress, on the ``availability and capacity of domestic
sources of energy generation to maintain the electricity grid in the
United States.'' The section goes on to state that the report should
``specifically'' evaluate ``grid stability.''
Evaluation of the availability and capacity of generation entails
an analysis of whether local utilities have access to enough
electricity generating facilities; whether there is adequate high
voltage transmission facilities to move electric energy from those
generating facilities economically over long distances; and whether
there are sufficient lower voltage distribution lines to deliver the
power to customers in a local area. Evaluation of grid stability is
different and entails an analysis of whether all these facilities are
operating within safe limits and in a coordinated manner. Section 110
appears to focus on monitoring availability and capacity of generation;
therefore, the references to ``grid stability'' may be inadvertent.
B. Regulatory Reviews
Section 112 of S. 388 and section 301 of S. 597 would both require
each federal agency to review its regulations every five years for
potential barriers to market entry of emerging energy technologies.
While federal regulation should not thwart the development and use of
advanced energy technologies, the same objective may be achievable in a
less burdensome way. First, the regulations of many agencies have
little or no effect on entry of emerging energy technologies, and these
agencies could be exempted from this review requirement with no adverse
effect on market entry. Second, if the first review is conducted
properly and does, in fact, result in the removal of any unnecessary
barriers to entry, there may be no need to incur the cost of additional
reviews every five years.
As for my agency, I can assure the Committee that the Commission is
continually reassessing its regulations and policies to encourage the
development of emerging energy technologies. More generally, the
Commission is continually reassessing its regulations and policies to
promote market entry and the removal of regulatory barriers to enhanced
competition in the wholesale supply and interstate delivery of energy
products and services. For example, on March 14, 2001 and May 16, 2001,
the Commission issued orders removing regulatory obstacles and
providing incentives to increased energy supply and reduced demand in
California and the rest of the West.
ii. interconnection standards
A. Interconnection With Transmission Facilities
Section 4(f) of S. 933 would amend the procedures for obtaining
interconnection with transmission facilities contained in section 210
of the Federal Power Act (FPA). S. 933 would add a new streamlined
process for a ``generating facility,'' defined as any ``facility that
generates electric energy,'' to obtain interconnection with a
``transmitting utility,'' defined as any entity that ``owns, controls,
or operates an electric power transmission facility that is used for
the sale of electric energy.'' S. 933 calls for the Commission to
promulgate a rule establishing technical standards for interconnection.
After promulgation of that rule, a generating facility would be
entitled to interconnection so long as it complied with the rule and
paid the just and reasonable cost of the interconnection, which could
in some circumstances be determined by a nonfederal regulatory
authority.
Reviewing applications for the interconnection of generators to
transmission facilities has become a growing workload for the
Commission, and I am interested in considering ways of making the
review process more efficient. The development and implementation of
broad regional transmission organizations will, in turn, promote the
development of standardized and nondiscriminatory interconnection
procedures. Moreover, the Commission recently announced that it intends
to evaluate the importance of developing standardized interconnection
procedures.
S. 933 requires the Commission to promulgate a rule establishing
``technical'' standards for interconnection under the new streamlined
process but does not specify what is meant by ``technical.'' While one
interpretation is that the term refers to safety, reliability, and
power quality matters (as in S. 597), I do not read the S. 933
requirement to limit the scope of the standards that may be included in
the rule (other standards might address priorities for obtaining
interconnections, requirements for appropriate studies, etc.). If the
bill is intended to define the term narrowly, however, this should be
clarified. Further, I do not interpret this provision of the bill as
affecting any Commission authorities to address interconnection matters
under other FPA provisions, and recommend that the bill be so
clarified.
In addition to creating the new process for obtaining
interconnection with a transmission facility discussed above, S. 933
would also make a number of changes to the existing process for
obtaining such interconnection. Most significantly, S. 933 would
clarify the Commission's authority to decide interconnection matters
based on a paper hearing. I support this proposal.
S. 933 would also amend the criteria for evaluating an application.
Under the existing language of section 210 of the FPA, the Commission
may grant an application if it is in the public interest and it would
either encourage overall conservation, optimize efficiency, or improve
reliability. S. 933 would allow the Commission to grant an application
if it were in the public interest and promoted competition. I support
this change. The use of more general language allows the Commission to
continue to consider conservation, efficiency and reliability, while
focusing the Commission on competitive goals that will truly benefit
consumers.
However, I am concerned that S. 933 appears to remove some of the
Commission's current authority under sections 210 and 212 of the FPA to
establish rates for transmission interconnections for nonpublic
utilities. S. 933 would allow nonfederal regulatory authorities to
determine costs (is, establish rates) for interconnections to nonpublic
utility transmission facilities. This removal of the Commission's
authority could result in disparate treatment of new generating
facilities, depending upon where on the transmission system they seek
to interconnect and the nonfederal authority that has jurisdiction over
the particular transmission facilities involved. In short, rather than
ensure fair, nondiscriminatory pricing rules for all interconnections
on the interstate transmission grid, this legislative change may result
in some facilities being treated in an unduly preferential or
discriminatory manner. (Also, the title used in S. 933, ``Effect of
FERC Lite,'' is ambiguous.)
Finally, S. 933 directs that the owner of the generating facility
``pays the costs of the interconnection.'' This could be interpreted as
requiring the Commission to assign all costs of an interconnection
directly to the owner of the generating facility. However, another
feasible approach would be to allocate these costs among all customers
benefitting from the addition of generation facilities, and this
approach may help expedite generation additions. I believe the
Commission should retain the flexibility to adapt its rate policy on
this issue as appropriate.
B. Interconnection With Local Distribution Facilities
Section 603 of S. 597 and section 4(b) of S. 933 would both amend
section 210 of the FPA to provide procedures for interconnection with
local distribution facilities. S. 597 addresses only interconnection of
``distributed generation facilities,'' which are defined as electric
power generation facilities ``designed to serve retail customers at or
near the point of consumption.'' S. 933 addresses interconnection of
all ``generating facilities,'' which, as mentioned above, are defined
as any ``facility that generates electric energy.'' As in section 4(f)
of S. 933 regarding interconnection to transmission facilities, these
sections concerning interconnection to local distribution facilities
call for the Commission to promulgate a rule establishing standards for
such interconnection. After promulgation of that rule, a generating
facility, or under S. 597, a distributed generation facility, would be
entitled to interconnection so long as it complied with the rule and
paid the just and reasonable cost of the interconnection.
As an initial matter, I must point out that S. 933 defines the term
``local distribution utility'' as an entity that owns, controls, or
operates an electric power ``distribution facility'' instead of ``local
distribution facility.'' This distinction is important given the
Commission's jurisdictional authorization under section 201 of the FPA,
which distinguishes between ``transmission'' and ``local distribution''
facilities. I recommend that in order to avoid confusion the definition
of ``local distribution utility'' use the term ``local distribution
facility'' and that conforming changes be made elsewhere in the
legislation.
These provisions also appear to depart from the previous allocation
of jurisdiction between the federal and state governments. Since the
enactment of the FPA, regulation of transmission in interstate commerce
by public utilities has been the exclusive responsibility of the
Commission, while regulation of local distribution has generally been
left to state and local authorities. Similarly, wholesale sales of
electric energy in interstate commerce by public utilities have been
subject to the sole jurisdiction of the Commission, whereas state and
local authorities have had exclusive jurisdiction over retail sales.
The issue of the appropriate federal role in regulating interconnection
with local distribution arises in both bills, but is particularly
significant in the case of S. 597, which applies only to generators who
intend to serve retail, rather than wholesale, customers.
Moreover, S. 597 specifically calls for the Commission's local
distribution interconnection rule to establish requirements on
``safety, reliability, and power quality.'' However, the Commission has
no current expertise in these matters. Congress should consider whether
the responsibility could be better met by another agency, such as the
Department of Energy.
Finally, S. 597 fails to identify which regulatory authority would
determine whether costs were just and reasonable. If legislation on
local distribution interconnection were adopted, it should include
clarification, like that in S. 933, that the justness and
reasonableness of costs would be determined by an appropriate
regulatory authority.
iii. net metering for renewable energy and fuel cells
Section 604 of S. 597 would amend title VI of the Public Utility
Regulatory Policies Act of 1978 to require retail electric suppliers to
provide net metering service to residential and commercial customers
that have small renewable-energy generators on site. Section 604 calls
upon the Commission, after consultation with state regulatory
authorities and nonregulated local distribution systems, to develop
control and testing requirements for such metering systems. As
discussed above, state and local authorities, rather than the
Commission, have traditionally regulated local distribution, including
retail metering. The Commission has no current experience or expertise
on the mechanics of net metering. Congress should consider whether the
responsibility could be better met by another agency, such as the
Department of Energy.
In addition to requiring the Commission to develop standards for
net metering, S. 597 would also require that net metering systems
comply with ``all applicable safety, performance, reliability, and
interconnection standards established by the National Electrical Code,
the Institute of Electrical and Electronics Engineers, and Underwriters
Laboratories.'' These different sets of standards may or may not be
fully compatible.
iv. transmission service to intermittent generators
Section 605 of S. 597 would amend the FPA to require the Commission
to ensure that transmitting utilities do not penalize wind- or solar-
powered generators ``for characteristics that are (1) inherent to
intermittent energy resources; and (2) are beyond the control of such
generators.'' Section 605 goes on to specify that prevention of such
penalization would necessitate the Commission, at a minimum, to ensure
that these intermittent generators: (1) are not penalized for
scheduling deviations; (2) are assessed embedded costs only on the
basis of kilowatt-hours generated, rather than capacity; and (3) are
offered ten-year contracts for nonfirm transmission service.
The Commission would be allowed to exempt a transmitting utility
from the ban on penalizing scheduling deviations if that utility could
demonstrate that scheduling deviations by intermittent generator
customers were likely to have a substantial adverse impact on
reliability. However, there would be a rebuttable presumption of no
adverse impact where intermittent generators collectively constituted
20 percent or less of the total generation interconnected with the
transmitting utility's system.
I agree with the concept that wind- and solar-powered generators
should be able to compete on a level playing field with other types of
generators. However, the issue of how best to address these difficult
issues in today's new electricity markets is still evolving. As we move
forward in developing any market rules that accommodate all forms of
generation, including intermittent energy sources, we need flexibility
to ensure that those rules work in a fair and nondiscriminatory
fashion. In my opinion, legislation that would prescribe ratemaking in
the degree of detail provided in section 605 may not be appropriate.
v. other issues
S. 597 and S. 933 call for the Commission to promulgate a number of
rules. Section 603(f) of S. 597 and sections 4(b) and 4(c) of S. 933
would require that when promulgating these rules, the Commission would
establish an advisory committee. The Commission is already subject to
the notice and comment requirements of the Administrative Procedures
Act when it promulgates rules. These requirements should provide
adequate opportunity for involvement of interested persons and
qualified experts, and the additional time and expense of conducting a
parallel process under the Federal Advisory Committee Act may not be
warranted.
vi. conclusion
I support the Senate Energy and Natural Resources Committee's
efforts to address potential barriers to the entry of alternative
technologies into the electricity markets. As discussed above, certain
revisions may be appropriate to the specific language of S. 388, S.
597, and S. 933. However, the Commission is committed to working with
you to address those concerns and to offer any other assistance that
you may need.
The Chairman. Let me just introduce the other three
witnesses we have on this subject. Ms. Elizabeth Birnbaum is
the director of government affairs with American Rivers. Thank
you for being here. Mr. Gerry Gray is the vice president with
the Forest Policy Center with American Forests here in
Washington. Thank you for being here. And Ms. Julie Keil is the
director of hydro-licensing and Water Rights with Portland
General Electric Company. Thank you for being here.
Why don't you each go ahead and summarize your testimony,
if you would, please.
Ms. Birnbaum.
STATEMENT OF S. ELIZABETH BIRNBAUM, DIRECTOR, GOVERNMENT
AFFAIRS, AMERICAN RIVERS
Ms. Birnbaum. Good afternoon, Mr. Chairman and members of
the committee. My name is Liz Birnbaum. I am the director of
government affairs in American Rivers, a national river
conservation organization with more than 30,000 members
nationwide.
We also chair the Hydropower Reform Coalition, a consortium
of more than 80 conservation and recreation organizations from
around the country with a combined membership of more than
800,000. We appreciate the opportunity to testify here today.
Our organizations strongly oppose any efforts to diminish
environmental protections in hydropower licensing, either
directly or through misguided process reforms. While we have
participated in and encouraged administrative efforts to make
the licensing process more efficient, we strongly disagree with
the proposition that the faults in the process lie with State
and Federal natural resource agencies.
The two remaining in efficiencies are FERC's unwillingness
to develop a single cooperative environmental review process
involving all State and Federal agencies and the licensees'
incentives to delay relicensing and withhold necessary
information regarding environmental impacts of their projects.
We appreciate the chairman's efforts to find ways to streamline
the licensing process without causing additional environmental
harm, but we would like to see further improvements to address
these remaining problems.
I would like to talk about three basic themes today. One,
protect the public trust resources threatened by hydropower
operations; two, improve the process without causing harm; and
three, oppose rolling back environmental protections in the
current licensing structure.
First, I think that all the participants in this process
will acknowledge that hydropower relicensing is a natural
resource issue, a rivers issue, not simply an energy issue. The
improvements made through relicensing at hydropower dams will
have huge implications for hundreds of species, thousands of
river miles, and millions of dollars in recreational
opportunities for decades to come.
In contrast, these decisions have a relatively small impact
on energy generation, electric rates or industry viability. By
requiring dam owners to build passage for fish, protect
critical riparian habitat, adjust river flows to conform to a
more normal pattern, and provide recreational access and
opportunity, we can protect and restore valuable fisheries,
native species diversity, recreational amenities, and natural
ecosystem functions. At the same time, we can enhance economic
opportunities, such as recreation, tourism, and ecological
services.
Because original licenses were issued before the enactment
of modern environmental statutes and prior to our understanding
of the impacts of dams on river ecosystems, virtually none of
these dams meets modern environmental standards before
relicensing. If awarded a license, a utility can monopolize a
river for half a century with little oversight. We must take
this once in a lifetime chance to set conditions that require
hydro operators to modernize the way they operate their dams on
our rivers.
We are encouraged by the chairman's bill. And subsequent
negotiations by his staff have begun to take a more rational
approach to hydropower legislation. We will be happy to
continue working with staff to meet the goals and reducing the
time and cost of obtaining a license while improving
environmental quality.
The chairman's provision to allow alternative licensing
conditions is a new benefit for the industry that we find
reasonable, so long as it does not delay the licensing process
and is available to all parties to the proceeding. We support
the chairman's proposals to directly reimburse Federal resource
agencies for licensing costs, to improve the collection of
electric charges, to require development of cooperative process
among FERC and the Federal resource agencies, and to address
the key problem with the current relicensing process,
inadequate information.
Determining the necessary studies should be the province of
the responsible resource agencies and not subject to the
interpretations and biases of FERC. We would strongly oppose
any provision that would require complex formal hearings.
Such a requirement would not streamline the licensing
process; it would only make it longer and more costly and would
leave the public at a distinct disadvantage against the well-
heeled resources of an electric generating corporation.
While the chairman's legislative proposals will not further
harm environmental quality, they are not likely to improve it
significantly either. Therefore, we would urge some additional
provisions that would improve the licensing process for
environmental purposes: Grant shorter license terms or more
flexible conditions within license terms; limit and condition
the issuance of annual licenses; institute a royalty fee for
the private use of public rivers; and reauthorize the office of
public participation in the statute.
The one thing that must be avoided in hydro-licensing
legislation is the roll-back of existing environmental
protections. In developing a balance of authorities in the
Federal Power Act, Congress determined that some basic
environmental protections must be afforded at every dam and
should not be balanced away to promote cheap hydropower. Expert
Federal and State resource managers established conditions
based on substantial evidence to protect public trust
resources. These basic protections form a floor above which
FERC can balance license conditions in the public interest.
Shifting these responsibilities to FERC would be
inefficient and would change the standards for licensing. State
and Federal agencies have considerable expertise in the
relicensing arena. They work in the field on a specific river,
as opposed to the FERC staff, who spend most of their time in
Washington. There is little reason to believe that
consolidation with FERC would either make the process faster or
improve the outcomes.
The good news is that relicensing provides significant
protection to rivers with a low cost to power production.
According to FERC's recent report, relicensing has reduced the
average per project generation only 1.6 percent. Such losses in
relicensing over the next 10 years would result in a .04
percent reduction in the Nation's overall electricity
generation.
In any case, the amount of lost generation is significantly
less than the 5 percent average fluctuation of energy demand
caused by factors such as weather, fuel prices, and advances in
technology.
The losses in generation are comparable to those caused by
installing a scrubber on a coal-fired plant. Being a good
environmental steward is a legitimate cost of doing business.
Unlike other industries, such as offshore oil development,
mining or timber, hydropower licensees pay nothing for the use
of public resources, our rivers. After 30 to 50 years, the
initial capital investment in these projects is fully
amortized. Asking that these dams make some small investment in
environmental quality after decades of profitable operation is
a reasonable and minor request. Paying for these changes
continues to leave hydropower as the cheapest source of energy
nationwide.
In the scramble to find a magic bullet for the energy
crises, we should be careful not to over rely on our nation's
already troubled rivers. Through careful and deliberative
evaluation involving the expertise of a range of agencies, we
can bring hydropower dams up to modern environmental standards
without compromising power generation.
Thank you for the opportunity to speak.
The Chairman. Thank you very much.
[The prepared statement of Ms. Birnbaum follows:]
Prepared Statement of S. Elizabeth Birnbaum, Director,
Government Affairs, American Rivers
introduction
American Rivers, a national river conservation organization with
more than 30,000 members nationwide, strongly opposes any efforts to
diminish environmental protections in hydropower licensing either
directly or through misguided process reforms. We do support efforts to
make the hydropower licensing process work better for all stakeholders
and eliminate historic inequities in this complex regulatory process.
These comments are also joined by the Hydropower Reform Coalition. The
Hydropower Reform Coalition is a consortium of more than 80
conservation and recreation organizations from around the country (see
attachment). The Coalition was formed in 1992 with the purpose of
improving river health and recreational opportunities through the
licensing, relicensing, and regulatory enforcement of hydropower dams
under the jurisdiction of the Federal Energy Regulatory Commission
(FERC). Coalition members are national, regional and local conservation
organizations, and together have a combined membership totaling more
than 800,000.
I would like to talk about three basic themes today, geared
primarily toward the hydropower title of the Chairman's Energy Bill and
subsequent discussions about revisions to that title, FERC's recently
released report to Congress pursuant to Section 603 of the Energy Act
of 2000, and the Administration's energy plan released in May:
1. Protect our public trust resources--Hydropower harms rivers, but
a strong process for relicensing can result in significant improvements
to environmental quality;
2. Improve the process without causing harm--The Commission should
work cooperatively with federal and state agencies to improve licensing
through administrative changes that seek a unified process, acknowledge
diverse, multiple authorities and improve environmental quality. If
FERC is unwilling to undertake this cooperative effort, Congress should
require FERC to do so.
3. Oppose environmental roll-backs--The current balance of
authorities in hydropower relicensing is appropriate and effective;
some proposed changes to that balance would threaten environmental
quality.
hydropower affects public rivers
Hydropower relicensing is a natural resource issue--a rivers
issue--not simply an energy issue. The improvements and changes made
through relicensing at hydropower dams will have huge implications for
hundreds of species, thousands of river miles, and millions of dollars
in recreational opportunities for decades to come. In contrast, these
decisions have a relatively small impact on energy generation, electric
rates, or industry viability.
American Rivers and members of the Hydropower Reform Coalition are
not anti-hydropower. We simply wish to ensure that these dams are
operated to protect and restore river resources using best available
technologies and best management practices. While decommissioning is a
popular topic these days, we believe that dam removal will be the
exception and not the rule.
As early as 1908, President Teddy Roosevelt understood the need to
safeguard our nation's rivers and helped to devise a system of periodic
review to protect these national treasures.
``The public must retain control of the great waterways. It
is essential that any permit to obstruct them for reasons and
on conditions that seem good at the moment should be subject to
revision when changed conditions demand.''
More than 75 years later, the 9th Circuit Court of Appeals in
Yakima Indian Nation v. FERC found that:
``Relicensing is more akin to an irreversible and
irretrievable commitment of a public resource than a mere
continuation of the status quo. Simply because the same
resource had been committed in the past does not make
relicensing a phase in a continuous activity. Relicensing
involves a new commitment of the resource . . .''
The impacts of hydropower dams on public trust resources are well
known and well documented. The President's own plan acknowledges and
catalogues the impacts of hydropower dams on natural resources.
``Hydropower, although a clean energy source, does present
environmental challenges. Unless properly designed and
operated, hydropower dams can injure or kill fish, such as
salmon, by blocking their passage to upstream spawning pools.
Innovations in fish ladders, screens, and hatcheries are
helping to mitigate these adverse impacts. Ongoing dam
relicensing efforts are resulting in community involvement and
the industry's application of the latest technologies to ensure
the maintenance of downstream flows and the upstream passage of
fish. These efforts also have been successful in identifying
and removing older, nonfunctioning dams and other impediments
to fish movements.'' (President's Plan, 3-8)
Because original licenses were issued before the enactment of
modern environmental statutes and prior to our understanding of the
impacts of dams on river ecosystems, virtually none of these dams meets
modern environmental standards before relicensing. By requiring dam
owners to build passage for fish, protect critical riparian habitat,
adjust river flows to conform to a more natural pattern, and provide
recreational access and opportunity, we can protect and restore
valuable fisheries, native species diversity, recreational amenities,
and natural ecosystem functions. At the same time we can enhance
economic opportunities such as recreation, tourism, and ecological
services.
The widespread recognition of the environmental impacts of
hydropower projects affirms the need for a careful review process that
addresses some of the sins of the past. If awarded a license, a utility
can monopolize a river for half a century with little oversight and no
motivation to make environmental improvements. It's imperative to take
this once-in-a-lifetime chance to set conditions that require hydro
operators to modernize the way they operate their dams on our rivers.
relicensing--an important balancing act
Because rivers are public resources with many competing interests
and significant environmental issues, the licensing process for
hydropower dams involves multiple stakeholders. Unlike most electricity
generating technologies, hydropower does not have ``end of pipe''
standards to ensure that the dam's operations do not unduly damage the
environment. This is because every dam and every river is different,
and generic standards cannot be applied to each project. The Federal
Power Act (FPA), although commonly considered an energy statute, also
occupies an important role in environmental protection. The statute was
amended in 1986 to require FERC to give ``equal consideration'' to
power (electricity generation) and non-power (fish and wildlife
protection, recreation, etc.) benefits of the river. The economics of
the hydropower facility should be taken into account by FERC in this
balancing process.
In developing this balance, Congress determined--and rightly so--
that some basic environmental protections must be afforded at every
dam, and should not be balanced away to promote cheap hydropower. Under
these statutory requirements, expert federal and state resource
managers establish conditions based on substantial evidence to protect
public trust resources. Just as there are mandatory ceilings on
emissions from fossil-fuel plants, these basic resource protections
form a floor above which FERC can balance license conditions in the
public interest.
Sometimes referred to as mandatory conditions, these requirements
assure that:
(1) Fish can be passed upstream and downstream of a dam (FPA
Section 18);
(2) If the private dam is located on federally owned land, other
purposes of the federal land are protected (FPA Section 4(e)); and
(3) The dam complies with state-developed water quality standards
(CWA Section 401).
Both fish passage and federal lands protection have been part of
the relicensing process since enactment of the Federal Power Act in
1920.
The current structure of the Act, which sets fishways apart as a
special consideration, is in keeping with the law and practice that
came to us from Europe at the time of settlement. Requiring millers--
dam owners--to provide fishways at their own expense dates back many
hundreds of years, based on the recognition that fish are equally
important to commerce.
The provision under Section 4(e) of the Federal Power Act that
grants authority to land management agencies to ensure that projects on
their lands meet current management goals and objectives is simple and
based on common sense. Projects that are located on federal or tribal
lands are already getting the benefit of cheap rent. In order to
adequately manage the lands entrusted to them, federal land management
agencies must have a say over how these projects are operated.
The protection of water quality is a responsibility that has been
delegated to the states under the Clean Water Act (CWA). Section 401 of
the act ensures that private hydro projects will not interfere with
state standards, by requiring that each federally licensed project
receive a certification from the state where it is located,
demonstrating that the project is consistent with the standards,
including the designated uses for each water body. The Supreme Court
has confirmed that standards may be numeric or narrative and include
chemical, physical, and biological parameters.
Any effort to shift these responsibilities to FERC would be
inefficient and would fundamentally change the standards upon which we
base these decisions. State and federal agencies have already developed
significant expertise in the relicensing arena and work in the field on
a specific river--as opposed to FERC staff who spend most of their time
in Washington. In addition, FERC's mandate for ``equal consideration''
might mean that these basic environmental protections would be assured
only if they did not affect a utility's bottom line. Considering recent
GAO findings, there is no evidence that consolidation with FERC would
improve the process in any event.
facts don't support the claims of a crisis
If we are worried about hydropower's impact on the environment,
then where do we turn for energy? The good news is that changes to dam
operations derived from relicensing can provide significant protection
to rivers with almost no cost to power production. According to FERC's
own report, relicensing has resulted in an average per-project
reduction in generation of only 1.6% and an increase in capacity of 4%.
Based on this track record, we can reasonably expect similar results
from projects due to be relicensed over the next ten years (these
represent 2.5% of the annual generation of the US). Such losses in
relicensing would result in a 0.04% reduction in the nation's overall
annual generation. In any case, the amount of ``lost'' generation is
significantly less than the 5% average fluctuation of energy demand
caused by factors such as weather, fuel prices, and advances in
technology.\1\ We should not forget that these losses in generation are
derived from comparing a baseline of operation that had NO
environmental conditions to one with modern environmental standards--
the losses in generation are comparable with those caused by installing
a scrubber on the smokestack of a coal-fired plant. We need not trade
healthy rivers for power production. We can have both.
---------------------------------------------------------------------------
\1\ The mean net generation of electric utilities and non-utility
power producers for 1990 to 1996 is 3,203,998 million kilowatt-hours,
with a standard deviation of +/-159084.6 million kwh or
+/-4.96%.
---------------------------------------------------------------------------
Being a good environmental steward is a legitimate cost of doing
business. Should the federal government guarantee profitability for
hydropower utilities? If a project is already unprofitable because of
market forces or because it is run poorly, should it be exempted from
any environmental conditions? The answer to these questions is clearly
no. According to the courts, ``There can be no guarantee of
profitability of water power projects under the Federal Power Act;
profitability is at risk from a number of variable factors, and values
other than profitability require appropriate consideration.'' \2\
---------------------------------------------------------------------------
\2\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th
Cir. 1994).
---------------------------------------------------------------------------
Unlike other industries such as offshore oil development, mining,
or timber, hydropower licensees pay nothing for the use of public
resources--our rivers--and are not required to post any kind of bond to
ensure that at the end of the projects useful life there is money to
properly dispose of it. After 30 to 50 years, the initial capital
investments in these projects are fully amortized. The only costs left
to the licensee are basic operations and maintenance (the lowest of any
electricity source) and environmental protection measures. Asking that
these dams make some small investment in environmental quality after
decades of profitable operation is a reasonable and minor request.
Paying for these changes continues to leave hydropower as the cheapest
source of electricity nationwide.
It is simply a false threat to suggest that dams are being
surrendered or abandoned due to the cost of environmental regulation.
Since 1996, only three operating licenses have been surrendered--each
because the facilities fell into disrepair or were damaged by flooding.
According to FERC, since1993 ``no licensee has refused to accept or
surrender their license citing project economics.'' \3\
---------------------------------------------------------------------------
\3\ Written supplemental testimony of Doug Smith, FERC General
Counsel, before the Senate Energy and Natural Resources Committee, 10/
27/99.
---------------------------------------------------------------------------
The Administration's own energy plan confirms that the principal
factors limiting hydropower development have nothing to do with
environmental regulation. The President's report explains that,
``Hydropower generation has remained relatively flat for years. The
most significant constraint on expansion of U.S. hydropower generation
is physical; most of the best locations for hydropower generation have
already been developed. Also, the amount of hydropower generation
depends upon the quantity of available water. A drought can have a
devastating effect on a region that depends on hydropower. In fact,
this year's water availability has been a contributing factor in
California's electricity supply shortages.'' (President's Plan, 5-18)
In the scramble to find a magic bullet for the energy crisis, we
should be careful not to over-rely on our nation's already troubled
rivers. Through careful and deliberate evaluation involving expertise
of a range of agencies, we can bring hydropower dams up to modern
environmental standards without compromising power generation.
solutions in search of problems
Over the past several years, a number of legislative proposals have
been put forward by members of the electric utility industry and most
recently by FERC. We have consistently opposed those efforts. The
common element of those reform bills has been to blame the resource
agencies for costs and delays and to consolidate greater authority with
FERC. We believe that these reforms address the wrong problem and
therefore offer a poor solution to inefficiencies with hydropower
regulation. Until recently, these proposals have been based on little
more than anecdotal evidence and industry assertion. While, the
publication of FERC's 603 Report offers new data and presents the first
comprehensive look at the relicensing process in several years, it has
been soundly criticized by the Government Accounting Office (GAO),
federal and state agencies, and the environmental community, and offers
no rigorous evidence or statistical verification for the claim that
resource agency participation in the process creates major costs and
delays.
critique of ferc's 603 report
In November 2000, Congress required FERC within six months ``to
undertake a comprehensive review of policies, procedures, and
regulations for the licensing of hydroelectric projects to determine
how to reduce the cost and time of obtaining a license.'' Congress
specified action by the Commission, but the report filed in May 2001
was explicitly a product of Commission staff (Report pg. 5). While it
is entirely appropriate for staff to assist the Commission in the
development of this report, we are troubled by the fact that the
persons with decision-making authority--the Commissioners--have no
ownership of this document.
Congress also required the Commission to consult with other
appropriate agencies, yet no draft was provided to those agencies for
comment despite repeated pleas for cooperation. Although FERC includes
agency comments in its appendix (as well as those from members of the
public), it does not address these recommendations with any
thoroughness, fails to include their recommendations or alternatives,
and fails to provide any explanation of the consultation process.
We are also troubled by an April report by the Government
Accounting Office (GAO), which strongly criticized the Commission for
failing to keep adequate records of its regulatory activities.\4\
According to GAO's report, until FERC does a better job collecting data
on the cost and timing of its process, ``FERC will not be able to reach
informed decisions on the need for further administrative reforms or
legislative changes to the licensing process.'' (pg. 17) This opinion
was restated during a hearing of the House Energy and Commerce
Committee along with a more specific GAO critique of the 603 Report.
---------------------------------------------------------------------------
\4\ Licensing Hydropower Projects: Better Time and Cost Data Needed
to Reach Informed Decisions About Process Reforms, U.S. General
Accounting Office GAO-01-499, May 2001.
---------------------------------------------------------------------------
In light of the GAO's indictment of FERC's data and record keeping,
let me highlight several conclusions in FERC's report about timing and
cost, some of which appear reasonable, others suspect.
Timing Data
The report suggests that Section 4(e) and 18 requirements by the
federal resource agencies are not a major cause for relicensing delays
(Report pg. 38). This is supported by an independent analysis by the
Department of the Interior, which draws the same conclusion. The report
does identify state agencies as being associated with significant
delays, but it fails to show whether these delays are within the sphere
of influence of those agencies or whether they are a victim of industry
procrastination and delay. Other evidence would suggest the latter.
We do know that license applicants have caused significant delay of
the relicensing process by failing to provide complete license
applications. Of the 157 relicensing applications filed by industry in
1993, only nine provided sufficient scientific information about
project impacts, forcing FERC to issue hundreds of additional
information requests in the other 148 cases.\5\ The need to conduct
further studies to complete their applications was a significant reason
that there were major delays in these relicensings.
---------------------------------------------------------------------------
\5\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review
(Oct., 1995).
---------------------------------------------------------------------------
FERC's median time to respond to requests for administrative appeal
or rehearing is 13.6 months, with a minimum of 6 months and a maximum
of 62 months--more than 5 years. Other types of petitions also go
unaddressed by the Commission for months or years. For instance, in one
case environmental groups filed a petition to the Commission to
initiate consultation under Section 7 of the Endangered Species Act
four years ago and have yet to receive any response. In these
situations, parties are prohibited from seeking judicial review until
FERC acts, but cannot force FERC to act. In the meantime the
environment continues to be harmed and legislative interpretations go
unanswered.
Cost Data
FERC's section on costs is even more problematic. The report
considers costs of the relicensing process to be limited to only those
of the licensee and the agencies. They do not consider the cost to the
public whether due to direct participation, or through the attendant
impacts to the environment. They also offer no measure of what costs
should be measured--no standard of analysis.
Cost is closely linked to time. Due to the lengthy term of original
hydropower licenses, those issued before the era of environmental
consciousness have been largely insulated from the responsibility of
paying for the environmental cost that they impose on society. No other
major source of power--coal, nuclear, gas, or oil--has been so
privileged. All these others have confronted their environmental
obligations, and begun to internalize the costs. For hydropower,
Congress has designated the issuance of a new hydropower license as the
time when the maldistribution of costs and responsibilities is to be
corrected.
Delays in the process often save the project owners money in the
short-run by maintaining status quo terms and conditions that allow the
postponement of expenditures for mitigation. These savings come at an
enormous expense to the environment, the public, and the tribes because
of delayed mitigation, and provide a perverse incentive on the part of
licensees to drag their feet and stonewall. Thus, it is often in the
interest of the public and the environment to minimize licensing time--
but finding ways to make the process more efficient should not override
the need to protect other public interests in public resources.
FERC's main evidence in support of its recommendation for ``one-
stop shopping''--eliminating mandatory conditioning by other federal
agencies--is the fact that projects with mandatory conditions incur
higher mitigation costs per kilowatt of capacity. However, consistent
with the criticisms outlined in the GAO report, this turns out to be a
very superficial analysis. Do the two groups of projects analyzed
(those with mandatories and those without) display any other
differences? Are projects without mandatories smaller? Less
controversial? Have they done less damage to the environment? In order
to make any sense out of these numbers, one would have to organize the
projects so that the only significant difference between the two groups
is that one group had mandatory conditions and one did not. In any
case, one must question whether FERC is suggesting that it would
dramatically reduce those costs if it were the agency in charge? How
would such efficiencies be found? Would that mean a reduction in
environmental protection? FERC offers no specifics as to how the
Commission would reduce costs to licensees but still maintain the same
level of environmental protection.
Clean Water Act
In its 603 report recommendation on Clean Water Act Section 401,
FERC demonstrates a complete misunderstanding of the Clean Water Act
and a total disregard for state delegated authority. Water quality is
inextricably linked to water quantity. The Clean Water Act requires the
protection of physical, chemical and biological components of a water
body. Protection of ``designated uses'' is a fundamental component of
the Clean Water Act. Designated uses ensure that waters will be
``fishable, swimmable, and boatable''--uses that require that water be
present in the waterway. Yet the Commission advocates limiting the
definition of ``clean water'' to apply to only a few simple parameters,
excluding water quantity and designated uses.
One Stop Shopping--A Common Theme But a Bad Idea
At no time in its history has the Commission had sole decision-
making authority in hydropower licensing. The Federal Power Act has
always been clear. The courts have consistently confirmed this
plurality of decision-making over the past 10 years. The problem is not
the multiple actors but FERC's unwillingness to cooperate and cede
authority.
committee drafting principles
American Rivers and the Hydropower Reform Coalition have been
highly critical of hydropower legislation coming out of this committee
over the past several years; however, we believe that the Chairman's
bill and subsequent negotiations by his staff have begun to take a more
rational approach. We will continue to work with his staff to ensure
than any legislation developed by the Committee will meet the goals of
reducing the time and cost of obtaining a license while improving
environmental quality.
While we continue to believe that the Chairman's legislative
proposals will not further harm environmental quality, they are not
likely to improve it significantly either. There is a great deal for
industry to cheer about in this package. The requirement that resource
agencies accept cheaper alternative mandatory conditions provided that
they meet or exceed the resource management goals is generous and
unprecedented. There is also a great deal in this package that should
benefit everyone and lead to real streamlining. Proposals to require
issuance of draft and final decisions from both FERC and the agencies
are welcomed and should make things run more smoothly. There are fewer
meaningful benefits to the environment but we look forward to working
with staff on a number of the proposals below that we believe will make
significant improvements.
Alternative Conditions
A provision that requires consideration of alternative mandatory
conditions for addressing costs does not benefit environmental
interests but it does not directly hurt them either. Unless a
permissive administration with a bias toward energy development were
willing to forgo critical environmental, recreational, and cultural
resources, the standards currently under discussion for accepting
alternative conditions would guard adequately against diminishing
environmental protections. Such a provision does have the potential to
create additional delays in the licensing process, and to that extent
could harm environmental interests by deferring implementation of all
environmental measures. We would urge that the provision be expressly
coordinated with the agencies' existing processes for proposing and
finalizing mandatory conditions and with draft and final NEPA analysis
of the licensing decision in order to minimize delay.
In addition, any provision that provides an opportunity to offer
alternative conditions must contain provisions for participation of all
stakeholders and not be limited to the licensee. Public participation
has become a fundamental tenet of the hydropower licensing process and
is consistent with every other procedure in the Federal Power Act. This
section should also include a reciprocal provision that allows not only
proposals for conditions that are equally protective but cost less but
also proposals that are more protective but cost the same. This would
not present a significantly greater burden on the resource agencies and
would still be limited to consideration of alternative conditions,
subject to the same requirements of substantial evidence, and leave
significant discretion to the Secretary.
We do not support inclusion of a new and undefined standard of
``sound science.'' The current standard of ``substantial evidence,''
which is the one that must be met by FERC and is defined under the
Administrative Procedures Act, is common and well-understood. ``Sound
science'' would simply open up a whole new round of litigation. We are
also unclear about the definition of electric ``reliability'' and
believe that the term should be understood and defined before using it
in statute. We would object to any definition that led to new peaking
operations of a hydropower facility.
Disposition of Licensing Charges
Lack of resources and funding is the biggest contributor to
resource agency difficulties with in the relicensing process. The
Chairman's proposals to directly reimburse federal resource agencies is
a critical first step in remedying this problem. The 1992 Energy Policy
Act directed FERC to charge licensees a fee to cover the costs of
agency participation in the relicensing process. However, this program
has not gone forward as Congress originally intended. While those fees
are being charged, the moneys are not making their way back to those
agencies. This simple change will remedy the problem.
The same amendment in 1992 also directed the reimbursement of state
fish and wildlife agencies. FERC has taken no steps to collect or
distribute those funds. We believe that this is a necessary
improvement. We would also support including state water quality
agencies in the Commission's cost recovery program.
Industry has requested clarification of which agency costs are
eligible for reimbursement. We support their position that those
charges should not include FERC appeals or litigation costs and should
instead be limited to participation in the relicensing process.
The other major component to the amendments to collection of
electric charges is returning the fees collected for the use of public
lands back to the respected land managing agency for protection and
restoration of headwaters. We strongly support this idea but offer two
significant amendments to improve upon what the Chairman has already
accomplished.
The first addresses the need to charge a fair market price for the
use of public lands. Currently industry pays only a token fee for the
use of federal lands an average of $30 per acre. This does not
accurately reflect the value of these mostly riparian lands, nor does
it reflect the financial benefits derived from using these public
resources. This fee is based upon twice the linear right-of-way fee
charged for pipelines and power lines. We recommend the following
amendment to address this problem:
Section 10(e) of such Act is amended by inserting after ``for
recompensing it for the use, occupancy, and enjoyment of its
lands or other property'' the following: ``, based on the fair
market value of such lands or other property, as determined by
the Secretary of the Department administering such lands or
other property.
The funds dedicated to this restoration fund are limited to those
currently earmarked for the Treasury, or 12.5% of the total collected.
Currently 50% of the funds collected for the use of federal lands are
dedicated to the Reclamation Fund, which benefits water development
projects in the West. We believe that it is inappropriate for those
moneys to be used for projects unrelated to licensed hydropower
projects. Because hydropower projects on federal lands are located
throughout the country and not simply in the West, we also believe that
payments to the Reclamation Fund are inappropriate. For these reasons,
we offer the following amendment in lieu of diverting payments to the
Treasury:
Section 17(a) is amended by replacing, ``the reclamation fund
created by the Act of Congress known as the Reclamation Act,
approved June 17, 1902'' with, ``a revolving fund to be
administered by the Secretary of the department upon whose
lands the project resides''.
The rest of the provision about where the money should go and how
it should be used requires no further amendments.
Resource Studies
We strongly support language to address an important problem with
the current relicensing process--inadequate studies and information. He
who controls the information controls the process, and without being
able to require an applicant to provide certain types of information
and studies, agencies are at a distinct disadvantage when developing
conditions that meet their statutory mandates. To date, FERC has show
an unwillingness to require studies by the license applicant other than
those needed for FERC's own purposes. This leaves the resource agencies
without the information necessary to meet their obligations.
Inadequate information is a leading cause of delays in hydropower
licensing proceedings. As mentioned above, of the 157 relicensing
applications filed by industry in 1993, only nine provided sufficient
scientific information about project impacts.\6\ The resulting delays
have significantly harmed environmental quality by issuing annual
licenses and delaying implementation of modern environmental
conditions.
---------------------------------------------------------------------------
\6\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review
(Oct., 1995).
---------------------------------------------------------------------------
In our view, studies and information requested by a federal agency
with authority under FPA Sections 4(e) and 18 or a state agency with
authority under the Clean Water Act or the Coastal Zone Management Act
should be the province of those agencies and not subject to the
interpretations and biases of FERC. The current ambiguity over who
determines what studies are ``reasonable and necessary'' simply creates
a struggle about who has final say over study requests. We oppose any
provision that leaves this determination with FERC.
Joint Agency Procedures
Cooperation among FERC and state and federal resource agencies will
greatly improve the efficiency of the relicensing process. Under a
charter signed in October 1998, the four principle federal agencies
involved in relicensing--FERC, Interior, Agriculture, and Commerce--
formed an Interagency Task Force to Improve Hydroelectric Licensing
Processes (ITF). This committee was established to coordinate federal
and state mandates. In July of 1999, the ITF established a Federal
Advisory Committee to provide a forum for non-federal entities
consisting of industry, states, tribes and environmental groups, to
review and provide feedback on the activities of the ITF.
This forum concluded its work at the end of 2000, publishing six
guidance documents covering a broad range of issues that confront
hydropower regulation. The process also resulted in several rulemakings
and formal policy changes within each of these agencies. We believe
that these reforms represent significant steps forward in improving the
relicensing process, but they have not been given much time to work.
Additional reforms, particularly by FERC, are still desirable. American
Rivers supports a licensing process that is structured around NEPA with
draft and final decisional documents, complete information for all
participants, flexible but reliable timeframes, and transparency of
analysis.
Unfortunately, as an independent agency, FERC cannot be compelled
by the administration to make administrative or regulatory changes.
This fact was recently confirmed by the President's energy plan. ``The
NEPD Group recommends that the President encourage the Federal Energy
Regulatory Commission (FERC) and direct federal resource agencies to
make the licensing process more clear and efficient, while preserving
environmental goals.'' (President's Plan emphasis added, 5-18 and 5-
22). While the President can ``direct'' federal resource agencies to
act, just as his predecessor did through the efforts of the ITF, he can
only ``encourage'' FERC. Congressional action is necessary. To date,
FERC has been unwilling to undertake major changes to its licensing
process other than those that reduce its own costs and time such as the
ALP. If FERC were required to issue a staff draft license decision
document along with its draft NEPA document, parties would have a
meaningful and substantive document upon which to comment and the
Commission would be able to better share its NEPA document with other
agencies instead, of treating it as a draft decision.
We oppose any provision that would requires complex, formal
hearings. Such a requirement would not streamline the licensing
process--it would only make it longer and more costly. The public does
not have the resources to participate in such formal adjudicatory
proceedings, leaving the public at a distinct disadvantage against the
well-healed resources of an electric generating corporation.
additional legislative changes to consider
American Rivers continues to believe that legislation is
unnecessary to improve the licensing process for hydropower dams;
however, if the Senate insists on moving forward with a legislative
package, we believe that it should include provisions that will improve
the environmental status quo. We offer the following additional
elements that should be included:
Grant shorter license terms or more flexible conditions
Some members of the Coalition believe that the Commission and
Congress should consider reducing the maximum term for license renewal
from 50 to 15 years in an effort to improve the licensing process.
There are several reasons to suggest this dramatic change. First,
energy policy has changed since the Federal Power Act (FPA) was first
enacted in 1920. The nation is no longer developing new hydropower on
the same scale or investing significant financial resources in capital-
intensive development. In fact, we now find ourselves in an
increasingly competitive marketplace with short investment horizons and
rapid exchange of assets. Fifty-year license terms are not consistent
with these changes.
Second, our knowledge of complex ecosystems and engineering is
expanding and evolving at a phenomenal pace, enabling us to make more
informed and effective decisions about resource management and energy
production, but also requiring that management change when new
information is developed. Licenses that lock in management decisions
for 50 years preclude agencies from applying this ever-growing
knowledge and understanding as it emerges. In contrast, shorter license
terms allow modification of management decisions on a more regular
basis to accommodate new information.
Finally, the varied interests competing for use of our nation's
rivers continue to increase. Hydropower is compatible with some of the
interests, incompatible with others. Licenses of 15 years would provide
FERC an opportunity to revisit on a more regular basis the uses to
which our rivers are put in light of changing values.
These factors have led some to conclude that shorter license terms
would certainly lead to improvements in the licensing process. With a
reduced term, stakeholders would not treat licensing as a ``once in a
lifetime'' opportunity, but instead would view it as an ongoing
process. This would be far more conducive to adaptive management,
allowing greater flexibility in license conditions with regular
monitoring and more frequent opportunity for technical advances.
Therefore, we offer the following amendment:
Section 6 and section 10(i) of The Federal Power Act are each
amended by striking ``fifty years'' and inserting ``thirty
years for original licenses and not more than 15 years for new
licenses'';
Subsections (d) and (e)(1) of such Act are each amended by
striking ``twenty'' and inserting ``5''.
Section 15(e) of such Act is amended by striking ``not less
than 30 years, nor more than 50 years'', and inserting, ``not
more than 30 years for original licenses and not more than 15
years for new licenses''.
While the reduction of the license term is arguably a dramatic
proposal, we still believe that a more regular review of license
conditions than the current 30 to 50 years would diminish the stakes of
each subsequent review and would be more consistent with other
regulatory proceedings such as those for municipal solid waste
facilities or thermal power plants.
Toward that end, we recommend that FERC be directed to institute an
adaptive management program that would specifically allow states to
ensure compliance with changing water quality standards on a regular
basis or to allow federal agencies to revisit endangered species
protection measures on a more regular basis. While at first blush this
would seem to require additional work, we believe that once the initial
relicense is issued following 30 to 50 years of unfettered operation,
subsequent proceedings would be less cumbersome, involving mere
refinements. We offer the following amendment as an example of this
concept.
Section 15(e) of such Act is amended by adding after the last
period, ``all licenses issued shall be reviewed every five years by the
Commission with the cooperation of relevant state and federal agencies
who are authorized to recommend or prescribe license conditions, and
pursuant to such review, the Commission and state and federal agencies
shall reopen the license as necessary to adequately and equitably
protect, water quality standards, new endangered or threatened species
listings, and address other circumstances unforeseen in the original
license.''
Limit and condition the issuance of annual licenses
As noted earlier, annual licenses provide an incentive for
licensees to delay the licensing process by allowing continued
operations without regard to current environmental standards. To
minimize this incentive, FERC should require interim terms and
conditions to be incorporated into annual licenses, limit the duration
and number of annual licenses, and raise the standards for obtaining an
annual license. Without a backstop to the process, licensees may allow
things to drag on and avoid doing studies in order to receive annual
licenses on old terms and conditions. Short of a Commission policy or
rule to this effect, Congress should compel the Commission to take
steps in this direction. We offer the following amendment as an example
of this concept.
Paragraph (1) of section 15(a)(1) of The Federal Power Act is
amended by replacing, ``of the existing license,'' with, ``required to
meet state water quality standards'' and inserting at the end of the
subsection, ``Notwithstanding other sections under this Act, the term
of any new license issued under this subsection shall be reduced by one
year for each annual license issued by the Commission.''.
Institute a royalty fee for the private use of public rivers
Hydropower continues to be one of the least costly forms of
electricity on the market, largely because hydropower generators do not
pay any costs for fuel. However, rivers belong to the public and the
public should therefore be compensated by dam owners for the ability to
profit from this resource. In the natural resources arena the concept
of a royalty payment is consistent with oil and gas leasing, mineral
leasing, and timber harvesting. These industries pay a royalty while
still mitigating for their impacts to the natural environment.
Hydropower should do the same. A small royalty payment of 3 mils per
kilowatt hour would have little effect on power prices and would
provide a return to taxpayers for the use of a public resource. A
portion of those fees could be returned to the state where the project
resides for river restoration, parks development, and other public
benefits. We offer the following language as a proposed amendment:
Section 10(e) of The Federal Power Act is amended by adding the
following at the end thereof:
``In addition to the annual charges under the preceding provisions
of this subsection, the Commission shall require the licensee of each
project under this part to pay to the United States for deposit into
the General Fund of the Treasury a royalty in the amount of 3 mills per
kilowatt hour of electricity generated by the project. Such royalty
shall be paid at such times and in such manner as the Commission shall
prescribe. Fifty percent of the amount of such royalties received with
respect to licensed projects in each State in each fiscal year are
authorized to be appropriated to the State for purposes of fish and
wildlife enhancement projects in such State.''
Reauthorize the Office of Public Participation
The licensing process significantly taxes the resources of the
general public. These stakeholders represent a wide array of interests,
have differing levels of understanding of the process, and sometimes
lack the technical expertise to meaningfully participate in all aspects
of the licensing process. In collaborative proceedings, when non-
governmental organizations are often expected to set forth coordinated
positions, managing such a diverse group of interests and making
difficult decisions can be quite challenging and often leads to delay.
Congress should reauthorize funding for FERC to provide the public
with compensation for ``. . . reasonable attorney's fees, expert
witness fees, and other costs of intervening or participating in any
proceeding before the Commission . . .'' consistent with 16 U.S.C.
Sec. 825q. We offer the following amendment to Section 319(b) of the
Federal Power Act:
Paragraph (2) is amended to read as follows:
``(2) The Commission shall reimburse any person granted
intervener status in any proceeding under Part I of this Act
for reasonable attorney's fees, expert witness fees, and other
costs incurred by such person to intervene and participate in
such proceeding.''
Paragraph (4) is amended to read as follows:
``(4) There are authorized to be appropriated to the
Commission to carry out this section such sums as may be
necessary. If, during any fiscal year, the Commission
determines that the reimbursement for costs referred to in
paragraph (2) cannot be provided because of insufficient
appropriations, the Commission shall establish a reasonable
schedule of fees that license applicants shall pay to the
persons referred to in paragraph (2) to reimburse such persons
for such costs.''
conclusion
Our nation's rivers and fisheries are facing a crisis of slow but
steady extinction. Resource agencies with expertise in these areas are
in the best position to address this threat. We can find better ways to
generate hydropower and new sources of energy but we cannot bring back
species once they have gone extinct. Reforms of the hydropower
licensing process must focus on improved relations among the agencies
and appropriate incentives for licensees rather than on reduced
protections for our river resources. We applaud the Chairman for his
efforts in this direction and encourage the Committee to follow his
lead.
The Chairman. Mr. Gray.
STATEMENT OF GERALD J. GRAY, VICE PRESIDENT FOR POLICY,
AMERICAN FORESTS
Mr. Gray. Thank you, Mr. Chairman, members of the
committee. I am Gerry Gray, vice president for policy at
American Forests. American Forests is the oldest national
citizens' conservation group in the country. Our mission is to
help people improve the environment with trees and forests. And
we do this through programs that provide information, tools and
resources to both urban and rural community groups across the
country.
The need for greater public and private investments in the
protection, restoration and maintenance of watersheds is a very
important concern to both us and many of our partners across
the country. I am delighted to be here today to present some of
our views on a specific section of S. 597, the Comprehensive
and Balanced Energy Policy Act. That section deals with
providing a portion of hydroelectric charges back to the
reservation where these projects are for watershed protection
activities.
I have several points I would like to make. First, there is
a great need for investment in watersheds. These are the
natural assets, the capital, that provides the water resource,
the ecological service to society. These assets are being
degraded. There has been a lack of investment in them. And we
need to find mechanisms to reinvest in these watersheds.
There is also a need to reinvest in the rural communities,
the human and social capital that will provide the ability for
these communities to help sustain these watersheds. We called
this a community-based approach. And it integrates the needs of
the communities with the help of the watersheds. And we think
it is the best way to approach some of these concerns.
Section 702 contains critical elements of the community-
based approach, which I will discuss later. But we do believe
it needs to increase the amount of funding to really address
the needs of these watersheds. To highlight the need for
investment in watersheds, I would like to discuss the Sierra
Nevada ecosystem project for a second. This 1996 study was one
of the first in the Nation to look at large-scale ecosystems.
And it found that the Sierra Nevada system produces about
$2.2 billion worth of commodities and services from natural
resource production activities, primarily related to water,
timber, recreation, tourism, grazing, and other agricultural
activities.
About 60 percent of that value was from water, about $1.5
billion a year. The study further found that of all of those
activities, only water did not provide resources to Federal and
local governments to reinvest in the maintenance of those
watersheds. The SNEP report referred to the lack of funding for
watershed maintenance as an under-investment problem. And it
concluded that a massive and directed investment of time and
money is needed to sustain and enhance the Sierra Nevada
ecosystem and communities. It also concluded that there needs
to be additional mechanisms to promote investment to maintain
these important Federal lands watersheds.
On a smaller scale in the northern part of the Sierra, the
Feather River watershed, about 3.2 million acres and its 71-
percent federally managed as national forest-national parks,
had some similar analysis. And it found that there, too, water
was the most significant economic resource from the watershed.
And yet the watershed continued to be degraded, and there was
no reinvestment in maintaining watershed health.
Further research showed that with investments in improving
watershed health, they could both increase water storage and
improve water supply from the watershed. A group called the
Feather River Coordinated Resource Management Group, a
consortium of 21 local, regional, and national entities has
developed a number of initiatives over the past 15 years to
look at ways to improve watershed health and productivity.
Recently it put together a list of short- and long-term
activities that are necessary to maintain watershed health in
the Feather River. And these activities mirror pretty much
those outlined in section 702 of the bill. And we would call
this a community-based approach once again, because it attempts
to strengthen the ties between ecosystem health or watershed
health and community well-being.
These elements include activities to analyze and assess
watershed conditions and trends, to highlight on-the-ground
priorities dealing with endangered or threatened resources,
roads issues, soil erosion and other things. It includes a very
innovative multi-party monitoring process to ensure
accountability and learning through these efforts, and to build
trust among the diverse interests at the local level. And it
includes a skill training or job training component to help
build local capacity to undertake these types of watershed
improvement activities.
Finally, I would like to mention that we are very much in
support of this innovative mechanism to redirect these funds
from hydroelectric charges to watershed maintenance activity
directly in these watersheds. Our estimate, however, is that it
will provide less than about $1 million a year to all the
national forest lands across the country, just insufficient to
really accomplish a great deal.
Therefore, we call this a very positive first step, but we
believe that we need to look for additional mechanisms to
increase both public and private investment in watershed
protection.
We would urge Congress and the Federal Government to
examine the economic value of these ecological services being
provided in these watersheds on Federal lands to identify the
beneficiaries of those values, both within and beyond the
boundaries of the watersheds, and to look for new mechanisms
through which the beneficiaries of these activities can invest
their fair share in watershed restoration and maintenance.
Thank you very much, Mr. Chairman.
The Chairman. Thank you very much.
[The prepared statement of Mr. Gray follows:]
Prepared Statement of Gerald J. Gray, Vice President for Policy,
American Forests
Mr. Chairman and Members of the Committee:
I am Gerry Gray, Vice President for Policy at American Forests, the
oldest national citizens' conservation organization in the U.S. The
mission of American Forests is to help people improve the environment
with trees and forests. We do this through programs that provide
information, tools, and resources to urban and rural communities to
protect, restore, and maintain healthy ecosystems. Over the past five
years, we have worked with many partners in forest-based communities to
advance understanding of community-based approaches to ecosystem
management. The need for greater public and private investment in the
protection, restoration, and maintenance of watersheds has been an
important concern of our partners across the country, in various
landscapes and ownership contexts. I am delighted to be here today to
present our views on Section 702 of the Comprehensive and Balanced
Energy Policy Act.
My comments are based in part on American Forests' national policy
agenda for ecosystem restoration and maintenance. One of our major
policy goals is ``to increase public and private investment in
ecosystem restoration and in building the capacity of communities to
maintain healthy ecosystems.'' My comments are also based on a paper
that I recently co-authored with Leah Wills of Forest Community
Research and Plumas Corporation in northern California. The paper,
entitled Exploring Reinvestment from a Community-based Watershed
Perspective,\1\ presents the view that watersheds, or ecosystems, are
capital assets that are being degraded and need investment so they can
continue to provide ecological services critical to the environmental,
social, and economic well-being of communities.
---------------------------------------------------------------------------
\1\ In Gray, G., Enzer, M., and Kusel, J. 2001. Understanding
Community-Based Forest Ecosystem Management. Haworth Press, Binghamton,
NY.
---------------------------------------------------------------------------
Key points I would like to make today are:
There is a great need for investment in the protection,
restoration, and maintenance of watersheds. Water resources
provide tremendous economic values, and there has been a lack
of investment in maintaining the capacity of watersheds--the
natural capital--to continue providing these natural resources
and economic benefits.
There is also a need to invest in communities--especially
their human and social capital-to protect, restore, and
maintain healthy watersheds.
We believe that a community-based approach--an approach that
integrates the needs of the watersheds, or ecosystems, and
communities--is the best approach to maintaining watershed
health.
Section 702 contains critical elements of a community-based
approach. It directs a continued annual flow of financial
resources toward a range of essential activities that will help
build capacity in rural communities and provide for analysis,
planning, implementation, and monitoring of projects that will
improve watershed health.
We would like to thank the Chairman for including this provision in
the Comprehensive and Balanced Energy Policy Act of 2001. This
provision demonstrates federal leadership in recognizing the need for
increased watershed investment, identifies an innovative source for
funding, and promotes a community-based approach for planning and
implementing the resource management activities.
the need for watershed investment
Water-supply issues are becoming critical in many areas of the arid
West, while in the East and South, water-quality concerns are driving
new ecosystem management approaches. California's extremely high water
values provide a dramatic example of the need for investment to
maintain the capacity of ecosystems to provide these resources. This
example is highly relevant to discussion of Section 702 because
significant portions of California's key watersheds, particularly the
headwaters of major waterways, are located on federal lands, such as
national forests and national parks. The example is not unique to
California, however. The U.S. Forest Service has increasingly been
recognizing the importance of national forests as the source of water
supplies, particularly drinking water, for many of our nation's major
metropolitan areas. The agency's growing emphasis on water is
illustrated by its recent large-scale watershed initiative, which
focuses on learning how to protect and manage twelve pilot watersheds
through collaborative efforts with other federal, state, and local
entities.
The California water example makes a strong economic case for
maintaining the environmental health of watersheds upstream of large
water and hydropower supply dams. The largely federally managed
watersheds of California are critical for catching, storing, and
channeling low-sediment flows of otherwise dispersed precipitation into
elaborate and expensive water supply and hydropower production
facilities. Combining the natural (watershed) and manufactured
(engineered) infrastructure enables water and hydropower purveyors to
produce billions of dollars of wealth through water and power sales.
Affordable water and hydropower, in turn, support a vast array of other
economic endeavors in California, most notably a multi-billion dollar
agricultural economy.
Although national policy has long recognized the value of federal
lands as producers of high-quality water, neither national nor state
policy has developed a way to foster investment in maintaining these
water-supply watersheds. The 1897 Organic Act that clarified the role
of the national forests focused on two primary purposes: ``securing
favorable conditions of water flows, and to furnish a continuous supply
of timber'' for the nation. Since then, a variety of mechanisms has
been developed to obtain revenues from timber, recreation, forage, and
other resource production activities and reinvest them in restoration
and maintenance of federal lands. Examples of these mechanisms include
direct payments to local jurisdictions, off-budget trust funds, yield
taxes, and user fees. However, a limited amount of funding from these
mechanisms has been directed toward the maintenance of federal lands
for water production (quality and quantity). Support for watershed
maintenance has only been provided through direct federal
appropriations, and this amount has been insufficient to protect
watershed health.
The congressionally authorized and funded Sierra Nevada Ecosystem
Project (SNEP) developed estimates of the economic values of natural
resource activities in the Sierra Nevada ecosystem. As one of the
nation's first efforts to estimate economic values for a large-scale
ecosystem (20 million acres), the 1996 SNEP study broke new ground. The
study examined and compared the value of natural resource production
activities related to water, timber, recreation and tourism, and
grazing and other agriculture. It found that the Sierra Nevada
ecosystem produces approximately $2.2 billion worth of commodities and
services annually and that water accounts for $1.5 billion--more than
60 percent of the value. Most of the water values accrued to users of
hydroelectricity and municipal and agricultural water supplies,
virtually all of who were located outside the boundaries of the Sierra
Nevada ecosystem. Water production activities generated no funding to
help to federal and local governments maintain watersheds or
communities. The SNEP report referred to the lack of funding for
watershed maintenance as an ``under-investment problem'' and concluded
that ``a massive and directed investment of time and money'' is needed
to sustain and enhance the Sierra Nevada ecosystem and communities
(SNEP, p. 1057). The report also concluded that ``additional mechanisms
to promote reinvestment are necessary to maintain and enhance the
Sierra Nevada ecosystem so that it can continue to provide the socially
desirable outputs.''
a community-based approach to watershed management
Over the past 15 years, the Feather River Coordinated Resource
Management (FR-CRM) group, a consortium of 21 local, regional, and
national entities, has developed a number of initiatives exploring
collaborative approaches to watershed management in the Feather River
watershed. Their initiatives seek to strengthen local capacity,
identify watershed reinvestment mechanisms and priorities, and forge
alliances with groups beyond the watershed's boundaries. They have
explored multi-issue, multi-scale approaches to investing in watershed
management through efforts with regional networks, such as the
California Urban Forest Advisory Council, the California Brownfields
Communities working group, and the Regional Council of Rural Counties,
and national networks. They have also worked with the Communities
Committee of the Seventh American Forest Congress, a national network
of organizations focused on the interdependence of forests and
communities.
The 3.2 million-acre Feather River watershed is the northernmost
drainage in the Sierra Nevada; 71 percent is federally managed as
national forests and national park land. The watershed delivers 4.6
million acre-feet of unimpaired flow to the famous 1,330.1 MW
``Stairway of Power,'' currently owned by Pacific Gas and Electric
Company (PGandE) and the California Department of Water Resources.
PGandE serves 600,000 customers using the Feather River hydrosystem as
part of its electrical supply grid. The Feather River watershed
historically supported a premier timber management and woods products
industry, and ``Feather River Country'' is increasingly attractive for
recreational developments. Recent research shows that investments in
improving watershed health could increase the water storage in and
supply from the watershed. Dr. Jeff Romm, an economist at the
University of California at Berkeley, found that ``in certain
conditions, riparian and meadow restoration actually can enhance water
storage more efficiently than dam augmentation.'' And, Dr. Linda Bond,
a consulting hydroecologist in Sacramento, and Dr. Rick Kattelmann, a
hydrologist at the Forest Service's Pacific Southwest research station,
estimated that investing in watershed health improvements could provide
at least an additional 250,000 acre-feet or, 7 percent more useable
water annually, to downstream water users. These watershed-specific
analyses mirror SNEP's earlier Sierra-wide findings and document water
as the most economically important output from the Feather River
watershed, yet the environmental health of the watershed continues to
degrade.
In 1995, the FR-CRM began an initiative to identify the most
effective short- and long-term reinvestment activities for maintaining
the health of the Feather River watershed. Based on the group's years
of experience, it concluded that a wide range of watershed management
activities need to be funded under an effective reinvestment program.
These activities include: watershed rehabilitation projects, planning,
economic incentives, critical habitat protection and enhancement,
stewardship education, project effectiveness monitoring and watershed
trend monitoring, resource condition assessments, job training and
development, and testing and evaluation of best management practices,
with some money set aside for unallocated expenses, such as
contingencies or emergencies. The breadth of the activities recognizes
that reinvestment efforts must integrate environmental and economic
concerns by developing comprehensive assessment information at the
outset of projects and comprehensive monitoring information at the
conclusion.
Beyond identifying its local reinvestment priorities, the FR-CRM
has also developed white papers for community forestry and watershed
groups as a means of moving reinvestment strategies forward on a
broader, regional basis. Its most in-depth work was sponsored by the
Collaborative Learning Circle, a regional consortium of community
forestry and watershed groups in the Pacific Northwest. The list of
watershed management activities developed through this initiative is
very consistent with the activities identified in Section 702 for the
protection of water resources.
comments on section 702
Given the need I have described for investment in watershed
protection, restoration, and maintenance, we are pleased with
provisions in Section 702 that direct federal funds from the proceeds
of hydropower charges directly to watershed protection activities on
federal lands. Our understanding is that the amount of funding
available from these proceeds will not be very large, however. Based on
annual proceeds of hydropower fees on the national forests in FY 2000,
we anticipate that the 12\1/2\ percent that would be directed toward
watershed protection will amount to less than $1 million per year under
the current fee structure for hydropower facilities. This amount of
funding, although helpful, will not accomplish a great deal in
addressing the needs of watersheds throughout the nation. Therefore, we
support the provision as a positive step, but we believe Congress and
the federal government should do more to generate revenues for
investment in watershed protection, restoration, and maintenance. We
believe that greater investment is needed, to ensure that watersheds
are not degraded, and that those who derive economic benefit from a
watershed, or ecosystem, should pay their fair share of the maintenance
costs. With respect to water resource issues, we believe it is critical
for the federal government to examine the economic value of the
ecological services being provided by federal-land watersheds, to
identify the beneficiaries of those values, both within and beyond the
watershed boundaries, and to identify mechanisms through which those
beneficiaries can invest their fair share into watershed restoration
and maintenance activities.
The watershed protection activities in Section 702 comprise
important elements of community-based approaches, which seek to
strengthen ties between ecosystem health and community well-being.
These elements include assessment activities to understand watershed
conditions and trends; on-the-ground activities to address high-
priority resource needs; multiparty monitoring of water protection
activities to ensure accountability and learning, as well as build
trust among diverse interests involved in the process; and job training
to help develop a skilled workforce and job opportunities in rural
communities. The provisions that allow the appropriate federal agency
to make grants or enter into cooperative agreements or contracts with
non-profits, small businesses, or other cooperative entities within or
near watersheds are also important to meet the goal of building
community capacity.
Finally, I would like to suggest two specific changes to the list
of watershed protection activities:
For item (F), add ``riparian and upland forests'' to the
list of land areas on which activities for erosion control and
restoring hydrologic function might be done. The condition of
these forest areas can greatly impact the health and function
of a watershed.
For item (E), add ``on public and private lands'' to the
language. It is important for watershed assessments to include
all lands within a watershed to fully understand investment
needs and priorities.
Thank you for the opportunity to testify on this legislation. I
would be happy to respond to any questions.
The Chairman. Ms. Keil, why don't you go ahead?
STATEMENT OF JULIE KEIL, DIRECTOR OF HYDRO-LICENSING AND WATER
RIGHTS, PORTLAND GENERAL ELECTRIC COMPANY
Ms. Keil. Chairman Bingaman and other members of the
committee, thank you for the opportunity to testify today. I am
the director of hydro-licensing and water rights for Portland
General Electric Company, a modestly sized investor owned
utility based in Portland, Oregon. We own five FERC license
projects. These form the cornerstone of our resource portfolio
that allows us to provide efficient and economical services to
our customers.
Senator Smith was kind enough to mention before our
aggressive conservation efforts. The portfolio includes that
along with large investments in wind and the other resources
that you heard about this morning.
I have appeared before Congress twice before on this topic.
I have a sincere hope that the next time I do it I will be here
to discuss with you all the benefits that we see from the
changes that you have enacted this session. The time has become
only more urgent for us to enact these changes. Over the next
15 years, one-half of the non-Federal hydro capacity, nearly
29,000 megawatts of energy, must undergo the relicensing
process. PGE alone, despite our modest size, we are relicensing
nearly 600 megawatts all before the year 2006.
Unlike the previous Congresses that I spoke before, the
current discussion is based on a deep and, I think, well-
informed record before you, based on my testimony and the
testimony of others. It is consensus driven and, most
importantly, bipartisan in nature. We are hopeful that this
spirit of bipartisanship will produce a balanced bill this
year.
I want to especially thank Chairman Bingaman and Senator
Craig, along with my home State Senators, Wyden and Smith, for
their commitment and efforts to try and reach consensus. But I
must emphasize that absent legislative reform of the FERC
relicensing process, hydro's role in the Nation's energy supply
is in jeopardy.
As you have heard today, hydropower is our largest and most
commercially viable renewable resource. And I want to emphasize
again that it would be a shame to increase other renewables to
the detriment of hydro. You need to rely on that base that was
talked about earlier.
More than any other form of power produce, it also provides
a myriad of other benefits, including recreation, flood
control, and irrigation. It is also emissions free, which, in
the time of ongoing concern over greenhouse gases, cannot be
overlooked.
All across the West, utilities are struggling to keep the
lights on and to provide the reliable power that is the engine
of economic growth. The margin for error these days is
perilously thin. In these circumstances, hydro's unique
reliability attributes have taken on increased importance.
Unlike most thermal power projects, hydropower projects can be
turned on and off almost instantaneously. This is a critical
component of a system that must exactly match generation to
load every minute of the day and every day of the week.
While we are committed to other renewables and to
conservation, none of those sources provide the flexibility and
system support that hydropower projects provide for us in the
West. Despite these benefits, America is in danger of losing
significant hydropower capacity and operational flexibility at
a time when it is most needed. Characterized by excessive costs
and delays, the Federal hydro-licensing system threatens to
reduce generation capacity and operational flexibility in
projects throughout the Nation.
You might well ask, how did we get to this point? Simply
put, the process fails to balance the environmental impacts of
hydro projects with the crucial energy and non-energy values of
the resource. It suffers, as Mr. Robinson mentioned, from
dispersed decision-making authority and an inability to balance
competing values. The net result is that no one has the
authority to speak on behalf of the public interest in general,
no one has the authority to make that final balance.
In relicensing our largest hydro project, Pelton Round
Butte, 11 agencies, each with a single mandate and mandatory
conditioning authority over some or all of the project, have a
role to play and have been involved. No one is responsible for
making their various mandates consistent. No one has the
authority to look at the broader picture and make sure that
important energy benefits are considered in the exercise of
those mandates. To call the process a three-ring circus does
not do justice to the complexity that we face.
To take the analogy one step further, in my role I juggle
many interests. I am responsible for providing reasonably
priced and reliable service to PGE's customers. I must also
ensure that the company's investors get a fair return on their
investment in the company. And I must negotiate terms and
conditions, which is what I do on a daily basis, which reflect
PGE's deeply held environmental stewardship ethic.
Our goal in relicensing is to make the environmental
footprint of the project as small as possible while still
maintaining a viable project.
My agency counterparts, on the other hand, often juggle
only one ball, the protection of natural resources. This
fundamental disparity is at the core of the hydro-licensing
conundrum. You will find attached to my written testimony many
other examples of how the process fails, and I would strongly
encourage you to read that attachment.
You will undoubtedly hear the argument that the problems
with hydro-licensing can be resolved solely through
administrative means. I have to disagree. And I do have
firsthand experience in this arena. I have served 3 years as a
member of the Federal Advisory Committee that advised the
Interagency Task Force and on a parallel level have been deeply
involved in the National Review Group founded by EPRI, which
has explored many different for administrative reforms.
The problem is they simply do not address the fundamental
problem with the system. The system as it is now benefits no
one. It certainly does not serve the interests of energy
production and, I would strongly argue, ill serves the
environment as well, as environmental protection delayed is
protection denied.
To craft a process that truly advances all interests,
energy and environment, legislative solutions are necessary.
For the hydro industry, our number one priority is to reinject
balance into the licensing process, to make sure, if you will,
that everyone has more than one ball to juggle, that everyone
in the process must balance and consider competing and
difficult interests.
Our other priorities include scientific administrative
review of mandatory conditions, deadlines for timely
submission, coordination of the environmental review process
under NEPA. The two legislative proposals you have before you,
S. 71 and S. 597, both address these needs in a variety of
ways. The question that we face now is, can these two
approaches be merged in a way that will allow us to wisely make
the most difficult of decisions: How do we provide for the
energy needs of today while protecting and enhancing precious
environmental resources for the future?
The industry stands ready to work with the committee and
with other interests, and we want to encourage you to continue
the bipartisan efforts to date. Keeping the lights on in the
Northwest and throughout the Nation is not a partisan issue.
And it demands your prompt attention.
Thank you.
[The prepared statement of Ms. Keil follows:]
Prepared Statement of Julie Keil, Director of Hydro-licensing and Water
Rights, Portland General Electric Company
Chairman Bingaman, Ranking Member Murkowski, Members of the
Committee, thank you very much for giving me the opportunity to appear
before you today to discuss legislation that has been introduced in the
Senate that would improve the Federal Energy Regulatory Commission's
hydroelectric relicensing process.
I appear before you today in two capacities. First and foremost, I
am Director of Hydro Licensing and Water Rights for Portland General
Electric Company. PGE is an investor owned utility based in Oregon,
serving more than 700,000 customers in the Portland metropolitan area
and the Willamette Valley. PGE owns 5 FERC-licensed hydroelectric
projects. The capabilities of these projects form the cornerstone of
our ability to provide efficient and economical service to our
customers.
I am also here representing the hydropower industry. As a former
President of the National Hydropower Association, I have participated
over the years in hundreds of discussions with industry colleagues and
non-industry stakeholders as to the challenges and opportunities facing
hydropower in the 21st century. I am a member of the Federal Advisory
Committee (FACA) that worked with the Interagency Task Force towards
administrative improvements to the hydro relicensing process;
similarly, I am a member of the EPRI National Review Group that has
also explored administrative relicensing process reform. In addition,
Portland General is an active member of the Hydroelectric Licensing
Reform Task Force, a coalition of public and investor-owned hydropower
generators drawn from the memberships of the American Public Power
Association, the Edison Electric Institute, and the National Hydropower
Association. As such, my testimony today reflects the sentiments of a
broad cross-section of the hydropower industry.
PGE is also a member of WaterPower: The Clean Energy Coalition, a
group of over 660 consumer, labor, environmental, farming and other
organizations that recognize the need to improve the hydro relicensing
process. At the local level, PGE has been a key participant in numerous
state task forces aimed at improving the process of state participation
in the relicensing of hydro projects.
The issue of hydro relicensing improvement is not new to this
committee. In oversight and legislative hearings held before this
committee during the previous two Congresses, a detailed record has
been compiled as to the complexity, costs, delays, and conflicting
mandates inherent in the FERC relicensing process. The energy crisis
that currently plagues California and the Pacific Northwest has only
underscored the need for and importance of Congress acting as soon as
possible to reform the relicensing process so as to preserve consumer
access to clean, reliable, and cost-efficient hydropower.
The urgency surrounding this issue has not dissipated with the
passage of time. In fact, with each passing year the stakes increase
considerably. Today, as we look at the next 15 years, one-half of all
non-federal hydroelectric capacity--nearly 29,000 MW of power (enough
to serve 29 million homes)--must undergo the FERC relicensing process.
This includes 240 projects in 38 states, much of it in Western states
where power supply is a major concern. Portland General alone is in the
process of relicensing nearly 600 megawatts, all before 2006. We are
not unusual in this respect.
What has changed, however, is the bipartisanship that now
characterizes efforts to improve the relicensing process. All of us
within the hydropower industry are encouraged by this shift towards a
bipartisan consensus on hydro relicensing. The fact that both
Republican and Democratic-sponsored Senate energy policy packages
introduced earlier this year contain sections on hydro relicensing
improvement is a testament to the important consumer benefits to be
gained from relicensing reform. We are hopeful that this spirit of
bipartisanship will produce a balanced, comprehensive, substantive bill
this year. I want to especially thank Chairman Bingaman and Senator
Craig, and my home-state Senators Wyden and Smith, for their commitment
to this issue and good-faith efforts to date at trying to reach
consensus. The fact is, hydropower has played--and must continue to
play--a key role in our nation's energy policy; and absent legislative
reform of the FERC relicensing process, that role is in jeopardy.
Hydropower accounts for about ten percent of the nation's
electricity and over 80 percent of its renewable energy. The benefits
of hydropower, and its continued importance to our nation's
environmental and energy policy objectives are well documented.
Hydropower is not only our largest, renewable energy resource; it is
low cost and efficient; it is a purely domestic resource; and it
provides Americans with abundant recreational opportunities, as well as
many flood control and irrigation benefits. It is also an emissions-
free resource, which in a time of ongoing concern over greenhouse gases
cannot be overlooked. In 1999, hydro displaced the emissions of 77
million metric tons of carbon; that is the equivalent of removing 62.2
million passenger cars, nearly 50% of the current fleet, from our
nation's roadways. In addition, emissions-free hydropower generation
helps us avoid significant amounts of Nitrogen Oxide (NOX)
and Sulfur Dioxide (SOX), which are major contributors to
decreased air quality.
As California and the West continue to grapple with an energy
supply insufficient to meet growing consumer and industrial demand, it
is another of hydropower's attributes that has taken on increased
importance: its reliability. The management of the nation's electric
grid depends upon fast, flexible generation sources like hydropower to
meet peak power demands and to restore service after a blackout.
Hydropower's ability to go from zero power to maximum output quickly
and predictably makes it exceptionally good at meeting changing loads
and providing ancillary electrical services.
Despite these multiple benefits, our supply of hydropower is waning
and America is in danger of losing significant hydropower capacity and
operational flexibility at a time when it is most needed. As we face
rising energy prices, increased levels of pollution, energy shortages
and reliability concerns, we must consider ways to counter these
trends. In short, now is the time for policymakers at the federal level
to fix the hydro relicensing process, for it is this process that poses
the greatest threat to the future viability of this important resource.
As documented in recent Congressional hearings and most recently by
FERC in its Section 603 Report, the relicensing process suffers from
dispersed decision-making authority and an inability to balance
competing values. The bottom line is that costs, delays, and
conflicting mandates inherent in the process threaten to reduce
generation capacity and operational flexibility throughout the nation.
As we lose megawatts and operational flexibility, we must rely on less
efficient generation sources that both cost more and produce greenhouse
gas and other emissions.
How did we get to this point? Why such a dysfunctional process?
While there is no shortage of explanations, most of it can be boiled
down to one unfortunate reality: the relicensing process fails to
properly balance the environmental impact of hydro projects with the
crucial energy and non-energy values of the resource.
Since 1986, FERC has been required, under the Federal Power Act, to
give ``equal consideration'' to a variety of factors when issuing hydro
project licenses and relicenses. This balancing authority requires FERC
not only to consider the power, economic, and development benefits of a
particular hydro project, but also to consider energy conservation and
the protection, mitigation of damage to, and enhancement of fish and
wildlife. In other words, under Federal law, FERC has the
responsibility and authority to strike a balance between power and
environmental values. If this were the provision of the Federal Power
Act that governed in this situation, relicensing might have a chance to
succeed. The courts, however, have interpreted the Federal Power Act so
as to prevent any balancing from taking place. The courts, in effect,
have given Federal resource agencies unilateral authority to set
``mandatory'' conditions on FERC relicenses. FERC has no opportunity to
question the basis of mandatory conditions set by the agencies, or to
fit those conditions into the final license.
This would not be a problem if federal resource agencies, when
imposing a mandatory condition, considered the many factors that FERC
is required to examine pursuant to the Federal Power Act. However, this
is simply not done. While all of the agency personnel with whom I have
worked over the years have been intelligent, well-intentioned people,
their statutory mandates simply do not permit them to look beyond the
narrow resource areas they are charged to protect. The net result is
that no one is balancing. No one has the authority to look at the big
picture of how hydro fits into our national energy policy. I go back to
my earlier observation: in today's energy-short climate, where every
megawatt counts, this is a situation that must be remedied, and
remedied soon.
A brief example from my experience may serve to illustrate. In
relicensing PGE's Pelton Round Butte Project, 11 agencies each with a
single focus and mandatory conditioning authority over all or part of
the project have been involved. No one is responsible for making their
various mandates and authorities consistent. As importantly, no one has
the authority to look at the broader picture and make sure that
important energy benefits are considered in the exercise of those
mandates. To call the process a three ring circus does not do justice
to the complexity we face.
Attached to my written testimony is a compilation of recent
relicensing experiences, reflecting the problems many of our hydropower
colleagues have witnessed first hand with the current relicensing
process.* For example, the National Marine Fisheries Service last year
imposed a fish passage requirement on the Enloe Dam project license in
Washington that was contrary to the wishes of a Congressionally
authorized regional collaborative planning council. Look at
PacifiCorp's North Umpqua project in Oregon where the relicensing
process took over 10 years. Even though a settlement was recently
reached in this proceeding, relicensing process improvements could have
resulted in smoother settlement negotiations, at far less cost and
resulted in investments being made in environmental improvements rather
than in study upon study upon study.
---------------------------------------------------------------------------
* The attachments have been retained in committee files.
---------------------------------------------------------------------------
Some have suggested that the problems with the FERC relicensing
process can be solved solely through administrative, rather than
legislative means. I disagree. And I draw that conclusion having
invested considerable time and energy in recent years in search of
substantive administrative remedies. As I mentioned earlier, for the
last three years I have been a member of the Federal Advisory Committee
(FACA) that worked with the Interagency Task Force towards
administrative improvements to the hydro relicensing process;
similarly, I am a member of the EPRI National Review Group that has
also explored administrative relicensing process reform. While the EPRI
NRG and an ITF successor group continue to explore administrative
reform, I have come to the following conclusion: properly developed and
implemented administrative remedies can certainly help on a number of
fronts and should be encouraged. But taken alone, administrative
reforms can not fully address the fundamental and substantive problems
with the process.
These thoughts were echoed in a letter that was sent earlier this
year to members of this Committee, signed by me and the other 5
industry FACA representatives, expressing the following assessment of
the ITF's work product. In that letter we said:
While the [ITF] reports themselves are helpful, they do not
resolve the fundamental conflict inherent in the existing
system of government oversight of hydropower projects, nor will
they assure maintenance of this reliable and low-cost source of
electricity . . . The reforms necessary to achieve substantive
improvements in the licensing of hydroelectric facilities can
best be obtained through legislation addressing the Federal
Power Act.
Let me say once again: legislative fixes are necessary if we are to
reform the hydroelectric relicensing process in a manner satisfactory
to most stakeholders.
So, what legislative fixes are needed? For the hydro industry, the
number one priority is to re-inject balance into the relicensing
process--a balance between environmental protection and the all-
important energy and non-power benefits of hydro projects. Both of the
legislative proposals that are before this Committee address this need,
albeit in different ways and to varying degrees.
S. 71, the ``Craig bill'', which also serves as Title VII of S.
388, requires agencies to take into consideration project benefits,
including economics and power values, system reliability, air quality
and flood control, and requires the agencies to document consideration
of these factors. It does not require agencies to subordinate their
natural resource responsibilities to these factors, it simply requires
them to take other factors into account. The hydro industry supports
this concept and believes it would secure the requisite balance that is
lacking in an environmentally compatible manner.
Title VII of S. 597, the Bingaman bill, seeks balance through
introducing the concept of an alternative mandatory condition. The bill
requires agencies to adopt applicant-drafted alternatives that provide
equal or greater environmental protection; are based on sound science;
and will either cost less to implement than the original condition or
result in less loss of generating capacity than the original condition.
We support this concept with the following qualifications:
i) it is important that the environmental standard not be too
restrictive so as to disqualify what might otherwise be the most
effective approach to achieving an environmental goal;
ii) since a mandatory condition does not generally impact capacity
at a project, the criteria for an alternative should be ``less loss of
electric generation, capacity or operational flexibility;''
iii) if an alternative must be based on sound science, then a
Secretary's rejection of an alternative should also be based on sound
science; and
iv) in the case of a disputed issue of material fact, there is a
need for a hearing on the record.
With these changes, the ``alternative condition'' language of the
Bingaman bill could be an effective and useful tool to encourage
innovative approaches to regulations without sacrificing important
environmental outcomes.
On a related note, some have suggested that any party should be
allowed to propose an alternative mandatory condition. We disagree.
Allowing any party to do so would not only clog the system with dozens
upon dozens of alternatives, but it also ignores the fact that other
parties will already have had ample opportunities to propose license
conditions in the proceeding. At the end of the day, it is the
applicant who must decide whether to accept a license with the
condition or to reject it; accordingly, it is the applicant and the
applicant alone who should have the opportunity to put forth a least-
cost alternative.
Other industry legislative priorities include:
Scientific Review of Mandatory Conditions
Industry believes that mandatory conditions should be grounded in
the best available scientific evidence. As such, federal resource
agencies should be required to subject each condition both to
appropriately substantiated scientific review based on best available
and current empirical data or field-tested data and to peer and public
review. The Craig bill gets us there, requiring a scientific basis for
all conditions and peer review. As for the Bingaman bill, our above-
mentioned qualifications to the alternative condition section would
insert a requisite grounding in ``sound science.''
An Objective Administrative Review Process for Mandatory Conditions
Usually, under the current relicensing regime, federal resource
agency field biologists are the ones who draft mandatory conditions,
without any opportunity given for an objective administrative review.
In order to shed greater light on the formulation of mandatory
conditions, federal resource agencies should be required to:
provide notice of draft conditions;
provide an opportunity for a hearing on the record;
consider all comments received; and
include comments in the documentation submitted to the
Commission as evidence.
The Craig bill provides for administrative review of contested
conditions before the issuance of a final order. This review could both
improve and shorten the relicensing process by eliminating the
likelihood for post-license litigation. While such administrative
review is absent from the Bingaman bill as introduced, we are pleased
that Chairman Bingaman and his staff have indicated a willingness to
revisit such concepts in a revised bill.
Establishment of Deadlines for the Timely Submission of Mandatory
Conditions
We must get away from excessively lengthy relicensing proceedings--
some taking more than 26 years. Under current FERC regulations,
resource agencies are already required to meet deadlines for submission
of conditions; rarely, however, do agencies adhere to these deadlines.
To be effective, these deadlines must be codified through amendment to
the Federal Power Act. The Craig bill sets firm deadlines for the
submission of draft and final mandatory conditions, which is a concept
we support. While the Bingaman bill does not set such deadlines, we
support the notion of FERC issuing an estimated schedule for all
subsequent actions by the applicant, FERC, resource agencies and other
parties--a notion that Chairman Bingaman and his staff are currently
considering.
Coordination of the Environmental Review Process Under NEPA Into One
Document
Finally, there is a palpable need for greater coordination among
agencies with jurisdiction over the hydro relicensing process. This is
especially the case in the area of environmental review. In order to
avoid duplication of efforts, we would recommend legislative efforts,
such as those contained in the Craig bill, to confirm FERC's
responsibilities as lead agency for environmental reviews of hydro
projects under NEPA, including a requirement that FERC set deadlines
for submitting input on environmental review by Federal, state and
local agencies. NEPA coordination is currently absent from the Bingaman
bill, but is under consideration by Chairman Bingaman and his staff; we
would encourage its inclusion in any final legislation.
The question then for this Committee is, can elements be drawn from
the Craig bill and the Bingaman bill in a way that would substantively
address the problems with the current process in a manner fully
compatible with environmental law? In answering this question, the
hydropower industry encourages Chairman Bingaman and Senator Craig, and
all the members of this Committee, to sit down and forge consensus
legislation. The hydropower industry stands ready and willing to assist
in this effort as needed. What is most important, is that the
extraordinary work done by Senators Bingaman and Craig to date not fall
prey to partisanship. The energy supply problems in my region, and
throughout the nation, are not partisan issues and demand prompt
attention. Accordingly, I urge the Committee to continue its good faith
efforts and pass consensus language on hydro relicensing reform this
summer.
In conclusion, I would like to offer the following thoughts on the
relationship between energy priorities and natural resources. The river
and fisheries resources administered by hydro project operators are
very important ones, and essential and long-lasting commitments are
being made in relicensing processes. Portland General and the
hydropower industry as a whole take seriously their role as stewards of
the rivers we are privileged to use. Licensees go to great lengths to
involve stakeholders and members of the public in licensing and
relicensing processes. These consultations take years and, without
question, natural resource issues constitute the bulk of those
discussions. Ultimately, the majority of direct and indirect
expenditures made by licensees are spent on environmental protection,
mitigation and enhancement measures.
Some rhetorically argue that the hydropower industry wants to
``roll back'' environmental regulations in this process. That is
absurd. With hydropower process improvements, resource enhancement and
protection will continue. But they must continue in a process that also
recognizes and protects the value of the product that is the subject of
the relicensing in the first place. We can and must achieve balance in
this arena. We strongly believe that healthy rivers and hydropower can
coexist and we continue to work toward that end.
Time is short. As we look to self-sustaining energy strategies, now
is the time for policymakers to better incorporate hydropower into the
nation's energy mix. We urge you to pass hydro relicensing improvement
legislation this Session. It is a goal that can benefit hydro
producers, the environment and consumers, and one that all Americans
should support.
Thank you.
The Chairman. Thank you very much.
Thank you all for your testimony. Let me just ask one
question here and then defer to Senator Craig. Mr. Robinson,
you indicated in your testimony that under the court rulings
that have come down, that if the Commission were to conclude
that one or more of the mandatory conditions that have been
imposed would render a project inconsistent with the public
interest, then the commission's only course would be to deny
the license application. Am I correctly understanding what you
said?
Mr. Robinson. yes.
The Chairman. Has there been any circumstance where that
has occurred, where an agency has imposed a mandatory condition
which you felt was so out of line that you went ahead and
denied a license application?
Mr. Robinson. I think the very scenario that you bring up
is one that goes to some of our longest running relicensing
actions. It is really not a viable option to deny a license at
relicensing. We are not sure where the project would go. So
what we have to do is to continue to try to facilitate a set of
conditions that will allow for a sustainable project and one
that does meet that public interest standard. And sometimes
that takes a number of years.
The Chairman. So instead of denying the license, you wind
up just prolonging the pre-licensing process.
Mr. Robinson. Well, we continue to work with all the
parties that are providing conditions to try to get a license
that meets that public interest standard. And that does at
times--from project to project can take some time. I would note
that we are the only agency that is required to balance all
those conditions and meet that standard when we issue that
license. And sometimes that is a difficult standard to meet,
when you are receiving mandatory conditions that do not have
that same standard of review.
The Chairman. Okay.
Senator Craig.
Senator Craig. Thank you, Mr. Chairman. And to all of you,
thank you for your valuable testimony. Obviously the issue of
licensing hydro projects is of great concern to all of us and
to all of you who are here. We appreciate your testimony.
First of all, Mark, I want to thank you and one of your
colleagues, John Katz, Office of General Counsel.
Mr. Chairman, recently we had a very difficult situation in
Idaho, and these gentlemen facilitated in a settlement process
between a investor-owned utility and a Federal agency that was
most helpful. And that was greatly appreciated by Idaho. And
Idaho consumers and rate payers, I suspect, were collectively
the beneficiary of that.
Mark, there have been many studies recently that address
loss of generation. Some say it is 4 percent, some say it is 8
percent. Mr. Bettenberg referenced that as it relates to the
consequence of FERC's current process. Are there other effects
in the relicensing process that is aside from the loss of
generation that have not received the appropriate attention?
Mr. Robinson. I think the answer is yes. In fact, I know
the answer is yes. The easiest thing to determine, when you
look at a relicense, is the effect on generation, the effect on
capacity. Those are numbers that you can pick out pretty
quickly.
What you cannot do as easily, and in fact no one has really
attempted to do this, is what the effect of relicensing and
changed conditions on how the project operates, what that does,
the ability of that project to factor into the reliability of
the system, to provide for peak load requirements, and to just
be a flexible component of the electric generating system that
that project exists within.
That is, for a hydropower project in particular, is so
interrelated to changing hydrological conditions that it is
hard to separate it out. But there is no doubt that, when you
take a project that has been operating with great flexibility
within an electric system and you put a condition on it that
says you will now operate what is called run of river, in other
words, no longer adjust the reservoir elevation to satisfy
power demands, that you have reduced its ability to be a factor
in system reliability and peak load demand. That has not really
been studied.
Senator Craig. I think we can all focus on numbers or
percentage of loss of generating capability. And that is
probably whey we have gone that route instead of the ability to
operate some flexibility.
Mr. Robinson. That is correct.
Senator Craig. Mr. Bettenberg, your colleague sitting next
to you today filed some lengthy written testimony with the
committee. Have you had a chance to review that testimony?
Mr. Bettenberg. I read it over quickly last night. Yes,
sir.
Senator Craig. Have you had a chance to read Mr.
Bettenberg's, Mark?
Mr. Robinson. Yes, sir.
Senator Craig. Is there anything in Mr. Bettenberg's
testimony that you would like to address or that you believe
needs to be clarified in order for this committee to be more
fully and completely informed on the issue? And I am talking
generally about agency responsibility. That is a question of
you, Mark.
Mr. Robinson. Okay. There were a couple points, and I will
try to be brief on them. And I heard them repeated at----
Senator Craig. The reason I am following this line of
questioning, Mr. Chairman, because I am using all of the other
testimony as a template to question Mark based on how FERC sees
these kinds of relationships.
Mr. Robinson. Okay. One of the statements that was made is
that there is no difference in the time required to relicense
between a project that contains mandatory conditions and those
that do not. If you look grossly at the statistics, in fact,
that is correct. However, given the number of projects we
relicense and the number of different things that can cause
delay, one delay masks another.
In the grand scheme of things, the issuance of a section
401 certificate under the Clean Water Act really drives the
train in about 40 percent of our projects. I mean, that is the
cause of the largest delay. But inside of that, inside of that
delay, clearly the receipt of 4(e) conditions, which runs about
17 months on the average, when the commission has asked for
those within about 2 months, leaving you about a 15-month delay
on average when we receive 4(e) conditions, it is a delay. And
a delay is a delay is a delay. And we cannot do anything about
that.
So to say that there is no difference between the two
really does not look at it in fine enough detail. And what we
found, what we did, is that you have about a 15-month period in
there, on average, where we do not receive 4(e) conditions,
just as an example. That is one instance.
The second thing I would like to bring up is the commitment
in the testimony, and again as expressed here, that conditions
will be provided within 60 days after we establish a notice
that says we are ready for your condition, which is consistent
with our regulations and what we would like to see those
conditions come in.
And then a second commitment, that they will come in with
their modifications to those conditions 60 days after the draft
NEPA document, and then a commitment to come in after the final
EIS with their ultimate conditions. Well, that is three bites
at the apple. We would like to have those conditions 60 days
after we establish that we are ready for those conditions.
Senator Craig. Let me go to a similar line of questioning
with the testimony that was given by Ms. Birnbaum. Did I do
that right, Liz? Thank you.
Have you had the opportunity, Mark, to review Ms.
Birnbaum's testimony, either her testimony filed here today or
she recently gave some, I think it was June 27, before the
House? And I was fascinated by many parts of her testimony, but
particular with her discussion of the Federal Resource Agency's
mandatory conditions and how they are used by Federal agencies
to, in her words, ``form a floor above which FERC can balance
license conditions.''
Do you have any thoughts in relation to that concept? I
thought that was an interesting statement as it related to the
overall process.
Mr. Robinson. Yes, sir, I do. It projects a visual in my
mind. If you look at it as you set the floor from which you
balance, it projects one type of image. The actual image is
this: If you have a--if you can think of it as a scale, like
a--I am a biologist. So I will say a triple beam balance type
of a scale, which is a long stick with a point in middle where,
you know, you balance things.
What really happens is, you come in one side of that
balance, and you set those conditions. Well, that will move
that up and down on one side. Once those are set, it is pointed
to, and it also sets the other side of the balance. Those non-
developmental--I am sorry, those developmental types of issues,
like power production, irrigation, safety, those things someone
mentioned from the table earlier.
So it does not exactly set the floor; it actually sets the
point that you are going to have on the power production sides
by setting the point that you are going to have for the
environmental protection.
I hope that was somewhat clear.
Senator Craig. Well, I think I understand it. Because that
was my frustration, agencies coming in with mandatory
requirements, I understand that. But it does change the
circumstance----
Mr. Robinson. It certainly does.
Senator Craig [continuing]. Under which an ultimate license
can be formed and ultimately a project operated.
I will return to you. I have more questions.
Mr. Robinson. Go right ahead.
Senator Craig. All right. Let me give you an opportunity,
Mark, to respond to what I considered to be a very charge that
Ms. Birnbaum made.
And certainly, Ms. Birnbaum, you, too, can respond.
And this came from her June 27 testimony in the House. She
asserts that, again in her words, ``FERC over relies on what is
characterized as the public interest.'' And you certainly have
mentioned that today, Mark. ``But is little more than best
professional judgment clouded by institutional biased.''
I believe that was your quote, Ms. Birnbaum.
She continues in her testimony to assert that the
Commission's decisions are often made in a black box and are
arbitrary and capricious. I guess I would have to say, do you
know what she is talking about here? Has American Rivers ever
formally raised this with the Commission and given particulars
so that it could respond to those kinds of allegations?
Mr. Robinson. I did notice that in her statement. It did
not escape me, I tell you. I am quite surprised at that.
Senator Craig. Well, they are not fighting words, but they
certainly are illustrative of a process or a condition.
Mr. Robinson. I am surprised at those statements. We have
worked with American Rivers and others for a number of years to
develop the process that we have now. And I cannot believe that
anybody at this table would say that the FERC licensing process
is anything other than one of the most public-intensive,
public-involvement, above-the-table, transparent regulatory
systems in place here in D.C. today.
We have--and as a result of that, you get an enormous
amount of process, and you get more time, more cost, which of
course now generates the criticism that we have. But that is
the truth of it.
And I would like to just go one step farther, if I could,
because another criticism we hear from American Rivers, and
hopefully I can address it and maybe will never hear it again,
but we might, is that the expertise only exists with the
agencies. There are two aspects of the expertise that come into
play in licensing a hydropower project on the environmental
side. And it is more than the environment, but just on the
environmental side.
One set of expertise rests with the agencies. There is no
doubt about it, and we rely on it. And we would propose nothing
that would diminish that input to the process. That is what
goes on with those resources locally. They know where the fish
are. They know where the elk range. And we have to have that
information to make good judgments and good decisions about
these projects.
The other set of information is what does a hydropower
project do to those kinds of resources? We have without doubt
the greatest concentration of environmental expertise. There
are 80 more people just like myself with advanced degrees in
environmental sciences that exist back at the Commission, who 5
days a week and at least 8 hours a day work on hydropower
licensing from an environmental perspective. They are
professionals. We have that expertise, and we know what
hydropower projects do to those resources.
If you combine those two, we have the best possible chance
of issuing a license that meets the public interest standards.
Neither one can stand alone. And hopefully American Rivers will
appreciate that and make note of that from this point forward.
Senator Craig. Liz, in fairness to you, certainly you are
entitled to respond.
Ms. Birnbaum. Thank you. I wanted to comment on the
elements of my earlier testimony that you commented on. The
institutional bias referred to, as is pretty clear, based on
the fact that FERC simply does not deny hydropower licenses.
They are a licensing agency. And they are supposed to be
deciding whether or not a hydropower project should be placed
where it is proposed. In fact, they do not deny licenses. They
are much more of a hydropower promotion agency.
Now under those conditions, Congress has put a number of
constraints and in 1986 determined that there needed to be more
of a requirement that FERC balance non-power interests, as well
as power interests, because it recognized that FERC's general
approach is to grant licenses.
On the black box perspective, although FERC's public docket
is very often, what happens at FERC is very much behind closed
doors. FERC does not, for example, publish a draft decision,
even a staff draft, before they come out with the final
decision on a license. And then as virtually everybody who has
had to deal with the FERC rehearing process knows, once a
petition for a rehearing is filed, nobody knows how, when, or
why a decision will be made. The statute requires that it be
done within 30 days.
Typically FERC issues a decision accepting the request for
a rehearing solely for the purpose of further consideration.
And then a final decision does not come out for 6 months to
several years.
All of that is a black box. Nobody knows what is going on
inside of it.
Senator Craig. Well, I understand the process, and I
appreciate some of the reasons and some of them economic as to
why those decisions are made in that light. You have made the
absolute statement that FERC has never denied a license. Do you
want to repeat that?
Ms. Birnbaum. I actually do not know whether FERC has ever
denied a license for sure, but I know that they do not in
general. The Corps of Engineers----
Senator Craig. I know of a few, and I will bet Mark could
come up with others.
Ms. Birnbaum. You know, the Corps of Engineers grants
thousands of wetlands permits and occasionally denies one. FERC
has been known to go back and tell people that they needed to
file a different application for a different license. But in
general, FERC is strongly biased towards granting license
applications.
Senator Craig. Again, Mark, for years now, many opponents
of hydro have asserted that FERC's licenses once issued are
immutable for periods of 30 to 50 years. First of all, is that
true? And what can the Commission do when environmental
resources are threatened as a consequence of changed
circumstances at the projects?
Mr. Robinson. Since about 1975, licenses issued by the
Commission have included what have commonly become known as
reopener provisions.
These are provisions that allow the commission, if there
are changed circumstances or unanticipated consequences of
licensing that appear during the course of the 30- to 50-year
license to go back in and, on its own merits or at the request
of the Department of the Interior or Commerce, I believe, make
adjustments to that license for the protection of fish and
wildlife, for the addition of recreational resources, and for a
number of other environmental types of conditions.
That really, around, I will say, 1991 or so, was
highlighted through what is known as the Platte River decision,
where we were asked to go in and make rough and ready changes
to a project, by the courts, to facilitate whooping crane
habitat.
Since that time, we have had about 50 other reopener
actions at the Commission, where we have gone back in during
the course of the license and modified those projects. We have
about 15 of those 50 pending right now. All but 3 or 4 of those
others that we have already treated were typically handled by
again negotiation with the licensee and the agencies that were
involved in coming up with a solution where the licensee would
come in and amend their project to take care of whatever
problem was there.
So we have a completed a large number of these. But it is a
provision that we include in all licenses now to ensure, if we
have changed circumstances or unintended consequences, we can
go back and make adjustments to those projects, recognizing
that we do that with great--I mean, there has to be the ability
to rely on those licenses by the people who are developing
these projects and investing their money.
But we also know that we have balance that with making sure
that we know when a new species is listed, endangered species
is listed, that we can go in and make some adjustments to that
project to satisfy the endangered species concern.
Senator Craig. You say it is a provision within the license
now. Is it a relatively new provision? How long have you been
doing this?
Mr. Robinson. I think it has been about since 1975 that
almost all of them include it. Right now it is very few
licenses that remain that do not include that provision.
Senator Craig. But historically speaking, and I know that
Ms. Birnbaum referred to that, I think what she said was
historically accurate in a sense, but I had understood there
was flexibility now, based on certain circumstances.
Mr. Robinson. We have been making use of the reopener
provision with much greater frequency since about 1991, about
ten years.
Ms. Birnbaum. May I comment on that?
Senator Craig. Yes, please.
Ms. Birnbaum. Although FERC has indeed used the reopener
provision where licensees have been willing to come in and
amend their licenses, some of the good actors who recognize
that they need to deal with new endangered species listings,
there are also some notable cases in which they have declined
to reopen licenses where they have reopener clauses, when new
species have been listed, and even where there have been die-
offs of endangered stocks of fish. And they have declined to
reopen those licenses.
Senator Craig. Okay. Mr. Chairman, I have other questions,
but you have been very generous with time. And it is late, and
this panel has been held longer than I think they probably
thought they would be here. I will submit some questions in
writing. And thank you very much.
The Chairman. Thank you, all, very much. I think it has
been very useful testimony. And we will conclude the hearing.
[Whereupon, at 12:25 p.m., the hearing was recessed, to be
reconvened on July 24, 2001.]
NATIONAL ENERGY ISSUES
----------
TUESDAY, JULY 24, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:42 a.m. in room
SD-106, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. The committee will come to order. This is one
of several hearings we have had both this year and in the last
Congress on the science of climate change, but in the past we
focused on the science of climate change, the cost of
implementing the Kyoto Protocol, and appropriate research and
development agenda to ensure technologies are developed to
reduce and eventually eliminate greenhouse gases from energy
sources. The committee has not held a hearing specifically on
measures undertaken by the private sector to actually reduce
emissions. I think this focus on a pragmatic and proactive plan
to reduce greenhouse gas emissions is certainly timely today.
We are all aware that the administration has removed the
United States from substantive participation in the
international negotiations that have been occurring in Bonn.
Agreement was reached on rules for the Kyoto Protocol yesterday
that include, as far as I can tell from press reports, all of
the flexibility mechanisms that the U.S. Government and U.S.
industry has long argued were critical to a cost-effective
strategy.
The meeting of the parties in Bonn will continue through
the end of the week as the details of the implementation are
being worked out. Unfortunately, those details will be worked
out without our involvement.
The two major criticisms of the protocol, first that the
market mechanisms essential to avoiding economic harm were not
clearly defined, and second that developing countries were not
required to take on defined commitments, those two criticisms
should in my view not have resulted in the administration
walking away without a serious effort to remedy those defects.
It appears to me from the press reports I have seen that the
first criticism that market mechanisms essential to avoiding
economic harm were not clearly defined, that criticism is well
on its way to being addressed.
The second criticism, that developing countries were not
required to make defined commitments I think also is in flux.
According to testimony that the committee received last month,
China has reduced its greenhouse gas emissions, or taken
actions to reduce greenhouse gas emissions from the levels they
otherwise would have achieved by as much as a third during the
past 20 years.
That same testimony indicated that our own greenhouse gas
emissions since the signing of the Rio treaty have increased
substantially.
While the Congress has debated the subject, many members of
the business community have been taking actions to reduce
greenhouse gas emissions. They are now seeking to build on this
experience through development of a clear legal framework for
domestic emission reductions.
Establishing risk parameters will enable the private sector
to make informed investment decisions and minimize cost. There
is no simple, universal answer for meeting the challenges of
climate change. The study that the Department of Energy came up
with, the Scenarios for a Clean Energy Future, written by five
of our national laboratories, makes the case that a vigorous
program of energy technology research, development,
demonstration, and deployment, coupled with an array of public
policies and programs to overcome market failures and
organizational barriers, can be an effective public response to
the Nation's energy-related challenges.
Such policies could significantly reduce inefficiencies,
reduce oil dependance, reduce air pollution and greenhouse
emissions at essentially no net cost to the U.S. economy. That
is the conclusion of this report that I referred to. I urge my
colleagues on the committee to review the report if they have
not done so. We need to develop a set of public policies that
will set up the necessary infrastructure to leverage our
resources to accomplish that goal.
I am obviously interested in hearing what the panelists'
views are on how policy changes, coupled with the
implementation of efficient new technologies and practices, can
move us forward in our effort to reduce greenhouse gas
emissions. Let me call on Senator Murkowski for any comments he
has, and then we will go to the witnesses.
[A prepared statement from Senator Hagel follows:]
Prepared Statement of Hon. Chuck Hagel, U.S. Senator From Nebraska
Mr. Chairman, I want to thank you for holding this important
hearing today on climate change.
The timing is very appropriate, coming on the heels of the Bonn
negotiations on the Kyoto Protocol. I believe the outcome of those
negotiations clearly indicates that the U.S. should take action
domestically to address the challenge of climate change, because the
path the international community is taking is veering further and
further from the interests of the United States.
The agreement reached in Bonn underscores President Bush's position
that the Kyoto Protocol is not in America's national interest. It
severely restricts the use of market mechanisms by reducing the use of
emissions trading, placing severe discounts on the use of carbon
sequestration efforts and including other measures that reduce a
nation's flexibility. The participation of developing nations wasn't
even discussed. The Bonn agreement moves the Kyoto Protocol further
from the provisions established by a 95-0 Senate vote on the Byrd-Hagel
resolution, and further away from any treaty that could ever be
ratified by the U.S. Senate.
The United States is committed to addressing the issue of climate
change. But we will not subjugate the economy of the United States,
which would have global implications, to an international agreement
that would have little to no impact on reducing global greenhouse gas
emissions. By completely leaving out any commitments from the
developing countries, the Kyoto Protocol is no solution for a global
challenge.
The United States will also work to take domestic actions to
enhance our knowledge of climate change, to develop technologies
necessary to address this challenge and to reduce greenhouse gas
emissions. I am working with my colleagues on this committee, Senators
Murkowski and Craig, to develop legislation which would do this.
I look forward to hearing from today's witnesses on various
approaches that can help us reduce our greenhouse gas emissions. We
need to look at a wide variety of voluntary measures that can be
undertaken now, and the technology we can develop in the future that
will allow the United States to take significant steps to reduce our
greenhouse gas emissions without wreaking havoc on our economy.
We also must continue our efforts to increase scientific
investigation into climate change in order to close the gaps that exist
in our knowledge of this extraordinarily complex issue. The actions we
take should be grounded on a sound scientific base.
I would like to note the presence of a fellow Nebraskan this
morning, John Campbell of Ag Processing Inc. I have worked with John on
numerous issues, particularly renewable fuels, and I believe he will
have some interesting things to say about how ethanol and biodiesel can
help us reduce greenhouse gas emissions.
Again, thank you Mr. Chairman for holding this timely hearing. I
look forward to the testimony from our witnesses.
STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman. Good morning.
It is a pleasure to begin another week with hearings on various
aspects of our energy legislation. With regard to Kyoto, I
think we have gone from bad to worse, relatively speaking. On
the other hand, the timing of the hearing is appropriate, given
the decisions that were made in Bonn.
As we look at finalizing the operational rules for the
Kyoto Protocol, it is my opinion that the partial agreement
reached by negotiators this past weekend has made a flawed
treaty, if you will, even worse.
Now, we do not have all the details relative to the
administration's views on this, but I expect we will shortly.
The negotiators basically placed more restrictive rules on
market mechanisms like emission trading, which basically
increases the cost to the economy. It is beyond me that they
would exclude nuclear power as part of the solution. Evidently,
the environmental ministers of many of the European countries
are so fearful that somehow--we have some feedback in the room,
Mr. Chairman.
The Chairman. I do not think it is feedback. I think
somebody is watching the soap operas towards the back of the
room.
Senator Murkowski. Either that, or they are listening to
the news, which may be better news than we are making.
The Chairman. You have got someone fixing it? Okay. We will
proceed.
Senator Murkowski. Well, we will proceed anyway. I wonder
who has got jurisdiction over the Energy Committee? Clearly
somebody does.
In any event, it is beyond me that those that are looking
for relief on global warming would exclude nuclear energy, and
evidently some of the developing nations are fearful--and
perhaps our witnesses can give us a little explanation on
this--that somehow the developed nations would dump the nuke
waste into the environments of the developing nations, but if
you are looking for relief on global warming, why, nuclear
clearly has a role, and I think that in itself, exclusion of
nuclear power, I am told that the French have decided to remain
neutral on it, and they are some 80, 85 percent dependent on
nuclear energy.
They limited use of carbon sequestration to reduce net
emissions to the atmosphere. We all know we could assimilate an
awful lot more carbon by encouraging second growth forestry.
Old growth does not assimilate carbon sequestration at the same
rate that second growth timber does. They cut a series of
political deals. I think that sets a bad precedent for future
efforts to limit emissions.
It is kind of interesting, we note China's reduction. China
made the reduction outside the global warming climate change
debate. One of the things that we were quite critical of was
the Three Gorges Dam, the development of that, and that in
itself will make a significant case to reduce emissions. I
think that dam alone was supposed to replace about 36 500-
megawatt coal-fired plants, to give you some idea, as we
criticize China's efforts to reduce emissions, of the trade-off
here.
The result of the discussion in Bonn I think probably takes
us further away from the Byrd-Hagel resolution, which--I do not
know if Hagel is with us this morning. I think it passed 95 to
zero.
Global participation by all nations was not even on the
agenda for discussion, and decisions on rules made the Kyoto
Protocol more expensive and less effective. These recent
actions on the international level I think only confirm the
President's wisdom to reject the flawed Kyoto Protocol and seek
an alternative way forward to reduce emissions of greenhouse
gases while providing the energy that we are going to need.
Kyoto is not the only game in town, as many in the
international community would have you believe. Today's
witnesses are voluntarily reducing their emissions without the
Kyoto Protocol in force, and they are developing promising new
options, including carbon sequestration to reduce emissions to
the atmosphere. There are several policy actions we can take to
foster more of these voluntary activities and make sure that
they yield quantifiable reductions, and I hope the witnesses
will provide us with their views.
For example, I believe we can improve the Department of
Energy program for reporting voluntary greenhouse gas emission
reductions by turning it into a robust registry that allows
companies to register baselines and actions taken to reduce
emissions. This registry can be used as a scorecard for our
efforts to reduce emissions in a cost-effective manner.
We should also invest in more energy research and
development to develop the energy technologies of tomorrow,
that is, energy without emissions, and to develop a range of
tools, including carbon sequestration, that we can use to
manage our risks. A lot of that is planting more trees. I
proposed this last year, and Senators Byrd and Stevens have
included this proposal in their legislation.
I think we should focus on the potential to avoid emissions
in developing countries through energy transfer technologies.
As I said earlier, we have the technology. We can assist those
countries.
This is clearly the right way forward, not the flawed Kyoto
Protocol made worse by decisions made in Bonn. Several of us
are working on legislation to help manage the risk of climate
change and provide an alternative for Kyoto, and I certainly
encourage those Senators who are sincerely concerned about this
effort to join us.
Thank you.
The Chairman. Thank you very much.
Our first panel is Hon. Francis Blake, who is the Deputy
Secretary of Energy here in Washington. He is a frequent
visitor to our committee, which we are very pleased about, and
Mr. Christopher Risbrudt--is that the correct pronunciation?--
who is the Acting Associate Deputy Chief for Programs and
Legislation with the U.S. Forest Service. I thank you both for
being here. Mr. Blake, why don't you go right ahead.
STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY
OF ENERGY
Mr. Blake. Thank you, Mr. Chairman and members of the
committee, and thank you for inviting me here this morning. I
would like to submit my testimony for the record and just
briefly summarize it, if that is all right.
The Chairman. That would be fine, and your full statement,
both of your statements will be included in the record.
Mr. Blake. The issue you are considering today is of
tremendous importance. At our current rate and pattern of
energy consumption, DOE estimates that U.S. carbon dioxide
emissions will increase at an annual average growth rate of
about 1.4 percent through 2020. We are going to need a
concerted effort to reverse this trend, and technology is going
to have to play a central role.
For that reason, President Bush created the National
Climate Change Technology Initiative. He has directed the
Secretary of Commerce to evaluate the current state of climate
technology research and make recommendations for improvement.
He has tasked the Department of Energy, in coordination with
other agencies:
First, to strengthen the basic research at our national
labs, looking to the development of advanced mitigation
technologies;
Second, to enhance public-private partnerships and expedite
innovative and effective reduction technologies;
Third, to make recommendations for funding of demonstration
projects; and
Fourth, to develop improved methods for measuring and
monitoring greenhouse gas emissions.
We are already well underway in that effort. Recently, we
announced a grant to the Nature Conservancy, studying land use
practices for studying carbon more effectively. We have made a
couple of awards to consortiums of companies that are looking
to develop new technologies for capturing and sequestering
CO2 from oilfields and from fossil fuel combustion
plants.
Across the Department, we have multiple programs aimed at
reducing the energy intensity of our economy, that is, the Btu
consumed per dollar of GDP, and reducing the carbon intensity,
that is, the amount of carbon per unit of energy.
We have major research and development programs focused on
efficiency improvements and in reducing CO2
emissions through greater use of lower carbon fuels and, of
course, through renewables. Geothermal, wind, nuclear, solar,
these are all technologies that promise tremendous
opportunities for reducing our greenhouse gas emissions, and I
know from our discussion last week and the support of this
committee on further research and development efforts, that we
share a number of perspectives on how we can move forward and
address this important issue.
I look forward to answering any questions and working with
this committee on the legislation that you have before you.
Thank you very much.
[The prepared statement of Mr. Blake follows:]
Prepared Statement of Francis Blake, Deputy Secretary of Energy
Mr. Chairman and members of the committee, I welcome the
opportunity to testify on S. 597, the Comprehensive and Balanced Energy
Policy Act of 2001; S. 388, the National Energy Security Act of 2001;
and S. 820, the Forest Resources for the Environment and the Economy
Act.
In June 2001, the President announced his commitment to develop an
effective and science-based approach to addressing global climate
change. A cornerstone of that commitment is the deployment of existing
technologies and the development of new technologies that can increase
energy supply, promote energy efficiency, and reduce greenhouse gas
emissions.
The Energy Information Administration is projecting that U.S.
carbon dioxide emissions from energy consumption will reach 1,800
million metric tons of carbon equivalent in 2010, and continue to rise
to 2,000 million metric tons of carbon equivalent by 2020, an average
annual growth rate of 1.4 percent. We will need a concerted effort to
reverse this trend.
While many different policy approaches to greenhouse gas reductions
may be considered, none can be successful without a continuing supply
of new, more economically and environmentally sound technology. Prudent
technology research and development reduces the costs of new
technologies, and expands economic opportunities while lowering
emissions. Accompanying public policy can provide incentives for
technology investment, diffusion and deployment.
Public support for reducing greenhouse gas emissions depends on
combining economic growth with environmental protection. Both can occur
if new, lower-emitting, cost-effective technologies are profitable and
economically efficient. Forcing costly and less productive technologies
into the economy reduces economic growth and inevitably drains public
support for emissions limitations. No climate change strategy, no
matter how flexible and efficient, can support robust economic growth
unless lower cost and higher productivity technologies reducing
greenhouse gas emissions are readily available.
Because greenhouse gas emissions come from many sectors of the
economy, a broad range of technologies will be needed. Such a portfolio
of technologies could include energy efficient technologies, lower
carbon-emitting technologies, carbon capture, storage and sequestration
technologies, and new technological discoveries yet to be made.
To assure that we can meet our technology needs to reduce
greenhouse gas emissions, the President created the National Climate
Change Technology Initiative and directed the Secretary of Energy, the
Secretary of Commerce and the Administrator of the Environmental
Protection Agency to: 1) evaluate the current state of U.S. climate
change technology research and development and make recommendations for
improvements; 2) provide guidance on strengthening basic research at
universities and national laboratories, including the development of
the advanced mitigation technologies that offer the greatest promise
for low-cost reductions of greenhouse gas emissions; 3) develop
opportunities to enhance private-public partnerships in applied
research and development to expedite innovative and cost-effective
approaches to reduce greenhouse gas emissions; 4) make recommendations
for funding demonstration projects for cutting-edge technologies; and
5) develop improved technologies for measuring and monitoring gross and
net greenhouse gas emissions. The National Climate Change Technology
Initiative also will enhance coordination across federal agencies and
among the federal government, universities, and the private sector. We
are now at work implementing the President's initiative and will be
able to report back to the President later this year.
We are making progress on other fronts as well. In mid-July, the
President announced new agreements that involve DOE. The first is an
agreement with the Nature Conservancy to study land use and forestry
practices for storing carbon more effectively in Brazil and Belize. The
second is with an international team of energy companies to develop a
new set of technologies for reducing the cost of capturing and
sequestering carbon dioxide from fossil fuel combustion plants. There
are other Federal agencies, notably the Environmental Protection Agency
and the Department of Agriculture, with programs that address climate
change through technology research and development and deployment.
The Administration is engaging on the international front as well.
As we speak, the United States is participating constructively in
international discussions on climate change at the continuation of the
Sixth Conference of the Parties to the Framework Convention on Climate
Change in Bonn, Germany.
At the Department of Energy, we have multiple programs aimed at
addressing climate change both indirectly through improvements in
energy efficiency and R&D on renewable energy sources, and directly
through R&D programs aimed at sequestering carbon. Our programs, many
in partnership with industry, address: efficiency improvements in end
use, distribution, transmission, and generation of electricity;
increased use of energy-efficient electro-technologies; reducing
CO2 emissions through increased efficiency of coal and gas-
fired plants; promotion of greater use of lower carbon fuels such as
natural gas, nuclear, or renewable energy; transportation actions,
including greater use of natural-gas-powered and electric vehicles;
recovery of methane from landfills and coal seams; and the use of fly-
ash as a cement substitute.
We've enjoyed numerous successes over the years and I'd like to
highlight a few examples.
DOE-sponsored technology advances in wind power has led to an
eight-fold drop in cost, to about five cents per kilowatt-hour in areas
with the best resources. In these locations, wind is competitive with
many traditional generation technologies. Geothermal power plants, once
restricted to the geysers area in northern California, are now
operating throughout California and in Nevada, Utah, and Hawaii.
Scientific advances have enabled successful geothermal power plant
construction and operation in these four states. Installed geothermal
power plant capacity now exceeds 2,800 megawatts. Over 400,000
geothermal heat pump applications have a total thermal capacity of
3,600 megawatts in the United States. Biomass power has grown to 350
U.S. power plants providing 7000 megawatts of power. New technologies
that boost the efficiency and cleanliness of biomass power are now
being tested. Through technology advances achieved by DOE research and
development, the performance of renewable technologies has increased
while the costs have dropped dramatically. Combined with a more
detailed knowledge of renewable energy, these advances have accelerated
the market for renewable technologies.
Starting from a few research and development firms supported by
federal funding, the U.S. photovoltaics industry has developed into a
thriving business with annual sales of $500 million. Thin-film
photovoltaic cells are now doubling as rooftop shingles. DOE research
on thin-film photovoltaic cells and a growing interest in integrating
photovoltaic cells into buildings have resulted in this new building
material that generates electricity-using sunlight. The energy
generated from a building's rooftop shingles can provide power both to
the building and to the utility's power grid. Several demonstration
projects, including a solar rooftop system showcased at the Southface
Energy and Environmental Resource Center in Atlanta, Georgia, have
proven that these innovative shingles can provide clean electricity.
Geothermal heat pumps are one of the most cost-effective heating
and cooling systems available. A typical system can reduce energy
consumption by 23 to 44 percent compared to traditional heating and
cooling systems. While geothermal heat pumps are typically more
expensive to install, their greater efficiency means the investment
maybe recouped in three to ten years. Experience has shown that use of
geothermal heat pumps can be beneficial to electric utilities and their
customers.
DOE's appliance standards program for clothes washers, furnaces,
air conditioners, water heaters and fluorescent lamp ballasts helps
reduce carbon emissions by reducing demand for electricity generated by
fossil fuels.
Nuclear energy will continue to play a significant role reducing
greenhouse gas emissions. DOE's research program on fuel improvements
for light-water nuclear reactors created a technology that currently
enables 50 percent more energy to be extracted from each unit of
nuclear fuel, with prospects for greater increases in the future. This
technology, called ``extended burnup,'' is now being implemented
worldwide in water-cooled reactors. Its widespread use also has several
other independently valuable consequences, such as increasing the
output of nuclear power systems, which do not produce greenhouse gases.
Extended burnup reduces fuel cost for each operating reactor by several
million dollars per year and permits utilities to extend the time
interval between refueling outages from 12 months to 18 or 24 months.
Also, by more fully using each unit of nuclear fuel, the amount of
spent nuclear fuel that must be stored today is reduced by one-third.
The President's National Energy Policy will build on these
successes. The Policy addresses conservation, energy efficiency, and
cleaner sources of energy. In particular, the President's clean coal
initiative builds on the success of prior public-private partnerships
in clean coal technology. From 1986 to 1993, government and industry
sponsored 38 first-of-kind clean coal technology projects in 18 States.
Before this program, only a few options existed for reducing pollutants
released from coal, and almost all were expensive. DOE's Clean Coal
Technology Program changed that. Today, because of the clean coal
investment, 75 percent of U.S. coal-fired power plants now use, or are
installing, low-cost, low-polluting burners to reduce smog-forming
nitrogen oxides. Power plants can now turn coal into a gas and remove
virtually all of its smog- and acid rain-forming impurities, creating a
fuel that rivals natural gas in environmental cleanliness. Also like
natural gas, coal gas can power ``combined cycle'' arrangements of gas
and steam turbines that boost fuel efficiencies and reduce greenhouse
gases.
I would like now to turn my attention to the several energy policy
bills that are the topic of the hearing today.
In examining these three bills (S. 388, S. 597, and S. 820), it is
clear that we share common goals though there are, of course,
differences in the relative emphasis placed on different goals. I
think, for instance, that we can all agree on the importance of energy
research and development and the role of new technology in helping us
to blunt the horns of our energy and environmental dilemma. There
appears to be a consensus on the importance of public investment in
energy efficiency. And there are several areas where the need for
updating the regulatory regime under which energy is produced,
transported, and sold is manifest.
Consistent with the emphasis on R&D and technology in the energy
bills under consideration, we are, as I mentioned earlier, working on
the President's National Climate Change Technology Initiative, which
will help us define a technology future that explicitly addresses
climate change. In addition, DOE, in partnership with USAID and the
Department of Commerce, has been working on the Clean Energy Technology
Exports initiative, which originated in Senate report language
accompanying the FY2001 Energy and Water Development Appropriation Bill
and is a component of the President's National Energy Policy as well as
being reflected in Section 111 of S. 597. The goal of the initiative is
to facilitate private sector efforts to launch clean-energy
technologies into international markets by improving the government's
role in clean energy research, development, demonstration, and
deployment.
In closing, the Administration welcomes the committee's efforts to
address our Nation's climate change challenge and its strong support of
the Department's energy science, research and technology development
programs. The legislation under consideration by the committee is
ambitious and many of its provisions would have consequences that must
be weighed carefully before enactment. In this regard, I request that
the Department be given the opportunity to continue to work with the
committee on those provisions in the bill that affect DOE's programs.
Mr. Chairman, that ends my testimony and I would be happy to answer
any questions the committee may have at this time.
The Chairman. Thank you very much.
Mr. Risbrudt, please go right ahead.
STATEMENT OF CHRISTOPHER RISBRUDT, ACTING ASSOCIATE DEPUTY
CHIEF FOR PROGRAMS AND LEGISLATION, FOREST SERVICE, DEPARTMENT
OF AGRICULTURE
Mr. Risbrudt. Thank you.
Mr. Chairman and members of the committee, thank you for
the opportunity to appear before you today to discuss S. 820,
the Forest Resources for the Environment and the Economy Act.
My name is Chris Risbrudt, Acting Associate Deputy Chief for
Programs and Legislation.
The administration agrees with the goals of S. 820, to
promote sustainable forestry in the United States and encourage
carbon sequestration on Federal, State, and nonindustrial
private lands, and would like to examine the bill in more
detail and work with the committee on an acceptable bill.
On June 11, the President announced a series of initial
steps, including plans for advancing the science of climate
change, advancing technologies to address climate change, and
promoting cooperation in the Western Hemisphere and beyond. The
Cabinet is continuing to work on this issue, and is considering
approaches that will tap the power of markets, help realize the
power of technology, and ensure the widest possible global
participation. Secretary Veneman is actively engaged in this
process.
The concepts and ideas contained in S. 820 will receive
serious consideration by the administration as we move forward
in developing an overall approach to address the serious
problem of climate change. Although there is much debate about
how to address climate change and the specific impacts of
climate change on the global environment, there is general
agreement that atmospheric CO2 levels are
increasing. Increasing forestland area, greater adoption of
agroforestry by agriculture, and improving forest and rangeland
management and productivity can help reduce the rate of
CO2 accumulation.
Trees are efficient at sequestering large amounts of
CO2. Simply put, trees store carbon in their stems
and branches, as well as below-ground in their root systems. In
fact, about 50 percent of the dry weight of a tree is carbon.
We believe that in forest ecosystems carbon accumulates over
time on the forest floor and in the soil due to woody debris,
leaves, and roots. Storing, or sequestering this carbon in
forests removes it from the atmosphere while providing other
environmental and economic benefits.
Approximately half of the land in the contiguous United
States is devoted to agriculture. Due to this extensive
agricultural land base, incorporating tree planting into a
small portion of these lands through windbreaks and riparian
forest buffers could result in an enormous amount of carbon
sequestration, as well as promoting conservation and economic
diversification.
The goals and objectives of S. 820 fit within the construct
of existing forest programs, and would give the agency more
tools to manage the national forests and grasslands, provide
assistance to State and private landowners through the
Cooperative Forestry Assistance Act, and continue cutting-edge
research and development activities.
Through research and development, the Forest Service would
continue to develop the science and technology needed to
understand, manage, enhance, monitor, and estimate forest
carbon stocks, including the above-ground, below-ground, and
forest product pools. The administration would like to review
its program across the Agricultural Research Service,
Cooperative State Research, Education and Extension Service,
the Department of Energy, the Forest Service, and the National
Science Foundation to evaluate what is now being done and the
best means to gather this information in the least burdensome
way.
In closing, Mr. Chairman, the administration appreciates
the effort and thoughts that have gone into developing S. 820.
The ideas contained in this bill warrant serious consideration.
However, the bill will affect direct spending. The
administration recommends that the activities called for by
this bill be funded through discretionary appropriations.
The forest-based initiatives articulated in this bill would
contribute to sustainable forestry and carbon storage on
Federal, State, and private lands. The administration is
developing a comprehensive plan for addressing climate change,
and welcomes this input. We would ask that, as Congress
develops its own ideas on methods to address this global
problem, it also considers opportunities to encourage
agroforestry and improve the management of agricultural soils
to increase carbon sequestration.
Thank you for the opportunity to comment today. I would be
pleased to answer any questions that you or members of your
committee may have.
[The prepared statement of Mr. Risbrudt follows:]
Prepared Statement of Christopher Risbrudt, Acting Associate Deputy
Chief for Programs and Legislation, Forest Service, Department of
Agriculture
Mr. Chairman and members of the committee: Thank you for the
opportunity to appear before you today to discuss S. 820, the Forest
Resources for the Environment and the Economy Act. I am Chris Risbrudt,
Acting Associate Deputy Chief for Programs and Legislation.
The Administration agrees with the goals of S. 820 to promote
sustainable forestry in the United States and encourage carbon
sequestration on federal, state, and non-industrial private lands, and
would like to examine the bill in more detail and work with the
committee on an acceptable bill.
On June 11, the President announced a series of initial steps,
including plans for advancing the science of climate change, advancing
technologies to address climate change, and promoting cooperation in
the Western Hemisphere and beyond. The Cabinet is continuing to work on
this issue and is considering approaches that will tap the power of
markets, help realize the promise of technology, and ensure the widest-
possible global participation. Secretary Veneman is actively engaged in
this process.
The concepts and ideas contained in S. 820 will receive serious
consideration by the Administration as we move forward in developing an
overall approach to address this serious problem.
S. 820 would amend the Energy Policy Act of 1992 to authorize a
role for the Secretary of Agriculture in the Climate Change program
relating to carbon sequestration on forested lands. S. 820 would direct
the Secretary of Agriculture to:
Report to Congress on carbon storage and the potential to
increase carbon storage on national forests through management
actions, and the contribution of U.S. forestry to the global
carbon budget;
Establish a Carbon and Forestry Advisory Council to advise
the Secretary on developing guidelines for accurate voluntary
reporting of greenhouse gas sequestration from forest
management actions; evaluating the potential effectiveness of
the guidelines; and estimating the effect of the proposed
implementation on carbon sequestration and storage;
Review and advise the Secretary of the Department of Energy
on existing voluntary reporting guidelines for greenhouse
gases;
Establish incentives for States, non-industrial forest land
owners, and nonprofit entities for forest management activities
and carbon sequestration through a revolving loan program; and
Establish reporting requirements for State, non-industrial
forest landowners, and nonprofit entities that participate in
the revolving loan program for carbon sequestration.
background
Although there is much debate about how to address climate change
and the specific impacts of climate change on the global environment,
there is general agreement that the atmospheric CO2 levels
are increasing. Increasing forestland area, greater adoption of agro-
forestry by agriculture, and improving forest and rangeland management
and productivity can help reduce the rate of CO2
accumulation.
Trees are efficient at sequestering large amounts of
CO2. Simply put, trees store carbon in their stems and
branches as well as below ground in their root systems. In fact, about
50% of the dry weight of a tree is carbon. We believe that, in forest
ecosystems, carbon accumulates over time on the forest floor and in the
soil due to woody debris, leaves, and roots. Storing or sequestering
this carbon in forests removes it from the atmosphere, while providing
other environmental and economic benefits.
Existing forests produce benefits because actively managed forests
produce fiber at the same time that they are storing carbon. Active
forest management results in a mixture of age-classes and younger,
faster growing forests produce fiber and store carbon at a faster rate.
Approximately half of the land in the contiguous U.S. is devoted to
agriculture. Due to this extensive agricultural land base,
incorporating tree planting into a small portion of these lands through
windbreaks and riparian-forest buffers could result in an enormous
amount of carbon sequestration as well as promoting conservation and
economic diversification. Other federal programs, such as the
Conservation Reserve Program or the Environmental Quality Incentives
Program encourage the planting of trees and shrubs in agricultural
settings.
The goals and objectives of S. 820 fit within the construct of
existing Forest Service programs and would enable the Agency to fully
utilize its authority to manage the national forests and grasslands,
provide assistance to State and private landowners through the
Cooperative Forestry Assistance Act, and continue cutting edge research
and development activities.
Through R&D (Research and Development), the Forest Service would
continue to develop the science and technology needed to understand,
manage, enhance, monitor, and estimate forest carbon stocks, including
the above-ground, below-ground, and forest product pools. The
Administration would like to review its program across Agricultural
Research Service (ARS), Cooperative, State, Research, Education &
Extension Service (CSREES), Department of Energy (DOE), Forest Service,
and the National Science Foundation (NSF) to evaluate what is now being
done and the best means to gather this information in the least
burdensome way.
The new incentives and revolving loan program would fit neatly into
existing Cooperative Forestry Programs. These programs provide
technical and financial assistance to private landowners for
reforestation and other forest management activities that result in
enhanced forest productivity, improved environmental quality, and
ultimately, increased carbon storage. The Rural Communities Assistance
programs would also help rural places develop and sustain economic
diversification and a market-based infrastructure.
In particular, the proposed revolving loan program is essentially
the same as the existing Smart Growth Partnership Program, a program
that is part of the conservation spending category. That program
provides funding to Intermediate Relending Program (IRP) entities at
low interest rates so that these entities can establish revolving
loans. The purpose of funding the IRP's is to help landowners manage
and develop woodlots and forests to protect these lands from
development.
The recent release of the President's Climate Change Review Interim
Report and the National Energy Policy complement these goals. We
commend the sponsors of this bill for their recognition of the
important role of our Nation's forests in carbon sequestration and
recognizing that long-lived forest products, such as construction
materials and furniture, are important carbon stocks that can be
estimated and managed as part of active forest management programs that
increase overall carbon storage. Estimates of carbon pools that do not
include forest products currently in use and in landfills are
inaccurate and misleading.
The bill should be clarified to reconcile the potential conflict
between carbon sequestration and ecosystem restoration. In many parts
of the country, particularly the Interior West, the health of our
national forests and public lands has deteriorated due to the excessive
growth of small diameter thatch. The result is high carbon density, but
low ecological health, not to mention high risks of catastrophic fire
damage. The bill needs to consider how, in various circumstances,
increasing carbon sequestration in a forest may run counter to other
important goals.
suggestions
The Administration would recommend a technical change to the title
of the bill by removing the reference to ``national forests derived
from the public domain.'' Unless this change is made, the initiatives
in the bill would not apply to national forests in the east and south
that were established from acquired lands.
We would also like to work with you to clearly define the intent of
term ``watershed.''
Because S. 820 amends the Energy Policy Act of 1992, which is
administered by the Secretary of Energy, there are several places in
the bill where it is not clear whether the authority or requirement
referring to ``the Secretary'' refers to the Secretary of Energy or the
Secretary of Agriculture.
The Administration would recommend several clarifications in
Section 4 of the bill, because the authority and administration of
several paragraphs is confusing. Section 4 of the bill amends 42 U.S.C.
13385 and requires the Secretary of Agriculture to undertake a review
of the guidelines for the voluntary collecting and reporting of
information on sources of greenhouse gases established by the Secretary
of Energy, Administrator of the Energy Information Administration, and
make recommendations for amendments and refinements of the guidelines.
The Administration would recommend redrafting the requirement for the
Secretary of Agriculture to complete public involvement on any
recommended changes before recommending them to the Secretary of
Energy. Instead, perhaps a collaborative approach to public involvement
might be more useful.
It is also unclear from the construction of Section 4 whether the
Secretary of Agriculture or the Secretary of Energy is ultimately the
keeper of carbon storage information generated by States and non-
industrial forest landowners participating in the revolving fund
program. The language of the bill needs to be clarified concerning the
role of the Administrator of the Energy Information Administration,
Department of Energy and the role of the Department of Agriculture in
data collection and storage.
Throughout Section 4 of the bill, which amends the Global Climate
Change Title of the Energy Policy Act administered by the Secretary of
Energy, the existing law refers to requirements and authorities of the
Secretary of Energy. This becomes problematic in Section 5 of the bill
where the question arises concerning the Forest Carbon Cooperative
Agreements and Loan program, whether ``The Secretary'' mean the
Secretary of Energy or ``The Secretary of Agriculture?''
The interactions with the State Foresters and activities on non-
industrial forest lands are similar to language in the Cooperative
Forestry Assistance Act that is within the authority of the Secretary
of Agriculture. The Administration would recommend that Section 5 of
the bill be redrafted to amend the Cooperative Forestry Assistance Act
of 1978 (16 U.S.C. 2101-2114, 16 U.S.C. 1606) to clarify the
administration of the State and non-industrial private land carbon
sequestration program to the Secretary of Agriculture through the Chief
of the Forest Service. This would speed implementation of the incentive
programs and movement of funds and direction through existing processes
and authorities under the Cooperative Forestry Assistance Act.
We commend your intent to be consistent with Executive Order 13112
on Invasive Species by identifying eligible tree species. This approach
provides important environmental safeguards while offering landowners
opportunities for increased productivity, increased local income, and
increased carbon sequestration that would not otherwise be realized.
This also provides the landowner with opportunities to take advantage
of science and technology advances in woody cropping systems that can
provide bioenergy feedstocks, thereby offsetting the use of fossil
fuels.
summary
In closing, Mr. Chairman, the Administration appreciates the effort
and thoughts that have gone into developing S. 820. The ideas contained
in this bill warrant serious consideration. However, the bill will
affect direct spending; the Administration recommends that the
activities called for by this bill be funded through discretionary
appropriations. The forest-based initiatives articulated in this bill
would contribute to sustainable forestry and carbon storage on federal,
state, and private lands. The Administration is developing a
comprehensive plan for addressing climate change and welcomes this
input. We would ask that, as Congress develops its own ideas on methods
to address this global problem, it also consider opportunities to
encourage agro-forestry and improve the management of agricultural
soils to increase carbon sequestration.
Thank you for the opportunity to comment today. I would be pleased
to answer any questions you or members of your committee may have.
The Chairman. Thank you very much. Let me start by asking
Secretary Blake, I have been concerned as I read the newspapers
about the action in Bonn. I have been concerned about the same
issue that Senator Murkowski discussed in his opening comments,
and that is the apparent decision that nuclear energy would not
be looked on, or a power producer of nuclear energy would not
be looked on as part of what a country would be given credit
for, or part of the framework that has now been agreed to in
Bonn.
I had thought that this meeting in Bonn would have been an
excellent opportunity for us to lobby for the consideration of
nuclear power as part of what is included there, and we missed
that opportunity. Am I misreading the situation, or what is
your view on that?
Mr. Blake. Excuse me, I am not familiar with the background
of the treaty negotiations myself, and I am just getting a note
confirming that nuclear energy is out of the Clean Development
Mechanism and Joint Implementation.
I think your broader comment is whether that is an
appropriate conclusion for the Protocol. I think we would share
Senator Murkowski and your concerns on that approach.
The Chairman. What was the judgment made--perhaps you are
not the right person in the administration to ask, but what was
the judgment that caused us to not want to be there lobbying
for inclusion of nuclear power?
Mr. Blake. I think we were there assisting throughout the
discussions. We had a team there. Whether that team discussed
the nuclear issue specifically I just do not know. I would not
be the right person to ask on that.
The Chairman. The Department of Energy was in no way
involved in any of that?
Mr. Blake. Yes, we were. Yes, we were. We had a number of
representatives there. What I cannot tell you is whether that
issue was specifically raised by any of our representatives
there with some of the other delegates.
The Chairman. If it was raised, since we had withdrawn from
the negotiations we were really not at the table to make
suggestions, were we? How were we participating?
Mr. Blake. I think we were able to make suggestions, but as
you say, we were not at the table as such.
The Chairman. Well, as I say, it seems to me that is an
unfortunate result which I do not know if it could have been
avoided had we been at the table, but I certainly am concerned.
Similarly, as I understand it, the framework that has now
been described, or the agreement that has now been described
there in Bonn, they are still working through the details for
the rest of this week on that, and again we are not there
participating in any of those negotiations. I am right about
that?
Mr. Blake. Again, we have people there who are there to
help in the discussions, and certainly provide the U.S.'s
views.
The Chairman. We are observers, and there if someone asks
us for our opinion, is that our essential position?
Mr. Blake. Well, we have the Convention itself, and then
there is the Protocol, and there are two sets of discussions,
and I think on the Convention we are more directly engaged than
on the Protocol. That is my understanding.
The Chairman. But the Protocol is the one they are now
working out the details of, is that correct?
Mr. Blake. That is correct.
The Chairman. So that is the part we are not engaged in.
Mr. Blake. Well, I think we are engaged. We are there
helping the other countries and certainly providing what is the
U.S. position.
The Chairman. Let me also ask, one of the concerns I had:
the President, of course, has issued the energy plan for the
country, and one of the concerns I had when I read it, there
was much in there I agreed with, but there was also a lack of
attention to the issue of climate change, as I saw it. It did
not seem to be integrated into that plan.
We in this committee are going to try to put together a
comprehensive energy bill as the administration has urged, and
I am anxious that we try, as best we can, to integrate policies
that we can agree upon on climate change into that energy bill.
It seems to me the best opportunity that we have in this year,
and maybe in this Congress, to do that. Do you have a position,
does the administration have a position on whether we should be
trying to address these issues as part of a comprehensive
energy bill?
Mr. Blake. I think when you look at the administration's
energy plan, probably 50 percent of the recommendations have a
direct bearing on carbon dioxide emissions, whether it is
energy efficiency renewables, increased research and
development. So there is already attention through the plan on
this question both of the energy intensity of our economy, as
well as the carbon intensity of the fuels that we use.
The Chairman. So the emphasis that is in your plan on
research and development and on renewable sources of energy,
you see that as essentially the climate change component.
Mr. Blake. The President has also directed us, to review,
on all of the efficiency and renewable portfolio. For example,
what we are doing, what we need to be doing, and we are taking
a top-to-bottom review of that, as well as directing us on the
R&D efforts that more particularly focus on our carbon dioxide
reduction program.
The Chairman. This internal working group, the
administration's got on climate policy or climate change, will
it have anything in the way of a recommendation that this
committee could consider as we put together comprehensive
energy legislation, or what is your intention with regard to
that?
Mr. Blake. Well, there are a number of aspects to it, as I
indicated. The Department of Commerce has been tasked with
looking at the state of climate change research, and I think
they will be coming up with some response to the President on
that, if I understand the time frame correctly, in August.
We are also working on the R&D technology side of that, the
efforts underway. I think we are working on an as soon as
possible report-out date, but I cannot give you a specific
time.
The Chairman. There are a couple of items I wanted to
particularly just mention which I would appreciate you looking
at that are not related to climate change, as such. One is the
Strategic Petroleum Reserve. Last week, we sent this letter to
Secretary Abraham urging that he initiate a full management
review of the operating cost of the Strategic Petroleum
Reserve. We are spending $160 million per year to maintain the
reserve, and it seemed to us that was an excessive amount, so I
would like--I hope you folks are working on getting us a
response to that.
Mr. Blake. Mr. Chairman, when we got your letter I met with
Director of that office last week, and we have begun the full
review.
The Chairman. Okay. Thank you very much.
One other item that we are just sending you a letter on
today, these are the remaining oil overcharge refunds. The
Department of Energy is still, as I understand it, sitting on
about $250 million of refunds that are due to the public for
oil overcharges that occurred about 20 years ago. I understand
a significant portion of those refunds are owed to utilities.
We are sending Secretary Abraham a letter today on the subject.
I would appreciate you looking at that as well and seeing if
you could give us a status report.
Mr. Blake. I will do that, yes, sir.
The Chairman. All right.
I think I have probably used all of my time. The timers are
not working here. I do not know if anyone has failed to turn
them on, but I think I have probably used all my time.
Senator Murkowski.
Senator Murkowski. Thanks very much.
I would like for the record to note the submission of
positions by the American Petroleum Institute and NEI, the
Nuclear Energy Institute, into the hearing today, and I would
ask unanimous consent that the statements be entered into the
record as submitted, and as if read.
I think it is important to note that as far as the
submission of the Nuclear Energy Institute, it covers a letter
to the governments around the world indicating the important
role nuclear power plays in meeting the challenge of reducing
emissions, and further states the continued safe, effective use
of nuclear electricity and of advanced nuclear power technology
are an integral part of the international effort to manage
risks from global warming. The letter is signed by 93 CEO's
from around the world. These are leaders in the nuclear
industry worldwide.
You know, it is just incomprehensible to me why at this
meeting in Bonn they would simply ignore the role of nuclear
energy. That is why it is my feeling there is a tremendous
inconsistency here with getting on with just how we are
seriously going to reduce emissions and ignore the role of
nuclear energy.
There is also a letter submitted by the American Petroleum
Institute which basically suggests that the petroleum industry,
refining industry and so forth, have made substantial
reductions in emissions as a consequence of greater awareness
and concentration of capital into reducing emissions through
technological breakthroughs, and I think that is an important
contributor as we recognize our obligation here in America to
try and do our share in reducing emissions.
Another item that I wanted to bring up, Mr. Blake is, there
is a bill around here--I do not know whether it is S. 556--I
think Senator Lieberman and Senator Jeffords are sponsors, but
I understand that the EIA has indicated in a recent study that
multipollution legislation for the utility sector as proposed
under this legislation would lead to about an $80-billion
higher annual electric cost by the year 2010, nearly a 30-
percent cost increase per kilowatt hour, and it would require
massive early retirement of coal-fired generation as a
consequence of eliminating that as one of the major sources.
I think coal provides about 50 percent of our energy, and I
would ask you if this is your analysis? Is this the reason why
the administration opposes caps on CO2 emissions
from powerplants?
Mr. Blake. Certainly the EIA study, which did analyze the
costs for a multi-pollutant approach, and particularly
CO2, pointed out the economic impacts. As you
indicated, they are about $80 billion higher electricity costs
in 2010, and average retail prices up over 40 percent. In
addition, and perhaps even more importantly in terms of the
Protocol, I think the concern was the lack of participation of
the developing countries. For example, from 1990 to 2010 the
increased emissions from developing countries not included
would more than double the reductions that the United States
would have been making. So for all of this dislocation of the
economy the net environmental benefit seemed very questionable.
Senator Murkowski. Senator Bingaman brought up a point that
I wanted to follow up on a little bit concerning SPRO, because
you remember our experience under the last administration when
we had the heating oil crisis in the Northeast Corridor about a
year ago, a little bit more than that, we were concerned about
relief, and we pulled 30 million barrels out of the Strategic
Petroleum Reserve and then found that we did not have the
refining capacity to refine that in an expeditious manner, and
I think we got about 3 million barrels or so of refined product
from that pull of 30 million barrels out of SPRO.
I certainly agree, $160 million per year seems an awful lot
of money to manage a program for reserves, but I would
appreciate it if you would provide us with an analysis of just
how fast we can move oil out of SPRO, reminding all of us that
it is crude oil, it is not refined product, and if we need it
in a hurry we still have to move it to a refinery, and if all
we do is offset an equal amount of that that we import we have
not accomplished much.
Is there any change in that, based on your recollection,
because my understanding is our refineries are running at very,
very high capacity now, so if we had to pull out SPRO, would we
have gained anything?
Mr. Blake. Senator, you are correct, and we can do the
analysis. As you indicate, the issue is not just the
withdrawal, it is the refining, and whether the refining
capacity is available, which was an issue the last time.
Senator Murkowski. Let me ask one more question relative to
the President's national energy plan. Does it not, in effect,
identify and highlight the reduction of greenhouse gases from
the concept of business as usual through some specifics that
are in this legislation, like cleaner fossil fuels, clean coal
technology, expanded nuclear energy and dependence, improved
energy efficiencies, enhanced alternative fuels, so is it not
really true that the President's energy plan does address
climate change specifically?
Mr. Blake. Yes, sir, in the sense that a number of the
recommendations, as I indicated, were exactly to the point of
cleaner burning fuels and lowering the energy intensity of the
United States. That is exactly correct.
Senator Murkowski. I think as we come off this question of,
well, gee, the rest of the world went ahead and signed on and
the United States did not, and therefore, why is it the United
States taking a position contrary to the views of some that we
ought to be a leader, and I think we are going to have to wait
for the administration to come back with their analysis, but it
seems to me that to go in seriously with a commitment to try
and do something about emissions and then eliminate the one
technology that provides substantial relief, and that is
nuclear energy, shows in itself the weakness and the fallacies
associated with those that were basically responsible for the
agenda, and I am just very disappointed that they started in
with the premise that they were going to eliminate nuclear
energy, so I think the administration certainly did the right
thing saying we are not going to be a party to it, we are going
to provide the leadership and technology and make it available
to the developing countries and the rest of the world as well.
Thank you.
The Chairman. Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman. Good
morning, Mr. Blake. I wanted to make a couple of comments to
you. I just came out of an election last year in California.
California is the fifth largest economy on earth. I had very
good business support.
I talked about global warming. Global warming was one of my
top priorities for reelection, and I won the reelection by over
1\1/2\ million votes. Californians I believe want action. This
Senator finds the U.S. absence from the Kyoto Protocol both
deplorable and I think really arrogant.
About a year-and-a-half ago, I spent the day at Scripps
Institute, talked with all of their senior scientists. I came
away believing without a doubt that climate change is a real
phenomenon. You have expressed that in some of the figures you
put forward in your written paper, but when it comes to really
taking the actions that are necessary, I find us really
backwards.
I am staggered by the fact that we are 5 percent of the
population and we consume 25 percent of the energy of the
world, and recently some have pointed out that in my State in
the next 100 years we are going to lose the entire Sierra
Nevada snow pack, and that is the drinking water for 22 million
people. It is the water for the largest agricultural-producing
State in the Nation, and for I think the largest segment of
high tech.
Californians are not afraid of doing what we need to do
with respect to retard global warming. The transportation
sector is responsible for one-third of it. Senator Snowe and I
have introduced legislation, as you know, to bring SUV and
light truck standards up to that of sedans within 6 years after
passage of the bill. That would save 10 percent on oil imports,
about a million barrels of oil a day, and it would keep 240
million tons of carbon dioxide from entering the atmosphere a
year.
Scientists have told me that it is the most effective
single stroke that the United States can take to really do our
share in reducing global warming. In view of what you say in
your paper, particularly about the 1.4 percent annual growth
rate of carbon emissions to the year 2020, I know the
administration's position has been, let us wait to see the
report of the National Academy of Sciences on bringing SUV's
and light trucks up to that of sedans, but I feel very strongly
supportive of the chairman's comments, and that whatever comes
out of this committee has to really be forceful. We have to be
leaders in this area. If we do not, and if we do not take the
steps now, I do not think we are ever going to be able to catch
up.
My question to you is, have there been any discussions in
the administration on Senator Snowe's and my bill on SUV light
trucks beyond the wait-and-see attitude, and secondly, are you
willing to take any steps to revisit the standards on air
conditioners and energy efficiency standards for other devices?
Mr. Blake. Senator, first on the issue of the NAS study and
CAFE standards, the administration's position is and remains
interested in removing the moratorium on DOT's development of
new standards, awaiting the report on the NAS--although a draft
was released to the press, the formal report has not been
forwarded--and then to balance the recommendations of that
report with the factors of safety and the environment and
consumer interest. That remains the administration's position.
On appliance standards, on air conditioners, increasing the
appliance efficiency requirements for air conditioners, we took
a very serious look at increasing where it is now 10 SEER, and
it was proposed to go to 13, and we are suggesting 12, so it is
still an increase.
One of the basic reasons for staying at 12 versus 13 was
the concern that actually 13 was going to be counterproductive,
that it would discourage certain kinds of purchases of
efficient equipment, and we would actually be better off from
an efficiency perspective with the 12 standard.
Senator Feinstein. I think I have just time for one more
question.
What other recommendations would you have, other than fuel
efficiency, assuming we can come to some agreement on that, as
to what Congress could do, kind of looking for bold strokes to
really play a major role in what I think is the largest
environmental problem we have?
Mr. Blake. I believe that the research and development
opportunities here are the single most interesting and most
effective role both Congress and the administration can play.
I would hope, in response to your earlier comments, when
you see some of the things that we are looking at, carbon
sequestration technologies that take--I mean, a lot of these
are still on the drawing board. For example, to take
CO2, put it in storage, have a biological agent
react it to methane, and the methane is used again for power
production. These are ideas on the drawing board that we are
looking at funding. We think this dramatically changes the
nature of this discussion. Instead of a forced march, where
basically the compliance mechanism is shift from coal to
natural gas, which has a lot of other implications, we look at
a much broader suite of technological solutions.
This committee had a hearing on the research and
development issues last week. I think there is a lot of common
ground on that, and some enormous progress that can be made
there.
The Chairman. Senator Burns.
Senator Burns. Thank you very much, Mr. Chairman. I have a
statement I just would put in the record at this time.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
I'd like to welcome the witnesses here today and thank the Chairman
for holding this hearing. This is the third hearing we've held in this
committee on global climate change, and finally we have reached the
place where we are ready to begin talking about where to go from here.
One of the big concerns in this debate has been carbon dioxide, how
much should we produce, whether it should be regulated, and its role in
climate change overall. I would ask that any time we look at
legislation or a change in policy we do two things: first, make sure
the response made is firmly rooted in science rather than emotion; and
second, resist the urge to write a new rule and build a bigger role for
government at every turn of this debate. Instead, I would suggest we
maximize the role of the free market and provide the incentives for
businesses and individuals to do whatever we'd like them to do.
I have said it before and I'll say it again. We need solid science
to make decisions about global climate change or any other issue of
this type that affects us as a country. We have had an entire hearing
on the basic science aspects of this research. In addition, I think it
is important we understand the wider implications of any plan to reduce
carbon dioxide. The plans I have seen would have huge effects on the
United States economy, and that is something we need to understand
before we rush into anything.
One of the most interesting studies I have seen was a recent report
by the Energy Information Administration which predicted the increase
in energy prices if carbon dioxide were added to a multi-pollutant
strategy which would be enforced by the EPA. The study found that
energy prices would increase 2 cents per kilowatt because of
restrictions which would hit the energy industry so hard. Two cents may
not seem like a lot when you look at it one kilowatt at a time, but
imagine the larger effects on manufacturing and even our clean
industries which rely heavily on computer technology. You need
electricity to run all that, and the more expensive it gets, the bigger
drag you will have on this economy.
The Senate recognized this in 1997 when it passed S. Res. 98 by a
vote of 95-0. Every Senator voting that day agreed that the United
States should enter into a global climate change treaty it should be
done globally, and with the least cost possible to the United States
economy. The Kyoto Protocol does neither of these, especially after
last week when the negotiations were taken up and severe limits were
put on emissions trading and carbon sequestration.
Carbon sequestration is a very interesting concept. I have a lot of
farmers and foresters alike in Montana who would like to know what this
means for them. I don't know yet, and I don't know if anyone does. I am
interested to hear the opinions of our witnesses today on what further
research is needed to implement any system of carbon sinks here in the
U.S.
We have several pieces of legislation from this Congress, and a few
from last Congress that I expect to see again, that I am interested in
learning more about. As with any issue, there are some good ideas out
there, and some that I fear would cripple our American prosperity with
little hope of solving any real problem.
Senator Burns. In the area of sequestration, Mr. Blake, I
am wondering if the administration is taking a look at--you
know, our farmers and ranchers are very much interested in that
and want to play a role in that, our forests, and of course you
have the U.S. Forest Service here today who wants to play a
role in that. We can capture some of that carbon from the
atmosphere. How can these be used as a part of the larger plan
to reduce the total carbon in the atmosphere?
Mr. Blake. Senator, my response, I defer to the gentleman
to my left as well, but we are looking within the Department at
technologies for biomass use in fuel-burning so that you get
the advantage--if you did, for example, a 5-percent co-fire in
a coal plant with biomass switch grass and the like, you get a
5-percent reduction in CO2 emissions. You get the
benefit of the carbon sink, and growing it, and then you have
got a benefit in burning. I think it has a very interesting
potential role to play in the overall carbon dioxide reduction
program.
Senator Burns. Give me your thoughts on coal bed methane.
Mr. Blake. I think the same principle applies there. It is
a new technology that would allow substantial reductions of
CO2.
Senator Burns. That is about all the questions I have. I
was going to listen to their testimony and I had to step out
for a second, but I did want to ask those couple of questions.
You know, I am not real sure that agriculture cannot play a
role in capturing--maybe if industry is going to get credits
for taking so much carbon dioxide and using it, why would not
agriculture be--it could be handled the same way, and looked at
the same way. After all, we feel, in growing crops, there is a
necessity to have a little of it. We cannot cut it all out
because it grows things, but we ought to get some credit for
that also.
So thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
First, Mr. Risbrudt, let me thank you for the generally
supportive comments that you made of the legislation that
Senator Craig and I authored, the Forest Resources for the
Environment and the Economy Act, and I will have a couple of
questions for you on that in just a minute.
Mr. Blake, you look at what the world is saying today about
the United States and this question of global climate change. I
mean, today, people are reading headlines all over the globe,
United States isolated, United States out in the cold, United
States only looks on--I mean, I could just kind of go on, one
after another, and like several of my colleagues I just think
this country cannot afford to be a bystander in this issue, and
my question to you is, how does the administration envisage
finding common ground at this point with the close to 180 other
nations?
I mean, it is not clear to me how, out of all these various
and sundry processes that we are following, the studies but not
participating and the like, how do you all envisage getting to
common ground so that we can do what Senator Craig and I did,
and actually make some progress?
Mr. Blake. Well, that is a very broad question that I am
not sure I am fully competent to answer in terms of the larger
geopolitical concerns.
Senator Wyden. Well, give me a sense of how out of all of
this bystanding, which is where we are today, we are actually
going to do what Senator Craig and I did, which is come up with
a practical proposal? I mean, I think it would be helpful if we
even had some general sense of how the administration was going
to get there from here.
Mr. Blake. What we are doing now is doing the basic review
of our technologies, and what roles our technologies can play
in providing answers to carbon dioxide removals. I think these
are going to be of dramatic interest to our allies, may well
set out a path that convinces them the U.S. position is
correct, and looks to what the developing countries can do,
what opportunities there are there, what are our opportunities
here. I say, things that are on the horizon that make a great
deal of sense for the entire world to be working towards.
Senator Wyden. I do not want to doubt your sincerity here,
but I think the proposition that out of this research you are
going to get something that convinces 180 countries that they
are essentially wrong and we are right is a very dubious
proposition.
And again, I want to work with you all in a bipartisan way.
We have shown in this committee again and again--Senator Craig,
Senator Burns and I put in a significant energy bill
yesterday--that we want to work in a bipartisan way, but you
have got to give us some material to work with, and I will not
belabor it at this point.
Mr. Risbrudt, a question for you. I do appreciate your
generally supportive comments this morning on the forest
resources legislation. What is left in your mind for Senator
Craig and I to do? I would rather not walk out of the room
uncertain about what is left to do.
I gather that you all would like to see some kind of
appropriation which is invariably written for this kind of
exercise, but are there other things that Senator Craig and I
should be trying to do, but what in your mind is left in order
to actually get this signed into law?
Mr. Risbrudt. I think the general outlines of the bill are
very good, Senator. We are really just asking for some fine-
tuning of the portions of the bill that will make it work
better for the administration.
Senator Wyden. Which provisions are most in need of fine-
tuning, in your mind?
Mr. Risbrudt. Since it is amending the 1992 bill that is
directed specifically at the Secretary of Agriculture, we think
we need to review the bill to make sure it is clear which
Secretary we are talking about in this bill. It needs to be
clear to us whether it is the Energy Secretary or the
Agriculture Secretary that is getting new authorities, for
example, so it is clarifications, I believe.
Senator Wyden. That seems very reasonable, and Mr.
Chairman, I will not go any further. I think that is the kind
of cooperation we need throughout this process, and that was
the point of my question, Mr. Blake.
Mr. Risbrudt leaves me, on a bipartisan bill, with a sense
of what we need to do, and he thinks that it is substantively
by and large a good bill. There needs to be some clarification
in going back to the 1992 statute. That certainly makes a lot
of sense to me.
But what I leave with respect to the big picture, Mr.
Blake, is the stark paradox between these headlines of all over
the world have the United States basically sitting this issue
out, and your discussion of how we are going to do some
research into various technologies and then we are going to
convince 180 people they are wrong and we are right, and I
think we need to do better.
Mr. Chairman, thank you.
The Chairman. Thank you.
Senator Craig.
Senator Craig. Thank you very much, Mr. Chairman.
Gentlemen, I am pleased you are here this morning, and Mr.
Chairman, thank you for holding the hearing.
From Buenos Aires to Kyoto, was it politics, or was it
science? My guess is that Kyoto was formed a great deal under
politics because the science could not come together and Kyoto
was falling apart, and the Vice President had to run to Japan
and tack it back together for all of the politics involved.
It is important that that be said this morning in the
context of this hearing, and the comments that are coming from
some of my colleagues. Is it wrong or misguided to argue that
something is wrong or misguided, and therefore say so? Is that
a statement of leadership, or a statement of arrogance?
I think what George W. Bush has proven is that his
statement is a statement of leadership, not a statement of
arrogance. Now, Mr. Chairman, I say that because I and others,
including yourself and Senator Murkowski, have spent a great
deal of time with this issue, more time on this issue than I
have spent on a good many others in the last several years, so
it is not by accident that two of the pieces of legislation,
one just referred to by my colleague from Oregon, S. 820, is a
part of my effort and Senator Wyden's effort, and S. 1776,
which is a much more comprehensive effort, to try to bring the
science together, create the modeling that we can agree to and
not rely on foreign modeling to result in the kinds of
conclusions that we can base public policy on.
I went so far as to spend a week at The Hague, the last
stop before the one that is now involved in Germany. I learned
a lot about the politics of Europe, but not much about the
science, because I will tell you, The Hague was a great deal
more about politics and how do we scheme, as a group of
Europeans and other nations of the world, to try to control the
U.S. economy, and if we can squeeze it and stifle it in the
name of something green, we win, they lose.
Well, I was there to protect sequestration, and I spent
long hours arguing with the U.S. delegation not to compromise
or give away one of the very tools we have and can improve upon
as a part of a total package, Mr. Chairman, when it relates to
climate change.
I know that everyone looks for the silver bullet on this
issue. They fail to recognize that all of the bits and pieces
put together that we have been working on collectively for the
last long while, including the Clean Air Act and a good many
others, and a lot of new technological applications, have
resulted in a dramatic reduction in the rate of CO2
emissions as it relates to a unit of production in this
country. We are doing very well today, but that is not to
suggest we cannot do a lot better.
But to drive ourselves toward Kyoto was, in itself, a
folly, and the Senate in S. Res. 98 in 1997, with an expression
of 95 to zip, said so, and yet we still want to maul this issue
to death for the politics of it because somehow we think it
will gain us votes.
I am very proud that President Bush called it for what he
saw it to be, and is now recognizing the importance of creating
new dynamics and new paradigms to lead this issue, and I must
tell you that if the Prime Minister from Japan stays where he
is, we win and the politics loses.
Now, I will have to admit, Mr. Chairman, that in that
process this President by his action has created a major
international void that needs to be filled, and that is what is
going on right now. The working group, the major effort to
analyze all of the bits and pieces is an effort to put
leadership into the science of this issue and not the politics
of this issue, and I say bravo, Mr. President.
Now, you and I and others have met with that working group.
They are looking at all of the pieces of legislation we have
collectively put together and I hope we can get there. We must
get there. You and I and others know that we have a problem out
there. The science is converging on the issue of warming, but
it is not converging on why, because the modeling is faulty,
and if we can come up with the right kind of models--and, Mr.
Chairman, we have the tools.
We have Mr. Blake's supercomputers that are sitting idle at
this moment on this issue because we have not brought the
science together to program them to do the modeling necessary
to give us accurate figures instead of Canadian figures or
German figures. We ought to do that. That is part of what S.
1776 does. It brings the science together, and it allows us to
begin to shape the issue.
Now, a part of that issue, and why I defended so vigorously
sequestration, and why I convinced people like Frank Loy and
others who were involved in the last meeting in The Hague not
to cut a bad deal when a good deal was possible, and thank
goodness they did not cut a bad deal, was to take away or tie
behind our back some of our tools.
You are going to have others talking about sequestration
this morning, but S. 820 works at that in a vigorous way, and I
am glad, Chris, that you have talked about that this morning
and looked at the dynamics of forest management. We need to
look at agriculture and rangeland management not in a nonactive
way, but very much an active way.
Nonactive forest management last year put more carbon into
the atmosphere out over Idaho and Montana than we have seen in
decades. Last year, for all of you who are interested, we
burned more public land acres in the United States than ever in
the history of the United States, and that was water vapor and
carbon going into the atmosphere, because when forests grow,
they collect carbon. They are carbon.
When they burn, they release it, and to understand that
inactive management creates monstrous fuel-loading that results
in ultimate carbon releases does not solve a problem. Active
growing, multidiverse forests, intermediate stands, all kinds
of uneven age stands creates the dynamics of an active forest
that sequesters huge volumes, potentially 300-plus million
metric tons. I think it is called a million metric tons of
carbon equivalent is the figure we use, Mr. Chairman.
Well, that is the issue here. Gentlemen, thank you. Or, at
least that is the issue from my perspective. We have an
opportunity to come together, but I do not see the United
States standing this one out, Mr. Chairman. I see it creating
an opportunity to lead us into true science and ultimate
policy, instead of just the raw politics of economic control.
Thank you.
The Chairman. Thank you very much.
Senator Landrieu.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Thank you, Mr. Chairman. First let me
thank you for continuing to emphasize the importance of the
issue of climate change in the context of our national energy
policy. I think that is clearly the right approach, a
comprehensive approach, and I really commend you for keeping it
in the forefront of our discussion as we move forward to
develop an energy policy that we can clean up our air and our
water with and also grow with and expand and recognize the
potential, or appreciate, experience the potential of this
great economic expansion for our Nation and the possibilities
for the world, so I thank you for that.
I just want to make a few brief points and then just ask
one question. One, I want to add my voice to those who have
expressed disappointment in the sort of lack of focus on the
nuclear issue, and how that worked out at the Bonn conference.
I am hoping and thinking and believing that nuclear should
be part of our energy policy and strategy, that we need greater
capacity generated by nuclear, or through nuclear in this
country and in the world, and so I want to add my voice to the
disappointment and hope that we can continue to make progress.
I know because we are not signers we are not at the table
in the details of the negotiation, but I again want to commend
Senator Domenici for his work on this area. I look forward to
working with him on several bills that have been introduced,
and believe that while there are challenges still with the
waste issue, nuclear is a road that we should travel if we want
to make significant headway in reducing the warming of the
earth's atmosphere.
No. 2, I am also happy to see the focus on natural gas, and
the role that natural gas can play in helping us meet our
challenges with our climate, and in particular want to submit
and will to the record the front page article of the New York
Times this week about the significance of moving forward with
an energy policy, looking for new production sources for
natural gas, and then the transmission part of that, to meet
the goals that we are discussing this morning.
A third brief point before I get to my question is, I want
to acknowledge, since sometimes the energy companies get beat
up pretty badly around here, I want to acknowledge that there
has really been a sea change in the industry recently, and that
every major oil company is part of a United Nations
International Petroleum Industry Environmental Conservation
Association.
I think almost every major company is involved in this
effort, and I want to particularly acknowledge Chevron and BP-
Amoco and Texaco, just to name a few. I am somewhat
disappointed that Exxon-Mobil continues to drag their feet a
little bit, but other than that company, most of the other
companies are really stepping forward with some very
constructive solutions and ideas, and I do believe that the
less political rhetoric we can bring to this subject and the
more we can bring industry and the environmental community
together to really meet our goals--and I wanted to acknowledge
them for the record and thank them for their good work.
Now, my question is to you, Mr. Risbrudt, whether you are
familiar, if you could comment, maybe, on the additional work
that we are doing on carbon sequestration, and how we could
verify the actual increases in the carbon sequestered through
this process. Do you agree that more research needs to be done,
or what could you elaborate a little bit on that point, because
I was party to a wonderful press conference that we had this
last week with one of our major power companies, and in a grand
area that was set aside in Louisiana.
It was one of the first models, the Catahoula Wildlife
Preserve, where this private-public partnership was modeled,
and I was very supportive of the idea conceptually, I think it
is quite good, but the real, I guess where the rubber hits the
road is, can we be confident that we are actually meeting the
goals of this public-private partnership, so do you agree that
more research needs to be done on this particular point, or
what are your views at this time?
Mr. Risbrudt. I think more research would be appropriate.
The Forest Service has a national inventory system called
the Forest Inventory and Assessment System, where we sample the
Nation's forests on a 5-kilometer grid, and we try and do that
on a 10-year cycle, to measure the amount of vegetation that is
there, and we are also using that to measure the changes in
carbon sequestration.
On a project-by-project basis, that is a little different
issue. We probably do not want to be the verifiers of small
projects relative to the national forest system, but we would
be very supportive of the research in the methods and protocols
for verifying that on those projects, yes.
Senator Landrieu. Well, do you think someone needs to be in
charge of monitoring the outcomes of these smaller projects?
What would your suggestion be if you all are not in the
position to monitor that?
Mr. Risbrudt. I think maybe with partnerships with the
States through our State and private branch. Each State has a
State Forester that we provide technical and financial
assistance to private landowners through the State Forester's
organization, and so I would suggest in partnership of the
States and possibly other organizations we could deal with that
issue.
Senator Landrieu. Okay. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Domenici.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR
FROM NEW MEXICO
Senator Domenici. Mr. Chairman, thank you very much for the
hearings. I personally was very late, and I apologize for that,
but I gather that you have had more success today, that a
number of Senators have come down to listen to this issue, and
I am glad to be last and try to take only a few minutes.
First, for those who were talking about implementing Kyoto,
and why our President is saying he will not, I remind everyone
that the U.S. Senate voted 95 to zero not--saying at that time,
do not send us the treaty, because we will not ratify it. Now,
that is 95 percent of the then-sitting U.S. Senate, which must
mean it is bipartisan.
It actually was led by a Democrat, partnering up with a new
Senator from Nebraska when this resolution was adopted, do not
bother to send it to us because we will be not ratify it.
Now, Mr. Chairman, I went to see how many of the Senators
are still in the Senate, and there are 78. Seventy-eight of the
sitting Senators today were among the 95 who said Kyoto is not
the right way to do it, and I guess inherently saying it is not
good for America, there may be--there must be a better way.
Now, I am not terribly impressed with the French leader
constantly lecturing us. I wish a Senator could be along,
anyone, and every time he tells our President what to do, maybe
the Senator could say, don't you know 95 out of 100 Senators
said this was not good for America? It is not George Bush. He
took over way after the signing of this resolution of
nonapproval.
Secondly, it is most interesting, for being what it is
supposed to be, the Kyoto agreement and all attendants to it
did not mention nuclear power. It is as if there were two
worlds. There is a world that wants to solve the problem their
way, and their way does not include even mentioning nuclear
power.
I think for some it renders it susceptibly invalid,
susceptibly impossible that the countries could follow it and
not find out that there are much better ways than they have.
My last, third observation at the top end of this is, while
Kyoto only attempts to put restraints on the industrialized
nations, clearly it is also a restraint on worldwide growth. It
will put a restraint. That means that some of the very poor
countries in this world that we say are free of Kyoto will have
no energy source of any significance unless we move ahead with
research to develop better, clean sources at reasonable prices
for them, too.
So I have on my own, to the extent that it is possible, I
have lined up as many Senators as I can, and we are going to
begin talking about America post Kyoto. We are going to start
talking about growth and prosperity beyond Kyoto.
We are going to start talking about growth and prosperity
for the poor countries of the world post Kyoto, because the
vision is, if you can move ahead with some of these clean
technologies, included among them are hydrogen and nuclear, set
up in a totally new generation, much less toxic, easy to manage
the toxicity, along with extraordinary efforts at clean coal,
and then fit those into the world market with a goal--with a
goal--there will not be a Kyoto problem in X number of years.
Somebody might want to keep a tab on CO2, but it
will not be relevant, because the world as it grows will not be
using energy that pollutes the atmosphere and causes global
warming.
So every time I come here, I do not help our chairman by
asking questions. I did one day on part of this subject which I
am very concerned about, that is the subject of waste
management, which we are working on, too.
But with that, I stand willing to work with this President,
with Democrats, Republicans, to try to get before the American
people an international plan that we would lead that could set
a 10-year and a 20-year goal, and put the standards that are to
be achieved right in the goals, and then say to American
scientists pooled with those around the world, marry up the
brethren that are in business and produce this kind of new,
clean technology within X number of years.
I think that is a marvelous thing to run up alongside a
Kyoto agreement that has created so much animosity, some of it
not right, but much of it right, and such accusations that if
you are not for that, you are not for the environment in the
world, those kinds of statements are just not true. Do you
think all 95 Senators when they voted not to do this, not to
enforce it, do you think they were all up there saying I want
to vote for a bad environment for my children and
grandchildren? Of course not. They knew fairly well that this
was a very different approach, and that maybe it would hurt
America rather than gain a lot, and maybe we could do a better
job another way.
Thank you, Senator Bingaman.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator
From New Mexico
Mr. Chairman, your hearing today focuses on legislative proposals
to mitigate greenhouse gas emissions. I appreciate your holding this
series of energy-related hearings to develop future legislation. The
nation will be well-served when we respond to the challenge of the
President's National Energy Policy with new legislation, and this area
should be part of that response.
Today, I'd like to remind this committee that the Senate is already
moving rapidly to reduce our greenhouse gas concerns through the strong
Energy and Water Development Appropriations bill that we just finished
last Thursday. In addition, I'd like to share with this committee a
vision that I've developed for a national response to move beyond
debates over details of the ill-conceived Kyoto Protocol towards
actions to truly help the world achieve prosperity through clean
energy.
The Energy and Water bill passed the Senate last Thursday by a 97-2
margin. It represents a major step in fulfilling the President's
commitment to a balanced and diversified energy policy--particularly in
the area of expanding the supply of clean energy from renewable sources
and nuclear power.
I've heard some argue that the President's Policy doesn't address
the possible threat of global warming. Those who have read the Policy
shouldn't make that statement. The Policy has strong support for clean
energy sources.
Renewable sources are encouraged in many ways, including tax
credits for wind, biomass, solar, and the purchase of clean fuel
vehicles. The Policy supports a major research program in clean-coal
technologies, advocates increased funding for renewable energy R&D and
recognizes nuclear energy for its very positive environmental benefits.
It is in these last two areas, renewable energy and nuclear energy,
that the Energy & Water bill takes a major step in implementing the
President's national energy policy.
The renewable energy programs are funded in this bill at $435
million. That's $60 million and 16% above the current year level.
There's no question that renewable sources can and should play a larger
role in our energy supply, and this budget will accelerate progress
towards that vision.
Nuclear energy received significant increases as well in this bill.
I strongly agree with the President's National Energy Policy in its
recommendation supporting the expansion of nuclear energy in the United
States. Nuclear plants offer emission-free power sources, help maintain
diversity of fuel supply, enhance energy security, meet growing
electricity demand, and protect consumers against volatility in the
electricity and natural gas markets.
The bill strongly supports a number of nuclear energy R&D programs,
including one devoted to reducing the quantity and toxicity of spent
nuclear fuel--called ``transmutation''. It's vital that we identify
national strategies for that spent fuel, failure to do so will stand as
a serious roadblock to nuclear energy's important contributions.
As a final thought on energy security, Mr. Chairman, I want to
share with you and my colleagues a vision, which is encompassed in that
Appropriations bill and which I've shared with President Bush.
I strongly believe that we need to reach beyond the debate over
Kyoto with a blueprint that provides the tools to combat global
warming.
I'm convinced that we can have growth and prosperity in America
without global warming.
And I'm equally convinced that we can help provide those same
benefits for the world.
I propose that we provide worldwide leadership to eliminate the
threat of global warming by a commitment to prosperity and growth
through clean energy.
And I further propose that we accomplish this goal through
partnerships with our friends and allies, especially those in
developing countries.
I've specifically urged the President to lead this new initiative,
to accelerate our own research and to build international partnerships
for joint development of all the clean sources of energy--renewables,
clean fossil fuels, nuclear energy, and hydrogen-based fuels. Then as
we transition to improved technologies in the future, our partner
nations will also be building up their energy infrastructure with the
latest and cleanest technologies.
With the new Energy and Water Appropriations bill and the
President's Policy, our nation will develop energy supplies that
provide us with clean, reliable, economic energy far into the future.
But we should be looking beyond our own borders.
We should be seizing every opportunity to help the developing
nations around the world achieve much higher standards of living. They
simply can't do that without reliable electricity supplies.
Each nation will make their own choices for fuel sources,
exploiting their own strengths. We have abundant natural gas--and it
will make a huge contribution to a cleaner future for our country. But
every nation needs diverse energy supplies, not a reliance on one
source. Other nations may be well positioned to exploit their solar or
wind resources--through this program nations can make the choices best
matching their circumstances.
The leadership shown by Senator Byrd on clean coal technologies
matches this vision very well. Some other nations have immense coal
resources, through this vision they can benefit from our investment in
clean coal technologies.
We can leave the poorest countries to their own resources to
develop whatever energy they can, or we can offer substantial help to
partner with these nations to help them develop sources that are not
only reliable and reasonably priced, but also clean.
It's strongly in our self interest to do this. After all, we all
share the same air. And in addition, countries with strong economies
are our best choice for trading partners.
Mr. Chairman, I hope my vision for a world with abundant clean
energy options is accepted by this committee. As we work toward the
comprehensive energy legislation called for in the National Energy
Policy, I hope that this vision can help to guide our discussions.
The Chairman. Senator Johnson.
STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR
FROM SOUTH DAKOTA
Senator Johnson. Thank you, Mr. Chairman. I would ask
consent to simply submit a full statement for the record and
only comment briefly that headlines all across the world this
morning are screaming that the United States is isolated from
the rest of the world by the decision the Bush administration
has made relative to the Kyoto treaty.
I do not believe that a Kyoto debate in this committee is
particularly fruitful at this time. I would observe that as I
recall the 95 to nothing vote in the U.S. Senate on the Byrd
amendment that it had to do with whether poor countries also
ought to be included in the Kyoto protocol, rather than up or
down directly on the Kyoto treaty, but in any event, whether we
participate or do not participate, the harsh reality exists
that the United States, with 4 to 5 percent of the population,
produces 25 percent or so of the greenhouse gases in the world,
and so whether in one context or another, we have an enormous
obligation to move forward, I think aggressively, with
strategies designed to address that issue.
The thrust of the hearings today, as I understand it, were
intended to focus in particular on the views of the private
sector with respect to pending legislation before the
committee, including provisions for reduced greenhouse gas
emissions, and for that reason, and with my particular interest
that I have in biofuels, I would withhold from any further
questions of this panel and thank them for their participation,
but expedite movement onto the private sector panel, and I
yield back.
[The prepared statement of Senator Johnson follows:]
Prepared Statement of Hon. Tim Johnson, U.S. Senator From South Dakota
Mr. Chairman, this is a timely hearing as it coincides with the
latest round of meetings and agreements on global climate changes in
Bonn. Unfortunately, the United States did not choose to engage in
substantive discussions in Bonn. This was a lost opportunity because
the challenges facing the world on emissions and climate change are
real and extremely important. Scientific studies are showing more
connection between our energy uses and their impact on the environment
and well-being of the globe. Any legislation we pass must maintain and
improve the delicate balance between increasing our energy needs and
improving our environment.
I am particularly interested in the role that biofuels can play in
helping to reduce emissions. As many of you know, Sen. Hagel and I have
introduced legislation, S. 1006, the Renewable Fuels for Energy
Security Act of 2001, that would require that a certain percentage of
all transportation fuels include a renewable fuels component. Not only
would this help to reduce our dependence on foreign oil but it would
also reduce emissions and improve our air quality.
Studies have shown that increase of biofuels would be beneficial to
the environment. The Department of Energy released a report in 1999
which stated that the use of ethanol as a transportation fuel reduces
greenhouse gas emissions. The report stated that the energy effects per
gallon of ethanol blended in gasoline could be significant--as much as
a 95% reduction in petroleum use, with an approximate 25% reduction in
greenhouse gas emissions and 45% reduction in fossil energy use.
Renewable fuels currently constitute 0.7% of the total U.S. consumption
of gasoline. The figures from the DOE report demonstrate increasing the
renewable percentage to 5%, as would be required by the Hagel/Johnson
bill, would greatly improve our air quality.
Moreover, an important but often overlooked fuel is biodiesel.
Diesel fuel is used to power big trucks and buses but emits high level
of particulates and harmful gases. Biodiesel, however, can have improve
this situation. Biodiesel production is small but has been growing
steadily. Like ethanol, biodiesel improves our air quality and
environment. Biodiesel is four times as efficient as diesel fuels in
utilizing fossil energy. The overall emissions of carbon dioxide from
biodiesel are 78% lower than regular diesel while particulate matter
emissions from biodiesel are 32% lower than regular diesel.
In addition, with the new EPA rules requiring dramatically lower
amounts of sulfur in diesel fuel by 2007, the market prospects for
biodiesel, an intrinsically low sulfur fuel, are very bright for
helping to meet this requirement.
Mr. Chairman, the increased use of biofuels is a small component of
the overall effort to improve our environment and reduce emissions. But
it is an important effort that must be pursued. It is a prime example
of how we can maintain and improve the need to fuel our transportation
sectors while improving our quality of life. Renewables fuels can help
to fill our existing transportation needs while making the environment
safer. Differences exist on how we can increase the use of renewable
fuels in a way that is economically viable. But I am confident that we
can do so in a way that benefits everyone. The fact that we can improve
our quality of life while also strengthening our energy security shows
means it is worth pursuing. The increased use of biofuels is the type
of initiative that has been envisioned in Bonn and Kyoto and should be
included in our long-term energy strategy.
Thank you, Mr.Chairman and I look forward to the testimony.
The Chairman. Thank you very much. Unless anyone has a
burning issue, I think I will move to the second panel. Thank
you both very much for your testimony.
Let me introduce the second panel as they come forward,
please. Mr. John Campbell, who is the vice president for
industrial products and government relations with Ag
Processing, Inc., in Omaha, Nebraska, Mr. Gardiner Hill, who is
with BP, he is the CO2 program director, Mr. Jim
Lyons, who is a professor at the Yale School of Forestry and
Environmental Studies, Mr. Frank Cassidy, who is the president
and chief operating officer of PSEG Power in Newark, New
Jersey, and Mr. Gene Gebolys, who is the president of World
Energy in Chelsea, Massachusetts.
Why don't we just start and go right across, starting on
the left-hand side and right across the panel here, and if each
of you would take 5 or 6 minutes to summarize the statement,
and we will include your full statement in the record, so thank
you very much for being here.
STATEMENT OF JOHN B. CAMPBELL, VICE PRESIDENT,
AG PROCESSING, INC., OMAHA, NE
Mr. Campbell. Thank you, Mr. Chairman. Ag Processing is a
regionally federated cooperative. We are owned by farmers in
several Midwestern States. Our primary business in soybean
processing, feed manufacturing, and the traditional value-added
businesses out there. However, we in 1995 got into the biofuels
business. We built a 30-million-gallon ethanol plant and
expanded it to 50 million gallons, and then in 1996 jumped into
the biodiesel business, which is a soybean-oil-derived additive
oxygenate, essentially, for diesel fuel, and have been in that
business since that time, so we are highly interested in
whatever value we can bring to our farmer members through the
efforts that we are making to reduce greenhouse gas emissions
as part of our normal business activities.
As you know, renewables are going to be a part of the
national energy strategy. With respect to agriculture, though,
I think renewables need to be considered in the context of not
only the direct greenhouse gas emission reductions through
displacement or replacement or enhancement of fossil fuels, but
also in the context of viewing agricultural production as part
of that system.
We have talked a lot about sinks. The literature on sinks
is very dramatic when it comes to agriculture. Farmers and
ranchers effectively own the greenhouse. We talk about
greenhouse gases. Well, that terrestrial ecosystem between what
the public sector owns in forests and what the private sector
owns in farmland and pastureland is essentially the foundation
of the greenhouse. We have enormous potential to sequester
greenhouse gases.
Part of this potential is enhanced or discouraged by
Federal farm policy. What we got in 1996 was called Freedom to
Farm, and in Freedom to Farm, farmers gained new flexibility to
use crop rotations, and what that has done is brought on
several, many millions of acres of soybean land, and what
soybean and corn rotations do is reduce nitrogen use, they
increase soil organic matter, or have the potential to, there
is all kinds of side environmental benefits from the use of
these crop rotations.
Agriculture is currently engaged in practices that are
already reducing greenhouse gases. Biofuels is one of them. Our
company alone, if you look at the ethanol and biodiesel that we
produce, are probably saving on the order of 300 million pounds
of CO2 equivalent per year.
When you look at the soils that these fuels are grown on,
the national estimate for carbon sequestration in agricultural
croplands is 5 billion tons of CO2. I mean, these
are enormous figures. Some scientists estimate that soil
sequestration alone could meet the hypothetical Kyoto targets
entirely for a 12- to 24-year period.
Now, after that period you reach a point of saturation
where you cannot really absorb any more carbon, and it becomes
a--you reach equilibrium, but agricultural land has released
about 50 percent of the soil organic carbon through traditional
tillage. As we bring modern tillage and enhanced tillage
mechanism and practices to farmland, we can gain back probably
half or more of that soil organic matter.
It is just like forests. The politics of soil and cropping
sequestration has not fit with the agenda, so what we have
essentially is we are in disagreement. There was more of a
consensus about the reforestation benefits of sinks, but
agricultural sinks are still out there in Never-Never Land as
far as the negotiations and the protocols are concerned.
The same is true with a lot of the other things we do in
agriculture. Just modern farming technology alone has reduced
the use of nitrogen fertilizer inputs, as an example. In Iowa
alone, where we have most of our processing plants, the
nitrogen fertilizer reductions in that State are the equivalent
of planting 1 million acres of trees, and these have been
voluntary efforts. They have happened because economics has
pushed farmers to reduce inputs, become less energy-intensive,
and increase soil organic matter as a part of natural farming
technologies.
I see the red light flashing. I will conclude by saying
this committee has a mission, a critical mission in developing
a national energy strategy. There is a bill pending before your
committee Senators Johnson and Hagel have introduced to
increase renewables. That bill alone would be worth about 16
million metric tons of CO2 equivalent if it were
implemented. If you combine that with measures in the farm bill
or other places to enhance and encourage and incentivize
sequestration activities, the compliance potential is enormous,
and along with forestry measures, gives the United States
options to voluntarily reduce greenhouse gas emissions in a
very significant way.
I thank you.
[The prepared statement of Mr. Campbell follows:]
Prepared Statement of John B. Campbell, Vice President,
Ag Processing Inc., Omaha, NE
Thank you and good morning Mr. Chairman. On behalf of Ag Processing
Inc. and Ag Environmental Products LLC, I appreciate the opportunity to
testify and commend the committee for holding this hearing. I know your
time is short and that you have many witnesses so I will highlight this
testimony and ask that the complete text be entered for the record.
Mr. Chairman, most people associate AGP with the regional
cooperative that crushes more soybeans and refines more soybean oil
than any other farmer-owned cooperative in the world. While that may be
nice bragging rights, our farmer and local cooperative manager Board of
Directors wanted to go farther and do more.
Popular buzzwords in rural America today are ``value-added'' and
``farmer-owned''. Other than sounding nice, what do these phrases
really mean? For our cooperative it means doing what we have always
done but also striking out in new directions. In 1986 it meant building
our first soybean oil refinery so that we could add value to soybean
oil. Throughout the years it has meant expanding our overseas and
domestic customer base. It has meant expanding plants and building new
ones to keep up with the growing soybean and livestock industry. It has
meant introducing the first and only component pricing program for
soybeans.
More specific to this hearing, our Board decided in 1995 to build a
grain ethanol plant in Hastings, Nebraska. That particular plant
started out as a 30 million-gallon plant and has been expanded to 50
million gallons. A year later we jumped into the biodiesel market by
building the first dedicated soydiesel plant in the Midwest at Sergeant
Bluff, Iowa.
The preceding is given as background not to toot our own horn, but
to let the committee know that ``value-added'' and ``farmer-owned'' are
not just cliches at AGP. We have put our money where our mouth is. Many
in the soybean industry thought we had lost our senses when we started
into the biodiesel business. There was no biodiesel industry. There
were no customers. Nobody in the government had even heard of
biodiesel. All there was back in the early 1990's was a small group of
farmers in Missouri, a couple of academics, a couple of entrepreneurs
and AGP.
Today, as you can see, things have sure changed. Biodiesel and
ethanol are the flavors of the week. Renewable and green energy have
gained credence as energy costs soar. America is reawakened to our
reliance on energy and our vulnerability to supply and demand changes.
I am not here to claim that renewables can alter fundamental energy
balance issues. I am here to say the renewables can make a difference.
If we add up a lot of small differences--be they slightly larger
domestic oil production, slightly larger refinery capacity, slightly
more conservation and a small portion of the market reserved for
renewables--we can begin the process of reversing the trend toward ever
increasing dependence on unstable and sometimes hostile regions of the
world for our economic well-being.
Mr. Chairman, the topic that I was invited to discuss before the
committee regards the nexus between greenhouse gasses and renewable
fuels. As a producer of renewable fuels, both ethanol and biodiesel,
our cooperative is highly interested in whatever value we might be able
to bring to our farmer-owners through credits for reductions in
greenhouse gas emissions.
Agriculture and renewable fuels go hand in hand and must be
considered a multi-dimensional path to both fossil fuel emission
reductions and greenhouse gas sinks should the United States embark on
a voluntary or incentivized path toward reductions in greenhouse
gasses.
To put things in perspective it is helpful to state the current
understanding of global CO2 respiration. Scientists estimate
that on an annual basis about 9 billion tons (Pg.) of CO2
are emitted. (6.4Pg. from fossil fuels, 1.1Pg. from land use change and
1.6 Pg. from deforestation.)
Where does the CO2 go? Scientists estimate that 3.4Pg.
goes into the atmosphere, 2.0Pg. is absorbed by forest growth and
2.0Pg. is absorbed by the ocean. The ``missing'' 1.6Pg. is thought to
be absorbed by the ``terrestrial biosphere''--meaning mainly soils and
non-forest plants. The object of those concerned about climate change
is to reduce the atmospheric loading. That may be accomplished by
reductions in emissions or increased retention in oceans, forests and
soils (otherwise known as ``sinks'').
No other industry has as much to offer, at so cheap a price, in the
effort to reduce greenhouse gasses as agriculture. After all, we are
the stewards of the natural carbon cycle when we grow plants. We farm
hundreds of millions of acres that take in CO2, as plant
matter is grown and act as storage for carbon dioxide--the major
greenhouse gas. To say it simply, farmers and ranchers own the
greenhouse in America. Agriculture can make a huge difference in how
much greenhouse gas is emitted.
For example, the greenhouse gas emission reductions from burning
biodiesel and ethanol are greatly enhanced if the grain and oilseed
feedstocks are grown in a crop rotation using the best available
tillage and farming technologies. Not only would fossil fuel emissions
be reduced through replacement with a renewable, but also
CO2 (carbon dioxide) would be sequestered in the soil as
organic matter builds. In addition, NOX (nitrous oxide)
emission can be reduced through nitrogen fertilizer management and crop
rotations.
These agricultural practices are encouraged or discouraged by
Federal farm policy. The ``Freedom to Farm'', or FAIR Act of 1996, as
it is officially known, changed the way government and farmers
interact. No longer does government control what farmers produce by
telling them where, what and how much of each crop they may plant.
Government also gave up attempting to manipulate grain prices by
holding reserves and idling land.
Farmers are now free to make planting and management decisions
based on the market. American agriculture has embraced the change with
gusto. Millions of acres have been freed up and are being switched by
farmers every year to the type of crops they want or need to grow.
One of the great benefits of this new policy has been the shift
toward crops like soybeans that are less energy intensive and
chemically dependent. The shift to soybeans also means an increase in
crop rotations that are recognized as good for the environment.
Way back in 1985, rotations were one of the main benefits Senators
Boren of Oklahoma and Boschwitz of Minnesota highlighted with their
``decoupling'' bill. That bill was the predecessor to Freedom to Farm.
The farm lobby was generally opposed to decoupling and is now
similarly concerned about the Kyoto agreement and other attempts to
reduce greenhouse gasses.
Some studies suggest that the cost of attaining the goals of the
Treaty would fall heavily on agriculture--with some projecting
reductions in net farm income exceeding 20 or even 40 percent.
Agriculture will be in tough shape if some of the policy options
suggested come to pass. The Commerce Department estimated that a 25
cents per gallon fuel tax would need to be imposed--other estimates are
much higher. However, an even more important consideration for
agriculture are the areas of manufactured inputs, fertilizers and
chemicals. These are energy sensitive products. For example, energy in
the form of natural gas typically accounts for 75 percent of the cash
cost of manufacturing anhydrous ammonia, a basic feedstock or
ingredient for all nitrogen fertilizer products.
Obviously, we cannot cut farmers loose from farm bill supports and
then hang them on the tree of global warming.
Agriculture should be viewed as a key part of the solution to
global warming. The fact that the Kyoto negotiators could not come to
terms with how to treat agricultural sinks gives a hint of their
enormous potential. One study reports that agricultural soils alone
could capture enough CO2 to offset any further increase in
the atmospheric inventory for 12-24 years. That is why Treaty
negotiators could not agree on the treatment of agricultural sinks.
Take ethanol for example. Argone National Laboratory published a
study in January 1999 that demonstrates that the use of corn-based
ethanol significantly reduces both greenhouse gas emissions and fossil
energy use. According to the study, every gallon of grain-based ethanol
used in 10 percent blends with gasoline achieves:
90-93% reduction in petroleum use.
12-19% reduction in greenhouse gas emissions, and
40% reduction in fossil energy use.
Another study published by Argone in December of 1997 indicated
that 10 percent blends of ethanol resulted in net greenhouse gas
savings on the order of 2-3 percent. (If all gasoline were a 10%
ethanol blend, greenhouse gas emissions would be reduced 2-3%.)
The same is true for biodiesel. According to the Institute for
Local Self-Reliance the energy balance for biodiesel 1:2.5 meaning two
and one half times more energy is produced than consumed in the full
life cycle production of biodiesel from soybeans. The greenhouse gas
reductions are even greater than those for ethanol because less
fertilizer is used as well as less energy in the conversion process to
fuel.
In May of 1998 the USDOE/USDA released the Biodiesel Lifecycle
Inventory Study. The study concludes that the total fossil energy
efficiency ratio (i.e. total fuel energy/total fossil energy used in
production, manufacture, transport, and distribution) for diesel fuel
and biodiesel shows that biodiesel is four times more efficient in
utilizing fossil energy.
The overall lifecycle emissions of CO2 from biodiesel
are 78 percent lower than the overall CO2 emissions from
diesel. ``The reduction is a direct result of carbon recycling in
soybean plants,'' notes the study. The biodiesel results are more
dramatic than ethanol because of the dramatically reduced need for
nitrogen fertilizer and the lower energy costs of conversion to fuel.
Basically, the soybean plant does almost all the work.
Farm management is another area of potential. Farmers continue to
become more efficient with the use of inputs. Since 1988, national
nitrogen use for corn has dropped from 137 lbs. to 127 lbs. per acre;
phosphorous use dropped from 63 to 56 lbs. per acre.
In Iowa, average nitrogen use dropped from 90 lbs. to 73 lbs. per
acre in 1995.
Why is this important in the climate change debate? Nitrous oxide
is a more potent greenhouse gas than CO2. Nitrous oxide has
a carbon dioxide equivalent of 270 times a carbon dioxide molecule.
Nitrous oxide emission reduction in Iowa has been estimated at 37,908
tons, or 10.2 million tons of CO2 equivalent. These
reductions were at no loss in yield and $363 million in production
input savings.
Let's put this in perspective. The savings in nitrogen fertilizer
use--on a voluntary basis--in Iowa alone are the equivalent of planting
nearly one million acres of trees.
Now lets examine carbon sinks. Trees, for example, are referred to
as carbon sinks. They take carbon from the atmosphere and store it in
their trunks, branches and roots. Projects have already been approved
as part of ``joint implementation'' strategies whereby utilities in one
country pay to plant trees in another country in order to reduce their
net carbon loading impact.
Soils are also a carbon sink. And who controls soils in this
country? The same people who own the wetlands, endangered species
habitat and a good portion of the forests--farmers and ranchers.
If the United States is about to embark on a program to reduce
greenhouse gasses why not incentivize farmers to fill up their sinks?
Typical farmland has about a 2 percent organic matter content.
Farms that utilize no-till or minimum till have around 4 percent and
grasslands have about 6 percent organic matter content.
Said another way; our 30 million acres of Conservation Reserve
Program (CRP) tripled in carbon value. The tens of millions of acres of
no-till and minimum till are on their way to doubling their organic
carbon content. Hundreds of millions of acres with lower organic matter
content could store enormous amounts of greenhouse gas components.
soil management and tillage practices
Soils act as a gigantic carbon sink. Just as plants and trees use
CO2 gasses, soils capture carbon as roots grow underground.
The carbon sequestration ability of farmland is enormous. For
example, the average organic matter of a traditionally tilled acre is 2
percent. Through the use of no-till or minimum-till methods the organic
matter can be increased to 4 percent over 20-30 years. Some scientists
believe soil organic carbon could be restored to 6 percent or above on
cropped ground. The CO2 equivalent of greenhouse gasses
saved would be around 65 tons per acre. That is 39,000 tons of
CO2 equivalent sequestered on a 600 acre farm verses the
previous tillage practice.
Why is that important? It could mean dollars in farmers' pockets.
I have seen estimates that CO2 could be worth $70/ton.
That is $2.7 million worth of CO2 gas credits on a 600-acre
farm.
other management practices
Increasing soil organic matter through farming practices is just
one of many greenhouse gas reduction options. Others include:
More efficient nutrient applications. (10-15 tons
CO2 equivalent/acre)
Reduced fuel and energy use for production, drying and
processing of crops. (3-5 percent annual reductions = .02 tn./
a./yr. = 8 ml.tn.CO2/yr.)
Manure management for methane--especially from large units.
Growth and use of fuel crops such as ethanol and biodiesel.
(current ethanol use saves 4.4 ml.tns. CO2/yr.)
Growth and use of trees in marginal areas such as buffer
strips or CRP. (1.4 tns. CO2/a./yr. of trees in
growth phase).
The private and public sectors are already engaged in creating a
mechanism to trade greenhouse gas credits. If the world is headed down
this road, agriculture needs to become fully engaged in figuring out
how to take financial advantage of the resources they control.
We have to spread the word that planting trees is fine and good but
incentivizing farmers to increase the organic matter of soils could do
in 5-10 years what it would take a forest to do in 40-50 years.
So where is this all leading? As I said before, the science about
greenhouse gasses and global warming and what impact human activity has
on all this is pretty incomplete.
What we need to focus on is the fact that the previous
Administration signed an agreement to cut our greenhouse gas emission
to 7% below 1990 levels. This means cuts of 20-25 percent of the
business as usual baseline in the out years. President Bush, while not
supportive of the Treaty, recently stated his support for voluntary
measures to reduce greenhouse gasses.
If we in agriculture do not get inventive and imaginative on this
issue I am confident we will bear a good portion of the costs. Rather
than get stuck with the bill, I hope that we work together with
Congress, the Administration and other industries to see how we can
contribute to the plus side of the ledger on greenhouse gasses.
If greenhouse gas reduction strategies are imminent, agriculture
needs to figure out a way to benefit from the contributions we make and
the increased contributions we could make if the incentives were
structured properly.
What would happen for example if utilities were required to
purchase 5 percent of their energy needs from renewable sources as part
of electricity deregulation legislation?
Or, how about a carbon credit on income taxes for the extra carbon
a farmer or rancher stores with their new production practices?
What about giving renewable industrial products a tax incentive
based on the amount of greenhouse gasses they displace?
Mr. Chairman, this committee is tasked with one of the most
important missions in decades--formulate and gain approval of a
National Energy Strategy. This strategy will be considered in an
environment where climate change issues are also a high priority. Your
committee has the opportunity for the proverbial ``two birds with one
stone'' kill.
Legislation has been proposed by Senators Hagel and Johnson and
referred to this committee. The bill establishes a renewable standard
for transportation fuels. Transportation fuels also happen to be the
leading source of increased greenhouse gas emissions. With one fell
swoop we could reduce our dependence on foreign oil and strike a blow
for greenhouse gas reduction.
I urge your favorable consideration of this and other measures that
would encourage renewable fuels and simultaneously reduce greenhouse
gas emissions.
The Chairman. Thank you very much.
Mr. Cassidy, why don't you go right ahead.
STATEMENT OF FRANK CASSIDY, PRESIDENT AND COO,
PSEG POWER LLC, NEWARK, NJ
Mr. Cassidy. Thank you, Mr. Chairman, and members of the
committee. I am pleased to be here today representing my
company, PSEG, and our coalition, the Clean Energy Group.
PSEG is a diversified energy holding company based in New
Jersey, with assets and operations overseas as well as in the
United States. We serve over 5 million energy consumers in the
United States and abroad. The other Clean Energy Group members
are Consolidated Edison, Key Span Energy, Northeast Utilities,
Connective, Exelon, PG&E National Energy Group, and Sempra
Energy.
This coalition shares a number of significant attributes
and principles. We operate and are developing powerplants in
almost every region of the United States. We operate coal, gas
and oil-fired fossil fuel generating plants as well as nuclear-
powered facilities. We believe in responsible environmental
stewardship and we are committed to working cooperatively with
the environmental community, government, and other stakeholders
to promote adoption of progressive policies to provide
meaningful environmental improvements on an economically sound
and sustainable basis.
There is no question that the issue of carbon dioxide
reductions presents a tremendous challenges for our industry.
However, members of our coalition share the view that the
scientific evidence on climate change has progressed to the
point where prudent action on reducing greenhouse gas emissions
is warranted. We also share the concerns expressed by members
of Congress, President Bush and his administration about the
necessity of maintaining a secure, diverse, reliable, and
affordable electric energy supply.
The Clean Energy Group believes we can make progress on
reducing carbon dioxide and other greenhouse gas emissions
without bankrupting the economy or eliminating coal as a viable
fuel supply. This testimony is not about reducing carbon
dioxide emissions through efficient operations and technology,
although my company has reduced its greenhouse gas emissions by
7 percent since 1990. It is about the legislation we believe is
necessary to properly incentivize these reductions going
forward.
One of the key questions that I and my industry colleagues
confront is how best to accommodate the requirement for
environmental improvement as we make business decisions that
affect the lives and livelihood of hundreds of thousands of
investors and involve billions of dollars. The Clean Energy
Group believes the best way to provide the business certainty
on which to base these decisions is through an integrated
environmental strategy and a multipollutant approach that
includes carbon.
We have developed a legislative proposal that would deliver
significant reductions in powerplant emissions of nitrogen
oxide, sulfur dioxide and mercury, and implement mandatory
carbon dioxide reductions in a manner that would not compromise
the reliability, fuel source diversity, or affordability of the
Nation's electric energy supply.
The legislation calls for mandatory emissions caps to be
achieved on established timetables, and the use of emissions
trading and other cost-effective, creative, and market-based
compliance techniques such as multisource trading and an all-
source allocation for credits that will allow industry to meet
the emission caps efficiently and at low cost.
I have attached a copy of the Clean Energy Group's
legislative proposal to my written testimony, and we look
forward to discussing it with interested members at any time.
We believe the legislation will provide real and significant
environmental benefits. However, there is also a strong
business rationale for an integrated approach and for
establishing a clear policy on carbon reductions now. Our
industry needs to know what the future environmental
requirements will be in terms of the amount of reductions and
the timetable.
Our view is that the best and most prudent course of
action, and the one that will foster investment in new energy
technologies in the electric infrastructure our country needs
is a comprehensive program that establishes clear, unambiguous
environmental targets and timetables over the next 15 years.
We also believe that such a program should be mandatory. If
the goal is to provide business certainty, our view is that
only a mandatory program in which all participants in the
electric generating industry are required to internalize the
cost of making necessary reductions will work. This is
especially relevant in the highly competitive wholesale power
market in which even small cost differentials can provide
material competitive advantage for those who choose not to
participate in a voluntary program.
Again, I am honored by the opportunity to make this
statement, and we look forward to working with Congress and the
administration to craft policies under which our industry will
make substantial environmental progress while it fulfills its
mission of providing secure, reliable, and affordable electric
energy.
I would be happy to respond to any of your questions.
[The prepared statement of Mr. Cassidy follows:]
Prepared Statement of Frank Cassidy, President and COO, PSEG Power LLC,
Newark, NJ
Mr. Chairman and members of the committee, I am pleased and honored
to appear before you this morning to represent my company, PSEG, and
our coalition, the Clean Energy Group.
PSEG is a diversified energy holding company based in New Jersey
with assets and operations overseas as well as in the United States.
The subsidiary I head, PSEG Power, is an independent power producer
with more than 17,000 megawatts of electric generating capacity in
operation, construction, or advanced development. PSEG's other
subsidiaries include Public Service Electric and Gas Company, one of
the nation's largest electric and gas utility companies, and PSEG
Global, which develops and operates energy production and distribution
facilities internationally. As an entity, PSEG serves more than five
million energy customers in the U.S. and abroad.
The Clean Energy Group members are Consolidated Edison Company,
KeySpan Energy, Northeast Utilities, Conectiv, Exelon Corporation,
Northeast Utilities, PG&E National Energy Group, Sempra Energy, and my
company, PSEG.
Members of our coalition share a number of significant attributes
and principles:
We operate and are developing power plants in almost every
region of the United States.
We operate coal, gas, and oil-fired fossil-fueled generating
plants and nuclear-powered facilities.
We believe in responsible environmental stewardship.
We are committed to working cooperatively with the
environmental community, government, and other stakeholders to
promote adoption of progressive policies that provide
meaningful environmental improvements on an economically sound
and sustainable basis.
There is no question the issue of carbon dioxide reductions
presents tremendous challenges to our industry. However, members of our
coalition share the view that the scientific evidence on climate change
has progressed to the point where prudent action on reducing greenhouse
gas emissions is warranted.
We also share the concerns expressed by Members of Congress,
President Bush, and his Administration about the necessity of
maintaining a secure, diverse, reliable, and affordable electric energy
supply.
The Clean Energy Group believes we can make progress on reducing
carbon dioxide and other greenhouse gas emissions without bankrupting
the economy or eliminating coal as a viable fuel supply.
One of the key questions I and my industry colleagues confront is
how best to accommodate the requirement for environmental improvements
as we make business decisions that involve billions of dollars and
affect the lives and livelihoods of hundreds of thousands of investors
and employees.
The Clean Energy Group believes the best way to provide the
business certainty on which to base these decisions is through an
integrated environmental strategy and a multi-pollutant approach that
includes carbon.
The Clean Energy Group has developed a legislative proposal that
would deliver significant reductions in power plant emissions of
nitrogen oxide, sulfur dioxide, and mercury, and implement mandatory
carbon dioxide reductions in a manner that will not compromise the
reliability, fuel-source diversity, or affordability of the nation's
electric energy supply.
The legislation calls for mandatory emissions caps to be achieved
on established timetables and use of emissions trading and other cost-
effective, creative, and market-based compliance techniques such as
multi-source trading and an all-source allocation for credits--
including renewables, hydro, and nuclear--that will allow industry to
meet the emissions caps efficiently and at low cost. Use of these
mechanisms would be scaled back over time--and on a specific schedule--
as the transition to a less carbon-intensive energy infrastructure
gains momentum.
I've attached a copy of the Clean Energy Group's legislative
proposal to my written testimony. We would look forward to discussing
it with interested Members and staff at any time.
We believe the legislation will provide real and significant
environmental benefits. However, there also is a strong business
rationale for an integrated approach and for establishing a clear
policy on carbon reductions now.
Our industry needs to know now what the future environmental
requirements will be in terms of the amount of reductions and the
timetable.
The issue boils down to one of business certainty for both the
electric power industry and the capital markets we turn to for
financing of new generating projects. We don't want to confront a
situation in which we are forced to waste or put at risk large-scale
investments predicated on one set of requirements only to have the
rules changed a few years down the road.
Our view is that the best and most prudent course of action--and
the one that will foster investment in new energy technologies and the
electric energy infrastructure our country needs--is a comprehensive,
program that establishes a clear, unambiguous environmental targets and
timetables over the next fifteen years.
We also believe such a program should be mandatory.
Clean Energy Group companies have participated in a number of
voluntary programs in the past that have been useful tools for the
industry. However, if a goal is to provide business certainty, our view
is that only a mandatory program in which all participants in the
electric generating industry are required to internalize the cost of
making necessary reductions will work. This is especially relevant in
the highly competitive wholesale power market in which even small cost
differentials can provide a material competitive advantage for those
who choose not to participate in a voluntary program.
Again, I am honored by the opportunity to make this statement on
behalf of my company and the Clean Energy Group. We look forward to
working with Congress and the Administration to craft the policies
under which our industry will make substantial environmental progress
while it fulfills its mission of providing a secure, reliable, and
affordable supply of electric energy. I would be happy to respond to
your questions.
The Chairman. Thank you very much.
Mr. Hill, why don't you go right ahead.
STATEMENT OF GARDINER HILL, CO2 PROGRAM DIRECTOR, BP
Mr. Hill. Thank you.
Mr. Chairman, and members of the committee, good morning.
My name is Gardiner Hill, and I am the director of BP
CO2 program worldwide based here in the United
States. I am also joined today by my colleague, Jeff Morgham,
who is the manager of our emissions trading program.
I have been asked to focus today on carbon sequestration
and emissions trading. I am delighted to have this opportunity
to share with you BP's ideas on the role of sequestration, to
address the concern around greenhouse gas emissions and climate
change.
BP is no stranger to the topic of climate change. We began
our no-regrets policy several years ago in a speech given in
May 1997 by John Browne, our chief executive officer. In that
speech, we announced a voluntary no-regrets policy which began
with, among other things, the creation of emissions baseline
data across all of our facilities, and the commitment with
Environmental Defense to develop an emissions-trading program
across our assets worldwide.
Later in September 1998, we announced targets and
timetables for a reduction in BP's greenhouse gas emissions of
a 10-percent figure below the 1990 baseline by 2010. As of
today, we are halfway there in meeting this target, having
reduced our emissions by 5 percent. On top of that, our
emissions trading system has exchanged 5 million tons of
greenhouse gases. This has been achieved by our employees by
actively identifying a number of innovative solutions, and the
majority of these solutions have actually been good business
sense.
What has become clear is that there is no one silver
bullet. There is no one-size-fits-all in how business must
address the issue of climate change. The most common emission
reduction approaches being considered today typically include
improvements in energy efficiency, land use practices such as
forest management and biofuels, and sequestration technology
for CO2 separation, capture, and storage.
BP believes that geologic storage offers enormous potential
for safe and permanent sequestration of carbon dioxide. To put
this into some perspective, geological storage has the
potential to close the entire gap which exists between
projections of future emissions and emission levels required to
stabilize atmospheric concentrations at 550 parts per million.
This technology builds on the oil and gas industry's
considerable experience of safely injecting, storing and
monitoring gases in geological formations.
Carbon sequestration can broadly be broken down into three
main categories, capture, transportation, and storage. In the
area of capture, we are looking at technologies which remove
the carbon before or after the combustion process, as well as
innovative combustion technologies to produce a concentrated
stream, which is easier to capture.
In the area of transportation, we are looking at the
relationship between purity and pipeline material requirements.
Lastly, as to storage, we are currently examining
geological formations of how CO2 can be permanently
and safely stored in existing oil and gas reservoirs. An
additional benefit of this application is increased production
from current fields.
Today, carbon sequestration projects are small in size and
scope. The main hurdle is cost. BP is working hard on
developing new technologies to substantially reduce the cost of
CO2 separation, capture, and geological storage. In
one such program, BP is a partner in an international industry
effort called the CO2 Capture Project. The project
has nine oil and gas companies from the USA, Canada, EU, and
Norway.
The CO2 Capture Project was recently announced
by the White House and the U.S. Department of Energy as a type
of project that will be important in the development of new,
lower cost technologies. The recent announced funding support
from the DOE recognizes the importance of forming public-
private partnerships, and we look forward to working with them
on this exciting program.
Equally as important as the specific technology development
are strategies for enabling the effective application. What BP
has learned is that market-based mechanisms such as greenhouse
gas trading can be effective at spurring innovation and action.
For example, in BP's internal emissions trading system, each
business leader is accountable for delivering the emissions
target, which is directly tied to his performance review and
his rewards. At the end of the year, a business must have
permits in hand to match their actual emissions.
Trading between business lines has allowed BP to implement
CO2 reductions in the most cost-effective manner.
Essential to any trading system are clear goals, clear methods
of establishing baselines, and clear incentives for taking
early action.
Mr. Chairman, I would like to conclude by saying that BP
believes that technology has a fundamentally important role in
the solutions set for climate change. Carbon sequestration is
one example that offers the potential for providing a minimum
of 30 years of permanent storage at today's emission rates. We
believe the recently announced DOE partnership is essential in
expediting and improving the potential for these technologies.
Lastly, we believe that voluntary market-based mechanisms
have enormous potential to bring early emissions reductions
forward in the most cost-effective manner. Indeed, we would
urge the Congress to consider a policy which would reward these
early actors for these reductions they voluntarily choose to
make.
On behalf of the men and women of BP, we thank the
committee for the opportunity to appear before you today. I
look forward to working with the committee in the future as you
pursue policy solutions to deal with climate change.
Thank you.
[The prepared statement of Mr. Hill follows:]
Prepared Statement of Gardiner Hill, CO2 Program Director,
BP
Mr. Chairman and members of the committee, good morning. My name is
Gardiner Hill and I am the Director for BP's CO2 Program
worldwide based here in the United States. I have been asked to focus
today on our efforts on carbon sequestration and emissions trading. I
am delighted to have this opportunity to share with you BP's ideas on
the role of sequestration to address the concern around greenhouse gas
emissions and climate change.
BP is no stranger to the topic of climate change. We began our no
regrets policy several years ago in a speech given in May of 1997 by
John Browne, our chief executive officer. In that speech we announced a
voluntary, no regrets policy, which began with the creation of
emissions base line data across all of our facilities, a pilot
sequestration project in the Bolivian Rainforest with the Nature
Conservancy, a challenge to grow our solar business ten fold in ten
years, and the commitment with Environmental Defense to develop an
emissions trading program across our assets worldwide. Later, in
September 1998, we announced targets and timetables for a reduction in
BP's greenhouse gas emissions of 10 percent below a 1990 baseline, by
2010.
As of today, we are halfway there in meeting this target by
reducing our emissions by five percent. On top of that, our emissions
trading system has exchanged five million tons of greenhouse gases.
This has been achieved by our employees proactively identifying a
number of innovative solutions. Many of these solutions have actually
made good business sense. I'd be delighted to provide the committee
with some specific examples.
What has become clear is that there is no one silver bullet, i.e.
no one-size-fits-all in how business must address the challenge of
climate change. The most common emission reduction approaches being
considered today by active members in the industrial community
typically include: improvements in energy efficiency, land use
practices such as forest management and biofuels, and sequestration
technology for CO2 separation, capture and storage.
BP believes that geologic storage offers enormous potential for
safe and permanent sequestration of carbon dioxide. To put this into
perspective, geologic storage has the potential to close the entire gap
which exists between projections of future emissions and emission
levels required to stabilize atmospheric concentrations at 550ppm--a
level considered by some as sufficient to avoid dangerous interference
of the world's climate. This technology builds on the oil and gas
industry's considerable experience in safely injecting, storing and
monitoring gases in geologic formations.
Carbon sequestration can broadly be broken down into three main
areas: capture, transportation and storage. In the area of capture we
are looking at technologies which remove the carbon before or after the
combustion process as well as innovative combustion technologies to
produce a concentrated stream which is easier to capture. In the area
of transportation we are looking at the relationship between purity and
pipeline material requirements. Lastly, as for storage, we are
currently examining geologic formations and how CO2 can be
permanently and safely stored in existing oil and gas reservoirs. An
additional benefit of this application is increased production from
current fields.
Today, carbon sequestration projects are small in size and scope.
The major hurdle is cost. BP is working hard on the development of new
technologies to substantially reduce cost of CO2 separation,
capture and geologic storage. In one such program, BP is a partner in
an international industry effort called the ``CO2 Capture
Project.'' The project has nine major oil and gas companies from the
USA, Canada, EU, and Norway. The CO2 Capture Project was
recently announced by the White House and the U.S. Department of Energy
(DOE) as the type of project that will be important in the development
of new, lower cost technologies. The recently announced funding support
from the DOE recognizes the importance of forming public-private
partnerships and we look forward to working with them on this exciting
program, which holds much promise for the future.
Equally as important as the specific technology development, are
strategies for enabling the effective application. What BP has learned
is that market based mechanisms such as greenhouse gas emissions
trading can be effective at spurring innovation and action. In BP's
internal emissions trading system the group emissions target, is held
by each of our business managers throughout the company. Each business
leader is accountable for delivering the emissions target which is
directly tied to his performance review and rewards. At the end of the
year, a business must have permits in hand to match their actual
emissions. Trading between businesses has allowed BP to implement
CO2 reductions in the most cost effective manner. Essential
to any trading system are clear goals, clear methods for establishing
baselines and clear incentives for taking early action.
Mr. Chairman, I would like to conclude by saying that BP believes
that technology has a fundamentally important role in the solutions set
for climate change. Carbon sequestration is but one example that offers
a potential to provide a minimum of 30 years of permanent storage at
today's emissions rates. We believe the recently announced DOE
partnership is essential in expediting and proving the safety and
potential for this technology. Lastly, we believe that voluntary market
based mechanisms have enormous potential to bring early emissions
reductions forward in the most cost effective manner. We would urge the
Congress to consider policy which would reward those early actors for
those reductions they voluntarily choose to make. On behalf of the men
and women of BP we thank the committee for the opportunity to appear
before you today and look forward to working with the committee in the
future as you pursue policy solutions to deal with climate change.
Thank you for the opportunity to share our thoughts on the
importance of technology in connection with climate change.
The Chairman. Thank you very much.
Mr. Gebolys.
STATEMENT OF GENE J. GEBOLYS, PRESIDENT,
WORLD ENERGY ALTERNATIVES, LLC, CHELSEA, MA
Mr. Gebolys. Mr. Chairman, and members of the committee,
thank you for the opportunity to share the views of one company
striving to make the promise of renewable fuels the reality in
America today.
Mr. Chairman, just 2 days ago the lead story in the Sunday
New York Times heralded: ``Allies Tell Bush They Will Act Alone
on Climate Accord.'' Another front page story that same day in
the same newspaper reported: ``Boom in Natural Gas Drilling
Cannot Match Soaring Demand.'' Everywhere we turn today, it
seems that the need to find new energy solutions is becoming
more urgent even as our existing options seem less suited to
the task.
Even as this global pressure to change intensifies, a new
and perhaps more pragmatic approach to energy diversification
is emerging. In both vehicle and fuel formats, hybrid
technologies are beginning to take center stage. In the vehicle
sector, gasoline hybrid electric vehicles have recently been
introduced.
Practical-minded consumers as well as socially minded
health and environmental groups have quickly embraced these new
cars and buses because they offer great efficiency without
great discomfort or inconvenience. With less fanfare, but
perhaps far greater impact, the same type of transformation has
been taking place in alternative fuel consumer markets as well.
Fuels, too, are going hybrid. Ethanol, and more recently
biodiesel, have become increasingly popular because they
augment our existing energy infrastructure rather than replace
it. Biodiesel, which can be used as a one-for-one replacement
for diesel, is most often used in blends ranging from 2 to 20
percent. As such, anything that can be powered by diesel can be
powered by a biodiesel blend. This ease of use and versatility
has enabled this technology to realize faster initial market
penetration than any other fuel.
Biodiesel blends are being used in existing diesel
vehicles, and they are being dispensed through our existing
fossil fuel infrastructure. This ease of use also makes for
ease of distribution. Energy stalwarts such as Gulf and BP have
begun making biodiesel blends available to their customers.
Growth in demand is leading to greater availability, and in
kind, greater availability is leading to greater use.
It has not been easy, and we have only begun to make our
mark, but I am proud to report that World Energy, AGP, and
others are making enormous strides in advancing the new hybrid
renewable fuel frontier. With offices in Massachusetts,
Florida, and California, and distribution outposts in virtually
all areas of the country, World Energy is actively promoting
biodiesel throughout the Nation.
Last month alone, World Energy sold more biodiesel than we
did in all of 1999. By midyear 2001, we had exceeded our sales
totals for all of the previous year, and by year end we expect
a fourfold growth over last year's totals. When the U.S.
Department of Energy recently announced that biodiesel was the
fastest-growing form of alternative energy in the United
States, it came as no surprise to us.
I am here today to testify to the fact that renewable
hybrid fuels can work in the United States, and I am here to
support legislative initiatives that will enable us to advance
practical and cost-effective measures to gradually increase the
use of renewable energy into the Nation's energy portfolio. The
struggle to introduce a cleaner renewable fuel in to the
Nation's diesel supply is no fad. Since 1994, World Energy and
its predecessor, Twin Rivers Technologies, have been pioneers
in bringing biodiesel to America. Far earlier, the Europeans
had embraced this straightforward technology as a way to
provide increased energy security, cleaner air, agricultural
support, and domestic energy stabilization.
Now, with global warming surfacing as the leading
environmental topic of our time, the question has begun to
change from, ``is global warming occurring?'' to ``what can we
do to stem the growth of greenhouse gases?'' There is certainly
no single answer to that question, but certainly a component of
the answer must lie within the lessons we are learning about
the growing popularity of hybrid vehicles and hybrid fuels.
That lesson is that if we are to begin to make progress, we
must find solutions that are easy to introduce, and those that
provide a wide spectrum of benefits. Under any definition, a
greater reliance on hybrid renewables meets this criterion.
According to the National Renewable Energy Lab, life cycle
emissions of CO2 for biodiesel are 78 percent lower
than conventional diesel. According to a recent USDA study,
even relatively modest increases of the use of biodiesel will
have a significant impact on farmer income. A recent EPA study
found that more than 75 percent--75 percent--of all cancer risk
associated with outdoor air contaminants relates directly to
diesel exhaust. Meanwhile, biodiesel exhaust has been found to
be completely nontoxic.
I cite these numbers not to suggest that we should or even
that we could replace all diesel with biodiesel. The point is
simple. Fossil fuel resources, vehicles, and infrastructure
dominate our energy landscape today. Further, we are likely to
depend on this same infrastructure well into the future. With
this reality as a starting point, we must begin thinking about
our existing energy infrastructure as a medium for a
diversified energy supply, rather than as an obstacle to it.
Today, Senators Hagel and Johnson have given us the
opportunity to do just that. S. 1006 provides us the
opportunity to get started. This is the renewable portfolio
bill, and this bill is good for air quality, good for energy
security, good for farmers, good for public health, and good
for America. The time for hybrid renewables has come. This bill
gives us the opportunity to get started. I urge you to pass it.
Thank you for the opportunity to be here.
The Chairman. Thank you very much.
Mr. Lyons, we are glad to see you back here.
STATEMENT OF JAMES R. LYONS, PROFESSOR, YALE SCHOOL OF FORESTRY
AND ENVIRONMENTAL STUDIES, NEW HAVEN, CT
Mr. Lyons. Thank you very much, Mr. Chairman. It is
certainly a pleasure to be back before the committee and have
an opportunity to address you today on the important issue of
global climate change. What I would like to do briefly this
morning is touch on a few things. First of all, I think it is
important to emphasize why we need to be concerned not only
about the opportunities for sequestration of carbon in
agriculture and forestry, but the impacts of climate change on
our agricultural production systems and on America's forests.
I would like to talk a little bit about the opportunities
to increase sequestration opportunities in agricultural and
forestlands, and then raise some important considerations as
you look at policies to promote the use of these lands for
sequestration purposes, and time permitting, maybe I will offer
a few comments on S. 820, introduced by Senators Craig and
Wyden.
Let me emphasize that although many reports, including the
most recent National Assessment Synthesis Team report,
emphasize that generally carbon fertilization should increase
production in agriculture and forestry, there are some dramatic
and important regional and localized impacts that need to be
considered.
Overall, if there is an increase in fertilization as a
result of CO2 and an increase in agricultural
production, that may not necessarily be good news for America's
farm sector. In fact, according to the NAST report, increased
production could result in an estimated $4 to $5 billion
reduction in producers' profits, which represent a 13 to 17
percent loss of income for America's farmers, and as the
Agriculture Committee today is attempting to mark up another
disaster bill for agriculture, I think it is fair to say we do
not need to try and increase production any further and
exacerbate low commodity prices.
For forests, while productivity might increase in certain
areas, there are dramatic regional effects. For example, again
according to the NAST report, seasonal severity of fire hazard
would be projected to increase about 10 percent over the next
century under several of the more popular models that project
impacts of carbon on terrestrial ecosystems. This translates
into small decreases in fire hazard in the northern plains, but
a 30-percent increase in fire hazard for the Southeast and for
Alaska.
Also, as one might imagine, there will be dramatic changes
in the forest landscape. Trees favoring cooler climates would
move northward, some species would probably disappear in their
entirety. While that may not seem significant for those of us
from New England, who have come to enjoy the fall foliage, we
would see a dramatic change in what occurs there, and it would
be interesting if, in fact, as a result of the disappearance of
Aspen, Aspen, Colorado no longer had any Aspen, and those are
some of the real potential effects of change over time.
With regard to sequestration potential, let me emphasize as
a part of our preparation for the first COP-6 at The Hague, we
prepared some estimates of the opportunities for sequestration.
We found, for example, that managed forests had the potential
to remove 288 million metric tons of carbon equivalent under a
business-as-usual scenario, that croplands had the potential to
sequester another 16 million metric tons per year, and that
pasturelands could, in fact, sequester about 8 million metric
tons per year, so there is a significant benefit and
opportunity associated with sequestration for agriculture and
forestry.
Generally speaking, as management practices improve the
organic content of soils through changes in tillage practices,
and the establishment of permanent cover, that sequestration
benefit will increase.
Others on the panel have already addressed some of the
other potential opportunities in agriculture such as the
production of biomass for energy crops which can serve multiple
benefits, particularly reducing air pollutants and also,
depending on cropping practices for crops such as switch grass,
also help to maintain soil organic matter and improve
sequestration.
With regard to forest opportunities, many of the
opportunities are associated with improvements in management
practices associated with marginal lands, with improving and
increasing agroforestry activities, and improving management on
private industrial and nonindustrial and forestlands.
For example, it is estimated that 23 to 45 million acres of
marginal lands may be available for conversion to forests in
the United States. Much of this is in the East and the
Southeast, and the estimates indicate that potential gains from
this conversion could be as much as 50 million metric tons per
year.
Now, some utilities have been creative and are already
capitalizing on those opportunities, and in fact in projects
currently underway in Louisiana, Arkansas, and Mississippi, the
planting of these marginal lands is actually leading to
creation of new habitat opportunities and creation of new lands
that might be added to the national wildlife refuge system.
Opportunities to increase sequestration rates on forest
lands are probably greatest on private forest lands, and I want
to emphasize there that probably the most limiting factor right
now is simply knowledge and information and resources to help
private nonindustrial landowners which manage two-thirds of the
forestlands in the United States with the opportunity to do a
better job managing the resources.
Finally, with regard to some key considerations in the use
of agriculture and forestlands for carbon sequestration, I
would emphasize the following, Mr. Chairman. First of all, I
think it is important, as you look at new policies, that
emphasis be placed on the development of sound scientifically
based and viable standards for measuring carbon sequestration.
Ideally, a single, internationally acceptable standard
should be developed that provides the means to credit or debit
carbon sequestered in accordance with a given management
practice or land use change. I would note that the
International Panel on Climate Change, IPCC, is currently
studying this issue, and established a program to develop
standard for methodologies to estimate anthropogenic emission
of greenhouse gases by sources and removals by sinks.
A second important consideration is the need to recognize
that the value of carbon cycles for farm and forestland will be
a function of policy and markets. Values must be viewed
separately from the science of determining what impacts land
use changes and management activities have in terms of their
effect on carbon cycles. Clearly, one of the impediments to
establishing values for carbon associated with changes in
management practices and land use is the uncertainty associated
with regulation of carbon emissions. Frank Cassidy has already
addressed this issue.
I think it is critically important that that uncertainty be
addressed. The best way to do that would be passage of
legislation and the development of regulations to establish
requirements for reductions in greenhouse gases domestically.
That would open a wide range of opportunities for investors,
farmers and ranchers and forestland owners, utilities and
others to use private markets to address global climate change
concerns.
In turn, this would likely spur additional investment in
carbon sequestration activities, particularly if mechanisms
exist to trade carbon sequestration credits for emission
reduction targets.
Now, some of these markets are already developing on an
experimental basis. I know you are aware of the Chicago Climate
Exchange, but they are largely speculative. I think if we want
to get to the point of promoting emission trading, or carbon
trading, if we want to spur private investment in sustainable
forestry and agriculture activities, and if we want to
encourage investment in bioenergy and related technologies,
then we need to cure the issue of uncertainty that certainly
clouds where we are, and I would suggest to you that S. 556,
introduced by Senator Jeffords and a number of his colleagues,
the multi-pollutant bill, might be a good place to start.
The last key consideration I think is that efforts to
enhance carbon sequestration activities on farm and forestlands
cannot be viewed in isolation. Through certain management
practices and land use changes, carbon sequestration values can
increase, and significant additional environmental benefits
would accrue, benefits such as improved water quality, wildlife
habitat, improvements in air quality and the environment
overall, and if some value were established for carbon that
might spur investment in these sequestration-enhancing
activities, then private money might be invested where
currently landowners and the taxpayer through financial
assistance programs are footing the entire bill.
Now, of course, the reverse is also true. Efforts to
enhance sequestration through practices that improve forest
productivity should not be permitted to do harm to water
quality, wildlife habitat, and the like. I would argue that the
full environmental budget for these activities needs to be
taken into account.
So in establishing any rules for measuring carbon
sequestration, perverse incentives that enhance carbon values
but lead to conversion of old growth forests or the loss of
biologically important natural resources or the conversion of
entire ecosystems should be disallowed.
If you like, Mr. Chairman, I would offer just a few
comments on S. 820. I want to commend Senator Craig and Senator
Wyden for their efforts in bringing this to the fore and
bringing a focus to the opportunities to promote sequestration
of carbon through better utilization of America's forests. I
would offer the following comments, though, for their
consideration.
First, I think it is important that carbon sequestration
potential for all forest lands in the United States be
accurately assessed and reported upon. It is not clear to me
from the text of the bill if the bill simply focuses on public
lands. I think it should take into account private lands as
well, because that is actually where the greatest potential
exists, with so many lands in private ownership, and so many of
those lands frankly more productive in terms of their forest
potential.
Second, in lieu of the Carbon and Forestry Advisory Council
established by the bill, what I would suggest is an independent
scientific panel be established under the rules of the Federal
Advisory Committee Act. The reason for this is simple. I think
the charge given to this advisory panel is largely technical
and scientific in nature, and not fully consistent with the
qualifications that are required for that panel in the bill.
Third, as I noted above, I think it is important for any
methodologies devised in accordance with that legislation be
consistent with other methodologies for measuring carbon
emission and sequestration rates developed in the United
States, and they have to be applicable internationally as well.
I think that amplifies the need to have scientific expertise in
that advisory panel.
Fourth, I think consistent with the stated purposes of the
bill, it is important that recommendations stemming from any
required study and actions of the advisory council give full
consideration to other environmental consequences associated
with enhancing carbon, and that is noted in the bill. I think
it should be emphasized.
And finally, I want to commend the authors for recommending
the establishment of cooperative agreements and loan program to
provide for additional investment in forest stewardship in the
United States. However, I might suggest that the management
activities provided for by these funds in forest management
plans that would be developed be managed through existing
forest stewardship activities, and perhaps through the existing
forest stewardship program.
With that, I will cease, Mr. Chairman, and again I want to
thank you for the opportunity to appear before the committee
today.
[The prepared statement of Mr. Lyons follows:]
Prepared Statement of James R. Lyons, Professor, Yale School of
Forestry and Environmental Studies, New Haven, CT
Mr. Chairman, Senator Murkowski and members of the committee. My
name is Jim Lyons and I am honored to appear before you today to
discuss proposals related to global climate change and measures to
mitigate greenhouse gas emissions. I am currently Professor in the
Practice of Resource Management at the Yale School of Forestry and
Environmental Studies in New Haven, Connecticut.
It is a pleasure to return to this room to address you today. I
want to commend you and your leadership in investigating the many
issues associated with the nation's current energy concerns, most
especially the issues associated with climate change that we will
discuss today. I also want to commend you for your introduction of S.
597, the Comprehensive and Balanced Energy Policy Act of 2001. Mr.
Murkowski, it is also a pleasure to be with you again and similar
commendation is due you in your efforts to provide leadership on energy
issues through introduction of S. 388, the National Energy Security Act
of 2001. I look forward to our discussions this morning.
My testimony this morning will focus on three aspects of the
climate change debate. First, I will briefly summarize some of the
concerns raised regarding the potential impacts of climate change on
forestry and agriculture. Second, I will address the role that forests,
crop and rangelands play in mitigating the effects of CO2
through carbon sequestration and how these functions can be enhanced.
Finally, I will discuss some important considerations in the use of
forest and agricultural lands as carbon sinks, and the need to be
mindful of the greater ecological considerations of changes in policy
intended to enhance the value of forests and agricultural lands as
sinks.
the impacts of climate change on agriculture and forestry
A number of studies have assessed the likely impacts of increasing
global climate on the nation's forests and agricultural lands. For
example, the U.S. National Assessment of Climate Change, released last
November, noted that ``The impacts of climate change will be
significant for Americans, [but] the nature and intensity of impacts
will depend on the location, activity, time period, and geographic
scale considered.'' (NAST, 2000). According to the National Assessment
Synthesis Team (NAST) report, nationally, agriculture and forestry are
likely to benefit in the short term due to climate change and rising
CO2 levels. The reason is assumed CO2
fertilization effects. But a closer look at the regional and more
localized effects of increased climate leads to greater concern.
Results of the Assessment suggest that the productivity of many
major crops will likely increase nationally. Pastures, too, will
benefit. However, for some crops, particularly wheat, rice, oats, hay,
sugar cane, potatoes, and tomatoes, yields will either increase or
decrease depending upon the scenarios analyzed. For example, as noted
by the NAST report, ``while wheat yields are likely to increase at the
national level, yields in western Kansas, a key breadbasket region, are
projected to decrease substantially under the Canadian climate model
scenario.''
The Pew Center on Global Climate Change report, ``Agriculture and
Global Climate Change'' (Adams, 1999) warns that other factors such as
precipitation and temperature can act to affect crop yields, in
addition to the effects of increased CO2. With regard to
climate change effects on livestock, the authors noted that warmer
summer temperatures might impact livestock production (e.g., low milk
production) and suppress livestock appetites, leading to lower weight
gain.
An interesting analysis of the economic effects of overall
increased crop yields suggests that while consumers might benefit
slightly from greater commodity production and slightly lower food
prices, the effects of producers' profits could be substantial. As
noted by the NAST, ``The estimated $4-5 billion reduction in
producers'' profits represents a 13-17 percent loss of income, while
the savings of $3-6 billion to consumers represent less than a 1
percent reduction in the consumers' food and fiber expenditures.''
(NAST, 2000).
For forests, modeling indicates that forest productivity increases
are likely to occur as a result of increased atmospheric
CO2, but that these increases will be tempered by local
variability in moisture and nutrient availability. Other environmental
factors also are affecting forest productivity. For example, ``current
ozone levels . . . have likely decreased production by 10 percent in
the Northeast forests and 5 percent in southern pine plantations.''
(NAST, 2000)
As in agriculture, regional variations in response to climate
change may be more striking and disturbing. For example, the NAST
reported that ``seasonal severity of fire hazard is projected to
increase about 10 percent over the next century over much of the U.S.
under both the Hadly and Canadian climate scenarios.'' (NAST, 2000)
This translates into small decreases in fire hazard in the northern
plains, but a 30% increase in fire hazard for the southeastern U.S. and
Alaska (emphasis added).
Potential changes in the range and distribution of tree species
could also result from increasing global climate. Trees favoring cooler
climates are likely to shift to the north while some alpine and sub-
alpine spruce-fir could possibly be eliminated. In the northeast, a
transition could occur from the present maple, beech, and birch tree
species to oak and hickory. Aspen and eastern birch communities could
contract dramatically in the U.S. and largely shift to Canada. As a
result, the fall foliage of New England could be dramatically different
than we're accustomed to knowing and Aspen, Colorado could find itself
without aspen if these predictions hold true.
With changes in forest types would come changes in associated plant
and animal species. As noted in the Pew Trust report, ``Ecosystems and
Global Climate Change'', ``The effects of climate change on ecosystems
and species are likely to be exacerbated in ecosystems that already are
under pressure from human activities, including air and water
pollution, habitat destruction and fragmentation, and the introduction
of invasive species.'' (Malcolm, 2000). The NAST report notes that,
``Invasive (weed) species that disperse rapidly are likely to find
opportunities in newly forming communities.'' (NAST, 2000).
And how might we respond to these changes? With limited knowledge
of ecosystem structures and functions, adaptation to changing climate
regimes would be extremely difficult. As noted by the Pew Trust report,
``Even the seemingly simple task of reintroduction plants into former
parts of their range has met little success so far.'' (Malcolm, 2000).
In short, the effects of increasing CO2 levels and
increases in global climate, though regional or localized, may be
substantial and dramatic. These findings were recently verified by the
National Academy of Sciences report, ``Climate Change Science: An
Analysis of some Key Questions'' which was prepared in response to a
White House request for assistance in its ongoing review of U.S.
climate change policy. The Committee noted,
The impacts of these climate changes will be significant, but
their nature and intensity will depend strongly on the region
and timing of occurrence . . . [O]n a regional basis the level
and extent of both beneficial and harmful impacts will grow.
Some economic sectors may be transformed substantially and
there may be significant regional transitions associated with
shifts in agriculture and forestry. . . . The possibility of
abrupt or unexpected changes could pose greater challenges for
adaptation. (NAS, 2001)
agriculture, forestry, and carbon sequestration
Crop, pasture, and forest lands can play a significant role in
mitigating the effects of climate change precisely because of their
ability to sequester or absorb carbon in CO2.
Last summer, an analysis was conducted of the capability of
forests, croplands, and pasture to sequester carbon to determine what
role these so-called ``sinks'' might play in helping to mitigate the
effects of increasing CO2 emissions. This analysis provided
the foundation for the U.S. position on the role of sinks in mitigating
global climate change at the COP VI in the Hague, Netherlands.
As of 1997, managed forests in the United States removed between
278 and 341 million metric tons of carbon equivalent (MMTCE) per year,
with an estimate of central tendency of 310 MMTCE per year. During 2008
to 2012, the first commitment period under the Kyoto Protocol, managed
forests are projected to remove between 245 and 331 MMTCE per year or
an average of 288 MMTCE. Much of this uptake occurs in the
Southeastern, Pacific Northwest, and Northeastern regions of the
country.
Based upon these estimates, managed forests in the U.S. currently
remove about 17 percent of total U.S. greenhouse gas emissions per year
on a carbon-equivalent basis or about 21 percent of fossil fuel-related
CO2 emissions. Assuming business as usual, during the period
2008-2012, managed forests in the U.S. could remove from 12 to 16
percent of total U.S. greenhouse gas emissions on a carbon equivalent
basis.
Cropland soils in the U.S. are projected to remove between 9 and 24
MMTCE per year during the commitment period with a central tendency of
16 MMTCE per year. Assuming business as usual, grazing land soils will
remove between 3 and 23 MMTCE per year from 2008-2012 or 8 MMTCE, on
average, per year.
So it is clear that forests, crop lands, and grazing lands can
serve an important role as sinks for carbon. It is also clear that
opportunities exist to increase carbon sequestration for each, through
improvements in management and changes in land use.
For example, for grazing lands changes in management that improve
carbon sequestration potential include improved productivity through
the use of fertilizer or manure management, management to improve plant
community stability, and noxious weed control. On croplands, conversion
to conservation tillage and practices such as no-till leave the soil
surface undisturbed, and thus increase soil organic carbon.
Establishment of vegetated buffer strips along waterways and wind
breaks can also enhance sequestration rates with the added benefit of
reducing soil erosion, providing wildlife habitat, and improving water
quality.
For forests, opportunities to enhance sequestration through
forestry are also available. Richard Birdsey, Director of the USDA
Forest Service's Global Change Research Program, recently briefed
Senate staff on some of these opportunities. Included were:
1. afforestation of marginal cropland and pasture
2. reducing conversion of forestland to nonforest use
3. improving forest management
4. reducing harvests
5. increasing agroforestry
6. substituting renewable biomass for fossil fuel energy
7. more efficient use of raw materials
8. increasing paper and wood recycling
9. planting trees in urban and suburban areas, and
10. improving energy efficiency in wood production.
I would like to focus, briefly, on the opportunities to increase
carbon sequestration on crop and forest lands, particularly as these
opportunities are associated with changes in management practices and
land use.
For crop and rangelands, improvements in the organic content of
soils through changes in tillage practices and the establishment of
permanent cover are key elements in efforts to increase carbon
sequestration. USDA's Environmental Quality Improvement Program (EQIP)
assists producers in applying improved conservation measures on working
lands and is one tool that can help increase carbon sequestration
potential. Agricultural programs like the conservation reserve program
(CRP), the wetlands reserve program (WRP), and the conservation reserve
enhancement program (CREP) all serve to increase sequestration
potential by providing for the maintenance of permanent cover on lands
which are ``set aside'' from normal agricultural production for
extended periods of time. Where farmers elect to plant trees on these
set-aside lands, sequestration is further increased.
Still other opportunities exist to enhance agriculture's capacity
to assist in reducing the effects of global climate change. For
example, an experimental program authorized last year has provided
opportunities for producers to grow ``energy crops'' such as
switchgrass which can be co-fired in coal fueled utility plants. This
renewable source of energy is currently being used in a demonstration
project in the Chariton Valley in Iowa. There, a coalition of twenty
organizations is working with an investor owned utility and about 150
farmers to replace 5 percent of the coal currently burned in a 740mW
coal fired power plant. Currently, 6000 acres are dedicated to energy
crop production with plans to increase to 50,000 acres.
Other sources of biomass, in addition to switchgrass, are currently
being evaluated to determine their potential to serve as a renewable
source of energy. Probably best known is ethanol where seven percent of
the corn crop is currently dedicated to fuel production. Estimates are
that even at this level of production, ethanol increases net farm
income by more than $4.5 billion, generates 192,000 jobs, and results
in net federal budget savings of over $3.5 billion.
Biomass crops have the benefit of being carbon neutral, thus
benefiting global warming from two perspectives. Their production,
particularly in the case of switchgrass, which requires no soil
tillage, maintains soil carbon over extended periods of time. And their
use as an alternative for coal reduces greenhouse gas emissions as well
as other harmful air pollutants.
Further opportunities exist to enhance the value of agriculture in
addressing climate change. More efficient use of livestock manure and
recapture of methane for energy production provides an important means
of converting a ``waste'' problem into an energy-producing opportunity.
Similarly, improvements in technology are providing important
opportunities to use biomass to produce feed products, specialty
products, and polymer products.
As noted in a March 14, 2001 issue of Chemical Week Magazine,
Cargill Dow, a startup company created by Cargill Incorporated and the
Dow Chemical Company, is building a world-scale facility in Blair,
Nebraska which will produce a new family of polymers called polyactides
(PLA). It will employ 33 people by 2005 and produce 300 million pounds
per year of PLA which will be used to produce packaging and fiber
products. PLA is the first family of polymers derived entirely from
annually renewable resources. According to representatives of Cargill
Dow, these products will be cost and performance competitive with
traditional fibers and packaging materials.
For forests, opportunities for increasing carbon sequestration
potential are greatest in a number of areas. These include the
reforestation of marginal lands, agroforestry activities, and
improvements in management of private industrial and non-industrial
forests and public forests.
Nearly one-third of the U.S. land base is forested. Of this, nearly
two-thirds is in private non-industrial ownership.
Afforestation of marginal crop and pasture pasturelands provides
one important opportunity to expand this forest land base and increase
sequestration. It is estimated that between 23 and 45 million acres of
marginal lands may be available for conversion to forest. Most of this
is in the east. The potential gains from this conversion according to
USDA Forest Service estimates are approximately 50 MMTCE/year.
As evidence of the value of this practice, in 1995, 41 utilities
established a non-profit corporation--the UtiliTree Carbon Company--
which is engaged in a number of international and domestic forestry
projects. The projects range from a mix of rural tree planting, forest
preservation, and forest management activities. Examples include a
series of bottomland hardwood projects in the Lower Mississippi River
Valley in Louisiana, Arkansas and Mississippi on lands recently
acquired by the U.S. Fish and Wildlife Service for addition to the
National Wildlife Refuge System. The projects would reestablish the
bottomland hardwood forests on approximately 2,400 acres. It is
estimated that the projects will sequester an estimated 9 tons of
CO2 over the first five years and 600 tons per acre after 70
years. In Western Oregon, a project that will plant trees on 300 acres
if unforested non-industrial timberland, will include a long-term
sustainable forest management plan and sequester approximately 200,000
tons of CO2 over the life of the project. A dozen or more
electric utility companies are involved in urban forestry and energy
conservation programs through American Forests' Global ReLeaf and Cool
Communities programs.
Agroforestry opportunities to incorporate tree planting into
agricultural landscapes also hold great potential to increase carbon
sequestration. Windbreaks, shelterbelts, and riparian forest buffers
can further efforts to reduce erosion, improve wildlife habitat, and
minimize polluted runoff for agricultural lands. Recently, for example,
the state of Maryland announced that it was approaching completion of
its goal of planting 600 miles of riparian buffers to trees along the
Chesapeake Bay and its tributaries.
Opportunities to increase sequestration rates for non-industrial
private forests are also significant. While industrial forest lands are
generally more productive, more intensive management of non-industrial
forest lands through such activities as regeneration, thinning,
improved stocking, fertilization, and low-impact harvesting can
increase their productivity. Forest Service researchers estimate that
the growth potential of many forest stands is well below their
biological potential and that more intensive management can increase
productivity and with it, rates of carbon sequestration. Impediments to
achieving this potential include landowner knowledge of the
opportunities, limited technical and financial assistance, and poor
markets.
On public forests, particularly national forest system lands,
additional opportunities exist to increase forest productivity and
reduce the quantity of woody debris and fuels that heighten risk of
wildfire. As reflected in the USDA Forest Service's wildfire strategy,
treatment of fuel loads is a top priority for reducing future wildfire
risk. Millions of acres of national forest system lands proximate to
urban landscapes and communities are in need of treatment. Through an
aggressive program of thinning and fuel removal, these lands can
provide biomass to generate power and the means to improve forest
health and productivity, further contributing to their potential to
sequester carbon. According to the USA Biomass Power Producers
Alliance70 percent of the biomass fuel consumed in the U.S. is from
forest-related activities. In fact, sixteen of California's 28
operating biomass power facilities are dependent, to some degree, on
fuels derived from public lands.
key considerations in promoting the use of farm and forest lands for
carbon sequestration
Finally, I would like to focus on some important considerations as
you develop new policies that might seek to enhance the use of farm and
forest lands to sequester carbon or produce biomass as a means of
mitigating the impacts of global climate change.
Of paramount concern is the development of sound, scientifically-
based, and viable standards for measuring carbon sequestration.
Ideally, a single, internationally-accepted standard would be developed
that provides the means to credit (or debit) carbon sequestered in
accordance with a given management practice or land use change.
Extensive work has been done to attempt to develop such
measurements for forestry. Winrock International has done extensive
work in this arena, dating back to 1992. The system they devised is now
being used to measure and monitor carbon in several private projects.
Less progress has been made in developing similar measures for
agricultural applications. The International Panel on Climate Change is
currently studying this issue and has established a program to develop
standards for methodologies to estimate anthropogenic emission of
greenhouse gases by sources and removals by sinks.
If methodologies are successfully established, these measures of
sequestration could serve as a valuable addition to current efforts to
measure and certify sustainable forestry in the U.S. Thus, sustainable
forestry might also be defined as forest management activities which,
in sum, have no negative impacts in terms of climate change. A valuable
lesson to be learned from the experiences of those involved in the
development of methodologies for measuring sustainable forestry would
be to assure third party verification and certification of the results.
To his credit, President Bush has called for improving cost-
effective measurement of land-based emission reduction and carbon
sequestration projects. In announcing this initiative, the
Administration noted,
A fundamental challenge in attracting private sector
investment to land-based greenhouse gas emission reduction or
carbon sequestration projects in the ability to accurately
quantify the net changes. Private sector investors are
reluctant to participate in projects without reliable and
credible quantification of the uncertainties associated with
different land management practices.
A second important consideration is the need to recognize that the
value of carbon per acre for farm and forest land will be a function of
policy and markets. Values must be viewed separately from the science
of determining what impacts land use changes and management activities
have in terms of their effects on carbon cycles.
One of the clear impediments to establishing values for carbon
associated with changes in management practices and land use is the
uncertainty associated with regulation of carbon emissions. If
preliminary reports from Bonn, Germany are true regarding agreement on
principles for implementation of the Kyoto protocol, then one part of
this hurdle may be overcome--at least on an international scale. What
the implications may be for carbon values and markets in the U.S. is
unclear. What is clear, however, is that removal of this uncertainty
through passage of legislation and the development of regulations to
establish requirements for reductions in greenhouse gases domestically,
would open a wide range of opportunities for investors, farmers and
ranchers, forest landowners, utilities, and others to use private
markets to address global climate concerns. In turn, this would likely
spur significant investment in carbon sequestration activities,
particularly if mechanisms existed to trade carbon sequestration
credits for emission reduction targets. While private markets are
currently developing, such as the Chicago Climate Exchange, they are
largely speculative, based on the assumption that some emission
reduction requirements will eventually be put in place. If we want to
get there sooner, if we want to spur private investment in sustainable
forestry and agricultural activities, if we want to encourage
investment in bioenergy and related technologies, then we need to cure
the uncertainty that currently clouds this issue.
A third key consideration is that efforts to enhance carbon
sequestration activities on farm and forest lands should not be viewed
in isolation. Through certain management practices and land use
changes, carbon sequestration values can increase and significant
additional environmental benefits can accrue. The benefits to water
quality, wildlife habitat, air quality and the environment, overall,
can be substantial. And, if some value were established for carbon that
might spur investment in these sequestration-enhancing activities, then
private money might be invested where currently, landowners and the
taxpayer, through financial assistance programs, now pay.
Of course, the reverse is also true. Efforts to enhance
sequestration, through practices that improve forest productivity or
promote the production of biomass, should not be permitted to do harm
to water quality, wildlife habitat and the like. The full
``environmental budget'' for these activities needs to be taken into
consideration. Efforts to promote carbon sequestration through
investments in forests, crop and range lands need to be viewed in their
larger environmental context. In establishing the ``rules'' for
measuring carbon sequestration, perverse incentives that enhance carbon
values but lead to the conversion of old-growth forests, the loss of
biologically-important natural resources, or the conversion of entire
ecosystems should be disallowed.
some comments on s. 820
Before I close, Mr. Chairman, I would like to offer a few comments
on S. 820, the ``Forest Resources for the Environment and the Economy
Act.'' I commend Mr. Wyden and Mr. Craig for taking the initiative to
introduce this legislation and to encourage further thinking about the
role that national forests can play in helping to address global
climate change concerns.
First, I believe it is important that the carbon sequestration
potential for all forest lands in the United States be accurately
assessed and reported upon, not simply national forest system lands. It
was not clear to me if the report required by this bill would include
industrial and private, non-industrial forest lands as well as native
American lands and other public lands. If not, I believe it should do
so.
Second, in lieu of the carbon and forestry advisory council
established by the bill, I would suggest that an independent scientific
panel be established under the rules of the Federal Advisory Committee
Act. I recommend this because I believe the functions required of the
council are largely technical and scientific in nature and not fully
consistent with the qualifications and expertise required in the make-
up of the council.
Third, as I noted above, it is important that any methodologies
devised in accordance with this legislation be consistent with other
methodologies for measuring carbon emissions and sequestration rates
developed for the United States and be applicable in an international
context. This amplifies the need to provide strong scientific input and
guidance in fulfilling the requirements of S. 820.
Fourth, consistent with the stated purpose of the bill, it is
important that any recommendations stemming from the required study and
actions of the advisory council give full consideration to the other
environmental concerns associated with efforts to enhance carbon
sequestration. Sequestration efforts should not be viewed in isolation.
Trade-offs and co-benefits associated with identified management
practices and land use changes should be clearly identified.
Finally, I commend the authors for recommending the establishment
of cooperative agreements and a loan program for forest carbon
activities on non-industrial private forest lands. I would suggest that
the management activities provided for by these funds and the forest
management plans that would be developed should be incorporated into
ongoing forest stewardship program activities. In addition, I strongly
support the notion of cancellation of these loans in return for
donation of permanent easements that would protect the forest carbon
reservoir, provided the affected lands continue to be managed under a
plan that is consistent with all applicable environmental laws.
summary
Mr. Chairman, tremendous opportunities exist to expand the use of
farm and forest lands to assist in U.S. efforts to address the effects
of global climate change. These lands can serves as sinks for carbon,
as the sources of biomass for renewable energy production, and, at the
same time, provide opportunities to improve water quality and wildlife
habitat.
Carbon sequestering and biomass production activities can provide
new sources of income for landowners. In addition, should markets
develop for carbon as a result of changes in domestic and/or
international policy, new sources of capital are likely to provide the
funds for improved management activities.
Effective means of measuring, monitoring, and verifying the carbon
sequestration benefits of management practices and land use changes
need to be developed. In addition, the uncertainty associated with
making investments in carbon sequestration activities needs to be
eliminated. This can best be done through the establishment of clear
requirements for reductions in CO2 emissions through the
enactment of legislation currently pending before the Congress.
Finally, any strategies for enhancing carbon sequestration
opportunities on farm and forest lands need to take into consideration
both the potential environmental benefits and costs. Generally,
management activities that improve carbon sequestration are likely to
provide significant conservation benefits as well. This provides an
exciting opportunity to promote mutually beneficial conservation and
carbon sequestration activities as components of sustainable forestry
and agricultural programs. However, a rush to promote land management
practices that enhance carbon sequestration or other activities
intended to address global climate change at the expense of other
environmental values would be a poor investment.
Mr. Chairman, thank you again, for the opportunity to appear before
you today.
The Chairman. Thank you very much.
Mr. Hill, let me ask you, on the emissions trading
activity, I am unclear just in trying to understand what our
exit from the negotiations in Bonn, what the effect of that is.
Your company is an international company. You have undoubtedly
been following the discussions in Bonn about establishing an
emissions trading program. Do you know how this would affect a
decision you might make on reducing emissions in the United
States, versus reducing emissions from an operation you might
have in Europe, or how does that work, as you understand it?
Mr. Hill. Mr. Chairman, that is certainly an issue I think
we are going to have to understand very deeply. At this time it
is too early for us to have really sat down and thought about
that. That is something we will be looking at over the coming
months.
One thing I will add, that our own internal program remains
unaffected by that. Each year we have a target set within our
business, and as I mentioned in my testimony, each business
leader is then responsible for meeting that target.
What we will have to check is that we are operating within
the legal framework that is set out in any particular country
or any particular treaty that has been subsequently introduced,
but as we understand it today, the program we have within the
company will remain intact.
The Chairman. Let me ask Mr. Cassidy, and first let me
congratulate you and this group that you are part of, the Clean
Energy Group, for your legislative proposal. There is another
group that I am also familiar with called the Clean Power
Group. Are you familiar with them?
Mr. Cassidy. Vaguely, Mr. Chairman.
The Chairman. Okay. That is another group of companies that
have come together and have developed a proposal, but I gather
from your comments you are not familiar with their proposal and
would not be able to comment on it relative to your own.
Mr. Cassidy. I am not, I am sorry, Mr. Chairman.
The Chairman. We might ask just for the record if I could
try to get you a description of the outline of what they are
talking about and get your reaction to it.
Mr. Cassidy. We would be happy to provide that. I can also
provide you, Mr. Chairman, with a comparison of our proposal to
the Jeffords bill which has been referred to several times here
today.
The Chairman. That would be very helpful if you could.
Mr. Cassidy. Sure.
The Chairman. If we could understand more clearly why you
think yours is the better proposal, that would be useful.
What do you see--Mr. Cassidy, let me ask another question
of you. What do you see as the major impediments to developing
new coal-fired generation capacity at this time in this
country?
Mr. Cassidy. If I look at the development of new generation
over the last 10 years or so, it has been almost entirely
natural gas-based, and that has largely been as a result of the
cost differential between natural gas and coal, not being able
to overcome the capital cost disadvantage of coal.
Today, with natural gas dependence being an issue for our
energy security, as well as the price of natural gas, coal has
started to become a lot more attractive, and in fact my company
has been looking at developing new coal-fired plants.
Also, we were able today, with the technologies that have
been developed, to be able to produce coal-fired plants that
are extremely clean in terms of nitrogen oxides, sulfur
dioxide, and mercury.
The big impediment, as we see it, is the uncertainty
surrounding the future of carbon. It is very difficult for us
to make a decision which has a 20- or 30- or 40-year life span
with no real certainty about how carbon is going to be
regulated going forward, and that is thus an inability for us
to predict how that investment is going to turn out.
The Chairman. Thank you very much.
Mr. Lyons, let me ask you about this agreement that has
been developed in Bonn, or is being developed, as you
understand it. How does the agreement promote the use of sinks
to meet these greenhouse gas emission targets? Are there ways
in which the agreement they are coming to there is going to
advantage or disadvantage us relative to these so-called carbon
sinks?
Mr. Lyons. Well, Mr. Chairman, I have to qualify my
comments by saying I only pulled down a copy of the text, or at
least the draft text, off the web last night, so I have only
had a brief opportunity to review it.
As I understand, there is some recognition for credits for
agricultural sinks, opportunities for use of reforestation and
afforestation in what is called the Clean Development
Mechanism, and then there is limited credit provided for forest
sinks, according to an appendix to the document.
The cap for U.S. forest sinks would be about 28 million
metric tons per year. Unfortunately that is about where we
were, at least with regard to forests, in our discussions in
The Hague, and I know Senator Craig and I spent many a long
night discussing the potential for incorporating sinks into the
discussions we had while we were in The Hague.
What is unclear, and certainly I am not an expert in
international treaty law, is what the ramifications are for the
United States should we not participate, and how this sink
proposal would affect us.
I mean, to some degree I would characterize it as a lost
opportunity. We were in The Hague arguing strongly for
inclusion of additional credits for sinks, given the high
potential for U.S. forests to serve as sinks for carbon.
Unfortunately, the agreement seems to have ended up where we
left off in The Hague, so the implications are not clear,
although there is some recognition for sequestration as a part
of the larger package.
The Chairman. Thank you very much.
Senator Craig.
Senator Craig. Mr. Chairman, let me take off from your last
question to query Mr. Lyons on that issue. I, too, have got a
copy now--I think it has been pulled off the net--that gives us
an understanding of where the group may well be as it relates
to sinks, and Jim, if we take your figures, 288 million metric
tons in the forest, and if we include croplands at 16, and
pasture at 8 then 312, somewhere in that range, and I
understand, though, that the 28 figure, using the formula that
apparently they are using, would give us less than 1/10th of
the existing U.S. capacity, potentially, to absorb carbon.
Now, it is interesting that Canada, with their vast
forests, got 11, Japan got 13. Japan probably got 13, and I am
told by those who were there that Japan was able to bargain up,
and there was willingness to allow them to bargain up. It was
something about a vote they might get if they kind of included
Japan a little more. I think it was true of the Russian
Federation.
When you look at Russia, at 17 metric tons of carbon per
year in the their vast steppe lands and their vast forests,
this is not very reflective of a desire to use sinks and carbon
sequestration as a right and proper tool based on current
science, not based on the new science of measurement that is
evolving as it relates to sinks.
So I think maybe I am as frustrated as you are by at least
the current figures and how they get to the formula. My guess--
as you know, we were about to bargain away at 35 percent of
capability when we were at The Hague. My guess is this is less,
or somewhere near that figure.
Anyway, I bring that up only to say that based on what I
read now, and what we know now, it is interesting what they are
doing, with or without us.
I also find out, just to add to the record, Mr. Chairman,
under article 12, called Clean Development Mechanism--here is a
real fascination, and this is subparagraph 2, to recognize that
parties included in Annex I are to refrain from using certified
emission reductions generated from nuclear facilities to meet
their commitments under article 3.1.
That is the exclusion of new nuclear, probably the cleanest
source of nonemitting energy sources there are today, and it is
fascinating that they would exclude it as a measurement. To me,
that is a statement of politics, not of good science, or the
reality of a problem and how you meet that problem. I do not
know how to meet it otherwise. I was not there, and should not
react.
But let me come to you, Mr. Hill, because I think all of us
recognize what BP is trying to do, and we applaud it. What you
have done voluntarily and collectively as a multinational
company is to be applauded.
Given your estimate of the potential for carbon
sequestration, I guess I would ask you what is your view of the
decision taken in Bonn this past weekend that appears to limit
the use of sinks under the Kyoto Protocol?
Now, do not take my interpretation. I trust that you have
some working knowledge of where they were.
Mr. Hill. I only have a very basic working knowledge of
that, and my area of expertise is indeed in the technology area
of carbon capture, separation, and storage.
What I can talk about is the experience that BP has had. As
you have said, we have taken a lot of preventative measures,
and what we have established is that we need to have the
flexibility to investigate and learn from all types of
sequestration, and by limiting that, and limiting the amount of
tons you can bring to the table, could have an impact on
reducing the costs in line with the way you would like to
reduce costs.
So I think I would have a concern that in any event, if we
are limiting the flexibility we have in the area of
sequestration, that could have an impact on how much we are
able to just cause the flexibility we have to offset
CO2.
Senator Craig. Given your experience with internal trading
programs, would BP support the development of a national
registry for emissions reduction, and would you use such a
registry?
Mr. Hill. I think our track record shows that we are
extremely supportive of open and transparent data, so we would
support mechanisms where we can actually report our emissions.
Senator Craig. BP has said we could store 30 years of
emissions in geologic reservoirs, is that accurate?
Mr. Hill. Right. In fact, these are not BP numbers. these
are numbers that have been determined independently by
research, and the numbers indicate that there is the capacity
in geological formations to store something in the order, at a
minimum, of 30 years of emissions as they currently exist
today.
Senator Craig. How does that relate to U.S. capacity?
Mr. Hill. How does that relate to U.S. capacity? I do not
actually have the split-down. That was actually a global figure
that was quoted, and I do not actually have the split-down into
U.S. capacity versus the rest of the world, but that is
something I can actually forward to you in a written statement.
Senator Craig. I would appreciate that.
Mr. Chairman, my light is on. I would like to ask a
question of Mr. Cassidy, if I might.
Mr. Cassidy, how do you respond to the Energy Information
Administration's study on multiple pollutant legislation? By
that, I mean they say that the costs of approaching multiple
pollutant legislation in relation to CO2 means
generally higher energy costs. Their figures are $80 billion
electrical cost to the United States annually, a 50 percent
reduction in coal generation.
Now, that is the price per kilowatt hour of electricity up
from 6.2 to about 8.5 cents, about a 30 to 40 percent increase
based on a multiple pollutant strategy, and you know, this
committee, in a bipartisan way, looks at the Energy Information
Administration as a fairly neutral agent of measurement and
information for us. How do you react to that?
Mr. Cassidy. Senator, we have done quite a bit of analysis
of the EIA's report, and first off I would say that the
scenario that they analyzed was one where there was a very
sudden carbon cap imposed with very little chance for a
transition into it, limited flexibility mechanisms, and no
trading involved, very different than the proposal which we are
proposing both in terms of timing and the amount of
flexibility.
I guess I would also comment that if you look back 20 years
ago at some of the estimates of the effect on electricity cost
that the Clean Air Act was going to have, we heard some of
these same kinds of statements, and it has turned out that the
actual cost to implement the Clean Air Act has been a small
fraction of what was estimated at the time.
Senator Craig. Is it not true, though, that mandatory
CO2 reduction would help the Clean Energy Group
companies from a competitive standpoint? Would it not just
inflict higher cost on your competitors?
Mr. Cassidy. I would say that that is absolutely true, that
we believe that part of what we are trying to do with this
proposal is to level the competitive playing field and to
assure that all competitors are internalizing the costs of
emissions control.
Senator Craig. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman. Thanks to this
panel. Mr. Campbell and Mr. Lyons demonstrate that there is
life after public service, indeed. We are glad to have them
here, and Mr. Campbell, again thank you for participating in
this committee's first field hearing in Sioux Falls, South
Dakota here this past month.
I have a particular interest in the biofuel side of things.
It seems to me that both in the case of ethanol and in the case
of biodiesel, an issue that Mr. Campbell and I discussed a bit
at the previous hearing has to do with the classic chicken-and-
egg issue here, and that is a reluctance on the part of the
private sector to make significant investments in the
production of either biodiesel or ethanol absent some at least
minimal assurance of what the market is going to be over a
longer period of time. It takes a significant amount of time to
recover the investment for these plants.
There has been some going forward of production capability
in this country, and I am grateful for that, but a high level
of uncertainty about the ultimate market. Currently, only about
7/10ths of 1 percent of motor fuel contains a biofuel product.
Senator Hagel and I are suggesting that we slowly ramp that up
to about 5 percent by the year 2016.
That is a long window, and we do not suggest that this is
going to displace all the petroleum in the world, but
nonetheless we would create by a matter of national policy a
volume of market that the private sector could respond to, and
I wonder, if Mr. Campbell, would you care to comment about that
chicken-and-egg problem that we currently have?
Mr. Campbell. Certainly from an investment perspective it
is very difficult to responsibly make 20- and 30-year
investments without the investment climate being more certain.
In renewables, we are constantly at the mercy of whatever
Congress decides to do, whether it be extending the excise tax
exemption or other EPACT-type strategies. It is a highly
unstable environment. However, I do see some change in at least
the political support for renewables. I see that as a positive
step.
I also see, at the ground level, at least a change in the
attitude of the petroleum industry. Certainly we see statements
from the top level that is supportive of renewables. We see
hundreds of millions of dollars of investment going into
renewables, but yet there is still the political fight. There
is still the political fight going on, and it needs to stop. We
need to come to closure on whether renewables are going to have
a place in the energy spectrum or not, and if they are, what is
it? We set up a framework, and we go forward, and I think that
is what your bill does. Other pieces of legislation address
that issues as well.
Senator Johnson. Mr. Gebolys, a lot of attention is given
to ethanol around here, but biodiesel also holds great prospect
I think for the country. We have some experience in that area
in particular.
One of the problems we have had with biofuels has been the
shortage of outlets, places where consumers can buy the fuel.
Where are we in terms of the availability of biodiesel fuel in
terms of stations around the country?
Mr. Gebolys. Biodiesel has come a long way in a short
period of time, as you know, Senator, because you were very
instrumental in leading the effort to make biodiesel an
eligible fuel for compliance with the Energy Policy Act that
was signed into law with the Energy Conservation
Reauthorization Act in late 1998, so biodiesel as a viable
alternative fuel in America has only been around for 2\1/2\
years.
Given that, we are now--we have distribution in most major
cities in the United States. Diesel fuel is distributed very
differently than gasoline. It does not get distributed at your
corner filling station. It largely is filled through central
fueling sites, and generally most diesel fuel is used by big
fleets, and therefore the challenge to introduce biodiesel into
the American mainstream petroleum supply is somewhat less
challenging than is getting other alternative fuels into the
mix.
Biodiesel, also by virtue of the fact that it goes into
existing vehicles, can go into anything. It can go into
stationary diesel generators, and it can go into virtually
anything.
So the real challenge here, as John Campbell had said, is
how do we create a movement in which the folks that will be
buying this know that it is going to be available and know that
there is a motivation to buy. Where there is an appetite for
biodiesel, we can satisfy that appetite, literally within a
week, and are doing that all over the country.
All major cities must have access to biodiesel now, and
really it is just a matter of getting the word out, getting the
product out, and putting in more stable sources of supply and
demand.
Senator Johnson. Does using a biodiesel blend require any
changes to the vehicle, or can any diesel use biodiesel?
Mr. Gebolys. Yes. That is really what sets biodiesel apart
from anything else in this framework. Biodiesel can go into
anything without any change at any blend level. There is no
thing like it that we have encountered in the past.
There is a real temptation to lump biodiesel in with
ethanol, but there is a pretty significant difference in the
sense that ethanol at higher volume levels has to go into
specifically designed vehicles, and therefore the--the
challenge to get biodiesel into the mainstream in America is
enormous. It is just smaller than anything else.
Senator Johnson. I think you raise a good point. Ethanol
fuels up to about a 10-percent blend can go into any vehicle,
and you can burn ethanol blend one day and not burn it the next
day. The same with biodiesel.
Now, if you get to the E-85 ethanol blends, the very high
ethanol, that does require a dual technology, and we have had
some controversy about Federal policy in that regard, but at
the lower percent blends, ethanol and biodiesel are the same in
that way.
The red light is on, but let me just ask you, we have had
some very great success in the State of South Dakota, where the
Black Hills National Forest has had its Federal forest fleet
use biodiesel in its diesel vehicles with great satisfaction.
The only complication they had was that they were being
requested to blend it themselves rather than buying preblended
biodiesel. Is there any complication with the pre-blended
biodiesel? Is this just part of the early stages of the
industry, or is there a problem with transporting a preblended
biodiesel fuel?
Mr. Gebolys. There is no problem at all. In fact, I am very
happy to report to you that working with our friends at BP we
are delivering preblended B-20, which is 20-percent biodiesel
products, throughout the State of Ohio. The entire Ohio
Department of Transportation is using biodiesel, and everybody
that receives those shipments, whether it is small or large
shipments, are getting preblended product, and unless someone
told them they would not know any difference from getting their
regular diesel fuel, so I guess in short, the answer is, we are
getting there, and in South Dakota we will be getting there,
too.
It is just a matter of, we have only been at this game for
a couple of years, and in the event that we are able to get
enough support that says this industry is going to continue to
be supported, and there is going to be a continued interest in
us continuing to make these kinds of investments, you will see
the AGP's and the World Energies of the world being joined by
the BP's and the Gulf Oil's of the world, and we will be moving
further and further down the road.
Senator Johnson. Thank you.
The Chairman. Thank you very much. Due to the late hour, I
think I will postpone additional questions and just do those
for the record as a follow-up. Senator Craig said he had an
additional question, so I will defer to him.
Senator Craig. Mr. Chairman, with your admonishment as it
relates to time, I will follow suit, but I did want to thank
Jim Lyons for his comments as it relates to the Craig-Wyden
bill, and hope that you will stay tuned, Jim, as we work to get
that into public policy and continue to give us your thoughts
and advice on it.
Let me ask the one question in closing. Do you believe that
carbon sequestration necessarily--does it mean, as it relates
to forests, a lock-up, or does it mean that we can include a
sustainable use pattern on these forests?
Mr. Lyons. I think the answer to that, Senator Craig, is
that it means a mix of practices to suit particular conditions
and needs. In some places it means retaining the carbon that is
already stored in trees vertically there. In other places it
means a much more aggressive management strategy such as the
Forest Service is attempting to do in dealing with the high
levels of fuels, particularly near communities at risk. That, I
think, affords tremendous potential to produce biomass as a
renewable energy source, and also to accelerate sequestration
opportunities through reforestation and improvement of forest
health in those areas.
Senator Craig. Thank you. To all the panelists, thank you
very much. Mr. Chairman.
The Chairman. Senator Johnson, did you have any other
questions?
Senator Johnson. Just one last question. Just to expedite
this, but I did want to ask either Mr. Campbell or Mr. Gebolys,
there has been a lot of testimony, a lot of science on record
about the environmental benefits of biodiesel.
There have been some individuals who have raised an issue
about nitrogen oxide, and I wonder if either of you would care
to comment about that particular issue.
Mr. Gebolys. Yes. Biodiesel has--it is amazing how many
different areas it helps. One area that in and of itself it
does not help is reductions of oxides of nitrogen. The broader
issue there is, does biodiesel lead to increased or decreased
smog. Smog results from the presence of hydrocarbons and oxides
of nitrogen coming together in the presence of sunlight.
Biodiesel does reduce hydrocarbons, and does, in fact, have
overall smog reduction potential.
We are working very hard in the industry to come up with a
liquid solution to the NOX issue, so that we can
unequivocally across the board address the issues relating to
all pollutant categories, but at this point oxides of nitrogen
is not one of them.
Senator Johnson. Is biodiesel an all-season fuel?
Mr. Gebolys. It is absolutely an all-season fuel. the
Michigan Department of Transportation ran its snow plows on it
all year last year, and I am happy to report that the folks in
Michigan got up and down the highways there just fine.
Senator Johnson. Very good. Mr. Chairman.
The Chairman. Well, thank you all very much for your
testimony. We appreciate it very much, and that will conclude
the hearing.
[Whereupon, at 12:03 p.m., the hearing was recessed, to be
reconvened on July 25, 2001.]
NATIONAL ENERGY ISSUES
----------
JULY 25, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:35 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Why don't we go ahead with the hearing.
Senator Murkowski is on his way. If, at some point during the
hearing this morning, we get twelve members, we're going to
interrupt the testimony, or the questioning, to do a very short
business meeting to try to take action on Dan Brouillette to be
the Assistant Secretary of Energy for Congressional and
Intergovernmental Affairs, but we will see whether the
membership arrives that allows us to do that this morning.
We're here to begin to address what I believe is one of our
most important issues coming before this committee this year.
That is the restructuring of the Nation's electricity markets.
Over the last few years, we have received several warnings that
this issue does require attention. Three years ago, there were
severe price spikes in wholesale electric markets--electricity
markets in the Midwest and the West.
Last year, beginning in California and spreading to much of
the rest of the West, prices began to spiral out of control.
Prices have come to levels that are not as high as they were
only a few weeks ago, but they still remain high.
We were warned that prices could rise again if weather
turns hotter in the remainder of the summer and that prices may
be high this winter in the Northwest, unless there is unusually
high rainfall.
Supplies of electricity are so short and demand is so high
that we have seen blackouts in California. We are further
warned that this pattern could emerge in other parts of the
country. New York and New England are mentioned. We are warned
that reliability of delivery is threatened in the South and in
the West.
During the 105th Congress and the 106th Congress, I
introduced legislation intended to facilitate the development
of competitive wholesale markets in electricity. Senator
Murkowski also introduced legislation with that same purpose.
The Clinton administration introduced legislation that
introduced wholesale and retail markets as well. The current
administration came into office announcing its intent to deal
with energy issues and mentioned electricity among those.
I believe that the warnings have been frequent and regular
enough. I believe we need to act. This is an opportunity for us
to do that; to set the stage for action. I circulated a White
Paper that contains a legislative proposal. Leon Lowry, on our
staff here, developed that. It's intended to address what I
believe are the critical issues to ensure that the country
continues to have the most reliable, affordable, clean
electricity delivery system in the world, and I hope that that
White Paper can represent a good starting point for the
committee. I know that the administration is looking at a
legislative proposal as well, and I look forward to working
with Senator Murkowski and the other members of this committee
to see if we can work with the administration to get something
actually done in this area.
Why don't we go ahead with the testimony, and we have a
great many witnesses this morning. So, if Secretary Blake will
come forward. He starts all of our hearings. It seems that way,
I'm sure, to him and to us as well, but we welcome him back;
and why don't you go ahead and summarize your comments and then
I'll have a few questions of you.
If you'd like to go ahead.
STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY
OF ENERGY
Mr. Blake. Thank you, Mr. Chairman, and members of the
committee. I would like to submit my testimony for the record
and just briefly summarize it.
First, you and this committee should be commended for
taking up comprehensive electricity legislation. We need to
learn from the lessons of the past year and revise our
electricity laws that were written in the 1930's, and are no
longer responsive to the needs of the 21st century.
Mr. Chairman, we agree with the statement in your White
Paper, that to prevent the problems in California and the West
from appearing elsewhere, it is essential that the structural
defects in the market be cured. Electricity legislation is
needed to make these markets more competitive to lower prices
and to assure adequate and reliable supply.
The legislation should focus on core Federal issues that
are beyond the State authority. Mr. Chairman, there's a great
deal of agreement between the legislation that you're now
considering and the administration's views of the critical
areas requiring Federal legislation.
First, our transmission system. We're in the midst of a
planned increase of probably about 25 percent in generating
capacity, yet only 4 percent increase in planned transmission
capacity additions. The current system has bottlenecks and
reliability issues that need to be addressed and we support
legislation that, among other things, would aid in the siting
of transmission facilities.
Second, the reliability of the system is a matter of
Federal concern and their need to be enforceable reliability
standards.
Third, on consumer protection, we need to make sure that,
as we move forward with the competitive industry, consumers are
adequately protected and given the data they need for informed
decision making.
Fourth, we need to reform and clarify some important roles
and responsibilities in the current Federal-State structure.
For instance, clarifying the authority of States to impose fees
to fund public purpose programs. We also need to move forward
with the repeal of the Public Utility Holding Company Act,
PUHCA, a law that has largely outlived its usefulness, and is
now preventing the flow of needed capital into the utility
sector. And we need to reform PURPA, the Public Utility
Regulatory Policies Act.
As these acronyms indicate, much of the needed legislation
is very technical in nature, but it is still extremely
important. The committee is doing a great service in addressing
these issues and we look forward to working with you. I would
be glad to answer any questions from you or other members of
the committee. Thank you.
[The prepared statement of Secretary Blake follows:]
Prepared Statement of Francis Blake, Deputy Secretary of Energy
Mr. Chairman and Members of the Committee, I welcome the
opportunity to testify before you today on comprehensive electricity
legislation.
I commend you for holding this hearing. Earlier in the year, many
believed there was little likelihood the Congress would consider
electricity legislation. The view was that the California electricity
crisis would discourage both the Administration and the Congress from
dealing with electricity legislation. Your hearing disproves this
common wisdom.
need for federal electricity legislation
The Administration recognizes the need for the Congress to pass
comprehensive electricity legislation. The National Energy Policy
included a recommendation that the ``Secretary of Energy propose
comprehensive electricity legislation that promotes competition,
protects consumers, enhances reliability, promotes renewable energy,
improves efficiency, repeals the Public Utility Holding Company Act of
1935, and reforms the Public Utility Regulatory Policies Act of 1978.''
We are working to that end.
Since 1995, the Congress has been grappling with electricity
legislation. Initial efforts sought to require states to open their
retail electricity market by a date certain. Subsequent legislation
focused on promoting competition in electricity markets and
complementing state retail competition programs.
We clearly need to revise Federal electricity laws to recognize
changes in electricity markets. The principal Federal electricity law--
the Federal Power Act--was written in 1935. At the time, there was
virtually no interstate commerce in electricity, there was no
interstate transmission grid, electricity markets were local, power
plants were built right next to consumers, and electricity generation
was perceived to be a natural monopoly.
Today, the transmission grid is both interstate and international,
electricity markets encompass entire regions, almost all wholesale
electricity sales are in interstate commerce, and the natural monopoly
in generation has long since been disproved.
Mr. Chairman, your white paper describes the changes that have
taken place in the electricity industry since 1935, and concludes:
``The business of supplying electricity has changed. So must the
regulatory and legal framework within which it operates now change.''
We could not agree more. The Administration believes the time has come
to make changes to Federal electricity law to reflect changes that have
occurred over the past 66 years, and the sweeping changes that are
underway in the industry.
The California electricity crisis demonstrates that mistakes made
by a single state can extend to an entire region. The impact of the
California electricity crisis on the West has been significant. The
Bonneville Power Administration recently announced a 46 percent
increase in its wholesale rates. That increase was caused in large part
by the California electricity crisis, which drove up electricity prices
throughout the West.
The Administration believes it is essential that Congress pass
comprehensive electricity legislation. Electricity legislation can make
electricity markets more competitive, lower prices, and assure ample
and reliable electricity supplies.
The Administration believes that electricity legislation should
focus on core Federal issues that are beyond State authority.
Before I review these core Federal issues, I want to make it very
clear that the Administration respects the state role in electricity
regulation. For example, the Administration does not support proposals
to require that states open their retail electricity markets by a date
certain.
Regulation of Interstate Commerce
Electricity markets are increasingly regional in nature. Under the
Constitution, states have no authority to regulate interstate commerce
and regulation of interstate commerce is a Federal responsibility. The
California experience shows that actions taken by one state can have
regional consequences.
Transmission
Assuring that our transmission system can deliver reliable
electricity supplies is a core Federal issue. As the National Energy
Policy noted, investment in new transmission capacity has failed to
keep pace with growth in demand and with changes in the industry's
structure. Since 1989, electricity sales have increased by 2.1 percent
per year, yet transmission capacity has increased by only 0.8 percent
per year. There is widespread recognition that there is a need to
expand the transmission system, remove bottlenecks, and provide for
open access. Since the transmission system is both interstate and
international, regulation of the grid is a Federal responsibility.
There are various reasons why transmission constraints exist. In
some cases, the problem is a lack of economic incentive. The national
energy policy proposes a solution to that problem: encouraging the
Federal Energy Regulatory Commission (FERC) to develop incentive rates
to promote transmission expansion. FERC has great flexibility under
current law to set transmission rates at a level to attract investment.
Recently, FERC has shown flexibility in considering non-traditional
transmission rates. For those reasons, it is not clear legislation is
needed to address transmission pricing.
In other cases, the problem is the siting process itself. Under
current law, transmission siting is an exclusively state function. That
law was written 66 years ago, at a time when power plants were located
right next to customers, and decades before transmission lines
interconnected states and regions. Congress did not provide for
transmission siting by the Federal government because it did not
foresee the transmission system would develop into not only an
interstate but also an international grid.
Much has changed since 1935. The transmission grid is the
interstate highway system for electricity. It should not be a system of
local toll roads.
Electricity legislation can remove transmission bottlenecks by
providing for siting by the Federal government of transmission
facilities used for interstate transmission. Legislation could provide
for Federal siting of transmission facilities in certain limited
circumstances.
Reliability
Ensuring the reliability of the interstate transmission system is
also a Federal responsibility. Since the 1960s, the reliability of our
transmission system has been based on voluntary compliance with
unenforceable reliability standards. That is no longer tenable, and
Federal legislation is needed to provide for enforceable standards
developed by a self-regulating organization subject to FERC oversight.
Market Power
In our view, the debate about market power often starts with a
misunderstanding about FERC authority under current law. Under the
Federal Power Act, FERC is responsible for ensuring that rates charged
by public utilities are just and reasonable. As a general matter, the
ability to set rates is the ability to prevent the exercise of market
power. An exercise of market power generally entails charging rates
that are higher than those produced in a truly competitive market. For
that reason, FERC can prevent the exercise of market power through its
authority over wholesale rates and by ordering refunds of unjust and
unreasonable rates.
A discussion of market power issues must start with a recognition
of FERC's authority under existing law, and a determination of whether
existing FERC authority to address market power is inadequate.
Legislation is needed to address some issues in this area. For
example, the Administration agrees with the Chairman that legislation
is needed to clarify FERC authority to approve holding company mergers
as well as mergers and asset dispositions involving generation
facilities.
Consumer Protection
Consumer protection is another core Federal issue. Electricity
markets are regional in nature, and are no longer confined neatly
within individual States. For that reason, there is a need for
electricity legislation that: protects consumers against ``slamming''
and ``cramming,'' strengthens the bargaining power of consumers through
aggregation, protects consumer privacy, and ensures that consumers have
the information to make informed decisions to meet their needs.
Federal Electric Utilities
Another core Federal issue is defining the role of Federal electric
utilities such as the Tennessee Valley Authority (TVA) and Bonneville
Power Administration in competitive electricity markets. Obviously,
states have no authority over Federal electric utilities. Legislation
is needed to provide open access to transmission systems operated by
the Federal electric utilities and ensure that one set of rules governs
the entire interstate transmission system.
Reform of Federal Electricity Laws
There is a need to reform Federal electricity laws, such as the
Public Utility Holding Company Act of 1935 (PUHCA) and the Public
Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA,
each of the past four presidents have supported PUHCA repeal, and
earlier this year the Senate Banking, Housing, and Urban Affairs
Committee reported out legislation to repeal PUHCA by a vote of 19 to
1. PUHCA repeal is an idea whose time came a long time ago. There is
also a need to repeal the PURPA mandatory purchase obligation
prospectively.
Jurisdiction
The jurisdictional boundaries between the Federal and state
regulatory roles have blurred as the electricity industry has changed.
The Federal Power Act was enacted to fill a regulatory gap when the
Supreme Court found that states lacked legal authority under the
Constitution to regulate interstate commerce in electricity.
One jurisdictional issue is state authority to charge public
purpose fees. The Administration believes that states are in the best
position to develop public purpose programs to suit their needs. One
state may prefer to develop strong low income assistance programs,
while another may elect to encourage aggressive conservation. States
have different needs, and need the flexibility to craft programs to
suit those needs. These programs can be funded through the distribution
charges--an area where states have exclusive jurisdiction--or charges
on retail sales of electricity.
Electricity legislation can clarify the authority of states to
impose fees to fund public purpose programs that meet their needs and
avoid bypass of state fees. We believe this is a better approach than
imposing a Federal tax to fund a Public Benefits Fund. One concern
relating to a Public Benefits Fund that has not received much attention
is that of equities in allocating funds. There is no assurance that tax
revenues raised in one state to finance a Public Benefits Fund will not
be spent in other states.
By no means is this intended to be an exclusive list and there are
other issues that may be appropriate to address in Federal electricity
legislation.
conclusion
We have a rare opportunity to learn a lesson from the California
experience and act to prevent a future electricity crisis. The Congress
normally passes energy legislation in the wake of a crisis, and it is
rare for it to act to prevent an energy crisis.
Mr. Chairman, the Congress has been slowly reforming Federal
electricity laws for over twenty years. This process began with the
Public Utility Regulatory Policies Act of 1978, which the encouraged
the development of independent power producers. This process continued
with enactment of the Energy Policy Act of 1992, which provided greater
access to the transmission system and further encouraged the
development of independent power producers. The time has come for
Congress to take another step, a bigger step, one that can make
electricity markets more competitive and result in lower electricity
prices, and ample and reliable electricity suppliers.
The Administration looks forward to working closely with the
Committee to develop comprehensive electricity legislation.
I appreciate the opportunity to testify before you today.
The Chairman. Well, thank you very much, and I am aware
that you are, as you indicated, the committee--or the
administration is working on legislation which addresses many
of these same issues and we are anxious to work jointly with
you to try to come up with something that we can all be behind.
Do you have a timetable for actually getting legislation to
the committee that we would be able to consider?
Mr. Blake. We are working on that now, Mr. Chairman. I
don't have a specific timetable for you. I hope that it will be
in the near term. There's obviously a lot of coordination
within the Federal branch that is still required.
The Chairman. Just as I'm sure you are aware, we are going
to try to start a markup next week and do a section--not the
section that relates to electricity restructuring, but a
different part of the bill--of a comprehensive bill, and then
come back in September; and probably the second week, we are
back in September, go on with that markup. And so, if we had
your bill in time to be considered before that, that would be
very useful.
Do you think that Federal siting authority for transmission
lines can be meaningful without clarifying the jurisdiction
over those lines?
Mr. Blake. I think it is useful to clarify the jurisdiction
as part of that. Yes, sir.
The Chairman. So, you think we need both? We need to
clarify the jurisdiction of the lines, but we also need to vest
some authority, at FERC, for the siting of those transmission
lines?
Mr. Blake. I think your White Paper said it well on the
issue of a Federal eminent domain and the siting issue, which
is that, by itself, that doesn't solve the problem, but having
some backstop authority in the Federal Government for eminent
domain is, we believe, needed.
The Chairman. Do we need to be doing something to ensure
adequate reserve margins in order to ensure reliability of
supply? Is that something that should be addressed specifically
in legislation?
Mr. Blake. Well, I think the reliability standards that we
believe should be made enforceable, presumably, but also
address reserve margins as well.
The Chairman. We have this proposal that some sort of
regional authority, either a pooling of State authority, or
dependence on regional transmission organizations be given
siting authority with the Federal Government sort of providing
a backstop to that. Is that the right formulation as you
understand it, or as you would have us pursue it?
Mr. Blake. I think there are a number of issues associated
with the siting question.
First, is a large number of States, I believe over 25,
actually by State law, cannot consider the benefits that are
external to the State in making siting decisions. I think there
is also a role for regional planning, whether setting up a
regional structure as part of the question of siting will be
positive in that I think we are still reviewing.
The Chairman. Does FERC's authority to address market power
need to be extended to public power entities?
Mr. Blake. If I understand the question, let me phrase it
as I would understand it, which is the rate making authority
that FERC would have over power generation supplied by public
power.
The standards that FERC exercises for that are, for
example, in what I'm familiar with, which is BPA, quite
different and the standards that would apply to BPA, and I
don't think you would want to disrupt that. I think you would
want BPA's standard setting continue to be governed under the
same--on the generation side--on the same approach that it is
now governed.
The Chairman. Let me defer to Senator Murkowski for any
opening statement he has, then any questions.
STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you very much. I apologize, but I
had an earlier meeting this morning. I want to thank our
witness, who has become a regular.
I think the discussion today is certainly timely on PUHCA
and PURPA and reliability, and as you know, in the last
Congress, and from previous bills, we have pretty much covered
the issues previously, but I think it is appropriate to have
the new administration reflect their views, and as a
consequence, I want to commend Senator Bingaman and his
professional staff.
Now, I'm going to refer to the memorandum Senator Bingaman
has circulated, to some extent, in my statement, because I
think it represents, collectively, the corresponding views--my
own, as well as his. There are some exceptions.
One of the concerns involves a major shift in jurisdiction
from the States to FERC. Particularly, over retail
transmission, giving new authorization to FERC as I believe is
the intent of the chairman; and one facet focuses on the
electric power system, which, in the White Paper, proposes to
pay for social programs through a so-called public benefits
fund. As I understand the fund's purpose, is that it should
support such programs as low income assistance, research and
development efficiency, conservation investment, renewable
resource investment, universal services and other public good
programs that are left behind by the transition to a
competitive industry.
I'm going to keep an open mind on this, but I think it is a
pretty tall order to try and encompass that kind of a
responsibility on the electric power system, and I would look
forward to hearing from those representing the utility
companies and others relative to this, because, in fairness,
without actual language, it is pretty difficult to gauge the
extent of the proposal, so I just point that out, since it is
extraordinarily broad and we will see the legislative language.
But, I'm a little skeptical about increasing FERC's authority,
particularly when it comes at the expense of the States. I've
always felt that the State' politics is local, in a sense,
motivating people and Senator Bingaman and I have had
discussions on this before and we could never quite come to
grips with it. But, we will try it again.
I think events in California demonstrate how important
electricity is to our economy and our way of life. Certainly
price reliability, security, we're all aboard on that. But,
most importantly, California demonstrates the following: I
think the real folly of trying to bend the laws of supply and
demand through the heavy hand of government regulation.
California's problems are not the result of a failure to
conserve. California is the second in the Nation in
conservation. California's problems are directly traceable to
government interference in the market, in my opinion, not by
the failure of competition.
California did not deregulate. Instead, California mandated
powerplant divestiture. California mandated 100 percent
reliance on a spot market. California refused to allow cost
pass-throughs. California failed to allow new potential
powerplants and transmission launch to keep up with growing
demand. The permitting time was just abominable, and so the
experience in California makes me a bit weary of two things.
First, I do not support more government control over the
marketplace, no matter how good or politically popular it
sounds at the time. And second, I do not support a one size
fits all program. Suppose FERC had approved the California
model for the entire United States. There's a little food for
thought there.
Having stated my philosophical view, let me also observe
that, because my State is not connected to the interstate grid,
it has very little effect on my State or my constituency, so
perhaps I can claim to be somewhat, to a degree, objective on
this point.
Accordingly, I'm very interested in the views of other
members of the committee who live in States that would be
directly affected and I will note that I will have a series of
questions for the witnesses to respond to, regarding the issues
raised in the memorandum of the chairman of July 20. But, I
would simply ask the Honorable Francis Blake to comment very
briefly on the idea of giving expanded authorities to FERC in
the shifting jurisdiction from States to FERC and whether the
administration has a position on that.
Mr. Blake. Well, I think as we understand the proposal,
certainly as outlined in the White Paper, much of what's
involved there is a clarification of the jurisdictional roles.
For example, on bundled transmission rates and FERC's authority
to look at the bundled rate and then separate out the part that
is State versus the part that is interstate and Federal, I
think, in principle, we certainly agree with the notion that
States are better able to make a number of decisions, but we
also have to recognize that it is an interstate transmission
grid. There are critical concerns in terms of open access that
have to be taken into account.
Senator Murkowski. An eminent domain, I assume, is one?
Mr. Blake. We see the need for eminent domain as a
backstop, again, relying principally on the local decision
making and understanding that that is not the solution, but as
a backstop it can be helpful.
Senator Murkowski. As you know, when we introduced our
comprehensive bill on our side sometime ago, we had a good deal
of debate about eminent domain and, as ours differentiates from
Senator Bingaman, who included eminent domain. I was of the
opinion that this was an obligation of the States to step up to
reality, but I reserve the right, that if the States didn't, we
would have to go to the other extreme, and that is to include
eminent domain. So, I'm still open on that issue.
The Chairman. Thank you very much.
Senator Johnson, do you have questions of Secretary Blake?
Senator Johnson. No.
The Chairman. Senator Smith?
Senator Smith. I have no questions.
The Chairman. Senator Craig?
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Mr. Chairman, thank you. First, let me thank
you for putting out some dates to schedule a markup on a
comprehensive energy policy for our country and the work that
this committee has been underway and that you picked up and are
now carrying on. The House is doing their work, we must do our
work, and I think probably one of the more valuable debates
we'll have this year on the floor of the U.S. Senate, for the
sake of our country and its future, is an energy policy that
will finally begin to direct this country and our energy needs.
Francis, a couple of thoughts to add to the comments of the
ranking member and the chairman. I was a bit of the dog in the
manger when it came to eminent domain, recognizing that States
should be a player here, and that private property is a bit
sacred, and the Federal Government shouldn't be running
roughshod.
There are a lot of good reasons, and I understand when we
built the interstate highway system, we needed the right of
eminent domain. Let's work to see if we can't create a balance
of the State rule there. I think that's awfully important.
At the same time, we understand that the current electrical
gridding system in our country is a bunch of country roads that
kind of run together and we probably, in a truly deregulated
system, if that's where we get, do need an interstate system to
tie it all together so that marketers can, in fact, move their
product without limitation or restriction.
Speaking of transmission, one of the things that we need to
get right, and somehow we're not getting it quite right, yet,
with the administration, with OMB, is borrowing authority for
the Bonneville Power Administration. We're talking about
Oregon, Washington, Idaho, western Montana, a tie to
California; and clearly the need to modernize, as a part of a
total energy package for our country.
The country believes that all you have to do is modernize
and add new technology and we'll solve this problem. There is
some truth to that. To take a 40-plus year old system and
modernize it, as we need to do with Bonneville, and Bonneville
represents about 75 percent of the Northwest's transmission
capacity, we've got some new stuff wanting to come on line out
there, but it can't get to the consumer, because Bonneville
can't act quickly enough, or it doesn't have the resources to
do so.
As you know, we need borrowing capacity and we need the
administration to be with us on that as we move this issue, to
be able to create that kind of flexibility to modernize this
system. And that's just a piece of this greater puzzle we're
all trying to put together here called a national energy
policy, both for the publics and the privates and the national
perspective when it comes to electrical generation.
One of my frustrations, departing from the issue of
borrowing capacity now, Francis, a good example, Mr. Chairman,
of what happens when you create total national authority or
have national overriding power, insensitive, or less sensitive
to State needs. When President Clinton, in his final days here,
created a Federal order to sell power to California, what he
did was he ordered the Pacific Northwest to open its penstocks
and generate electricity out of its hydro system and, draining
a reservoir in a drought cycle when the West, especially
Oregon, Washington, and Idaho knew they were in trouble, is not
such a good move.
President Bush, when he got to town, found the need to
renew it because he really didn't quite grasp it yet, but
finally did and said we'd not renew it again, and, as we know,
the reservoir behind the great Grand Coulee Dam, Lake
Roosevelt, is now probably at the lowest it's been since the
dam started filling all these years ago.
That's what happens when there appears to be a national
interest, but you don't incorporate regional and/or State
interests in decision making processes. And while I respect the
FERC, and see its role, I'm not sure that we give it the right
of everything, or the power to bring about those kinds of
decisions in many instances, and I think the publics are
independent here and, as it relates to rate--and we need to see
it kept that way.
But, that was a policy that, from this perspective in
Washington, and inside the Beltway, sounded good, but out in
Oregon, Washington, and Idaho it was hurting us. Not that we
weren't going to get paid. We were willing to contribute to the
disaster in California. At the same time, it was creating a
future disaster for Idaho, Oregon, and Washington, and that's
what we deal with, when we look at it from a national
perspective only. States do play a role, should play a role.
Let's work on the borrowing capacity for Bonneville and see if
we can't incorporate that into the broader picture so that we
can retain and--that expanded capacity out there in a very
rapidly growing area of the county.
Francis, thank you.
Mr. Blake. Senator, thank you.
The Chairman. Senator Cantwell, did you have questions of
Secretary Blake?
Senator Cantwell. Thank you, Mr. Chairman, I would just
like to add my concern and comments to the Senator from Idaho
in regards to BPA borrowing authority and the critical nature
of that, when there's so much transmission capacity that is
currently available to us, but could be an integration of
between 8,000 and 12,000 megawatts of new supply, and yet the
administration has not been supportive of that. I don't know if
you have any comments on that or----
Mr. Blake. Senator, in comment to that question, and also
Senator Craig's comments, I have reviewed the BPA plans. This
is critically important. It is in the President's energy
policy.
As you say, there are 8 to 12 gigawatts of potential
capacity that are going to need some new transmission lines.
The view, at this time, is that BPA is adequately--has adequate
authorization, through at least '03, and that was the response
that the administration gave. But it was not at all intended to
suggest that the needed upgrades on the transmission lines,
needed upgrades on the hydro facilities--that we don't agree
with that.
Senator Cantwell. Well, but it puts BPA at a position of
not being able to plan for the future. I mean, this
infrastructure can't come on line without a commitment of the
resources, in this case, bonding and the Federal Government
putting up a commitment to that, so I'm not sure I understand
the administration's position, on one hand saying they support
it, but not coming up with the resources to back it.
Mr. Blake. It may have been more the mechanism for the
support rather than the support, because I believe the
statement of the administration's position also said, yes we
recognize that this is important, there is an analysis underway
on the spending required. It appears to be that it's covered
through 2003. To the extent more money is needed after that, we
will address it.
Senator Cantwell. I think that there's a disagreement on--I
think that a commitment of resources through 2003 is committed,
and to get new capacity on line, this new bonding authority
must be in place. So, without it, it isn't that the project is
continuing, there are other things where those resources are
committed, so we're obviously, in the Northwest, very
concerned, given the impacts that my colleague from Idaho----
Senator Craig. Will the Senator yield?
Senator Cantwell. Yes.
Senator Craig. I think the concern we're talking about
here, Francis, in the overall picture, if we're looking at 5-
year construction projects, how do you commit to a long-term
plan when you only have a couple of years worth of authority?
And my guess is the perspective there is--yes, there is short
term availability and short term needs and short term
capability, but there's not long term capability for extended
construction programs of the kind we're talking about.
Mr. Blake. I understand that concern.
Senator Cantwell. And I would just add that I think your
putting the rate payers in the Puget Sound area and other parts
of Washington who've seen 50 percent rate increases--I mean,
you're basically telling them that, within the Department of
Energy, you don't agree on the budget assessments of one of the
groups within that agency, and so what we'd like to see is OMB
and the Department of Energy sit back down with Bonneville and
come to conclusion on what the transmission needs are for the
future, that we'll get this power on line and make the long
term commitment, and Mr. Chairman, I hope that as we go through
our process on the energy bill, that we take a very close look
at this and what we need to do to make sure that this message
is clear about getting more transmission capacity on line in
the Northwest.
The Chairman. Thank you very much.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Mr. Blake, it seems to me that we have all these issues and
so on, but we don't seem to have yet developed an overall
picture of where we want to go. It would seem to me that it
would seem like we need an interstate grid of some kind,
probably with the RTOs attaching to that, but we don't seem to
focus on that. We get all diverted into different kinds of
things. But if that's where we're going, it seems to me that
that's one of the things that we really need to look at. And
your testimony here indicates you want incentives for building
transmission. Now do you think that lends into an overall plan?
Mr. Blake. I think when you think about transmission issues
you have basically three issues: access, siting, and pricing.
The access issue is largely addressed by FERC. The siting issue
we've been discussing in terms of the backup of Federal eminent
domain. And then pricing, incentive based rates, as indicated
in the President's policy, we think is very important to
incentivize the----
Senator Thomas. I'm sure it's very important. I don't agree
with that. It seems to me like that's just working with what we
have. That's just dealing with the current situation. And we've
got to do better than that. We've got to look for some kind of
a system, probably with a third party operator, with some kind
of a national grid, which is a little different than we have
not.
I mean we're wondering why people haven't invested. Well,
they haven't invested because they don't know where we're
going, they don't know where we're going to be. There's not
investment in generation because we've talked about re-
regulation and so on, but we have pretty much decided that
wholesale power is going to be deregulated and we're going to
be buying it all over. We've got more market generators now
than we do for their own system, but we don't have a system to
transmit it. And it seems to me we'd be thinking in just a
little broader sense than what we're doing here.
And, in fact, you say here that the President's policy has
said to the Department we want legislation from you, but I
don't think we're going to get there by simply continuing to
look at where we already are and making little bitsy things. Do
you have a broad plan?
Mr. Blake. We are also, as directed by the President, doing
an overall transmission study that I think is addressing
exactly the point that you were raising, which is going to look
at where the constraints are in the system now, what we need to
do to address those constraints, and move towards a more
effective national system. I would still say parts of the
answers are in the legislation you're considering on access
issues and siting issues and pricing issues.
Senator Thomas. I think it's fairly clear we've made some
changes in generation. If you're going to have that kind of
generation and encourage people to build generation facilities
to put it in the market, you got to have a way to get it there.
You talk about California and Washington all the time. Well,
you can make power, but there's no way to get it there. And I
don't think we want to have a national system that does
everything but we ought to have a national responsibility for
an interstate system that ties into RTOs that are run locally.
Isn't that the concept that we want to pursue?
Mr. Blake. Senator, I think we're going to take a national
look and we're going to--but I don't think there's any intent
at this point to move more broadly than beyond the RTOs, the
regional transmission organizations that the parties----
Senator Thomas. How do you--I don't understand how you can
defend that. If you're moving power, how can you just deal with
RTOs and talk about a national grid?
Mr. Blake. I think RTOs themselves are going to be--moving
to a regional organization will be a challenge in itself before
taking the next step and moving to a national organization.
Senator Thomas. I'm not sure I agree with you. I'm not sure
that's the next step. If you're going to be talking about
shortages of power in different parts, like the Northwest, then
the RTO isn't the answer. You got to move stuff often within
the RTOs. Well, I'd just urge you to take a broader look and
just kind of--rather than stand where we are, which is where I
sense you are.
The Chairman. Senator Bayh, did you have questions of
Secretary Blake?
Senator Bayh. Thank you, Mr. Chairman. Just a few brief
comments. Just a few brief comments, Mr. Secretary Blake, and
then two brief questions, Mr. Chairman.
First, Mr. Chairman, I'd like to salute you for your
leadership on this very, very important issue of electricity
restructuring and the energy issue in general. It's one of the
few issues that in Congress we'll address that affects every
consumer and every home across our entire country.
It's also going to be vitally important to our economic
competitiveness. As we look at those overseas with whom we
compete and what they're doing in their energy markets, it's
important that we stay up ahead of the curve with regard to our
own electricity efficiency and production capabilities to
insure affordable and reliable energy sources for our
industries and producers across our country.
Finally, I'd just point to the savings. The estimates have
varied anywhere from 20 billion to several tens of billions of
dollars more than that for both residential customers and
business customers, possibly achieved through electricity
restructuring. That is of the same magnitude as the tax cut
that was recently enacted and could do a lot to help spur our
economy.
For all these reasons, Mr. Chairman, I salute you for your
leadership. I am a strong proponent of electricity
restructuring. I believe that in the long run markets are more
likely to deliver the outcomes that we seek in a highly
regulated structure, but of course we have to have safeguards,
as the recent experience in California has demonstrated. We
have to make sure that we not just do it, but do it correctly,
learning from both our experience and our mistakes. But the
recent experience in California, we might say the recent
mistakes in California, should not dissuade us from going
forward and getting it right for the entire country for the
economic competitiveness benefits to be accrued, as well as the
savings to consumers across the board.
Mr. Chairman, I look forward to working with you on this
important issue. It's something that I think could benefit our
country if done correctly for a long, long time to come. It's
one of these few once in a generation opportunities we have,
and I thank you for your leadership. I had a chance to briefly
review the White Paper. I think it's an excellent starting
point and I commend you for your work in that regard.
Two very brief questions, Secretary Blake. I noticed in
your testimony you say the administration believes it's
essential that Congress pass comprehensive electricity
legislation, and that the National Energy Plan in fact calls
for this also. Will the administration be sending us a
proposal?
Mr. Blake. We are working on legislative language now, as I
mentioned, to the chairman. It is going through the process.
We'll have an internal review process within the
administration. And I hope that we will have something----
Senator Bayh. Do you have a time frame for us?
Mr. Blake. I don't, but I--the chairman just gave us a time
frame.
Senator Bayh. Good. Well, it's--I endorse the chairman's
time frame. How about that, Mr. Chairman?
Finally, my last question. It's a rather small item, but
when Secretary Abraham was before us I asked and I followed up
with a letter; this was back in June; asking if he could update
us on the Department's review of energy efficiency programs. I
know you all have a lot going on over there, but now that we've
confirmed a legislative liaison I would respectfully ask that
perhaps that letter could be responded to and we could get an
update on the review of the efficiency programs. Many of us
believe that that's an important component of comprehensive
energy strategy. So if you could put that somewhere on the list
for our new----
Mr. Blake. We will get an immediate response to you, and
the review is underway.
Senator Bayh. I couldn't ask for more than immediate. So I
appreciate that very much, Mr. Blake. Thank you for your
presence today.
The Chairman. Senator Hagel.
Senator Hagel. No questions.
Senator Burns. If the Senator could hold, could I just ask
to cast my vote in favor of the nominee.
The Chairman. We will have the record show that you favor
the nominee.
Senator Burns. And I have a statement for this hearing and
I'm going to go back to another hearing. And I think that you--
--
The Chairman. We'll include your statement and we
appreciate your attendance.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
Mr. Chairman, thank you for calling this hearing today. Since the
Energy Policy Act of 1992, legislation dealing with the structure of
our electric utility industry has barely seen the light of day. Even
more significant is that legislation opening up some of our nation's
most significant supply sources to production didn't see the ink of the
President's pen in the eight previous years. I'm hopeful that today we
can focus this debate on what needs to be done in this Committee to
prepare for electric restructuring.
There are obviously issues that arise when we discuss the Public
Utility Holding Companies Act (PUHCA) and Public Utility Regulatory
Policies Act (PURPA), many of my-constituents and I have serious
concerns with the proposal to place Rural Electric Cooperatives and
public power providers under FERC jurisdiction.
The members of this Committee have heard me say this before, but I
think it particularly applies to today's hearing on electricity
restructuring. We cannot have a significant federal deregulation or
restructuring bill until we have the transmission grid available to
support it. If we truly want to address the long term energy needs of
this country, and truly want a more competitive market, transmission is
the first issue for Congress to deal with.
Over the next ten years, demand for electric power is expected to
increase by about 25 percent, and more than 200,000 megawatts of new
capacity will be required. Under current plans, electric transmission
capacity will only increase by four percent.
California may think they can escape the need for building new
transmission lines, by instead building plants closer to the source.
However, I've heard that in one year of the high fuel costs paid this
past year, the fuel costs alone would have paid for the transmission
lines.
Our large energy deposits are located great distances from urban
centers where the electricity is needed. Urban areas are continuing to
expand geographically thus making it difficult to build high capacity
generation plants near the areas of high demand. Furthermore, the
environment around and near populated areas cannot sustain even the
cleanest of new high capacity power plants in their air emissions.
Strategically, our nation is the most dependent upon its electrical
distribution system. Several nations and non-state actors are actively
considering this dependency for possible targeting of asymmetrical
warfare/terrorist tactics. The lack of diverse interstate transmission
networks raise the likelihood that a natural or man-made event could
deprive electricity to major sectors of our nation for days or even
weeks.
These challenges and national security interest can all be
satisfied by increasing our nation's high capacity interstate electric
transmission network. We can bring life to the economies of rural
western states by creating energy at the mine-mouth. In addition, we
will provide energy for the economies of the larger cities without
adding to the stresses of urban sprawl. The safety of each and every
American will also be in mind when we make our electricity
infrastructure less vulnerable to terrorist attack.
It's a very simple choice here folks. To my friends representing
rural America--it means jobs and tax revenues for schools. To my
friends representing inner cities--it means cleaner air and a reliable
energy supply for business. To all of us, it means a stronger American
economy and energy infrastructure safer from terrorist activities.
The Chairman. Senator Hagel had no questions.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, I'm in the same situation as
Senator Burns. I have a Commerce Committee hearing going on and
I'm trying to get to several places, and I regret that I missed
Secretary Blake's presentation.
This is, in my judgment, one of the most important elements
of an energy policy. We have the capacity in our State, for
example, to produce a substantial amount of additional energy
using late night coal, especially wind energy potential as
identified by the Department of Energy, but if we can't find
ways to transmit that energy and move that energy, its
production is irrelevant to the rest of the country. So
transmission issues are critically important. And I appreciate
this hearing and your leadership, Mr. Chairman.
Let me ask, Mr. Blake, you were discussing the RTOs
earlier, I believe with Senator Thomas. What is the
administration's position on the reliability language that a
number of organizations have developed and has been kicking
around legislation here? Do you have--are we pretty much agreed
on reliability language, do you think?
Mr. Blake. We support enforceable reliability standards. I
think we'd want to work with the committee on the particular
language in the legislation.
Senator Dorgan. You will obviously provide us----
Mr. Blake. Yes, sir.
Senator Dorgan [continuing]. The discussion about the
language that you want to work with us on?
Mr. Blake. Yes, sir.
Senator Dorgan. Let me ask you about the issue of
technology and transmission. I mean there are a couple ways to
enhance transmission capabilities. One is to build additional
lines; the other is to upgrade lines; the other is to invest in
new technology, composite conductors and so on. Tell me your
evaluation of technology being able to substantially address
some of our transmission issues.
Mr. Blake. There is some very interesting technology that's
under development that will improve both the throughput of the
lines, allow additional capacity on what we already have. That
has a lot of advantages very obviously, and we're working to
fund a number of those technologies.
Senator Dorgan. What is the most promising, do you think?
Mr. Blake. Well, there is--super conductivity is one area.
I'm aware of another area that I think is being worked on in
the Northeast that involves basically moving from analog
switching to digital switching on the transmission lines, which
will allow a dramatically increased throughput on the line. And
that that's under--it's actually in testing now in New York
State, I believe.
Senator Dorgan. I wonder if you--if I might, Mr. Chairman,
ask Mr. Blake to have your technical people provide the
committee with their assessment of the potential of these
technologies, what you're looking at, how much money you're
investing in them, and the work that's going on. I think that
would be helpful to us.
Again, Mr. Chairman, I regret not being able to be at the
entire hearing because of the Commerce Committee hearing, but I
think this is a critically important issue and I look forward
that we can work together on this committee to address it.
Thank you.
The Chairman. Thank you very much.
Secretary Blake, thank you very much for testifying again
today, and we will allow you to leave and call panel 2 forward
please.
Let me introduce this panel. It's a very distinguished
panel. We appreciate them being here.
Mr. Jeffery Ayers, who is senior vice president and general
counsel for Aquila, Inc., which is located in Kansas City,
Missouri.
Mr. John Rowe, who is a--not a frequent testifier here, but
one that we always welcome. He is the co-CEO and president of
Exelon Corporation in Chicago.
Mr. Roy Thilly, who is the chief executive officer,
Wisconsin Public Power. Thank you for being here.
Mr. Glenn English, thank you very much for being here. He's
the chief executive officer for the National Rural Electric Co-
op Association.
Why don't we just go across the table in the order that I
introduced you there and if you'll take 5 or 6 minutes and
summarize your main points. We would include the full
statements you have prepared in the record.
STATEMENT OF JEFFREY D. AYERS, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, AQUILA, INC.
Mr. Ayers. Mr. Chairman, Senator Murkowski and members of
the committee, my name is Jeff Ayers. I am the senior vice
president and general counsel for Aquila, Inc. based in Kansas
City, Missouri. Aquila is a provider of risk management, a
developer of powerplants, and a wholesale supplier of
electricity, natural gas and coal in North America and Europe.
I'm here today representing Aquila and the member companies
of the Electric Power Supply Association, or EPSA, the National
Trade Association, representing competitive power suppliers,
including independent power producers, merchant generators and
power marketers.
Mr. Chairman, we commend you for your far-sighted White
Paper. It provides a strong template for a national
transmission policy.
While we addressed many issues in our written testimony
which I would like to submit for the record, I would like to
concentrate my comments on the following three key points that
are critical for the development of a sound national
transmission policy.
First, FERC oversight for the electric transmission grid
must include all owners of interstate transmission assets.
Second, a clear deadline for all transmission owners,
including non-FERC jurisdictional owners to join regional
transmission organizations must be set.
Third, uniform interconnection rules for new sources of
power supply must be adopted.
Unless a sound national transmission policy develops, Mr.
Chairman, I can assure you that private capital will not
provide the $56 billion that a recent EEI study estimated is
necessary for transmission upgrades and investment in the
current decade. The interstate transmission grid is the
lynchpin of our national electricity infrastructure. In order
to attract private capital to fix our national transmission
system, the structural defects in the wholesale market must be
cured. This magnitude of capital investment will require a
consistent FERC-led approach throughout the Nation and
innovative incentives.
Regarding my first point, FERC oversight must cover all
owners of interstate transmission assets, regardless of whether
private companies, public power, cooperatives, or the Federal
Government hold these transmission assets. The industry needs
clear and consistent rules that apply to all owners of
transmission assets to insure a fair and even playing field.
Second, Congress must set a clear deadline for all
transmission owners, including currently non-FERC
jurisdictional owners, to join RTOs. We are supportive of the
White Paper's call for legislation to support FERC's authority
to order transmission owners to join RTOs. We also support
FERC's recent effort to organize large, regional RTOs that
reflect the way power flows. Pricing for transmission should
prohibit multiple charges as power flows from one transmission
system to the next, commonly known as pancaking. And each use
of the transmission grid must be required to take service under
a single open access transmission tariff.
Regarding my third point. The power industry must have
clarification of interconnection rules for new sources of power
generation. We cannot overemphasize how important this issue is
for investment and construction of new generation. For
companies interested in expanding electric generation capacity
which is critical to expanded supply throughout the country,
the physical interconnection of the generation plant to the
power grid has become too often a choke point for project
development. Ad hoc interconnection standards create
uncertainty, extensive delays, and unexpected or unreasonable
costs for developers. We need to assure the right of new
generation to interconnect on a nondiscriminatory basis to
transmission facilities. We must provide a clear avenue for
FERC review of interconnection policies.
Federal legislation should require FERC to promote
competitive markets by providing clear, consistent rules
applied evenly to all market participants. This committee began
addressing open wholesale electric policy in 1978 with PURPA,
and in 1992 with EPAct. It is now time to finish what was
started a quarter century ago, creating a national grid under
FERC oversight for the open, nondiscriminatory movement of
wholesale power. The result will be a reliable, affordable
supply of electricity that fosters the creation of new
technologies and attracts the necessary private capital for
infrastructure that insures a robust marketplace for the
future.
Thank you. And I would be happy to answer any questions.
[The prepared statement of Mr. Ayers follows:]
Prepared Statement of Jeffery D. Ayers, Senior Vice President
and General Counsel, Aquila, Inc.
Mr. Chairman, Senator Murkowski and members of the Committee, my
name is Jeffrey Ayers. I am the Senior Vice President and General
Counsel for Aquila, Inc. (NYSE: ILA). Based in Kansas City, Missouri,
Aquila is a provider of risk management services including weather and
plant outage protection, and a wholesale supplier of electricity,
natural gas and coal in North America as well as a developer of power
plants. It also provides wholesale energy services in the United
Kingdom and continental Europe. Aquila is an 80% owned subsidiary of
UtiliCorp United (NYSE:UCU), an international energy company with more
than 4 million customers across the U.S. and internationally.
I am here today representing Aquila and the member companies of the
Electric Power Supply Association (EPSA). EPSA is the national trade
association representing competitive power suppliers, including
independent power producers, merchant generators and power marketers.
EPSA members provide reliable, competitively priced electricity from
environmentally responsible facilities in U.S. and global power
markets. On behalf of the competitive power industry, I thank you for
this opportunity to respond to legislative proposals to address
electricity markets.
We believe that the keys to a secure energy future are well-
functioning, competitive energy markets and a national infrastructure
that is robust and efficient. While EPSA's vision of the future
ultimately demands a national, competitive retail market for
electricity, there is a broad consensus that additional federal action
is needed today to promote truly competitive wholesale power markets,
and your white paper provides an outstanding set of principles upon
which to draft legislation for federal policy.
One of the crucial lessons from the electricity crisis in the
Western states is that no market can function without adequate supply
or without transmission policies--the ``rules of the road''--that are
fair and consistent to all market participants. Appropriate reform of
the regulatory framework that governs the interstate transmission grid
is essential to ending the crisis in the West and avoiding these same
pitfalls elsewhere.
Competitive power suppliers stand ready to commit hundreds of
billions of dollars of private sector investment to increase the supply
of electricity. This new investment in efficient, cleaner technologies
is desperately needed not only in the West, but nationwide. Since 1990,
the competitive power supply industry has accounted for more than half
of all the power generation capacity brought online in this country,
and we expect this percentage to increase as competitive wholesale
markets develop.
More and more, however, EPSA companies view their investment
decisions as contingent upon the continued development and regulatory
reform of the interstate transmission grid. I can also assure you, Mr.
Chairman, that the financial community will not provide the $56 billion
that EEI estimates is necessary for transmission upgrades and
investment in the current decade, unless reform occurs. This magnitude
of investment will require a consistent, FERC-led approach, throughout
the nation, and innovative financial incentives. In addition, even with
new generation supply, there will be no long-term remedy to the
situation in the West and elsewhere without critical changes to
transmission regulatory policies and expansion of the interstate
transmission grid.
Federal energy policy must recognize power flows from state-to-
state and region-to-region on a regular basis. The interstate
transmission grid is the linchpin of our electricity infrastructure and
regulation of that grid needs to be uniform, predictable and capable of
fostering regional and national wholesale power markets. Although I
will comment on a wide range of policies outlined in the White Paper,
we will focus much of our attention on proposals to reform and improve
the regulation of the interstate transmission grid.
transmission jurisdiction
Clarification of Federal/State Authority over the Interstate Grid
We agree that the division of authority between state and federal
regulatory organizations must be clear and consistent, and cannot be
allowed to Balkanize the wholesale power market. Today, there is too
often ambiguity as to whether a transmission asset lies within state or
federal jurisdiction. While a state role in retail markets should be
maintained, more uniform and efficient regulation of the interstate
transmission grid--with consistent, predictable regulatory oversight at
the federal level--is essential.
As the White Paper makes clear, these rules must cover all owners
of interstate transmission assets, regardless of whether these assets
are held by private companies, public power, co-operatives or the
federal government.
Assurance of a Robust Interstate Transmission Grid
The White Paper affirms FERC's authority to order utilities to join
Regional Transmission Organizations (RTOs). We are supportive of FERC's
recent bold step to organize large, regional RTOs to reflect the way
power flows. FERC's action was a very important step, but we urge you
to go further. The transmission system is sporadically open to
competition, and barriers to new plant development are slowing the
infusion of critical investment for increased generation supply.
Congress must set a clear deadline for all utilities to join Regional
Transmission Organizations (RTOs). RTOs should be large and conducive
to competition. Pricing for transmission should preclude ``pancaking''
(multiple charges as power flows from one transmission system to the
next), and each use of the transmission grid must be required to take
service under a single open access transmission tariff. Also, Congress
should also explicitly require currently non-FERC-jurisdictional
entities that own interstate transmission assets to join RTOs.
Standardized Interconnection to the Transmission Grid
The White Paper endorses a clarification of interconnection rules
for new sources of power generation. We cannot overemphasize how
important this issue is for investment and construction of new
generation. For companies interested in expanding electric generation
capacity (critical to affordable power rates throughout the country),
the physical interconnection of the generation plant to the power grid
has become too often the ``choke point'' for project development. Ad
hoc interconnection standards create uncertainty, extensive delays and
unexpected or unfair costs for developers. Legislation needs to affirm
the right of new generation to interconnect on a non-discriminatory
basis to transmission facilities, provide a clear avenue for the
federal review of interconnection policies, and establish a timely
remedy, if necessary, for any abuse.
We will comment briefly on the remaining policy proposals of the
White Paper:
reliability
We support establishing a national framework for electric grid
reliability that will assist, not impede, the growth of robust,
competitive power markets. EPSA has been an active participant in the
NERC ``consensus'' process. We are engaged today in an effort to update
the legislative proposal from last Congress and hope that this effort
will succeed. A national self-regulating reliability organization must
have adequate representation from all segments of the industry, be
consistent with existing and future market structures, and be subject
to federal oversight.
rates and market power
Federal legislation should require FERC to promote competitive
markets by providing clear, consistent rules applied evenly to all
market participants--and addressing any abuse of market power. EPSA
believes strongly that the development of a pro-competitive framework
for transmission regulation and the adoption of reforms identified
earlier in this statement will go far towards reducing the risks of
abusive market practices and protecting electricity consumers. In
addition, market participants should be encouraged to use risk
management mechanisms, such as long-term contracting, to reduce their
exposure to price volatility. The California experience has
demonstrated the effects of a prohibition of basic risk management
tools.
regional planning and siting
Expansion of the interstate transmission grid must occur in a
timely fashion and fully reflect the best interests of the whole
region. Siting issues remain an enormous roadblock to critically needed
facilities. Any transmission expansion provision should encourage the
construction and siting of much-needed transmission lines and ensure
that costs are fairly borne by all users of transmission. We reiterate,
however, that additional transmission assets and an expanded
transmission grid will do little to prevent future bottlenecks if there
is no concomitant regulatory reform of this same grid.
other provisions
PURPA--If PURPA is amended as part of a comprehensive
federal electricity bill, there must be explicit recognition
and preservation of existing PURPA contracts. We also endorse
your efforts to guarantee the recovery of PURPA contract costs
as appropriate federal policy. However, such cost recovery must
be explicitly related to the honoring of existing contracts.
Moreover, EPSA urges the repeal of the ownership restrictions
on PURPA Qualifying Facilities (QFs). In 1992, the Congress
placed no such restrictions on Exempt Wholesale Generators
(EWGs) and the time has come for similar treatment for QFs.
PUHCA--EPSA supports the repeal of PUHCA as part of
comprehensive federal legislation.
Public Benefits Fund--If a Public Benefits Fund is included
in federal legislation, its costs and benefits should be
allocated so that no market participant is favored over any
other. We would urge you to avoid a provision that places the
costs of such a fund solely on generators. Given that some
generators operate pursuant to long-term contracts, it is not
clear that the costs of such a fund will have a balanced and
fair impact on all sources of generation and operators. If the
Committee endorses a Fund, its costs should be truly non-
discriminatory.
Renewable Energy--Renewable energy plays a vital role in
energy markets today and this role will increase in the future.
EPSA believes that federal legislation should recognize the
value of fuel diversity and continued investment in a broad
range of energy resources. The full range of renewable
technologies, including solar energy, wind, landfill gas,
biomass, geothermal and waste-to-energy should be supported in
any renewable provisions. EPSA has also endorsed the extension
and expansion of tax credits for renewable power resources.
Tax Provisions--The White Paper identifies a number of
changes in tax law that are important to the development of
competitive markets. Federal legislation is also needed to
resolve uncertainties associated with the tax treatment of
assets associated with interconnection. Although tax issues are
not under the direct purview of your Committee, one issue
(referred to generally as ``Contributions in Aid to
Construction'') should be addressed in federal electricity
legislation. IRS policies since 1988 have generally held that
interconnection costs should not be classified as income to a
utility. However, the IRS is now studying this issue and has
opened the door to possible revisions in this policy. This, in
turn, has caused significant financial uncertainty for our
members who make the investments in capital necessary to
establish interconnections and to build power plants. The
Energy Policy Tax Act of 2001 should be amended to clarify that
the costs of interconnection, which are essential for power
plant developers to supply power to the electric grid, should
not be treated as taxable income to transmission owners.
Treating the costs of interconnection as income to the
transmission owning utility increases the cost of connecting to
the transmission grid and impedes construction of new
generation. As a consequence, electricity consumers face higher
costs, whether due to shortages of available electricity or
higher tax bills to new plant developers.
EPSA appreciates this opportunity to provide you with comments on
the White Paper. We applaud your leadership on this matter, and
appreciate all the time and energy that the Committee has dedicated to
this matter over the past few years. We believe that appropriate
federal legislation can finish the job that this Committee began in
1978 with PURPA and in 1992 with EPAct to create a national grid under
FERC oversight for open, non-discriminatory movement of wholesale
power. This action is necessary to ensure a reliable, affordable supply
of electricity, to foster the creation of new technologies, to attract
the necessary capital for this infrastructure and to ensure a robust
marketplace for the future.
The Chairman. Thank you very much for your testimony.
Mr. Rowe, why don't you go right ahead with your comments.
STATEMENT OF JOHN W. ROWE, PRESIDENT AND CO-CHIEF EXECUTIVE
OFFICER, EXELON CORPORATION, ON BEHALF OF THE EDISON ELECTRIC
INSTITUTE
Mr. Rowe. Thank you, Mr. Chairman.
I'm delighted to be here today and am pleased that you are
continuing the tradition of this committee in active
involvement in these very important issues. My company serves
about 5 million retail customers, principally in Illinois and
Pennsylvania, but we have generation investments in most parts
of the country and are involved in issues of transmission
access in both parts of the--in most parts of the country.
I am submitting prepared testimony today on behalf of the
Edison Electric Institute, of which I am the past chairman. In
that written testimony I comment on the White Paper which you
released recently, which in my opinion is a very accurate
summary of the issues we're dealing with on the proposed S. 388
and on the Cheney task force report.
In my opinion, you and your colleagues here have a set of
issues which are of very great importance, a set of problems to
solve which are sometimes painful to address, and a set of
opportunities which are large indeed. For as I cautioned
members of my industry, we are dealing with issues like energy
supply and energy conservation and environmental effects which
involve investments of tens or scores of years and which
involve effects on reliability and the economy and the
environment of tens or scores of years. And in that context,
there is simply no alternative to seeking a broad, bipartisan
energy policy.
We have been greatly fortunate in this country for most of
the past two decades in having plentiful, cheap natural gas and
improving technologies to burn it. They have allowed us to put
off some of the difficult issues which face us all. We cannot
continue to put off those issues, however. The supply issues,
the jurisdictional issues, the environmental issues must be
addressed to the best of this committee's capability, and of
course to the best of folks like the rest of us capability in
both contributing to your decisions and in acting upon them.
I believe we ought to start with supply, for we all fool
ourselves if we think there are any substitutes for adequate
supplies. No system of regulation, no system of jurisdiction
will work if we don't have adequate supplies to start with.
Natural gas has been, as I have said, the fuel of choice for
new electric generation due to its favorable economics and
environmental qualities. And I commend many of you for the work
you've done on making natural gas more available, and
particular Senator Murkowski on his constant work in this
regard. But as we have seen from the vicissitudes of the
marketplace in the past 6 months, we cannot rely on natural gas
alone.
We must have stable policies for nuclear power and for
coal. I strongly believe that this Nation must live up to its
commitments to build a permanent waste repository for nuclear
fuel; and I certainly hope Congress will choose to extend the
Price Anderson Act, which are the two key activities in the
nuclear area.
In the coal area, I submit respectfully that more work
needs to be done with respect to environmental standards for
existing coal fired powerplants. EEI is actively negotiating
with members of the environmental community on proposals to
present to all of you. I also believe that the combination of
the President's action on the proposed Kyoto Accord (phonetic)
and the recent concessions made in Europe with respect to the
treatment of sinks for carbon dioxide create a climate in which
this committee can begin to address the CO2 issue on
a long-term basis.
With respect to transmission, we believe that we must
continue to encourage RTOs, that we must have reliability
standards, and that we must have favorable tax treatment for
the transmission of the--for the transition of transmission
assets to such RTOs. Chairman Bingaman, your White Paper is
very helpful in this respect.
We, of course, believe that PUHCA and PURPA must be
repealed, but we also believe that in a time when energy
remains intensely regulated we are not getting true free market
decisions in the development of energy conservation. Thus, we
at my company support a broad range of energy efficiency
standards. The EEI and our company support the proposals which
have recently passed the House Energy & Commerce Committee and
the House Ways & Means Committee. We believe that requiring new
buildings and new appliances to have state-of-the-art energy
efficiency technology is important.
In sum, we respectfully ask this committee to grasp these
hard issues and to formulate rules in which the marketplace can
continue to evolve to provide both a more reliable supply and a
cleaner supply of energy for your constituents and our
consumers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Rowe follows:]
Prepared Statement of John W. Rowe, President and Co-Chief Executive
Officer, Exelon Corporation
Mr. Chairman and Members of the Committee:
My name is John W. Rowe. I am the President and Co-Chief Executive
Officer of Exelon Corporation. Exelon, formed last year by the merger
of Unicom Corporation and PECO Energy, is headquartered in Chicago,
Illinois. We serve over five million customers principally in Illinois
and Pennsylvania, which have both restructured their electricity
markets.
I am testifying today on behalf of the Edison Electric Institute
(EEI), which is the association of U.S. shareholder-owned electric
utilities and industry affiliates and associates worldwide. We are
pleased to have the opportunity to testify before the Committee on the
development of a comprehensive national energy policy. My testimony
today includes comments on Chairman Bingaman's recently released White
Paper on Electricity Legislation which includes a comprehensive
legislative proposal, as well as S. 388, the ``National Energy Security
Act of 2001,'' S. 597, the ``Comprehensive and Balanced Energy Policy
Act of 2001,'' and the Administration's National Energy Policy
Development Group (NEPD Group) Report, released on May 17 (the ``Cheney
Task Force Report'').
The electricity industry is in the middle of a sometimes painful
transition from an industry composed of highly regulated integrated
utilities with monopoly service territories and cost-based pricing, to
an industry with competitive power generation markets, market-based
pricing and a wide diversity of market participants. New institutions
are emerging, such as regional transmission organizations. It remains
our firm belief that market-oriented restructuring of the electric
industry remains the best opportunity we have to provide consumer
benefits and to develop reliable new sources of supply. We must work
together to make competitive markets work.
To accomplish the goal of a competitive market-oriented electricity
industry, EEI strongly supports passage of a comprehensive national
energy policy that achieves the following objectives: (1) assures a
stable and diverse supply of fuel sources, consistent with responsible
environmental goals; (2) facilitates the ability of utilities and other
generators to build adequate, competitive generation to meet consumer
demand; (3) enables regional transmission organizations (RTOs) and
other transmission-owning utilities to expand the Nation's transmission
grid; (4) enhances energy efficiency and conservation initiatives; and
(5) helps protect lower income consumers.
We are pleased, Mr. Chairman, that you have announced your
intention to ask the Committee to consider comprehensive legislation
designed to ensure the integrity of our Nation's electricity supply
infrastructure. While EEI has not had an opportunity to develop a
detailed position on the White Paper on Electricity Legislation which
you released last week, Mr. Chairman, I feel safe in saying that most
utility executives that I know would support your effort to enact a
comprehensive proposal.
Let me highlight each of the objectives we believe should form the
basis for comprehensive legislation.
(1) assure a stable, diverse supply of fuels
Maintaining a diversity of fuel supply options is essential for
affordable and reliable electricity. No individual fuel is capable of
providing the energy required to meet all of our Nation's electricity
demands. Policy makers and regulators should work together to maximize
the development and viability of all our fuel sources. And, they should
reconcile conflicting energy, environmental and other public policy
goals.
Right now natural gas is nearly always the fuel of choice for new
generation. That is unlikely to change soon. But, gas prices rose to
painfully high levels in recent months and may do so again. A sustained
change could affect the economics of the fuel choice for new
generation.
We must enable the continued operation of our nuclear fleet by
completing a permanent spent fuel repository and by renewing the Price-
Anderson Act.
Given President Bush's rejection of the Kyoto accord, it is
appropriate for this Committee to reexamine what this Nation's policy
should be on a going forward basis. Many of us--including myself and my
company--believe it is time for the federal government to limit
CO2 in a ``no regrets'' way. I also believe that we need to
revisit the standards for SO2, NOX, and mercury
so that decisions on life extensions for existing coal-fired plants can
be made on a sound economic basis.
(2) assure adequate, competitive electricity generation
Rapid economic growth, combined with the increasing electrification
of our homes, businesses and industries, has strained our energy
infrastructure. Between 1995 and 1999, U.S. electric demand increased
by 9.5 percent, while total electricity generation additions rose by
only 1.6 percent. This has resulted in a decline in utility reserve
margins.
The dramatic increase in electricity prices we have seen in
California is proof positive of what happens when capacity does not
keep up with demand. Responsible public officials must support the
siting and construction of generating facilities to ensure reliable and
adequate electricity supplies; otherwise consumers will pay a very high
price.
Congress can facilitate the availability of adequate generation by
removing federal roadblocks that hinder development of sufficient and
affordable generation capacity. These barriers include the Public
Utility Holding Company Act (PUHCA) and the Public Utility Regulatory
Policies Act (PURPA).
Public Utility Holding Company Act
Comprehensive national energy legislation should repeal PUHCA.
PUHCA repeal is included in the Chairman's White Paper, in S. 388, and
in the Cheney Task Force Report. The Securities and Exchange Commission
(SEC), which administers PUHCA, also calls for PUHCA repeal. Clearly
there is a consensus in favor of PUHCA repeal.
PUHCA is an outmoded 1935 statute that acts as a barrier to
competition. PUHCA restricts the flow of capital into new generation
and limits the number of new suppliers in electricity markets by
prohibiting exempt wholesale generators from selling directly to retail
consumers. PUHCA also acts as an impediment to the formation of RTOs--a
problem I will discuss in greater detail later.
Public Utility Regulatory Policies Act
Comprehensive national energy legislation also should repeal
PURPA's mandatory purchase obligation, protect existing contracts and
provide for the recovery of federally mandated (``FERC'')
jurisdictional PURPA costs. Again, repeal of PURPA's mandatory purchase
obligation is included in the Chairman's White Paper, in S. 388, and in
the Cheney Task Force Report. Clearly there is a consensus in favor of
repealing PURPA's mandatory purchase requirements.
PURPA has failed to achieve one of its primary goals, to encourage
the development of renewable energy resources. Even though PURPA was
enacted 23 years ago, only 2 percent of the electricity generated in
this country is from non-hydroelectric renewable energy resources.
PURPA is also anti-competitive and anti-consumer. PURPA's mandatory
purchase obligation forces utilities to purchase power they may not
need at above-market prices even when more efficient and less expensive
generating resources are available. As a result, utility consumers pay
more than $8 billion a year in above-market electricity prices.
Distributed Generation/Net Metering
Distributed generation involves the use of small generation
facilities built at customer locations to serve some or all of a
consumer's energy needs, which also can deliver surplus power to the
distribution network. Distributed generation is becoming a viable
option to meet consumers' electricity needs. This is especially true
for consumers who can use distributed generation to hedge against price
volatility, those who place a premium on reliability and power quality
and for consumers who are in isolated, hard-to-serve areas.
Recognizing the growing utilization of distributed generation
facilities, EEI's member companies have been working with proponents of
distributed generation to reach a compromise on legislation that will
facilitate the interconnection of distributed generation to the grid
while addressing issues relating to jurisdiction, backup power
requirements and cost recovery. Again, the Chairman's White Paper
recognizes the need to develop interconnection standards for
distributed generation. We support doing so.
Market Power
California's electricity crisis has increased the focus on FERC's
market power authority. I personally believe that FERC already has
adequate authority to address the market power issues posed by public
utilities that are already subject to its jurisdiction under the
Federal Power Act. Under Sections 205 and 206 of the Federal Power Act,
FERC has the authority to regulate prices for wholesale power and
transmission services charged by investor-owned utilities, and to order
refunds when it finds those prices unjust and unreasonable.
FERC has utilized its existing authority in a series of orders that
impose just and reasonable standards appropriate to different kinds of
markets. FERC is actively discussing revisions to its market power
analysis for its market-based rate standards with regard to
jurisdictional utilities. However, FERC lacks comparable authority over
federal, state and municipal utilities, as well as electric
cooperatives, which are engaged in interstate commerce.
Government-owned utilities and electric cooperatives argue that the
rates they charge for wholesale power sales and transmission services
should not be subject to FERC's ``just and reasonable'' standard
because they are not-for-profit entities. However, we believe their
not-for-profit status is irrelevant when they engage in wholesale sales
and provide interstate transmission for others.
No solution to any regional price issues can occur as long as a
significant number of energy suppliers in those markets are outside of
FERC's jurisdiction. Thus, a comprehensive energy bill should extend
FERC's ``just and reasonable'' rate standard to all electricity
suppliers by making all utilities subject to Sections 205 and 206 of
the Federal Power Act. The Chairman's White Paper includes such a
proposal.
(3) expand the electricity transmission system
Like the Nation's generation capacity, our transmission capacity
has not expanded to keep pace with demand. The current situation is
comparable to a country road trying to carry the traffic of an
interstate highway. All segments of the electricity industry are
imposing tremendous demands on the transmission system to carry more
and more transactions across even greater distances. As a result, the
transmission system is facing significant increases in congestion.
Between 1999 and 2000, transmission congestion grew by more than 200
percent. In the first quarter of 2001, transmission congestion was
already three times the level experienced during the same period in
2000.
Annual investment in transmission has been declining by almost $120
million a year for the past 25 years. Transmission investment in 1999
was less than half of what it had been 20 years earlier. Maintaining
transmission adequacy at current levels would require about $56 billion
in investment during the present decade. The Electric Power Research
Institute (``EPRI'') estimates it will cost up to $30 billion to bring
the western regional transmission system back to a stable condition and
$1 billion to $3 billion a year after that to maintain this condition
in the face of continued growth.
How do we ensure sufficient transmission capacity to help assure
the success of competitive electricity markets? We believe the
following proposals should be included in a comprehensive national
energy policy.
Transmission Siting Authority
EEI supports granting FERC a backstop role to help site new
transmission lines when states are unable or unwilling to act on new
transmission line applications. The Cheney Task Force Report recommends
developing legislation to grant FERC siting authority for new
transmission. S. 2098, introduced by Senator Murkowski and Senator
Landrieu in the 106th Congress, included FERC transmission siting
authority if a state failed to act on an application within a year.
Such an approach would give states the first opportunity to act on
transmission siting applications. EEI would not favor the portion of
the transmission siting proposal contained in the Chairman's White
Paper that provides for regional compacts because it could create yet
another bureaucracy governing our industry. RTOs are emerging as
regional planning entities. Establishing yet another regional
bureaucracy would be counter-productive.
It made sense in 1935 when the Federal Power Act was adopted to
leave transmission siting authority with the states, since transmission
lines were generally local in nature. Now, however, our transmission
system is being asked move large amounts of energy across long
distances and across state lines. Under these circumstances, it could
be increasingly difficult to obtain the necessary siting permits from
affected states, which may receive few direct benefits and thus have
little incentive to approve construction.
Under this proposal, FERC would be given the authority to issue a
certificate of public convenience and necessity for a transmission
line. Eminent domain authority will rest with the holder of the
certificate. Electric utilities that are issued such certificates by
the states also may exercise the power of eminent domain if they are
unable to acquire the rights-of-way through other means.
Federal electric utilities that own transmission, including the
Tennessee Valley Authority, Bonneville Power Administration and the
other power marketing administrations, already have such authority. In
addition, FERC has this authority for transmission for hydroelectric
facilities.
Innovative Pricing
Current returns on transmission are too low to attract the huge
amounts of capital needed to fund investments in transmission
expansion. A comprehensive national energy policy should include
direction to FERC to utilize innovative transmission pricing
incentives, including rates of return more appropriate with the higher
levels of investor risk in a restructured electricity industry. These
incentives must be available to all transmission owners; not just to
owners who have made transmission improvements and not just to RTO
operators--which is the current FERC policy. The Cheney Task Force
Report called for DOE to work with FERC to encourage the use of
incentive ratemaking proposals.
Reliability
As NERC testified recently before this Committee, it is seeing
increasing violations of its reliability rules. A voluntary reliability
regime lacks the enforcement authority needed in a competitive
electricity market. A comprehensive national energy policy should
include provisions to establish a self-regulating reliability
organization, with FERC oversight, to develop and enforce reliability
rules and standards that are binding on all market participants. We are
extremely pleased that the Chairman's White Paper, S. 388, and S. 597
include these provisions and that the Cheney Task Force Report calls
for such legislation. This Committee approved and the Senate passed a
similar bill last year.
PUHCA
As I mentioned earlier, PUHCA also acts as a barrier to the
formation of interstate independent transmission companies.
Shareholder-owned utilities and FERC are working quickly to meet FERC's
goal, established in Order No. 2000, of having RTOs operational by the
end of 2001.
PUHCA is an impediment to this effort. An RTO could be required to
become a registered holding company and subject to PUHCA restrictions
and additional regulation. As our companies attempt to raise financing
for these newly formed RTOs, they are discovering that PUHCA's
restrictions are a significant concern to Wall Street firms and a
barrier to investment.
Federal Lands Issues
A comprehensive national energy policy should provide for the
coordination of transmission siting activities among multiple federal
land management agencies. FERC should be designated as the lead agency
for any environmental analysis necessary to site transmission lines. A
FERC decision to grant a transmission line a certificate of public
convenience and necessity should be conclusive as to the need for the
facility for the purposes of any other permits that might be necessary
to build the line. A comprehensive national energy policy also should
include provisions to help reduce delays associated with transmission
permit processing and approval by requiring federal land management
agencies to develop and implement uniform regulations and practices to
utilize qualified third-party contractors to assist in these
responsibilities.
Transmission Tax Issues
A number of tax law changes are critical to expanding our
transmission infrastructure. Chairman Bingaman's White Paper correctly
highlights the need for changes to the tax code to expand our
transmission infrastructure. Also, we commend Senator Murkowski for
including in S. 389 the tax compromise agreement reached between EEI,
LPPC and APPA last year. This agreement would (1) grant ``private use''
relief for government-owned utilities that provide open access to their
transmission systems, (2) grant tax relief for the sale or spin-off of
transmission facilities to form FERC-approved RTOs or independent
transmission companies that are part of a FERC-approved RTO, (3) allow
continued contributions to nuclear decommissioning trust funds in a
restructured electricity market and (4) remove the tax on contributions
in aid of construction.
We also support the provisions included in both S. 389 and S. 596
that would shorten the depreciable life for transmission facilities.
Chairman Bingaman's White Paper addresses these issues as well, though
the tax relief is limited to spinoffs of transmission systems; it
should cover sales as well.
(4) enhance energy efficiency and conservation
Wise energy use and improved energy efficiency and conservation can
reduce demand for energy and can help lower consumers' energy bills.
Today, the U.S. economy uses 42 percent less energy to produce one
dollar of gross domestic product when compared to 1970 energy intensity
levels. However, there still is obvious room for improvement, beginning
with public sector facilities.
I would like to call the Committee's attention to the conservation
and efficiency provisions in legislation passed in the last two weeks
by the House Energy and Commerce and Ways and Means Committees. They
have broad support in both the utility and conservation/efficiency
communities.
New metering technologies that enable consumers to respond to
variable energy prices can help reduce energy costs and consumption.
Utilities are working closely with their customers, particularly larger
energy users, to install real-time meters so consumers will know when
to reduce or modify their energy usage to help reduce peak demands for
electricity. We also support tax incentives for real-time metering, as
contained in H.R. 2511, the Energy Tax Policy Act of 2001.
The federal government is the largest single user of electricity in
the world. Utilities work closely with their federal customers to
improve their energy efficiency. S. 388 includes provisions
specifically intended to help achieve this goal. The Cheney Task Force
Report also calls for reducing energy use in federal facilities. EEI
believes that any legislation to promote greater energy efficiency in
federal facilities should ensure the continued viability of utility
incentive programs as well as Energy Savings Performance Contracts
(ESPCs). Section 605 of S. 388 would continue this policy as well as
enhance it.
We support including provisions in a comprehensive energy bill to
establish a federal grants program to local school districts to improve
energy efficiency of school buildings. Both S. 388 and S. 597 contain
such provisions.
We support the inclusion of provisions to expand and extend the
authorization for state energy conservation programs, as called for in
S. 388. In addition, we support federal funding for enhanced research
and development programs, as outlined in S. 597. And, while tax issues
fall outside of this Committee's jurisdiction, we also support tax
incentives to purchase energy efficient homes, appliances and vehicles.
The Cheney Task Force Report calls for increasing public awareness
of Energy Star-labeled products and for expanding the scope of
appliance standards programs, where appropriate. We support both of
these initiatives.
Many of these issues are included in the Chairman's White Paper; we
would be pleased to work with the Committee staff to help develop
specific proposals for the Committee's consideration.
(5) protect lower income consumers
We believe comprehensive energy legislation should expand and
increase funding for the Low Income Home Energy Assistance Program
(LIHEAP). We are pleased that S. 388 and S. 352, introduced by Chairman
Bingaman, call for increased funding for the LIHEAP program. In
addition, the Chairman's White Paper and the Cheney Task Force Report
both call for a higher funding level for LIHEAP.
Similarly, funding for the low-income weatherization assistance
program should be increased to assist low-income families with lowering
their energy bills through increased energy efficiency and
conservation. Again, S. 388, S. 352, the Chairman's White Paper, and
the Cheney Task Force Report support additional financial support for
this program.
conclusion
Our country needs a comprehensive national energy policy. The
bedrock principle upon which the policy should be based is the
encouragement of competitive electricity markets. Action is needed to
ensure our country has affordable and reliable electricity for years to
come. Congress has been debating electricity issues for six years. In
the meantime our Nation's electricity infrastructure has not kept pace
with the growing demands of our new economy. California's woes have
clearly sounded an alarm bell that must be heeded by the Congress. The
time to act is now. We look forward to working with this Committee to
achieve these objectives.
I would be pleased to answer any questions the Committee may have.
The Chairman. Thank you very much for that statement.
Mr. Thilly, why don't you go ahead.
STATEMENT OF ROY THILLY, CHIEF EXECUTIVE OFFICER, WISCONSIN
PUBLIC POWER, INC., ON BEHALF OF THE AMERICAN PUBLIC POWER
ASSOCIATION
Mr. Thilly. Mr. Chairman, Senator Murkowski, members of the
committee, I'd like to thank you for the opportunity to testify
today.
I'm here on behalf of the America Public Power Association,
which represents the interest of the Nation's 2,000 public
power utilities. We have submitted formal testimony that
addresses the issues point by point.
In summary, we believe the White Paper is excellent. And
Public Power would like very much to work with the committee
and its staff to turn the ideas in the White Paper into
legislation. We are very pleased that the White Paper
recognizes that public power systems are different than many
other players in the industry, and seeks to achieve the paper's
objectives without unnecessarily or unduly interfering with the
local control of community owned systems. Any extension of
Federal jurisdiction to local public power systems is a very
sensitive matter.
In terms of differences, I note that the White Paper states
that the regulatory compact; that is, the obligation to serve;
has been severed in States that have adopted retail competition
programs, and also that utilities are no longer building
generation as utilities. And I agree with that in general, but
it's important to recognize that Public Power's compact with
its communities and with its customers is and will remain very
much intact. Public power systems, regardless of State
deregulation programs, will continue to provide highly reliable
electric service on a cost basis, not whatever the market will
bear, to the residents and the businesses of their communities
over the long term. That's why we're here.
Also, public power systems, a number have commenced
construction or announced construction of new generation
dedicated to their customers. We strongly support the
development of a vigorously competitive wholesale market
because we believe it will benefit all customers, and that
vigorous competition at wholesale is obviously essential for
retail competition programs to work. But I would caution the
committee to recognize that the competitive model will not work
today in some places, and clearly will not result in just and
reasonable prices because we lack the transmission
infrastructure that's necessary for the market to work.
Deregulation in a highly constrained market would be a
disaster.
In my State, we are highly constrained and we have a highly
concentrated market. Our transmission import capability is down
to about 15 percent. California, I think, has 30 percent import
capability. One entity controls 54 percent of our generation. I
think in California the largest generator controls about 11
percent of the generation, and yet there are market power
problems. The consensus within Wisconsin, I think across the
board, is that deregulation in this circumstance today would
result in higher prices, significantly higher prices. And this
is not a unique situation.
Unfortunately, transmission is becoming more and more
constrained across the country. This week there were firm
transmission curtailments in Iowa. I don't think there have
ever been firm curtailments in Iowa in the past. And we have
seen more and more curtailments in our State. The weakness of
the transmission system is a significant threat to the
objective to achieve robust, competitive markets.
And the White Paper correctly focuses on transmission as
the key. We need strong, independent regional transmission
organizations, and Congress needs to affirm FERC's authority in
this regard or we'll be in litigation indefinitely in trying to
create those organizations. But we also need to build, and we
need to build a significant amount of new transmission.
The APPA supports Federal eminent domain authority, but we
also recognize the real interest, important interest of States
in siting. So I think the idea of enabling the States to come
together in regional compacts to jointly approve projects that
are in RTO plans, regional plans, based upon regional need and
reliability, is very important and very--an excellent idea.
There needs to be a Federal backstop, however, that if the
States don't pick up the ball in this regard regionally that
the FERC will have siting authority.
I was--we were very pleased to see that the White Paper
does not advocate incentive transmission rates, as were
mentioned earlier today. There is, of course, a chorus from
transmission owners on the need for incentives, and I've never
met a utility that thought its return was adequate. But the
problem is not really--the problem is the disincentive for a
vertically integrated system to build transmission.
A weak transmission system protects generation. In most
vertically integrated systems, major investment is in
generation. Building new transmission opens that generation up
to competition. And transmission's got to compete in that
environment with other investments that don't have that down
side, and I think it's lost consistently in the last 10 years.
Trying to force construction through incentives in this
circumstance is a no win proposition for consumers.
In Wisconsin, companies have now divested their
transmission into a for profit transco that is a single purpose
company. It has an obligation to build for a robust market.
There is no internal competition for capital, and the only way
for this company to grow is to build additional facilities. I
think these incentives will provide much better planning and a
much more robust construction program. And I would urge you to
look at RTOs in terms of the authority to build and to bid out
construction to passive investors so we put competitive
pressure on the cost of new transmission.
Finally, the other key issue is the Public Utility Holding
Company Act repeal. I would simply caution the committee there
that any repeal will clearly lead to much more consolidation in
the industry and of complex affiliate transactions, and
consolidation will threaten the objective to achieve
competitive markets. So we need to be very, very careful there.
We need to extend the authority to include acquisitions of
generation as well as mergers of holding companies.
In closing, I'd like to thank Senator Murkowski personally
for his very important leadership in helping public power and
private power forge a historic compromise on tax issues. Thank
you.
[The prepared statement of Mr. Thilly follows:]
Prepared Statement of Roy Thilly, Chief Executive Officer,
Wisconsin Public Power, Inc.
Thank you, Chairman Bingaman and Ranking Member Murkowski. On
behalf of the American Public Power Association, I am pleased to appear
today to discuss electricity restructuring.
I am the Chief Executive Officer of Wisconsin Public Power, Inc.,
and past Chair of the APPA Board of Directors from June 1999 through
June 2000. APPA represents the interests of more than 2000 publicly
owned electric utility systems across the country, serving about 40
million customers. APPA member utilities include state public power
agencies and municipal electric utilities that serve some of the
nation's largest cities. However, the vast majority of these publicly
owned electric utilities serve small and medium-sized communities in 49
states, all but Hawaii. In fact, 75 percent of our members are located
in cities with populations of 10,000 people or less.
Public power systems' first and only purpose is to provide
reliable, efficient service to their local customers at the lowest
possible cost. Public power exists for a purpose, not a profit. Like
hospitals, public schools, police and fire departments, and publicly
owned water and waste water utilities, public power systems are locally
created governmental institutions that address a basic community need:
they operate to provide an essential public service, reliably and
efficiently at a reasonable, not-for-profit price. Publicly owned
utilities also have an obligation to serve the electricity needs of
their customers. And, because they are governed democratically through
their state and local government structures, public power systems
operate in the sunshine, subject to open meeting laws, public record
laws and conflict of interest rules. Most, especially the smaller
systems, are governed by an elected city council, while an elected or
appointed board independently governs others. Democratically governed,
not-for-profit, obligation to serve--the importance of these unique
characteristics has been highlighted by the recent events in the West.
Under California's restructuring law, public power was able to retain
its obligation to plan for and serve the electricity needs of our
consumer-owners. As a consequence, municipal utilities retained their
power plants dedicated to serve native load customers, and they engaged
in long-range planning to satisfy demands that exceeded their own
generation resources. This gave public power utilities the ability to
mitigate market risk for their customer-owners.
Understanding the underlying structure and mission of public power
is essential in crafting balanced electricity legislation that will
maintain industry diversity. This diversity has helped many public
power communities in the West endure the electricity crisis with bumps
and bruises rather than broken bones. We believe the entire nation has
been well served by this diverse mix of publicly, privately and
cooperatively owned utilities combined with federal institutions
including the Tennessee Valley Authority and the federal power
marketing administrations. In restructuring our industry, every effort
should be made to ensure the preservation of this diversity.
wholesale competition first--the role of the federal government
The rush to restructure the electric utility industry in several
states has truly put the cart before the horse. Retail choice programs
adopted by states and localities cannot succeed without truly
competitive wholesale markets. (This is certainly one of many lessons
learned from what has happened in California.) The fundamental
characteristics of a competitive market include, among other things:
access of buyers to numerous sellers; mitigation of market power; ease
of entry into the market for new participants; a sufficient number of
participants to impose discipline on all; and transparency of
information.
APPA has supported legislative efforts to make the wholesale
electric market more competitive for decades. APPA was one of the major
supporters of the transmission access provisions of the Energy Policy
Act of 1992. On numerous occasions over the past few years, we have
testified in support of additional legislation to ensure that the
promises of wholesale competition become reality. In our view,
comprehensive federal restructuring legislation must, at a minimum,
achieve the following objectives:
Promote more effective wholesale competition by providing
sufficient federal authority to ensure non-discriminatory
access to regional transmission facilities at fair and
comparable rates.
Promote the maintenance and expansion of the nation's
transmission facilities including, where necessary and subject
to appropriate limitations, the exercise of federal eminent
domain authority.
Establish policies to maintain the reliability of the
nation's electricity industry through competitively neutral
means.
Eliminate market power in generation and transmission by: 1)
Providing for truly neutral management of the nation's
transmission system--allowing for federal oversight to ensure
RTO development, independence and effectiveness, 2) Clearly
articulating FERC's role in monitoring the wholesale market,
directing FERC to investigate and mitigate market power, and
enhancing its power to accomplish this difficult task, and; 3)
Strengthening FERC's merger review process to allow for
consideration of a proposed merger's impact on the development
of competition.
Eliminate the tax-related impediments to competition for
municipal utilities imposed by the private use restrictions on
tax-exempt bonds while retaining local control over municipal
decisions.
Consider changes to PUHCA only in the context of providing
reasonable substitutes to protect consumers and promote
competition.
appa comments on chairman bingaman's ``white paper on
electricity legislation''
APPA believes that Chairman Bingaman's White Paper memorandum of
July 20, 2001, represents an excellent starting point for industry
restructuring legislation. Many of the principles are absolutely
essential to the creation of truly competitive wholesale markets. The
remainder of my testimony will focus on these topics following, for the
most part, in the order in which they are delineated in the white
paper. I will reference existing legislation as appropriate.
transmission jurisdiction
Local control is one of the most fundamental aspects of public
power. However, it is difficult to envision effective wholesale
markets, which, as noted, APPA strongly supports, without some degree
of federal involvement in public power transmission that is part of the
regional grid. APPA members have struggled with the problem of
balancing the retention of local control with the recognition that
transmission is a matter of interstate commerce.
The White Paper recommends that ``FERC [transmission] jurisdiction
should be extended to public, cooperative and federal utilities. Such
jurisdiction should not extend to setting transmission rates for these
entities, but should require that rates set by these transmitting
utilities should be comparable to those that the public power utilities
charge to themselves.'' While publicly owned utilities with
transmission facilities are not anxious to be subjected to FERC
jurisdiction, the limited jurisdiction contemplated in this portion of
the White Paper is an acceptable compromise and is consistent with a
resolution adopted by APPA in 1998.
The White Paper states that ``[l]egislation should affirm FERC's
authority to order utilities to join regional transmission
organizations.'' Presumably, this authority would extend to all
``transmitting'' utilities regardless of ownership. For the most part,
publicly owned utilities have been anxious to participate in RTOs that
are consistent with the specific criteria set forth by FERC in Order
No. 888. In fact, FERC commissioners and various FERC orders have
specifically addressed public power participation, not to encourage
public power systems to join but rather to encourage private utilities
to let them join on fair and reasonable terms.
FERC has indicated that it believes it currently has the authority
to order jurisdictional utilities to participate in RTOs, and we agree
that Congress should affirm this authority. FERC should be required to
condition market-based pricing for jurisdictional utilities on becoming
part of a large, regional RTO.
It is not clear from the White Paper whether FERC authority to
order RTO participation would apply only to jurisdictional utilities,
or whether this would extend to publicly owned utilities as well. If
the latter, then deference should be provided to publicly owned
utilities, similar to the restraints on FERC jurisdiction over
transmission noted above. Specifically, APPA recommends that FERC
authority to order publicly owned utilities to join a regional
transmission organization should be limited to situations in which FERC
finds that (1) the publicly owned transmission owner has (a) engaged in
undue discrimination in the provision of transmission services, or (b)
abused its control over transmission so as to disadvantage competitors;
and (2) that the FERC open access transmission tariff has not and is
not likely to remedy the problem. In such cases, APPA agrees FERC
should be authorized to require the publicly owned utility at issue to
surrender control of its transmission to an independent regional
transmission organization that meets FERC RTO criteria. We also believe
Congress, in clarifying FERC's authority to order utilities to join
RTOs, should take into consideration the cost consequences of such
action. Clearly, RTOs should decrease, not increase, total transmission
costs. Cost shifts and increases have been a very significant problem
for public power systems in California. Obviously, it would be
imprudent for a public power system, which has financed transmission
with public funds, to join an RTO that will significantly increase the
cost of power to its customers. Some cost shifting may be inevitable,
but any FERC action in this area should be premised on the principle
that adverse cost consequences for utilities ordered to join RTOs
should be held to the minimum possible, and this is particularly
important with respect to public power systems that have constructed
their facilities with public funds.
The White Paper also recommends clarification of the Federal Power
Act to ensure that ``FERC has jurisdiction over all transmission,
whether bundled or unbundled. Once jurisdiction has been clarified, the
Commission can use its existing legal authority [to] determine which
facilities are transmission in interstate commerce and which are
distribution facilities and thus state jurisdictional.'' (We assume
that ``state jurisdictional'' includes ``local jurisdictional'' in the
case of publicly owned utilities.) In some respects, this statement is
similar to H.R. 2944, legislation reported from the House Subcommittee
on Energy and Power in the last Congress. That measure authorized FERC
to determine whether particular facilities were transmission or
distribution based on function. We supported that aspect of H.R. 2944.
We disagreed with another aspect of the same section of H.R. 2944
because, while it attempted to establish a bright line between federal
and state regulatory jurisdiction, it compromised FERC jurisdiction by
failing to allow sufficient FERC regulation over the transmission
component of bundled retail sales. We support the clarification of
interconnection rules suggested in the White Paper including a
sufficient reservation of local authority to address system-specific
issues. Not addressed here, however, is the issue of who bears the cost
of interconnection. We are concerned over a possible trend to shift
onto the bulk power grid costs that should be borne by generation
owners. We do not believe it is appropriate to force all users of the
interstate grid to assume interconnection costs driven by the decisions
of individual generators.
It is not clear whether the provisions in the White Paper would
apply to utilities within Electric Reliability Council of Texas
(ERCOT). FERC does have limited jurisdiction over utilities in ERCOT
under section 211. The need for further expansion of FERC jurisdiction
over ERCOT utilities is not readily apparent, at least until ERCOT is
interconnected through AC facilities with other regions. APPA's
policies with respect to FERC jurisdiction have generally been adopted
with the understanding that they would not apply to ERCOT unless or
until public utilities in that region become jurisdictional through
interconnections.
reliability
APPA urges the Committee to require mandatory involvement by all
industry participants in a national compliance program to ensure
continued reliability of the high voltage electric transmission grid.
The Administration's National Energy Policy report also calls for
enactment of mandatory reliability standards by an independent body and
overseen by FERC to ``address the problems created by increased demands
on the transmission system that have resulted from changes within the
industry brought on by wholesale competition.'' In their respective
energy policy bills, Chairman Bingaman and Ranking Member Murkowski
have included reliability language supported by APPA and other industry
stakeholders.
Even though the United States has the most reliable electric system
in the world, the crisis in the West has demonstrated the delicate
balance between reliability and the markets within which the electric
grid must operate. Consequently, great care needs to be taken to ensure
that the current level of reliability is not sacrificed in any
restructuring of the industry. As the industry has become more
competitive, more participants have been executing an increasingly
larger number of transactions every day. The focus of most of these
transactions is on short-term costs rather than system stability. While
the current voluntary system of compliance with reliability standards
worked reasonably well in the regulated environment in which the
industry previously operated, it will not continue to provide the
necessary safeguards in a competitive market.
Currently, reliability standards are established and monitored by
the North American Electric Reliability Council (NERC), which is a non-
profit organization that monitors the electric utility industry's
voluntary compliance with policies, standards, principles, and guides,
and assesses the future reliability of the bulk electric systems. The
NERC Board of Trustees has approved and begun the transformation of
NERC to the North American Electric Reliability Organization (NAERO),
in which participation and adherence to standards and practices would
be mandatory. Federal legislation is required to give NAERO the
enforcement tools necessary to ensure compliance and achieve a system
that properly balances reliability with market pressures and decisions.
An industry-wide effort to forge a compromise on such legislation
resulted in the language being advanced by the Chairman and Ranking
Member and by Members in the House.
APPA has worked actively on the NERC consensus proposal, and we
continue to support it. However, we could also support simplifying that
proposal so long as the basic tenets are adhered to. We do have
concerns about reliability being delegated exclusively to RTOs, some of
which may be for-profit entities, that would not only set the rules,
but must comply with them.
An item of particular importance to APPA in the consensus
reliability legislation is a sentence developed during negotiations in
late 2000. The sentence would clarify that FERC is granted oversight
authority over public power systems in the regulatory title only for
the purposes of enforcement of reliability standards. Public power
systems support oversight with regard to reliability standards but this
provision should not be used by FERC to impose additional regulation at
a later date. Through an oversight, this sentence was not included in
reliability legislation pending in Congress. We would appreciate it if
the sentence were added to your draft bill.
rates and market power, market transparency rules and puhca
We have combined three different areas of the White Paper to
address in this portion of our testimony because, from our perspective,
they are interrelated and all must be addressed to achieve the goal of
workably competitive wholesale markets. Here again, we believe there
are some extremely important lessons to be learned from California.
These include:
Market structure is critical to market performance.
Market power is a very real problem that must be addressed.
Markets need rules and market monitors to enforce them.
Market monitors need data.
There are many aspects of the White Paper that we endorse. We agree
that, where feasible, ``legislation should require the FERC to promote
competitive markets.'' From our perspective, however, the paramount
role of a regulatory agency must be to protect the public interest and
the interests of consumers. Competition is a means to this end, not the
end itself. In California and throughout the West over the last year,
we believe FERC was so focused on promoting competition that it
completely lost sight of its obligation to permit only just and
reasonable wholesale rates, and its responsibility to ensure consumers
were protected from abuses of market power. We hope that, in clarifying
FERC's mission, Congress will provide that, first and foremost, FERC
must protect the public interest and the interests of consumers.
We support the proposition in the White Paper that, if markets are
allowed to set rates, FERC must ensure that such markets are workably
competitive. This begs the question, however, with respect to the
methodology used to make such a determination, and also doesn't specify
how rates should be established in markets that are not competitive.
APPA believes market based rates for jurisdictional utilities should
only be approved on a finding that the applicant will not possess
market power and that effective and sustainable competition will exist
in that market. The analysis must include an examination not only of
the resources available to individual applicants and whether such
assets could be used to set the market clearing price, but also of the
effect of transmission constraints and how those assets fit into the
broader market structure. Location-specific constraints must be taken
into account, as should requirements for grid reliability. Further, and
frequently ignored in traditional market analysis, is the time-
sensitive nature of electricity. In some markets, an entity controlling
a very small amount of generation can exercise market power.
FERC should be given other ``tools'' in addition to those it
already has to address market power problems. It should, for example,
require jurisdictional utilities to submit market power mitigation
plans for approval or modification. Its merger review process should be
revised to require that merger approval be granted on an affirmative
finding that the proposed merger is in the public interest as opposed
to the current standard which only requires that the merger be
consistent with the public interest. In reviewing mergers, FERC should
be required to consider whether they will promote effective wholesale
competition, or undermine it. FERC should also have the authority to
require shared access to essential assets, including reserve/risk
sharing mechanisms, on a non-discriminatory basis and with just and
reasonable rates. Further, FERC should be able to preserve the
integrity of the market through preliminary relief in order to prevent
irreparable harm pending issuance of a final order.
The White Paper states that ``all sellers (which we assume includes
public power sellers) into such [competitive] markets should be clearly
subject to market rules and market mitigation measures ordered by the
Commission. It should be made clear that normal transactions, not into
market-based rate setting institutions, by public power entities should
continue to be non-jurisdictional.'' As consumer-owned utilities,
APPA's members certainly believe that no market participant should be
able to abuse market power to the detriment of end users. Until the
debacle in the West, application of this principle to public power
systems in wholesale markets has not been an issue, and therefore this
specific issue has not been addressed by APPA. However, publicly owned
utilities in California and elsewhere in the West have stated that they
would voluntarily abide by market rules applicable to jurisdictional
utilities. The exclusion for ``normal'' transactions is clearly
appropriate, but the extent to which sales by public power systems into
market institutions would be subject to FERC oversight is unclear and
could be problematic. APPA is confident that, if FERC clearly defines
in advance the rules applicable to jurisdictional utilities who are
responsible for the vast majority of all such transactions, public
power systems will live within that framework without the need for any
expansion of FERC jurisdiction.
As this particular element of the White Paper is given additional
consideration, it is important for members of the Committee to keep in
mind that publicly owned utilities are units of local government. They
have their own unique set of legal requirements imposed by state and
local laws as well as under contracts or, more specifically, bond
covenants. Accounting principles, that apply to governmental entities
are not the same as those that apply to private, for-profit
corporations. Power sold, whether through bi-lateral contracts or into
the spot market, is publicly owned property. Public power systems have
a fiduciary responsibility to ensure that they and their customer-
owners receive reasonable compensation.
The White Paper notes that ``legislation must ensure transparent
information on market transactions and should grant clear authority to
the Energy Information Administration and the FERC to collect and
publish appropriate data, while protecting proprietary information.''
APPA agrees and strongly supports this proposition with the important
clarification that ``proprietary information'' warranting protection
must be narrowly circumscribed. APPA would, in fact, encourage that
congressional direction be absolutely clear that data must be collected
and made public. Claims of confidentiality of data based on commercial
sensitivity are already being made to limit data collection or
dissemination. There is a danger that commercial sensitivity arguments
will completely undermine the legitimate right of the public to this
data. Transparency of market information is a fundamental prerequisite
of competitive markets and necessary to protect consumers. (We would
note that disclosure is required under the security laws, and such
disclosure has had a salutary effect on the markets. If the SEC's rules
did not exist today, almost every company that is subject to SEC
regulation would claim that much of the information they are required
to disclose today is in fact proprietary.) Congress should be very
clear in telling EIA and FERC that close calls should be resolved in
favor of transparency, not secrecy.
We believe consideration of PUHCA repeal should logically be
undertaken within the context of the discussion of market power. This
is recognized within the White Paper, which states that PUHCA should be
repealed ``only if FERC is given enhanced authority to address market
power problems, and both FERC and the states are given greater access
to the books and records of holding companies to prevent affiliate
abuses.''
While these are appropriate pre-conditions to PUHCA repeal, APPA
does not believe they are sufficient.
In addition to the recommendations regarding authority for FERC to
address market power issues, APPA would recommend specific authority
for FERC to review mergers of utility holding companies as well as the
disposition of generation assets by jurisdictional utilities and
acquisition of natural gas companies. The FERC lacks the clear
authority to review the former. While we believe it has the authority
and responsibility to review the latter, it has recently declined to do
so. This action has come at precisely the same time that utilities and
utility holding companies are swapping assets like trading cards. A
utility with a significant presence in generation in one region sells
those assets, then buys similar assets in another region. Such
transactions can clearly lead to the concentration of significant
amounts of generation in specific geographic markets, yet no one is
examining what consequences these asset trades will have on
competition.
FERC and state commission access to books and records of holding
companies to prevent affiliate abuses is an inadequate substitute for
the protections provided consumers, state commissions and others under
PUHCA. As a practical matter, many state commissions don't have the
resources to examine the books and records of today's extremely complex
utility holding companies and all of their subsidiary companies. And
even if they do, it isn't clear what remedies they can impose when the
keeper of the funds--the parent holding company--may exist outside of
the jurisdiction of specific state utility commission.
Advocates of PUHCA repeal have argued that the statute is no longer
necessary, that it is redundant with other statutes, and, incredibly,
that it is an impediment to competition. S. 206, the Public Utility
Holding Company Act of 2001, reported out of the Senate Banking
Committee earlier this year, provides, in the statement of findings and
purposes, the following:
Developments since 1935, including changes in other
regulation and in the electric and gas industries, have called
into question the continued relevance of the model of
regulation established by that Act.
Limited Federal regulation is necessary to supplement the
work of State commissions for the continued rate protection of
electric and gas utility customers.
The Attorney General of California strongly disagrees with these
two statements. Earlier this month, he filed a petition with the
Securities and Exchange Commission (the agency with responsibility to
enforce PUHCA) for review and revocation of PG&E Corporation's
exemption from PUHCA. As stated in the petition ``PG&E Co. [the
electric operating utility] has now filed for bankruptcy after
upstreaming billions of dollars from the utility to the utility holding
company--the precise type of behavior identified in PUHCA as a primary
basis for the law.'' He concludes his petition as follows: ``All of the
primary evils addressed by PUHCA are relevant to PG&E Corp. [the
utility holding company], including movement of capital and assets from
its utilities to the holding company and affiliated, wholly-owned
subsidiaries as well as massive investments in out-of-state non-utility
activities and properties. The Commission has the chance, indeed the
obligation, to address potential holding company abuses by PG&E Corp.
before additional damage is done. The current crisis in California has
been a catalyst for closer scrutiny of federal and state regulation of
the utility industry. This crisis highlights the fact that Commission
enforcement of PUHCA is still needed.''
Clearly, times have changed since PUHCA was enacted in 1935.
Utilities have changed. Human nature hasn't. The abusive practices that
gave rise to PUHCA 65 years ago have been more difficult to accomplish,
because of the existence of PUHCA's restraint on corporate structure
and behavior, but have not disappeared entirely. It may be that some
elements of PUHCA need to be revised. But the opportunity for the
California Attorney General, and perhaps others similarly situated in
the future, to have a forum at FERC or the SEC in which they can
examine the financial transactions within a monstrously complex
interstate holding company structure to determine whether electric
consumers have been abused, must not be eliminated.
regional planning and siting
APPA supports federal eminent domain authority to form a more
cohesive and functional national approach to the expansion of the
transmission grid. The more certainty that exists in transmission, the
better our members are able to serve their customers. However,
permitting private parties to use this extraordinary tool of government
should be undertaken very carefully, permitting the maximum possible
involvement of state and local governments. It could, for example, be a
last resort remedy. It should also be exercised in a manner that
ensures the optimal expansion of the grid, which will require regional
transmission planning. Finally, facilities constructed when this
authority is exercised must be dedicated to serve the general public
interest, including the lowest reasonable rates for transmission
service. We believe that the White Paper's suggestion that regional
siting compacts be authorized and encouraged is definitely worth
pursuing. These compacts should recognize RTO orders and regional
needs. FERC should be available as a backstop if states do not deal
with siting issues jointly on a regional-needs basis.
other provisions
APPA offers the following comments with respect to the ``other
provisions'' in the White Paper.
1) Repeal PURPA's mandatory purchase requirements with certain
replacements--interconnection standards for distributed generation.
APPA does not oppose the repeal of PURPA's purchase requirements, so
long as stranded cost recovery is addressed using FERC's current
process. APPA strongly supports increased use of distributed resources
and efforts at the federal level to promote such use. We therefore
encourage the committee to pursue legislative language on transmission
and distribution interconnection policies that provide FERC the
authority to order the use of standardized technical interconnections
while at the same time preserving local authority to require any
additional measures necessary for system reliability, safety, or other
factors deemed to be in the public interest. A positive step has been
taken with the introduction of S. 933 by Senator Jeffords, which for
the first time addresses the concern of local utilities.
2) Incentives for renewable resources. In preparing its recently-
published report on public power's renewable profile, entitled ``Shades
of Green,'' (copies of which were previously sent to all members of
this Committee) , APPA discovered that public power systems have a
higher proportion of renewable, non-hydropower generation than other
segments of the industry--but we still have more work to do. APPA
therefore applauds the idea of creating market-based incentives for all
segments of the industry. I'll discuss comparable incentives for public
power systems in the section on tax provisions below.
3) Public Benefits Fund. APPA believes such programs are better
suited to state and local initiatives as opposed to federal
legislation.
4) Tax Provisions. An area of great importance to public power
systems is their treatment in the tax code. Tax exempt bonds issued to
finance generation, transmission and distribution facilities owned by
public power systems carry with them restrictions on the amount of
private use allowed for those facilities. While sound tax policies
warrant certain restrictions on private use of public facilities, such
policies must change with changing times. These private use
restrictions, which were manageable several years ago, are now
unreasonable in the new competitive environment and need to be modified
to conform to the goal of enhancing greater competition. The
restrictions are contrary to the goals of the Energy Policy Act of
1992. The public power community and the Investor Owned Utilities have
worked together to come up with language to remedy this situation and
certain tax code problems that they are encountering as a result of
industry changes. Ranking Member Murkowski has taken the lead to
address this problem with his bill, the Electric Power Industry Tax
Modernization Act, S. 972, which provides greater flexibility to
publicly owned utilities to accommodate industry changes. APPA
sincerely appreciates Senator Murkowski's leadership on this issue. We
hope that the Finance Committee will act soon to address this vital
issue.
Finally, I would like to mention one other tax related issue. It is
clear that additional generation is needed in this country. It is also
clear that such generation should come from non-traditional renewable
energy sources as well as from better and cleaner utilization of our
nation's most abundant resource, coal. Traditionally, Congress has
turned to tax credits to provide incentives to industry to achieve
socially desirable goals. If the goal is to promote renewable energy
and clean coal technology development and utilization by the electric
utility industry, then incentives must be provided that work for all
elements of the industry. Tax credits can be utilized by IOUs, which
serve about 75 percent of the nation's electric consumers, but cannot
be used by not-for-profit publicly and cooperatively owned utilities
that serve the balance. As a policy matter, it seems to make little
sense to refuse to provide comparable incentives to ensure that 100
percent of the nation's utilities are encouraged to develop these
resources. We have recommended ``tradable tax credits'' for publicly
and cooperatively owned utilities. These tradable credits could be sold
to tax paying entities at a discount to help them reduce their own tax
liability. This concept has been developed by municipal public power
systems and the rural electric cooperatives and is supported by the
entire electric utility industry. APPA commends Chairman Bingaman for
including tradable tax credits language in his comprehensive bill S.
597. We hope this proposal receives favorable action in the Senate
Finance Committee.
Thank you again for inviting me to testify and I will be happy to
answer any questions you may have.
The Chairman. Thank you very much.
Mr. English, why don't you go right ahead.
STATEMENT OF GLENN ENGLISH, CHIEF EXECUTVE OFFICER, NATIONAL
RURAL ELECTRIC COOPERATIVE ASSOCIATION, ARLINGTON, VA
Mr. English. Thank you very much, Mr. Chairman. I
appreciate that.
My name is Glenn English. I'm the chief executive officer
of the National Rural Electric Cooperative Association, which
is a service organization for some 34 million consumers who own
their own electric utility as cooperatives. We're situated in
some 46 States all across this country.
Very quickly, Mr. Chairman, I want to hit some high points
and then focus on one particular area of my testimony. Electric
cooperatives strongly support the efforts of Congress to
replace the North American Electric Reliability Council with a
new entity that has the authority under the Federal Energy
Regulatory Commission for oversight to develop and enforce
mandatory reliability standards. Electric cooperatives applaud
the chairman and the ranking member in the administration for
recognizing the importance of fuel diversity.
Electric cooperatives, however, oppose the expansion of
Federal energy regulatory jurisdiction over rural electric
cooperatives, the reason being that many small electric
cooperatives, this is additional Federal regulation in addition
to rural utility service which would duplicate and become
extremely burdensome and expensive for them. And electric
cooperatives applaud the chairman for recognizing the need for
additional market power oversight.
But, Mr. Chairman, the one thing that we feel is the most
critical element as far as any kind of coming to grips with the
energy difficulties that this country is facing is in the area
of transmission. When you really look at transmission, unless
the transmission system works, unless it has the ability to
move power around this country under the 1992 Energy Act, then
much of the rest of the debate and discussion that we're having
really doesn't mean a great deal, because the system just won't
work. So for that reason, we would strongly urge that this
committee focus its attention on the development of an
interstate highway system approach to remove the transmission
restraints that exist today.
Now up until this point, Mr. Chairman, what I think this
committee has heard so much about, as has the Congress, has
been the focus on the risk of building transmission. And as a
result of that, the risk needs to be offset with incentives or
with other means in which to compensate those who would build
transmission for that risk. Mr. Chairman, it's my understanding
that the Federal Energy Regulatory Commission has such
authority now. And we don't see a great deal of transmission
being built in this country and I think there are a host of
different reasons as to why that is taking place.
In addition to looking at compensating for the risk, I
would suggest that this committee focus its attention on how
they might reduce the risk of building transmission in this
country; how in fact we can make it easier, how in fact we can
focus our attention on certain areas of development, so that we
in fact can develop a true interstate type of system for the
electric utility industry to transmit its power.
I think that without question, Mr. Chairman, that we have
to understand that any competition that exists will likely take
place on the generation side. And in those States that in fact
pass it, on the retail side. When you look in the area of
transmission, this may be the one impediment for competition
working either on the wholesale or the retail side. And we've
seen examples of that. You mentioned in your testimony earlier,
or in your statement earlier this morning about price spikes
and the difficulties in California. And I think virtually
everyone understands that those problems are transmission
related. And certainly if we continue to focus our attention
elsewhere, this congestion and these difficulties will
continue.
We've got to understand, however, there are those who
benefit by congestion and by the impasses that exist in the
existing system, people who in fact make a great deal of money
out of the difficulties that exist in the system and will
resist the changes. That's the reason that we strongly believe
that local entities, whether it's through some kind of joint
planning group or whether it's through RTOs, should in fact
take the lead in determining and identifying what portions of
the existing transmission system should be part of an
interstate system. And they should have the opportunity to
focus their attention on what is the best way to link up the
various regional systems that exist, link up the various
elements that would be included in any kind of interstate
transmission system.
We also think this makes great sense from a regulatory
point of view. The Federal Energy Regulatory Commission does
not have unlimited resources, either in manpower or in funds.
And it should be understood that those resources should be
focused on where they'll do the greatest amount of good. By
obviously identifying certain segments of the existing
transmission system and also focusing on how to connect up
those systems with other systems that are identified in other
regions, that we in fact can make a great deal of sense from
making sure that the limited resources of FERC are focused
where they'll do the most good.
But we think that what can be done, Mr. Chairman, is to
focus on reducing risk, focus on in fact giving the people of
this country the opportunity to keep their transmission costs
as low as they possibly can, to do so by building transmission
systems at cost with a modest return for the investment. This
is a system that has served this country well in the past. It's
one that we think will serve us well as we develop a truly
interstate transmission system in this Nation today.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National
Rural Electric Cooperative Association, Arlington, VA
executive summary
NRECA supports the development of an Interstate Highway
system approach to relieve transmission constraints; the
current transmission system cannot reliably handle the dramatic
increase in transactions since enactment of the Energy Policy
Act and FERC order 888, four years ago.
NRECA supports the efforts of Congress to replace the North
American Electric Reliability Council (NERC) with a new entity
that has the authority under the Federal Energy Regulatory
Commission (FERC) oversight, to develop and enforce mandatory
reliability standards. This much-needed legislation should be
passed immediately.
NRECA applauds the Chairman, Ranking Member, and the
Administration for recognizing the importance of fuel
diversity.
NRECA opposes the expansion of FERC jurisdiction over rural
electric cooperatives. For many small electric cooperatives
this additional federal regulation would be duplicative and
overly burdensome.
NRECA commends the Chairman for recognizing the need for
additional market power oversight.
The National Rural Electric Cooperative Association (NRECA) is the
national service organization that represents 930 rural electric
systems providing central station service to approximately 34 million
consumers in 46 states. Of these rural systems, 60 are generation and
transmission cooperatives, which are owned by and serve approximately
695 of 870 distribution cooperatives. Kilowatt-hour sales by rural
systems amount to 9% of total electricity sales in the United States,
approximately 45% of the electricity sold by cooperatives is purchased
from others.
transmission reliability
North America needs the new electric transmission equivalent of the
interstate highway system. The current transmission system cannot
reliably handle the dramatic increase in transactions since the 1992
Energy Policy Act. Transmission deficiencies are contributing to
wholesale and retail electric market failures that are harming
consumers.
NRECA strongly opposes the argument that the transmission problem
can be fixed only if utilities are offered enough money through
incentive transmission rates or other financial incentives. NRECA
believes that high rates of return are not an acceptable means of
attracting investment in transmission. The incentive approach only
increases costs for consumers, the people who were supposed to have
seen lower prices from competition, without guaranteeing that
transmission will be built.
Moreover, high transmission costs do not strengthen wholesale
electric markets, they severely curtail them. The high rates act as
``toll gates,'' narrowing generation markets and protecting the
monopoly power of local generators.
NRECA believes the best approach is to lower the risk of building
transmission instead of raising rates of return and increasing costs to
consumers. Congress should direct FERC to ensure that any entity that
builds a qualifying transmission project recovers its costs. To qualify
for guaranteed cost recovery, NRECA believes that transmission projects
must:
be identified through a regional joint-planning process that
coordinates and has oversight for the reliable operation of the
regional transmission system
be constructed according to best engineering practices
be operated by the relevant Regional Transmission
Organization (RTO)
offer service pursuant to traditional cost-of-service
principles, with the cost-of-service analysis taking into
account the low risk provided by FERC's obligation to assure
cost recovery.
By mitigating risk, spreading the cost of new facilities broadly,
and enabling new competitors to build transmission, NRECA's approach to
new transmission helps to ensure that the interstate highway system can
be built at the lowest possible cost to consumers.
electric reliability
Since 1968, the electric utilities of the United States, Canada,
and part of Mexico have worked together through NERC to develop
voluntary standards that have provided North Americans with the most
reliable energy in the world.
The introduction of restructuring, however, is putting pressure on
the voluntary system. Under regulation, regulators have placed a
premium on reliability and utilities were guaranteed to recover
reasonable reliability-related expenses. In a competitive environment,
however, investor-owned utilities are rewarded for cutting costs and no
one has the authority to ensure that those cost-cutting measures do not
degrade the reliability of the bulk transmission system.
It is necessary for Congress to replace NERC with a new entity that
has the authority, under FERC oversight, to develop and enforce
mandatory reliability standards.
For that reason, NRECA supported S. 2071 in the 106th Congress.
That language would require FERC to approve a new North American
Electric Reliability Organization that would have the power to ensure
the reliable operation of the interstate bulk transmission grid. NRECA
believes that similar legislation needs to be enacted as soon as
possible.
energy supply
NRECA strongly supports a national energy policy that recognizes
the importance of fuel diversity. The recent increase in natural gas
and petroleum prices clearly demonstrates the important role that coal,
nuclear energy, and other fuels continue to play in North America's
energy portfolio. NRECA supports the full development of all needed
U.S. energy and power resources including hydro, nuclear and fossil in
a manner that strengthens fuel diversity while balancing appropriate
environmental considerations. That national energy policy should also
provide financing for research and development and incentives to fully
utilize domestic resources. These programs should be made available to
all segments of the industry on an equitable basis.
NRECA supports the development and implementation of clean coal
technologies and renewable resources. We advocate continued funding for
research, development and demonstration to continue to reduce the cost
of power from these clean sources of energy. Clean coal and renewable
resources should be an integral part of a total energy package.
NRECA also believes in the future of nuclear power and is a strong
supporter of this ``emission-free'' source of energy. Nuclear power is
a safe, efficient source of electricity, with an adequate supply of
fuel. Nuclear power currently provides 20 percent of the nation's
electricity at affordable and stable prices. With spiking prices in
natural gas and oil, nuclear power plants offer a stable, levelized
source of electricity. NRECA supports the relicensing of existing
operating reactors, and encourages the Department of Energy to begin
accepting the spent nuclear fuel, as DOE promised and contracted for
under the Nuclear Waste Fuel Act. NRECA supports the development of the
Yucca Mountain Repository. NRECA also supports continued development of
future safer and cheaper nuclear reactor technologies as well as the
improved Nuclear Regulatory Commission (NRC) licensing programs to
support future development. NRECA believes that the Price Anderson Act,
due to expire in 2002, should be extended.
ferc jurisdiction
NRECA opposes efforts to subject electric cooperatives to the
jurisdiction of FERC (under Federal Power Act (FPA) Sections 205 and
206, 16 U.S.C. 791a, et seq. by including them within the definition of
``public utility'' in Section 201(e) of the FPA). Electric cooperatives
are owned and controlled by their consumers so there is no conflict
between shareholders and customers requiring governmental economic
regulation.
Similarly, the federal agencies that provide reliable, low-cost
electrical power are already regulated by Congressional oversight and
are under the authority of the Secretary of Energy. Moreover, electric
cooperatives were formed in response to the national need to extend
electric service at the lowest possible cost to primarily rural areas
under a program providing that federal governmental oversight would
only be through the Rural Utilities Service (RUS). NRECA's position was
confirmed in the Dairyland case, decided by the Federal Power
Commission (FERC's predecessor) more than 30 years ago, which held that
electric cooperative borrowers from the RUS are not ``public
utilities'' as defined in Section 201(e) of the Federal Power Act.
NRECA opposes efforts to subject the RUS-borrower electric
cooperatives, involuntarily, to FERC jurisdiction under FPA Sections
205 and 206, which continues to be good public policy. NRECA also
recognizes the important regional federal power issues that are part of
this restructuring debate in the Pacific Northwest and have supported
previous efforts to establish a ``Northwest Title'' in restructuring
legislation. NRECA supports legislative efforts to exclude from FERC
jurisdiction:
RUS borrower electric cooperatives,
not-for-profit, consumer-owned utilities, and
federal power marketing agencies.
market power
Market power is a problem that must be confronted in the move
toward a more competitive marketplace. Insufficient federal oversight
and authority exists for distinguishing between pro-competitive and
anti-competitive mergers and acquisitions. Under the Public Utility
Holding Company Act (PUHCA), only one regulatory entity--the Securities
and Exchange Commission (SEC)--has comprehensive authority to protect
consumers against registered holding company abuses. The elimination of
PUHCA or substantial changes to the Act without offsetting consumer
protections will result in greater monopoly power for these holding
companies and their utility subsidiaries, and higher electricity costs
for consumers.
Congress should adopt rigorous merger and acquisition guidelines at
the federal level that will prevent the accumulation of market power by
one or a few dominant firms. These changes would include:
Placing the burden of proof on entities seeking to transfer
generation or seeking ``mega-mergers'' of existing monopolies
to demonstrate that the acquisitions will enhance competition
and benefit consumers through lower rates, increased
reliability and expanded services, while reducing regulatory
burdens on pro-competitive mergers and ventures.
Providing regulators (FERC) with tools to protect consumers
and enhance competition, including the authority to impose
structural solutions that remedy or prevent public utilities
from accumulating or exercising undue market power.
Strengthen the antitrust provisions in the Federal Trade
Commission Act and Federal Power Act to prevent market power
abuses, and deny approvals for mergers and acquisitions that
lessen competition.
Authorizing FERC to impose civil penalties for market power
abuses.
In closing, I appreciate the opportunity to testify before the
Committee and look forward to working with you to address these
important issues.
The Chairman. Thank you very much. I think all the
testimony has been very useful. Let me ask just a few
questions.
Mr. Rowe, let me ask you first. In your written statement
that you gave us I understand you oppose a new layer of
regulation at the regional level in these decisions on siting
of transmission lines. Is there some other way that we can have
those decisions made at the regional level that would make more
sense from your point of view; more dependence on RTOs, for
example? What is--could you maybe elaborate on your views as to
how siting decisions ought to be made and where that authority
ought to be?
Mr. Rowe. Surely, Mr. Chairman.
It is obvious to us, as your White Paper makes clear it is
to you, that the transmission system is the regional
superhighway for the competitive marketplace we're all trying
to work on. And in that sense, we believe that FERC has the
essence of it in its emphasis on strong, large, regional
transmission organizations. We think it will help to have those
be quite large. We think strengthening FERC's authority in that
respect is positive. We believe that making the RTOs for profit
businesses is positive. We believe that the reference in your
White Paper to making it easier from a tax point of view to
create transcos and RTOs is positive. And we believe as these
regional entities are created they will allow for some of the
goals that your White Paper seeks in terms of input from the
different States without creating, you know, one more layer of
process.
The Chairman. All right. Thank you very much.
Mr. Thilly, let me ask you about the issue of obviously one
of the things we promote in this White Paper is that sales by
public power entities into the market rate generating
institutions should be subject to the same rules as other
sales. Can you help us figure out where the line needs to be
drawn between sales that should be subject to market rules
established by FERC, how we separate those sales from other
sales that should not be subject to these rules set by FERC?
Mr. Thilly. I hope so. I think that we generally agree with
the characterizations in the White Paper. As I understand it,
what that means is where there is a RTO developed market or a
power exchange market that has been approved by FERC, that all
participants will have to adhere to the rules of that market,
including any circuit breakers or price caps that exist. And we
certainly, I think, agree with that. We believe that will
happen with or without legislation.
We would certainly also oppose the notion of full cost of
service regulation for public power systems. There has been no
call for the need for that that I know of in the last 50 years.
And the--those--so we see no need there. But we do believe that
in the formal institutions that are established for a
competitive market, that the rules would apply to all
participants in those markets.
The Chairman. Okay. Mr. English, you state in your
testimony that you oppose extending FERC jurisdiction over
cooperatives. FERC has already declared that it has some
jurisdiction over your members in the West by subjecting them
to the market mitigation plan that they issued on the 18th of
June. Have your members given you reason to believe that that
order goes too far in including what would otherwise be normal
transactions between co-ops?
Mr. English. I think, Mr. Chairman, that many of our
members would challenge whether or not FERC does have that
authority. And that may be an issue that the court would have
to decide. That seems to be an open question.
The point is though that we recognize there's a problem in
the West. And electric cooperatives fully understand that they
have a moral obligation and responsibility to help out. And so
they are in fact cooperating and working with that order as if
it was in fact a point of law. But, you know, we're not
conceding the fact that there is an open question as to whether
they do have that jurisdiction and certainly--but we right now
feel that the bigger question is responding to the problem in
the West.
The Chairman. Okay. One of the points we make in the White
Paper is our belief that it's necessary to include all
transmission under the same rules. Do you believe there are
some ways that we could work to build in protections for the
smaller co-ops that you represent, members that do not have
transmission systems, so that they can--they would be agreeable
to that kind of a explicit grant of authority to FERC?
Mr. English. Well, as I stated in my testimony, we're very
concerned about particularly some of our smaller cooperatives.
But not just exclusively smaller cooperatives, but the
distribution cooperatives that under the interpretation, more
lenient interpretation of some of the regulations, would
encompass some 400 distribution cooperatives, which I don't
think either FERC or certainly the Congress intended to be
included. There's also this question of the relationship
between the cooperative, the management and employees of the
cooperative and those consumers, and it is that self-governance
regulation.
The real issue here, I think before us, is the question of
what portion of the transmission system that electric
cooperatives owns truly plays in any kind of interstate
commerce. And as we begin to define and to narrow that in, you
know, that's probably where the open issue is.
But with this particular point, that's the reason we think
an interstate designation or an interstate type system that is
focused on moving power across this country is where FERC
should be focusing its attention. And certainly if that is the
case, obviously any transmission that doesn't fall under that
category would either be left up to the States, or in the case
of electric cooperatives, our own self-governance.
The Chairman. We'd be anxious to work with you as we try to
refine some language that'll keep the protections that you
think are essential, but also provide that we do have one set
of rules for transmission around the country.
Mr. English. Thank you.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you very much, Mr. Chairman.
Mr. Thilly, relative to your statement, you indicated there
isn't enough transmission. We certainly agree with that. But
you also said that you are opposed to incentive pricing, as I
recall, for transmission. How do you get there from here?
Mr. Thilly. I believe that there is adequate capital in the
market that--to finance the new construction that's needed at a
reasonable rate of return, 12 percent by FERC, with a
reasonable depreciation schedule. That that capital is there,
that there are investors that are looking for that solid and
very safe return.
Senator Murkowski. Why hasn't it been done?
Mr. Thilly. Because we've been relying on vertically
integrated utilities to build the transmission. And when they
make that transmission investment they may realize the return,
but they also expose their generation to competition and loss.
And it's that offsetting, or that down side of construction
that is the problem.
Senator Murkowski. Mr. Rowe, would you agree with that?
Mr. Rowe. I'm afraid I totally disagree with it. I have
been unable to discern why there is so much opposition to
incentive regulations with transmission, when the total cost of
transmission is a relatively small portion of the end price of
electricity and when proper incentives for greater throughput
on transmission lines and greater access to transmission lines
can help so much in making the competitive generation market we
all want effective.
I mean I believe that building transmission in today's
economic and political world is a difficult and risky business.
And it just isn't as easy to do as 12 percent sounds. In my
company, we are putting our transmission where our mouth is,
not only by joining the Alliance RTO, but yesterday our board
voted to authorize us to be the first company in that RTO to
announce its intention to sell its assets to the RTO if an
independent operator can be found.
Senator Murkowski. Well, it appears then that the need's
been there. You've not chosen to do so because the incentive
hasn't been adequate. And, you know, we have two views on
what's adequate, but clearly the marketplace is going to
determine where they're going to direct their capital.
And it seems to me that it's pretty obvious here. We've got
a problem, we need to increase capacity. In order to get it we
can jawbone about whether 12 percent return on equity is
adequate and therefore they ought to do it, but, you know, you
can't force them to do it if they can deploy their capital at a
better return. And so am I missing something here, Mr. English?
Mr. English. I think you are, Senator.
Senator Murkowski. My time's short, so I want to----
Senator Murkowski. I'll make it very, very quick then. As I
said, I think you put your finger on it, it is the question of
risk. And the question is how you're going to deal with this
risk. Are in fact we going to provide additional rewards for
taking the risks, or do we reduce the risk? What we have not
explored is reducing the risk.
Senator Murkowski. What we need to do is increase the
transmission.
Mr. English. And that's exactly getting to the point. The
issue is how do we take hold of this. And I think that we do
have to make it a national priority to designate existing
transmission systems and making the connections within the
regions as interstate systems. That's where we put our energy
and that's what we're really focused on.
Senator Murkowski. Is that going to be sufficient for Mr.
Rowe to invest his capital?
Mr. English. At this particular point, already as I
mentioned in my testimony, that the Federal Energy Regulatory
Commission has the opportunity to provide for that kind of
incentives, if you wish. What I'm suggesting is that you also
give them the opportunity to reduce the risk, to provide for a
guarantee return if they build that transmission. In other
words, let's have competing options to them.
Senator Murkowski. Well, this is a little different than
Mr. Thilly's statement.
Mr. English. Exactly, it is.
Senator Murkowski. Mr. Rowe, do you want to jump in here?
Mr. Rowe. Well, I think our decision to propose the sale of
our transmission reflects two judgments. One is that it is not
a strategically opportune asset for us under the present rules.
And two, in independent hands, it has more chance of getting
favorable economic rules. So again, I would respectfully submit
that we're putting our capital behind our words.
Senator Murkowski. Mr. Ayers, do you want to jump in to
this?
Mr. Ayers. Yeah. I would add that in this case, if you look
at transmission, it's very much up front costs for 50 years of
transmission being there with not a lot of operating costs. So
from a business proposition of wanting to finance this, you
have to look at what the return and the value of that
transmission over 50 years. And that has changed over the last
few years. You've got to be able to determine whether you will
still need the transmission over that time frame. And the risk
profile of someone investing and wanting to line up financing
has changed. And in order, I think in today's market, it's
necessary to look at incentive in order to have that
transmission built.
Senator Murkowski. Well, it seems that we have reached a
significant point relative to just how we're going to increase
transmission and whether we can do it without incentives,
pricing incentives. The market is going to have to make that
determination.
My final question is to Mr. Thilly and Mr. English relative
to your support for giving FERC authority to order the IOUs to
join a transmission organization. And I think you support
giving FERC additional market power authority and so the
question comes to mind, shouldn't public power and cooperatives
be subject to basically the same rules?
Mr. English. I'll take a crack at that first, Senator.
Senator Murkowski. Very short.
Mr. English. First of all, we support the voluntary
approach with regard to RTOs. The second thing is that we think
there ought to be incentives for people to participate in RTOs,
since we're talking about incentives and that makes sense. And
the third thing is that RTOs have to be independent and open,
and everyone has to have the opportunity to participate in it.
We don't think that's been the case to this point.
Mr. Thilly. We strongly support RTOs. And it's important
that public power participate. Public power is at the table. A
number are. The difficulty has been it is not prudent for a
public power system to join if it's going to dramatically
increase its costs, which is what the situation in California
has been.
Senator Murkowski. All right. Well, I thank you. And hope
that we can understand here the implications in the White Paper
suggest that public power would remain more flexible in setting
its own rate structure, but by the same token, be
nondiscriminatory. But by setting its own rate structure, there
are--there has to be a safeguard and a balance for
efficiencies. And that gets a little out of our area of
responsibility, but is certainly in the public interest.
The Chairman. Senator Carper.
Senator Carper. Thank you, Mr. Chairman. Mr. Chairman, a
number of years ago Mr. Craig and Mr. Thomas and Mr. English
and I worked together in the House of Representatives. We all
served together for a number of years. And I just want to say
welcome. It is great to see you, Glenn. And you had a
reputation then for being clear thinking, plain spoken, get
right to the point. And I'm pleased to say that he hasn't
changed in that respect.
I'm a new member of this committee. I've been on it for all
of about 14 days. And some of the people that have already
served here have forgotten more than I'm likely to ever know.
So I'm just struggling to come up to speed. I feel like
somebody who's walked into a party about 11 o'clock at night
and everybody else is three sheets to the wind and I'm trying
to figure out where the bar is.
[Laughter.]
Senator Carper. It would be helpful for me--and just keep
in mind I'm still trying to understand all of the acronyms that
we're talking about here. But what would be helpful for me is
for each of you to take a minute or so and with respect to
interconnection standards, with respect to transmission
capability and capacity, where do you agree. What we've got to
figure out is how to develop some consensus here. And in those
two areas especially, if you could just tell me where do you
all agree in a way that would be helpful for us in formulating
some bipartisan approach here.
Glenn.
Mr. English. If I could take a very quick crack at that,
Senator. And let me just say I've always been struck by your
wisdom and your candor, and I see that that hasn't changed and
delighted that you're here. I think you've got an excellent
view of what's taken place in the energy industry, let me also
say, with the 14 days you've been here.
Very quickly this. I don't think that you have to choose. I
don't think that you have to choose. Let's have a little
competition. Isn't this what this is all about? We talk about
competition in the electric utility industry. We've got
incentive pricing that's already available to the Federal
Energy Regulatory Commission. Let's give them the other option
of reducing risk, then let's let them make the choice.
Let's go even beyond that. We're talking about joint
planning groups, we're talking about RTOs. Let's let them get
into this act and decide what's best in their region. You know,
we wholeheartedly agree that we need to bring all the
interested parties together in an RTO or whatever else you want
to call it for that region, and let them make the decision.
Let them play the role and identify what portion of the
transmission system within that region that truly should be a
part of an interstate system. And then let's let them say
here's the best way to link it up with neighboring systems as a
part of the grid. And then let's give the Federal Energy
Regulatory Commission the authority then to say yes, that makes
sense. We agree with that, and give their blessings. And we
move on and we go to a competitive process, and let's see which
way this thing goes out.
What we're suggesting to you is if you can reduce the risk,
if you can do that by in fact guaranteeing the return and by
the very nature that any of this new construction that's taking
place or any upgrades that are taking place in the transmission
system. In fact, if that's a part of an interstate system,
you're going to have the traffic to get the return. And that's
what you're really telling the investors, you're going to be
guaranteed that return. And then let's stretch it over an
extended period of time, and say 30, 35 years.
We've been in the construction and transmission business
for some time. That's normally what our--we've got a record on
that kind of stuff. We're not interested in getting in and
building transmission, by the way, if you're looking at this as
the electric co-op way of approaching it. What we're really
interested in is making sure that we have low cost
transmissions, you're able to move power. So if you're going to
have competition and make some sense in this country, the
transmission system in itself is a conveyance, just like the
interstate highway system. And we're not interested in adding
more toll booths, we're not interested in adding a lot of
unnecessary cost. Let's make this as least costly as we can for
the American people.
But we're not saying hey, let's exclude the whole
opportunity to have incentive pricing. If FERC comes to the
conclusion that's what they need, give them that chance. But
let's give them both opportunities. That's all we're asking.
Mr. Rowe. Senator, I believe that----
Senator Carper. Let me just say something. I've heard a lot
of people testify over the years. I really like the way that
you speak slowly. No kidding, it's just----
Mr. Rowe. My wife says I follow my mother in that respect
and it has little to do with learning.
Senator Carper. Give your mom our best if she's still
around.
[Laughter.]
Mr. Rowe. I think there are three large issues on which
those at this table and those who govern us fundamentally
agree. We need more supplies of energy, we need them to be
cleaner and consistently so, and we need the energy to be used
efficiently. I believe that around those principles detailed
legislation can be hammered.
I think those at this table agree on the importance of
reliability standards for the regional transmission
organizations and for people who are participating in the
supply marketplace. I believe we agree on the importance of
regional transmission organizations. I believe we agree on the
fundamental principles of open access. Those are the--about the
furtherest (sic) list we all probably agree on, but with a
little work you can get some more out of us.
Senator Carper. Good. Okay. Thank you, Mr. Rowe.
Please.
Mr. Thilly. I agree with what Mr. Rowe just said. I think
that's very accurate. There are differences obviously, the one
that has been identified this morning on incentive rates. And,
you know, maybe if we step back from that one, I agree with Mr.
English.
The FERC has authority to set transmission rates and can do
a number of things, but it has to be just and reasonable within
the Federal Power Act. If we're talking and if an incentive is
just and reasonable, then we already have the authority to do
it. It's going beyond that to authorize incentives that would
not pass the just and reasonable test that we have very
significant problems with.
Mr. Ayers. I would also agree with Mr. Rowe's comments. I
think that's a good, accurate summary.
I would like to add with respect to you mentioned
interconnection requirements; that I would hope that everyone
would agree here that the current process for interconnection
and the ability for new powerplants to connect to the grid is a
time frame that does not work. Just to give you an example of a
recent experience we've had, in a process that should take 120
to 180 days, this process took over 600 days to negotiate and
place the necessary requirements to interconnect to the grid.
And clearly I think that is not a process that is going to
allow new generation to be built and come on line in this
country.
And so with respect to that, I think that is clearly an
area I would hope most people would agree we need some
different standards. Maybe there may be open issues on what
those are, but the current process doesn't work.
On transmission, I think I would support all of Mr. Rowe's
comments.
Senator Carper. All right, good. Well, thank you. Thank you
all very much.
The Chairman. Thank you very much.
Senator Craig.
Senator Craig. Then we all agree that transmission is the
number one problem in today's current electric markets of this
country?
Mr. Ayers. Yes.
Senator Craig. Is that correct, Mr. Rowe?
Mr. Rowe. It is. I would say transmission and diversity of
generation supply are about equal, but they're together the
number one problem.
Senator Craig. Mr. Rowe, in reading your testimony, while
you touched on it in passing, as it related to sequestration in
your testimony you say something a bit more bold. Let me read
it. ``Given President Bush's rejection of the Kyoto Accord, it
is appropriate for this committee to re-examine what this
nation's policy should be on a going forward basis. Many of us,
including myself and my company, believe it is time for the
Federal Government to limit CO2 in a no regrets way.
I also believe that we need to revisit the standards of
SOX and NOX and mercury so that decisions
on life extension for existing coal-fired plants can be made on
a sound economic basis.''
With that statement, my question--one of my questions would
be what is an appropriate CO2 limit that the Federal
Government could mandate that wouldn't be arbitrary?
Mr. Rowe. I think there are so many uncertainties in this
area that almost anything is arbitrary, and yet something
probably should be done. It is my personal opinion that the
Kyoto Accord went too far and involved promises by some
governments that they had no intention of meeting. At the same
time, I think the gathering weight of evidence on the long run
carbon issue is more impressive all the time.
There is an engineer at Illinois Institute of Technology
named Henry Linden who's been on the board of BAS Corporation;
I think he's retired now; but he's done several papers on
preliminary steps that can be taken. And if you would permit
me, sir, I would like to offer one of those papers for the
committee, because I think there are ways, particularly as we
increase efficiency and increase the use of natural gas, that
we can take steps to reduce carbon and do them without some of
the economic consequences that the Kyoto Accord would have had,
at least before the recent steps in Europe this week.
Senator Craig. Well, I agree with you that technology is
leading us toward reduction. But is it not true that if we were
to set a cap, and that were arbitrary, we would be picking
winners and losers? And that means a heck of a lot of lawsuits
around the country.
Mr. Rowe. I smile just a little, because----
Senator Craig. And I guess my follow-up question would be
as the CEO of a company, are you a winner or you a loser?
Mr. Rowe. We are the largest nuclear generator in this
country.
Senator Craig. Ah, the winner.
Mr. Rowe. And therefore----
Senator Craig. Maybe that's why you were bold.
Mr. Rowe. Well, that may be why my suggestion wasn't bold
at all, Senator. But we believe that as this country evolves,
coal must have a continued role. I think that's essential. But
I think most new coal will replace existing coal in a cleaner
fashion, and we believe that gas and nuclear and efficiency
have to have increasing roles if we take the global warming
issue seriously.
Senator Craig. Well, you had mentioned, I believe in your
comments, that you sensed what they did in relation to
sequestration to be a positive.
Mr. Rowe. Yes, I do. It's my understanding that this
government argued in the original Kyoto negotiations to allow
more credit toward the carbon goals if you promoted
sequestration programs. In my own previous company, we had some
experience investing in tropical forests as carbon
sequestration tools. And it's very clear that today, carbon
sequestration in forests of the like can be a cheaper way of
limiting carbon in some circumstances than some attempt to
remove it from the initial process.
I still don't believe there are a lot of ways to burn
carbon without creating carbon dioxide. So to me, adding more
credit for sequestration, as happened last week, was a partial
response to the U.S. position. I'm not saying whether it was an
adequate one. And one that we should take seriously, because it
also tends to reduce some of the international wealth transfer
issues that I think haunted the original Kyoto Accord.
Senator Craig. I was curious about that, because it limits
us by their formula to about 28 mmpces, or whatever that term
is. And we have a capability based upon reasonable estimates,
both forest, farmlands, pasture lands, upwards of 300 million
metric tons of carbon sequestration on an annualized basis.
It also, I noticed, was interesting that they were trying
to buy a Japanese vote, so they gave them a good deal more than
they otherwise had the capability of sequestering. It appeared
to me that their charts were a good deal more political than
they were real.
Mr. Rowe. I have always felt that, Senator. I'm quite
certain that you're right on that. And I commend you and
Chairman Bingaman and others on this committee for brokering
with this issue with the interest of this Nation so deeply at
heart.
Senator Craig. Well, I thank you for those observations.
I'm just not sure that we have yet determined what levels of
CO2 are harmful and/or beneficial. I think you and I
would collectively agree that more is not good.
And in the long term, our technology is clearly leading us
toward reductions. And if we benefitted in that direction or
incentivized it in that direction, a good deal more will come.
I'm not quite sure that we need to play the politics of
capping. My guess is there's a greater risk there than there is
a reality.
Mr. Rowe. As somebody who's in business, as my colleagues
at this table have suggested, I always like incentives better
than caps, Senator.
Senator Craig. Oh, by the way, the red light's on, but did
you check--you need to check the paragraph that Bond did on
nuclear. They did you in.
Mr. Rowe. It's always been a hard slog, sir, but we're a
lot better off in this country because we have what we have.
Senator Craig. Well, we will try to deal you back in. Thank
you.
The Chairman. Senator Thomas.
Senator Thomas. Thank you. You know, as I sit and listen,
it sounds like maybe sometimes we don't recognize some of the
fairly significant changes that have taken place in generation,
where almost in the past always the generation and the
transmission was designed to fit your service area. And so but
that's changing. Now we got people selling generation, getting
into the marketer. And so you have to have a different kind of,
seems to me, a different kind of a transmission system.
Mr. Rowe, you sort of indicate let's keep on doing what
we're doing. Give us a little tax break. It doesn't seem to me
that that's enough difference. What's wrong with the idea of
having an interstate highway system that connects RTOs, do
something about having a third party operator. You pay for it
when you use the system. Over some bonding and over some time
you do that. So you're not expecting a generator or a
distribution system to do the transmission.
Mr. Rowe. I think that works. Forgive me if I were
inarticulate, because I think you have it exactly right. You
described correctly, as does the chairman's White Paper, the
history of generation and transmission being tied together. To
make what we're talking about work it does need to be a
competitive interstate highway system. That's why we support
strong, large, regional transmission organizations. And that's
why our board voted yesterday to express its intention to sell
our transmission assets to the RTO if it has an adequate
transmission operator that would meet your standards. We agree
exactly.
Senator Thomas. But an RTO is not an interstate national
system.
Mr. Rowe. But if there are, as FERC contemplates, four or
five big ones, then it becomes simpler and simpler to regulate
the connections between them. I mean the issue is whether we
get there in one step, or two or three. But it has to be a
broad interstate system, and the question is only how big are
the regions such that you get operating efficiency. I suspect
you wouldn't want the whole U.S. transmission system----
Senator Thomas. Well, we already have regions pretty much
established. That's not a new idea. But we need to move, be
able to move it.
Mr. English, would you support a system that's a third
party operator with the funding coming back from bonding or
whatever by people who pay to get on, and everyone pays the
same rate and so on?
Mr. English. I think there's merit in that, in the concept.
As having--as Senator Craig and you and Senator Carper and I
have worked in the other body for many years, I'm also very
sensitive and aware of the politics. That obviously becomes a
great deal more difficult politically.
What I'm focusing on now and suggesting is we need
something in the short-term. We need something that can be done
right now. We need some kind of focus in this country on the
transmission system so that you got the physical infrastructure
to do these other things that we talk about. And until that
infrastructure's in place, quite frankly, there's no way the
rest of this works.
And so what I'm suggesting is this: I think you're on the
right track with regard to the interstate system. I think
you're absolutely correct with regard to obviously what an RTO
needs to do as far as the operation of that system, is where I
understand you're coming from. But at this point, I would
suggest that we need immediate action on the whole concept of
designating we're going to build an interstate highway
transmission system in this country, the equivalent of that,
and we're going to start upgrading existing systems that are
part of that, just as we did the interstate highway system, and
to move forward on it.
Senator Thomas. That's fine. Except I sense that we don't
have a vision of where we want to be. If you're going to do
something that is going to be as complicated as this, you had
better get a pretty good vision of where you want to be when
it's over, so that what you do in the interim leads to that.
And we've talked about interstate movement and this and that,
but we haven't had a notion of how those things fit into an
ultimate vision of where we are.
Now, Mr. Ayers, you're primarily generators; right? You're
not distributors?
Mr. Ayers. No. We do wholesale marketing.
Senator Thomas. So your whole life depends upon your
ability to move your product?
Mr. Ayers. That's correct.
Senator Thomas. And you would support, I would suppose,
wouldn't you, an intestate system that would move among the
RTOs and be a third party operator, and you would pay to get on
there just like everybody else?
Mr. Ayers. Absolutely. And I think the recent FERC activity
of four large RTO systems is a step in that direction. There
are some natural marketplaces in the United States currently,
and to design the RTOs around where those natural marketplaces
exist as a starting point is a good step that could lead then
eventually to combining even those RTOs.
Senator Thomas. Well, again, I hope that we can kind of
devise in our mind where we want to be in 15 years, or
whatever, so that as we move, why what we do will accomplish
that. I sense that--and FERC, frankly, doesn't impress me as
being a group that looks out in the future very much. They're
pretty much--and I'm not critical of it. Their designed to deal
with today's problems. And someone has to take a little more
vision and then let them implement, it seems to me. Thank you
all for being here.
The Chairman. Well, let me thank the whole panel for your
excellent testimony. We appreciate it very much.
We will take a 5-minute break. And during that time, if the
people who are on panels 3 and 4 could all come forward or be
available when we start up again, we will combine those two
panels and go ahead with the balance of the hearing.
[Recess.]
The Chairman. Why don't we get going again. We have got six
additional witnesses we want to hear from each of them. Let me
just start over here at the left-hand side of the table.
We have Mr. William Nugent, who is the president of the
National Association of Regulatory and Utility Commissioners,
NARUC. We're very pleased to have Commissioner Nugent here.
Mr. James Dushaw, who is the director of utility department
for the International Brotherhood of Electrical Workers, IBEW.
Thank you very much for being here.
David Hamilton, who is the policy director for the Alliance
to Save Energy. In the spirit of full disclosure, I'm
associated with that organization, which I have been for many
years.
Mr. James Rouse, who is the chairman of ELCON in Danbury,
Connecticut. We very much appreciate you being here.
Mr. Stephen Ward is the president of the National
Association of State Utility Consumer Advocates. Thank you very
much for being here.
And Mr. David Cook, who is general counsel for the North
American Electrical Reliability Council, NAERC, in Princeton,
New Jersey.
So thank you all for being here. If you'd each take 5 or 6
minutes and give us your perspective on the proposals that
we're considering here on the committee. Let me state at the
outset that your full statements will be included in the
record. And if you could just summarize the main points that
you think we need to be aware of, I'd appreciate it.
Commissioner Nugent, why don't you start out.
STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC
UTILITIES COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS
Commissioner Nugent. Thank you, Mr. Chairman. And thank you
for the courtesy that you've shown to me on this and my
previous opportunities to appear here. I appreciate your
including the comments in the record, the written comments.
Let me talk about briefly some--an overview on this. And
that is let me offer you some caution. This is an
extraordinarily complex subject. I'm sure you're aware of that.
But we have been wrestling with this for some time trying to
figure out the proper way to do this, and I would look forward
to working with you and members, other members of the committee
and staff to work our way through this.
Electricity is not gas----
The Chairman. Let me just say by way of response, I agree
with you. We have got to approach it with caution, but that is
about all we've approached it with so far for the last two or
three Congresses. I think we also need to try to act. And so
we're anxious to get your input as to how to do that
responsibly.
Commissioner Nugent. I will not dispute the utility of
acting on this.
First of all, gas is not electricity. On previous
appearances here I have been complimentary of the FERC and the
manner in which it has sited transmission. It has done so
expeditiously and enabled us to get important new
infrastructure into Maine. But gas and electricity differ in
important respects.
In gas, you pick up a commodity from wherever it happens to
be coming out of the ground, you transport it to end users who
decide the manner in which they're going to do it. In
electricity, you do have alternatives to that. You can generate
at some distant place and then deliver it, but there are
important tradeoffs with the siting of generation and the
manner in which this articulates with the retail markets.
I think those differences make it important that State
regulators work closely with the FERC, and that entire
authority for transmission siting, generation and generation
siting, if that enters your plan, not be reposed solely at the
Federal level. There are a whole lot of fine points here that
will tend to get missed in that particular approach.
I believe in addition, that the proposals that are under
discussion here load an awful lot on FERC. And I have questions
about the capacity of that staff. It's not that they're not
bright people and that they're not working hard, but there is
an enormous additional volume of work. First of all, these are
very difficult matters of first impression for them to think
their way through and come to reasonable solutions. I think
what you do have in State regulators is a body of people who
are already committed to the public interest, who are there and
available and knowledgeable about the local situations who can
work with the FERC to offer a decent solution to these things.
Now going down in the specifics, let me add a third one,
because it occurs late in the White Paper, and that is the
question that the White Paper raises about transmission,
transferring assets into either an affiliated interest or
freeing them entirely. There is a very, very big question there
of at what value. These are assets that have been constructed
over time with important support from rate payers.
And I don't say this should be the solution, but it may be
instructive. Maine, in going to retail competition in
electricity, mandated a separation that the vertically
integrated utilities sell their generation assets and continue
to operate as wires company. It was our concern that we provide
a level playing field for all sellers of generation within
Maine; that the wires company not favor any particular provider
of generation. That has worked well. We have attracted more
competition in Maine than any other State. We have about 40
percent of our load that has gone to competitive suppliers. So
the proof is in the pudding in that regard.
But the point for this White Paper is that in directing the
vertically integrated utility to divest itself of its
generation assets, we--they were fully compensated for the book
value of those assets. The value of those assets in excess of
book went to rate payers, in return for which rate payers
assumed the responsibility of 100 percent of stranded costs.
There was a tradeoff, but I think it was an equitable solution
to that.
One of the concerns that I have is that if the assets go
to--transmission assets go into the--a separate, unregulated or
less tightly regulated entity, the question is what are the
rates of return, where is the equity for an investment over
time that rate payers have made? I'm not going to--I can't, in
the few minutes we have here, fully discuss at great length
this kind of an issue. I want to flag it for you and suggest
that it's worthy of very careful investigation in the future,
which we will do with staff or any of the members who wants to
do it.
But I've done my--gone through my 5 minutes and I've
probably got 18 more pages, and I'm going to rely on the
written testimony to do that. And I'll be happy to answer any
questions, either now, in writing, or at any time you wish.
Thank you for the courtesy.
[The prepared statement of Commissioner Nugent follows:]
Prepared Statement of William M. Nugent, Commissioner, Maine Public
Utilities Commission, and President, National Association of Regulatory
and Utility Commissioners
Mr. Chairman and Members of the Committee:
Good morning. My name is William M. Nugent. I am a Commissioner on
the Maine Public Utilities Commission and President of the National
Association of Regulatory Utility Commissioners, commonly known as
NARUC. I respectfully request that NARUC's written statement be
included in today's hearing record as if fully read.
NARUC is a quasi-governmental nonprofit organization founded in
1889. Its membership includes the state public utility commissions for
all states and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to assure the establishment and maintenance of such
energy utility services as may be required by the public convenience
and necessity, and to ensure that such services are provided at rates
and conditions that are just, reasonable and nondiscriminatory for all
consumers.
I greatly appreciate the opportunity to appear again, on behalf of
NARUC, before the Senate Energy and Natural Resources Committee.
Today, I have been asked to comment on S. 388 and S. 597 from the
107th Congress and S. 1273 and S. 2098 from the 106th Congress.
Additionally, I have been asked to comment on a White Paper containing
a legislative proposal for the Committee. I believe NARUC witnesses
have testified a number of times, during the last Congress, and are on
record with regard to S. 1273 and S. 2098, therefore I will limit my
remarks to S. 388, S. 597, and the White Paper.
transmission jurisdiction
NARUC supports legislation affirming State authority to regulate
retail power delivery regardless of the facilities used (transmission
or distribution). We oppose the expansion of FERC jurisdiction to
include unbundled retail transmission service. It is our position that
States should retain authority to establish retail transmission rates
unless the State tariffs violate Federally determined open-access, non-
discriminatory, competitive transmission policies. FERC should continue
to have ratemaking authority for interstate wholesale transactions and
should have jurisdiction over transactions between suppliers and retail
customers located in different States. However, States should be
authorized to form voluntary regional bodies to address regional
transmission system issues and FERC should be required to defer to
States acting on a regional basis.
States have an important stake in how retail services over
transmission facilities are provided. Transmission facilities were
approved by state governmental entities, and importantly have been paid
for by retail customers. However, we are keenly aware of the interstate
commerce implications of transmission service and we believe that the
issue of transmission jurisdiction is correctly being adjudicated
before the Supreme Court. Therefore, NARUC would respectfully recommend
that Congress follow precedent and allow the Court to rule on this
issue prior to taking legislative action.
States should be primarily responsible for expeditiously handling
retail complaints alleging undue discrimination in the market place.
Appeals by market participants could then be made to FERC.
NARUC supports legislation leading to voluntary formation of
Regional Transmission Organizations (RTOs), with deference given to
States in RTO development and to States acting collectively on a
regional basis. Congress should develop a mechanism for States to
address ongoing concerns in RTO functions after the initial RTO
development period. State interests include reliability, market
monitoring, pricing, congestion management, planning and interregional
coordination. Additionally, Congress should provide for a State
commission advisory role in RTO governance that allows for deference to
State commissions that reach consensus concerning governance issues
within a region.
NARUC supports legislation establishing national interconnection
and power quality standards, developed and adopted by appropriate
technical standards organizations, such as the Institute of Electrical
and Electronics Engineers, Inc., for generating facilities by a date
certain. However, the States should have the ability to adopt these
rules or more tailored rules that a State chooses.
NARUC further supports legislation removing federal barriers to
State implementation of net metering. The most critical barrier
involves the current lack of jurisdictional clarity over net metering.
The Federal Power Act has been alleged to preempt State net metering
programs, slowing development of this promising new approach to
promoting competition and resource divesting.
For the reasons I just iterated, NARUC has serious concerns with
the White Paper section on transmission jurisdiction and must
respectfully oppose legislation based upon the language included in
this section of the White Paper.
reliability
NARUC continues to support the NERC process and legislation that
establishes mandatory compliance with industry-developed reliability
standards and provides explicit authority to FERC and the States to
cooperate to enforce those standards. NARUC also supports legislation
that includes workable mechanisms to support energy efficiency programs
that enhance reliability.
The reliability of the nation's electric system is one of the most
important issues in this debate, and NARUC believes that Federal
legislation must indeed address reliability. Enforcement of operational
standards and criteria should be supervised by the FERC in cooperation
with the States through existing state authority, joint boards, or
other mechanisms. Enforcement of compliance with planning and system
adequacy standards should rest first with the States and regional
bodies. Congress should explicitly affirm the public interest in
transmission grid reliability and the need for mandatory compliance
with reliability standards.
Federal legislation should also facilitate effective decision-
making by the States and recognize the authority of the States to
create regional mechanisms including but not limited to inter-state
compacts, or regional reliability boards, for the purpose of addressing
transmission reliability issues. NARUC cannot support reliability
language that fails to provide a continuing role for States in ensuring
reliability of all aspects of electrical service, including generation,
transmission, and power delivery services or results in FERC preemption
of State authority to ensure safe and reliable service to retail
consumers. State officials will be held accountable by the public when
the lights fail to come on. Additionally, because of this
responsibility, State officials and State regulators are particularly
concerned with the ability to promote actions that ensure uninterrupted
electricity service.
NARUC believes that Congress should expressly include in
legislation: (1) A savings clause to protect existing State authority
to ensure reliable transmission service, and (2) a regional advisory
role for the States. Therefore, NARUC supports the reliability
provisions on these points found in S. 388 and S. 597 and commends both
you, Mr. Chairman, and Senator Murkowski for including these two
provisions in your respective bills.
rates and market power
Congress should not preempt jurisdiction in the States to address
market power concerns, including the authority to require behavioral
and structural remedies to address excessive market power. NARUC
advocates a continuum of options, such as accounting conventions and
codes of conduct, for the mitigation of market power, and urges
Congress to preserve State flexibility to use these options as needed.
Legislation should clarify: 1) the authority of the States to
require and police the separation of utility and non-utility, and
monopoly and competitive businesses, and to impose affiliate
transaction and other rules to assure that electric customers do not
subsidize non-utility ventures; 2) that States have authority to
require the formation of appropriate State, territory, and regional
institutions where necessary to ensure a competitive electricity
market; 3) as market power abuse may require the application of well-
tailored structural solutions, legislation should clarify the States
are authorized to require divestiture where appropriate and necessary;
and 4) that State regulators have authority to ensure effective retail
markets and should eliminate any barriers to the exercise of that
authority by the States.
We believe these legislative suggestions should be included in both
S. 388 and S. 597. Additionally, NARUC is concerned that the White
Paper implies preemption of State market power jurisdiction by
remaining silent on any role for the States.
regional planning and siting
The main impediment to siting energy infrastructure is the great
difficulty in getting public acceptance for needed facilities. Quite
frankly, this tells us that no matter where siting responsibility
falls, with State government or the Federal government, siting energy
infrastructure will not be easy and there will be no ``quick fix'' to
this situation.
NARUC believes that the States should do more to improve upon the
tremendous success story of the nation's electricity infrastructure.
States exercising jurisdiction over the siting and certification of
transmission facilities should not discriminate against interstate
facilities, meaning that in general, interstate facilities should be
sited, certificated, and otherwise regulated under the same standards
and procedures as intrastate facilities.
NARUC is strongly opposed to Federal eminent domain and siting
authority. However, NARUC supports voluntary regional bodies that
permit the States in which an interstate transmission facility is
proposed to be sited, to issue certificates authorizing the
construction of the proposed facility through collective
decisionmaking. If States choose to retain certification authority for
themselves, there should be agreed upon mechanisms to resolve disputes
where individual States involved have come to conflicting and/or
inconsistent determinations in their respective deliberations. These
voluntary regional bodies could: address siting of transmission;
identify regional bulk power market needs for State siting agencies to
consider in their respective deliberations; and, plan for the
construction of new interstate transmission facilities.
Congress should affirm that States have the primary authority to
establish, operate and govern these voluntary regional siting bodies,
and the Federal Energy Regulatory Commission (FERC) could act as an
appropriate ``backstop'' authority where States or regions fail to act.
Additionally, Congress should provide an explicit grant of authority to
the States and FERC to act in cooperation.
Because the White Paper develops a necessity for FERC siting
authority we must strongly oppose the provisions of this section that
contemplate such authority going to FERC. While NARUC is supportive of
the concept of a voluntary regional approach, NARUC is equally in
opposition to the proposal found in the White Paper that contemplates
FERC preemption of the regional bodies and the non-voluntary nature of
the White Paper proposal. Additionally, as a matter of public safety,
the States should continue oversight of maintenance requirements.
market transparency rules
Many regional electric markets throughout the country have
experienced price spikes of unusual and unexpected proportions. These
price spikes have led to curtailment or shutdown of operations of some
large industrial customers and to increased prices for smaller
commercial and residential customers.
The high market price volatility has raised concerns about the
integrity of the markets, leading to calls from numerous participants,
consumers and policy makers for heightened monitoring of these markets
by regulatory bodies. In order to identify corrective policy options to
assure the public of the competitiveness and efficiency of the
developing wholesale electricity market and its prices, regulatory
bodies need access to data such as production for generating plants,
transmission path schedules and actual flows.
The electric industry restructuring efforts of the Federal
government and the various States are based upon an assumption that
wholesale markets are workably competitive. To that end, policy makers
must have the ability to provide confidence to an already skeptical and
uneasy public that the market is not being ``gamed.'' This confidence
can only be provided if regulators are able to access the data
necessary to ensure that the market is functioning in a truly
competitive fashion. To the extent data is currently shared among
market participants for purposes of reliability, it should also be
available to regulators and the public.
NARUC supports legislation recently introduced by Senator Wyden and
co-sponsored by Senator Burns as an effective way to ensure both
Federal and State regulators have the information necessary to
adequately monitor wholesale electricity markets and to assure proper
access to such information. NARUC believes this legislation would
provide great benefits to the market and its customers and should be
included in any comprehensive energy bill.
puhca and purpa
NARUC has adopted resolutions that support Congressional action to
address the Public Utility Holding Company Act (PUHCA) and the Public
Utility Regulatory Policies Act (PURPA) provided certain conditions are
met. In the case of PUHCA, we believe that Congress could substantially
streamline the statute (while providing State commissions and FERC
enforceable access to holding company books and records, such as in
sections 814 and 815 of S. 389) only as part of a broader legislative
effort to restructure the utility industry. With respect to PURPA, we
would support prospectively repealing the utility mandatory purchase
requirements, conditioned upon the development of competitive electric
markets and as part of broader restructuring legislation, not as a
stand alone initiative.
As a general matter, it is NARUC policy that neither PUHCA nor
PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC
believes that relief from these statutes should be contingent upon the
development of competitive markets as determined through a State
commission supervised restructuring program.
I wish to address a specific concern with S. 388. Section 803 is
intended to protect prior PURPA contracts by preempting State
ratemaking authority. Specifically, it restricts the ability of State
commissions to require utilities to take steps to mitigate stranded
costs that may result from above-market contracts. Section 803 of S.
388 would leave little incentive for utility companies to minimize
costs passed through to customers, holding harmless utilities and
qualifying facilities.
consumer information and protection
As we have seen in restructured telecommunications markets, the
movement to competition in retail energy markets will require State
regulators to be especially vigilant on such consumer protection issues
as slamming (unauthorized switching of consumers to alternative service
providers) and cramming (charging consumers for services they did not
request).
Complaints to State commissions about utility service quality and
about specific practice have burgeoned in recent years. Most States
have expanded their customer service programs. Many State legislatures
have adopted tough new laws to protect customers from practices such as
slamming and cramming. Through NARUC and the National Regulatory
Research Institute, State commissions have worked together to develop
creative and effective new customer education and protection programs.
NARUC has strongly supported policies to provide consumers with price
and environmental impact information concerning their electricity
consumption. These efforts strengthen competition, especially for small
business and residential customers by giving customers the confidence
they need to participate in energy markets and by keeping the bad
apples out of the energy market barrel.
Federal restructuring legislation must not interfere with State
efforts to protect consumers, either by preempting State authority or
precluding States from adopting more protective standards in areas
where Federal standards apply.
public benefits
NARUC continues its insistence that public benefits programs must
be included in any federal legislation, however we believe that further
study of societal costs and benefits is warranted prior to NARUC
supporting any particular implementation or funding mechanism for the
continued support of public benefits programs.
tax provisions
NARUC has taken no position on the tax provisions described in the
White Paper or in S. 388 and S. 597.
In conclusion, I would like to thank the Chairman, the Ranking
Member and the Committee for giving me an opportunity to appear on
behalf of NARUC. On the jurisdictional issues where consensus is
difficult to reach, such as siting RTO membership and retail
transmission, we would urge the Committee to defer to the courts and
FERC to wrestle with these issues. In other critical areas such as
enforceable reliability standards, uniform interconnection rules and
development of market monitoring tools, we urge the Committee to move
forward with legislation to serve the goal of establishing workably
competitive and transparent wholesale power markets.
Thank you for your attention, and I look forward to any questions
the Committee may have.
The Chairman. Thank you very much for your testimony.
Mr. Dushaw.
STATEMENT OF JAMES L. DUSHAW, DIRECTOR, UTILITY DEPARTMENT,
INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS
Mr. Dushaw. Thank you, Mr. Chairman. I guess it's enough to
say the IBEW, the International Brotherhood of Electrical
Workers, is the union that represents the majority of the
unionized electric utility employees in the Nation, some
220,000 more in Canada, and working in all aspects of the
industry and in all types of ownership, Federal, municipal,
investor owned, coop.
It should be clearly understood, Mr. Chairman, that the
IBEW doesn't believe that average Americans, workers and
families are calling for commoditization and restructuring of
the industry. They are becoming aggravated with the risks and
they're becoming more apparent. Not to mention what has been a
huge transfer of wealth taking place. Those real energy costs
take a bigger bite out of workers' household budgets.
This morning, I want to briefly address the relationship
between the American electric utility worker and the
reliability of the utility system, I think a faction that has
been overlooked up to this point. Some energy marketers would
have us believe it's been said their reliability or it should
be just a function of the marketplace. Some have urged that the
Nation should not afford ``a gold plated system'' as they
believed the earlier compact had delivered.
Obviously, we would have to accept less reliability as a
quid pro quo for competition. IBEW workers take serious issue
with all these philosophies. They see that for the overwhelming
majority of Americans, reliable electric power is an essential
service, not just to market commodity.
Beginning in 1990, in the advent of competition, electric
utilities, mostly the large IOUs, began to downsize their
companies to look good in the Wall Street Journal and to gain
more efficiencies. The Energy Information Administration
documents the cascade of the utility downsizing over a 10-year
period that has resulted in more than a 27 percent smaller
electric utility operations workforce. These are not
administrative personnel. These are hands on work force people.
That trend continues to this day and I think is a cause for
serious concern.
Now what do these numbers actually mean in terms of real
world reliability experiences? Well, the report of the U.S.
Department of Energy Power Outage Study Team uncovered several
factors common to the eight major outages of the summer of 1999
which were the object of this study. The IBEW measured several
of the findings as attributable to cutbacks in the work force
and lack of maintenance as budgets were compressed in order to
meet the challenges of competition. The Keystone Study released
just last month found that from 1994 to 1999 Pennsylvania
utilities decreased their work force by about 6,500 people.
Perhaps coincidentally at this same time period, customer
complaints more than doubled.
Electric utility outages not including major storms lasted
on average, in Pennsylvania, 30 minutes longer in 1999 than
they did in 1994. During the 6 years examined by the study,
Pennsylvania's utilities reinvested just 5 percent of their
profits in Pennsylvania's utility systems. The rest amounting
to more than $15 billion was spent elsewhere off in another
State or even in other countries. Consumers and workers do not
appear to have gained ground and investment trends raised
questions about the long term adequacy and safety of
Pennsylvania's utility infrastructure.
With competition, the economic players pushing electric
restructuring have no allegiance to the broader public
interest. Evidence, how all the deal makers ducked
responsibility when California went sour. Nobody seemed to be a
part of that deal in the end now. The market is not designed
nor equipped to address reliability issues for the average
consumer. We believe it will take a proactive public sector
working with the appropriate government entities to safeguard
reliability.
Common sense tells you that if the customer base for
electricity is growing, and it is, and the work force that
supplies that electricity is shrinking, cut to the bone and
then some, we've got problems and things are going to get worse
before they get better because there are other negative factors
that impact the worker reliability equation.
I've shown you a work force dramatically diminished in
numbers. Add that to the fact that the average utility worker
is in their 1940's, mid-1940's, and top that with the fact that
almost all utilities stopped funding apprentice and training
programs about 8 to 10 years ago. In other words, we're facing
a generation gap. There are few trained workers anywhere in the
United States to step up and fill the jobs that even now are
going begging. Some utilities are hiring directly now from
Canada now. These are trained workers.
Utility employers have cannibalized each other's work
forces until there's nobody left to hire. So where will this
new skilled work force come from? Obviously, the training of
this new utility work force will continue to be a key
reliability issue. At the end of the policy chain, there is
somebody with hands on responsibilities to make the system
work. These people have huge responsibilities for reliability
and require training typically 5 years for a trained worker as
a lineman at this hands on stuff.
Well, the IBEW and the EEI in accordance with the National
Skills Standards Act of 1994 have been working with each other
and with the National Electric Cooperative Association and the
American Public Power Association that's trying to come to some
sort of an approach to this. So the IBEW here urges Congress to
assist this process by endorsing guidelines for model codes and
standards for training and reliability.
Basically, the idea is is that Congress would in some way
urge the Secretary of Energy to facilitate development of codes
and standards for worker training and also for reliability.
There are innumerous standards that the industry has invested a
lot of time and money and effort in developing but it is not
homogenized or coordinated in any way.
So we would urge that Congress take a hard look at urging
the Secretary of Energy to develop guidelines in both of these
areas, worker training and reliability, to put forth for
adoption voluntarily by the States. In other words, we bring
the best in the industry together to develop the best possible
approach to this. Thank you.
[The prepared statement of Mr. Dushaw follows.]
Prepared Statement of James Dushaw, Director, Utility Department,
International Brotherhood of Electrical Workers
Good morning Mr. Chairman, and Members of the Committee:
My name is Jim Dushaw and I am the Director of the International
Brotherhood of Electrical Workers Utility Department. Thank you for
inviting the IBEW to comment this morning.
Of the 95% of investor-owned electric utilities that employ union
members, the International Brotherhood of Electrical Workers represents
98% of those workers. We also represent the largest number of unionized
employees working for municipal and rural cooperative employers, and
the IBEW represents workers at federal electricity facilities, such as
TVA and Bonneville Power. Of the three-quarter million membership of
IBEW, more than two-hundred-fifty thousand of them are utility workers,
who are covered by some 1400 collective bargaining agreements in the
U.S. and Canada.
It should be clearly understood from the outset that the IBEW does
not believe that average Americans, workers and families, are calling
for the commoditization and restructuring of electricity and, indeed,
are becoming aggravated with the risks that are becoming more apparent;
not to mention the huge transfer of wealth taking place, as real energy
costs take a bigger bite out of household budgeting.
This morning I will briefly address the relationship between the
American electric utility worker and the reliability of the electric
utility system. Some energy marketers would have us believe that
reliability is, or should be, just a function of the market. Some have
urged that the nation should not afford a ``gold-plated system'' as
before the drive to restructuring. Others would have us accept less
reliability as the quid pro quo for achieving competition. The IBEW
utility workers take serious issue with all of these philosophies. For
the overwhelming majority of Americans, reliable electric power is an
essential service--not a market commodity.
Beginning in 1990, in anticipation of the coming competitive
marketplace, electric utilities, mostly the large IOU's, began
downsizing workforces in order to cut costs and gain the edge they
believed would secure success, or at least survival, in the
marketplace. The Energy Information Administration documents the
cascade of utility downsizing over a 10-year period that has resulted
in a 27% smaller workforce overall--and that trend continues to this
day.
What do those numbers actually mean in terms of real-world
reliability experiences?
The report of the U.S. Department of Energy Power Outage Study Team
uncovered several factors common to the eight major outages of summer
1999, which were the object of their study. The IBEW measured several
of the findings as attributable to cutbacks in the workforce and
maintenance.
The Keystone Study, released last month, found that from 1994 to
1999, Pennsylvania utilities decreased their workforce by about 6,500
people. Perhaps coincidentally during this same time period, customer
complaints more than doubled to over 10,000. Electric utility outages
(not including major storms) lasted, on average, 30 minutes longer in
1999 than they did in 1994.
During the six years examined by the study, Pennsylvania's
utilities reinvested just 5% of their profits in Pennsylvania's utility
systems. The rest, amounting to more than $15 billion, was spent
elsewhere (often in other states or even in other countries). The study
concluded that utility CEOs (with 76% pay hikes in that time frame),
and the electric utilities themselves have prospered most as
deregulation has moved forward. Consumers and workers ``do not appear
to have gained.'' And investment trends raise questions about the long-
run adequacy and safety of Pennsylvania's utility infrastructure.
Pennsylvania has been touted as the poster child of electricity
deregulation. Residential customers have indeed enjoyed lower
electricity rates--mandated by a legislated price cap (recently
extended for up to five years). No one in Pennsylvania has had to
suffer free-market electricity prices.
With competition, the economic players pushing electric
restructuring have no allegiance to the broader public interest.
Evidence: how all the dealmakers ducked responsibility when California
went sour. The market is not designed nor equipped to address
reliability issues for the average consumer. We believe it will take a
proactive public sector working with the appropriate government
entities to safeguard reliability.
Common sense tells you that if the customer base for electricity is
growing, and it is, and the workforce that supplies that electricity is
shrinking, cut to the bone and then some, we've got problems. And
things are going to get worse before they get better, because there are
other negative factors that impact the worker/reliability equation.
I've shown you a workforce dramatically diminished in numbers; add
to that the Edison Electric Institute statistic that the average
utility worker is in their forties, and top that with the fact that
almost all utilities stopped funding apprentice training programs about
8-10 years ago. In other words, we're facing a generation gap--there
are few trained workers anywhere in the U.S. to step up and fill the
jobs that even now are going begging. Utility employers have
cannibalized each other's workforces until there's nobody left to hire.
So where will this new, skilled workforce come from? Obviously, the
training of this new utility workforce will continue to be a key
reliability issue. Sooner or later it may, of necessity, become an
important regulatory issue.
The IBEW and Edison Electric Institute, in accordance with the
National Skills Standard Act of 1994, have been working with other
industry stakeholders to develop skills standards for electric utility
workers.
The IBEW urges Congress to assist this process by endorsing
guidelines for model codes and standards for training and reliability.
A national training standard would require every employer in the
electricity industry to employ only workers certified to that standard,
and to train them to that standard if they were not. This would
increase system reliability because industry across the board would be
required to employ workers who are trained to established minimum
levels, know their jobs, and be able to do the work efficiently and
safely.
Congress envisioned that the 1992 Energy Policy Act would create a
vibrant robust wholesale electricity market, which would lower bulk
power prices and benefit all consumers.
The ensuing years have brought forth everything but. The electric
power industry has become destabilized to the degree that industrial
customers feel they must buy their own electricity generators to insure
supply! Reliability has become a function of the market all right--go
to the market and buy your own generator!
To summarize, system reliability depends in great measure upon a
trained, experienced and adequate workforce. Presently, the aging
workforce has been diminished by layoffs, working longer hours on
systems poorly maintained, with no relief in sight. Training programs,
buttressed with national skills standards, and having mechanisms to
attract and retain qualified workers, are critical to the maintenance
and expansion of the national electrical systems.
Additionally, Mr. Chairman, the IBEW recognizes your remarkable
effort to distill the vital issues needed to be addressed in order to
begin to calm the industry. Among these, we would rank accelerated
development and investment in the combined U.S. transmission grid
system as most important.
The Chairman. Thank you very much for your testimony.
Mr. Hamilton.
STATEMENT OF DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE
ENERGY
Mr. Hamilton. Mr. Chairman, my name is David Hamilton. I'm
policy director of the Alliance to Save Energy, a bipartisan
non-profit coalition of business, government, environmental and
consumer leaders dedicated to improving the efficiency with
which our economy uses energy. And considering your familiarity
with the organization, I'll leave that at that.
But I appreciate the opportunity today to testify in
support of the creation of a public benefits fund, a mechanism
designed to help attack energy waste in our Nation's electric
systems, save taxpayers money, increase the availability and
the reliability of the nation's electricity supply, improve
services for low income Americans, reduce environmental
pollution, and help meet our future electricity needs more
cheaply, quickly, and cleanly.
One might say, Mr. Chairman, that 2001, considering the
huge amount of coverage and the swirling debates over energy
issues could be described as 2001, an energy odyssey. We have
heard in different places that we have an energy crisis. We've
heard that we don't have an energy crisis. We've heard that
California's problems have been the result of the lack of
Arctic oil and that actually California's attempts to save
energy have been the cause of their problems.
It's been very difficult to sort out exactly what the truth
is in the swirling issues of energy but what we do know is that
we're at a point at which we need to make decisions and move
forward. And the one thing that most parties seem to agree with
is that energy efficiency needs to be an elemental component in
a balanced energy program.
The Vice President, the President, leaders of Congress and
both parties have expressed that, but coming up with policies
that are agreeable, that actually aggressively dip into energy
waste, have been more elusive to come by and there's been a
general resistance to the policies that either take a lot of
resources or that require producers of products to make their
products much more efficient.
I'm here to testify in support of your proposal to create a
public benefits fund, Mr. Chairman. There are a number of
conditions in the system and in the economy right now which
make this a wise and sound thing to do, including rampant
energy waste in the system, lack of guidance for consumers as
to how to save energy while their bills are rising, large
decreases over the past decade in public benefit spending,
we've got reliability problems that have affected most regions
of the country over the last several years, and a dearth of
substantive measures to achieve greater energy efficiency.
The bottom line, Mr. Chairman, is that the Alliance to Save
Energy estimates that the public benefits fund that you
recommend can displace up to a 130,000 megawatts over the
next--by 2020. That's more than 400 300-megawatt powerplants
and nearly one-third of the needed capacity increases estimated
by the Energy Information Administration in 1999. We believe it
could cut America's energy bills by $135 billion.
Public benefits programs have a long and fruitful history
of success. I'll point up a couple of examples. The Vermont
legislature could not agree on utility restructuring. What they
could agree on was that they needed to do spending on energy
efficiency and over the last 10 months of the year 2000, they
spent a little over $5 million on energy efficiency programs
and were able to displace six megawatts of winter peak and over
two megawatts of summer peak at a cost of 2.6 cents per
kilowatt hour at a time when the wholesale price in Vermont was
over 5 cents a kilowatt hour. When we make the claim that
energy efficiency can deliver electricity resources, you know,
quickly, cheaply and cleanly, this is the kind of thing we
mean.
Savings in Vermont over 10 months amounted to $17 million
on a $5 million investment and a 220 percent return on
investment in a very short period of time. These investments
are out there and waiting to be capitalized on and reaped.
The Rand Corp. did a study on California energy efficiency
programs from 1977 to 1995 and came up with again startling
conclusions that they--the commercial and industrial programs
returned over approximately $1,000 per capita over that time
period for $125 per capita expenditure. At the same time, it
prevented a 40 percent increase in stationary source air
pollution by not having to go to powerplants and perhaps most
indicative of the ancillary economic benefits of increased
energy efficiency of taking capital away from unproductive uses
like keeping the lights on and putting them into productive
uses like innovation and investment, the 3 percent of the
California gross State product in 1995 was the result of
lowered energy intensity that the multiplier effect for taking
money out of unproductive and putting it into productive uses
is greater than in most cases.
And in a year of hand wringing over what we can do in the
short term, these programs remain out there. Now public
benefits programs have been decreased by 43 percent since the
early 90's. Part of that is the restructuring in States where
separating generation, distribution and transmission where you
don't have a single interest in building less generation that
you used to.
You've got States that have promoted deregulation and feel
that they have less authority to require utilities to do
spending than in the past. But in any case, we have less than
half the resources to do this kind of spending at a time when
we need a great deal more of those kind of resources.
Finally, there--all we've heard about, the difficulties of
the transmission system and how to insure reliability, there is
another way to look at it. And if you can--rather than thinking
about what is the next weakest link in the chain, think about
lightening the load at the end of the chain so that, you know,
ultimately the system is more secure because you're less likely
to reach that critical point because you've saved energy.
The red light's on and those are my basic points. Thank you
very much, Mr. Chairman.
[The prepared statement of Mr. Hamilton follows.]
Prepared Statement of David Hamilton, Policy Director,
Alliance to Save Energy
Mr. Chairman and Members of the Committee, thank you for the
opportunity to testify before you today in support of the creation of a
Public Benefits Fund, a mechanism designed to help attack energy waste
in our nation's electric system, save taxpayers money, increase the
availability and reliability of the nation's electricity supply,
improve services for low-income Americans, reduce environmental
pollution, and help to meet our future electricity needs more cheaply,
quickly, and cleanly.
My name is David Hamilton. I am Policy Director of the Alliance to
Save Energy, a bi-partisan, non-profit coalition of business,
government, environmental, and consumer leaders dedicated to improving
the efficiency with which our economy uses energy. Senators Charles
Percy and Hubert Humphrey founded the Alliance in 1977; we are grateful
to have you as our Chairman, Sen. Bingaman, and, as you know, the
current Vice Chairs are Sen. James Jeffords and Rep. Ed Markey.
Over sixty companies and organizations currently support the
Alliance to Save Energy under our well-known Alliance Associates
Program. If it pleases the Chairman I would like to include for the
record a complete list of the Alliance's Board of Directors and
Associates, which includes many of the nation's leading energy
efficiency manufacturers and end users, electric and gas utilities,
research organizations, state energy programs, and others providing
cost savings and pollution reduction to the marketplace.
The Alliance has a long history of researching and evaluating
federal energy efficiency efforts. We also have a well-established
history of supporting and participating in efforts to promote energy
efficiency that rely not on mandatory federal regulations, but on
partnerships between government and business and between the federal
and State governments. Federal energy efficiency programs at the
Department of Energy (DOE), the Environmental Protection Agency (EPA),
and other agencies are largely voluntary programs that further the
national goals of environmental protection, as well as broad-based
economic growth, national security and economic competitiveness.
summary: energy efficiency in an energy crisis
Mr. Chairman, the economic and political developments surrounding
energy issues that have occurred this year could--in cinematic form--be
titled ``2001: An Energy Odyssey.'' The vast media coverage of energy
issues and the resultant spin have some pundits predicting a full blown
energy crisis requiring the dismantling of our infrastructure of
environmental regulations, while others denounce a crisis mentality as
an opportunistic spin on a few price and supply blips. California's
unusual situation has had people blaming the rolling blackouts and
financial woes that have occurred on everything from the lack of oil
from the Arctic National Wildlife Refuge, to California's aggressive
efforts to save energy in the 1980s and early 1990s,
Whatever the final resolution of these questions, we are at a
political point at which we need to make decisions about how we proceed
in the future to provide clean, cheap, reliable energy supplies to our
nation. Mr. Chairman, nearly everyone in this debate--either sooner or
later--has advocated the nation's need to pursue aggressive energy-
efficiency measures as part of a balanced energy bill. The President
and Vice-President have, after initial equivocation, now include energy
efficiency and conservation in their discussions on energy policy
options. House and Senate leaders on both sides of the aisle have done
the same. Public opinion polls have demonstrated overwhelming support
for making energy-efficiency a key, active component of any energy
plan.
Mr. Chairman, developing sound policies to accomplish this goal has
proven somewhat more elusive. While the President's energy plan
contained excellent arguments for improving energy-efficiency, the
actual details of the plan failed to provide methods to substantially
reduce America's energy use in transportation, electricity, or home
heating fuels. Similarly, the bill expected to reach the House floor
next week--with the exception of the tax title--fails to produce
meaningful energy-efficiency improvements. Although we anticipate that
the provisions of the tax title will help to reduce energy use in the
residential sector, the Alliance feels that much more can and should be
done by Congress to take advantage of this golden opportunity to
promote energy efficiency. Member's have focused their concerns on
possible costs to consumers and industries--however we have strong
analytical evidence that demonstrates the overall savings with the
implementation of aggressive energy efficiency measures and policies.
If we are to actually improve energy-efficiency and achieve the
``balanced'' energy policy that nearly all interests claim to seek, Mr.
Chairman, we need to have the will to commit resources to where they
are needed and to carry out these improvements. The Alliance to Save
Energy regards the creation of a public benefits fund as a critical
element in any energy plan that hopes to bridge the electric system of
today with a deregulated market of tomorrow. Mr. Chairman, we cannot
just do what is easy in a national energy plan. We have to have the
commitment to take ambitious steps to capture the benefits of energy-
efficiency for the budgets of Americans, our environment, our national
security, and our economy.
why a public benefits fund?
Mr. Chairman, the concept of a public benefits fund is designed to
solve a number of the problems with the way we generate, transport, and
sell electricity in the United States that are not currently being
effectively addressed. A public benefits fund will pull together
resources through which states can--in a targeted, flexible fashion--
attack pockets of energy waste, seize opportunities to employ renewable
energy, improve electric services for low-income Americans, and develop
targeted mechanisms for providing electricity cleanly and cheaply.
We praise your introduction of this provision in your own
legislation and see it as a logical and critical compliment to other
measures in your bill to further the deregulation of the electricity
industry.
The current conditions that warrant the creation of a federal
public benefits fund are:
1. Rampant energy waste in the electricity system;
2. Lack of guidance for consumers in identifying ways to save
energy;
3. Large decreases over the past decade, in spending on public
benefits programs;
4. Problems with the reliability of the electric system in the
Western, Mid-Western, and Eastern United States over the past three
years; and
5. A dearth of substantive measures to achieve greater energy-
efficiency in the electric system.
what is a public benefits fund?
As created in S. 597 and in other legislation introduced in the
last Congress, a public benefits fund would be created through the
imposition of a non-bypassable charge on electricity entering the
transmission grid. The fund would be collected and administered by an
independent fiscal agent. The monies collected in the fund would then
be redistributed to the state and tribal governments for specific uses
to promote public benefits that are not addressed through the interests
of power generators, or transmission and distribution utilities.
Proposals to date have varied as to the level of the charge, how
the money is administered, and the specific public purposes qualifying
for funding under the proposal. Some are set up as matching funds for
public purpose expenditures, others leave the distribution scheme to
the Secretary. Some contain caps on the amount of money that can be
collected, while others set out a procedure by which states apply for
funding according to their previous year's expenditures.
Twenty-three states now have public benefits programs--ways of
conglomerating resources to be targeted toward saving energy and other
public purposes. These states are: Arizona, California, Connecticut,
Delaware, District of Columbia, Illinois, Maine, Maryland,
Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico,
New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Vermont,
West Virginia, and Wisconsin. Some of these programs are funded by
wires charges, some are funded by direct state appropriations or other
methods.
A federal public benefits fund is needed to augment state resources
devoted to these public purposes, and to spur the creation of public
benefits programs in the more than one-half of the states that do not
undertake them now.
the bingaman proposal (s. 597)
S. 597 would levy a one mill per kilowatt-hour charge on generators
of electricity. This charge would be collected as the electricity
enters the transmission system. Such a minor charge would raise a
significant amount of money for the fund--estimates run as high as $3.4
billion each year given current levels of usage. The Alliance to Save
Energy estimates the residential share of the cost to be approximately
$1.00 per month. An independent fiscal agent appointed by the Secretary
of Energy on a monthly basis would collect the monies monthly from
transmission utilities and disbursed in block grants to states and
tribes. Imported electricity will also be assessed the one mill charge.
The specific public purpose programs delineated in the Bingaman
proposal include:
low-income assistance;
improvement of electric facilities for rural or remote
communities;
electricity demand reduction;
greenhouse gas mitigation projects (must be 50 percent cost-
shared);
new renewable energy capacity or efficiency improvements to
existing renewable energy capacity;
increased efficiency of hydroelectric dams or providing
additional capacity at existing dams.
The Secretary of Energy would be charged with developing a formula
to allocate public benefit funds among the states and tribes based on
the number of low-income households and the average annual cost of
electricity to households in those jurisdictions. In addition, the
Secretary would be responsible for developing criteria that delineate
what are and what are not public purpose programs as guided by the
legislation. The states and tribes may either receive and administer
the monies themselves, or they may designate a separate entity to
perform that function. If enacted, the fund in S. 597 will remain in
existence until December 31, 2015.
The bottom line, Mr. Chairman, is that the Alliance to Save Energy
estimates that the public benefits fund in your legislation can
displace up to 130,000 MW of electric capacity by the year 2020! That
is equivalent to more than 400 300-MW power plants, and nearly one-
third of needed capacity increases by 2020 estimated by the Energy
Information Administration in 1999. We believe it could cut America's
energy bills by $135 billion, and bring with it significant reductions
in both criteria air pollutants and greenhouse gases.
comments on the bingaman proposal
1. Greenhouse gas mitigation needs further definition. In addition,
we don't believe it is appropriate for a state to spend its entire
share of the fund in this area only, so we would favor a cap on the
amount of the fund available for this purpose.
2. As opposed to other proposals, this public benefits fund does
not include a state match. A match or partial match provides
significant incentive for a state to maximize its efforts on public
purpose programs, and thus stands to save more energy than the program
outlined here. While we acknowledge political constraints in this area,
we support continued consideration of measures to maximize state
participation.
3. The legislation leaves the determination of what is an eligible
public purpose program up to the Secretary. This provides less public
accountability than other mechanisms. We urge that the proposal include
opportunity for public input and comment to the criteria developed by
the Secretary.
capturing energy waste in the electric system cleanly, cheaply, and
quickly
Public benefits programs have been startlingly successful at
attacking energy waste on a local and regional basis. During the decade
leading up to 1994, demand side programs in the nation were able to
displace 30,000 MW of electric capacity--or the equivalent of 100 300-
MW power plants. This substantial savings was achieved for a utility
cost of less than $0.03 per kilowatt hour, considerably less than many
wholesale rates for electricity then and now.
Take the Vermont experience in 2000. Several years ago, the Vermont
Legislature took up utility restructuring legislation. Like the state
of Wisconsin, after a tough political fight over deregulation ground to
stalemate, what they decided they could agree on was to initiate
investments in energy-efficiency. To do this, the state set up an
``energy-efficiency utility,'' run by a private contractor and
accountable to the Vermont Public Service Board. During the final 10
months of 2000--while undergoing all the additional burdens of setting
up a major project--Efficiency Vermont was able to displace 2.1 MW of
summer peak power and 6.3 MW of winter peak. All for a cost of $0.026
per kilowatt hour. This rate was achieved at a time when wholesale
rates in Vermont are more than $0.052 per kWh. In 10 months, the
Vermont effort netted $17.7 million in saved electricity against
expenditures of $5.4 million--a 227 percent return on investment in the
first year of operation.
In this year of hand-wringing over what we can do in the short term
to relieve the burden of high energy prices and supply constraints,
Vermont provides an example of high returns in a very short period of
time.
In March 1999, the Rand Corporation published a study of the
results California utility energy-efficiency investments between 1977
and 1995. The Rand study came to some remarkable conclusions, Mr.
Chairman. Rand concluded that energy-efficiency efforts paid back into
the state's economy at roughly $1000 per capita on investments of $125
per capita over that period. In addition, the energy saved prevented a
40 percent increase in stationary source air pollution by avoiding the
construction of many new power plants. Most startling of all, Mr.
Chairman, might be that Rand estimates that 3 percent of the California
gross state product in 1995 was produced due to lowered energy
intensity in the state over the preceding period. An entire year's
worth of healthy economic growth, derived from taking money out of
relatively unproductive uses like keeping the lights on, and made
available for productive uses like investment and innovation.
I could spend the entire hearing recounting success stories
achieved by demand-side energy-efficiency investments, Mr. Chairman.
The message is, however, that these programs work, and we need more of
them in more places.
consumers need additional guidance and help to lower their energy bills
Inherent in a wide variety of public benefits programs, Mr.
Chairman, is consumer education and in many cases, actual subsidies for
the purchase of energy-efficient equipment for home owners. While
residential consumers will pay as much as an extra dollar per month for
electricity under the public benefits fund contained in S. 579, public
benefits programs give them the tools to save a much greater amount
than that on their electricity bills. For example, rebates offered for
compact flourescent light bulbs can create substantial savings for
consumers, while public education programs like the aggressive
marketing of the Energy Star label in New York is giving consumers
direction in targeting the purchases of appliances, refrigerators, and
other energy-gulping devices toward the most energy-efficient options.
In many cases, the public information extends well beyond
electricity into other areas of home energy use. The spike in natural
gas prices last winter resulted in millions of Americans scrambling to
pay substantially higher home energy bills. The double duty now
expected of natural gas supply to meet the home heating needs of over
50 percent of American families and to power the lion's share of new
electric generation will likely continue to be an issue in coming
years. Public benefits programs can step in to substantially meet this
need for information and even provide discounts to induce consumers to
buy more efficient equipment.
Along with making it easier to build more plants and transmission
facilities, we must make it easier for consumers to trim their own
energy use. The public benefits fund contained in the legislation is an
excellent mechanism to achieve this.
resources for public benefits: shrinking over time
In the 1980s and early 1990s, Mr. Chairman, States justified their
public benefits programs on the basis that saving energy to augment
electricity supply was largely cheaper for utilities and ratepayers
than building new generation. In addition, saving energy avoided the
environmental downside of burning fossil fuels, could be deployed in a
relatively short period of time, and reduced--rather than increased--
strain on transmission and distribution infrastructure.
In addition, in many states a process known as Integrated Resource
Planning (IRP) was employed to determine the best way to meet demand
growth for the state or region. That involved actually considering
alternatives like cost, environmental values, time of deployment, and
overall load considerations before deciding on a course to expand
capacity. In this context, many States required utilities to expend
resources on public purpose programs and made those expenditures
recoverable in rates. National expenditures for public benefits reached
an estimated high of $3 billion in the early 1990s. Unfortunately,
these impressive numbers have been steadily declining due to changes in
the utility industry and lack of attention by States and spending on
public benefit funds has fallen to an estimated $1.7 billion this year.
Fast forward, Mr. Chairman, to the mid-to-late 1990s when States
were involved in a frenzied effort to go in the other direction, away
from considering options for the development of the electric system and
toward market competition for electricity. In addition to the loss of
rational comparison of alternatives, many States also no longer felt
they could compel utilities to undertake public benefits programs when
the overall direction of the market was toward deregulation. Finally,
the widespread separation of generation, transmission, and distribution
resources away from the traditional vertically integrated utility
erased the inherent interest of utilities in meeting demand in the
cheapest way. Distribution utilities no longer cared where the power
came from, as long as they could get it cheaply, and generators had no
desire to be constrained from building plants. In addition, almost all
players braced for fierce competition in the industry and believed that
payouts for public purpose programs would constitute both a hindrance
to their competitive position and investments that might pay off for
others, but not for them.
All this brings us to today, where we are in a suspended transition
to competition--some states have struck restructuring agreements, some
have not begun the process, and still others have begun the process
only to stop dead in their tracks. Major jurisdictional, environmental,
physical, economic, and other questions need yet to be answered before
the seamless national highway for electricity purchases--envisioned by
those who originally espoused the brave new world of competitive
electricity markets--can be realized. Sorting out all of these concerns
is likely to take many years.
In the meantime, Mr. Chairman, the need for the achievement of
energy efficiency is greater than ever to help stabilize supply and
price, reduce air pollution and greenhouse gases, and ease the need for
massive infrastructure replacement. Public benefits programs are high-
yield, short term investments that provide nearly as much in ancillary
benefits as in their considerable economic returns. The 43 percent
reduction in public benefits spending since the peak in the early 1990s
represents a critical missed-opportunity for the American consumer,
environment, and economy.
cheaper, quicker, cleaner reliability
Rising consumption of electricity in the United States has created
a situation where peak demand for power is straining generation,
transmission, and distribution capacity in many regions of the country.
We have a variety of tools to address this problem. The one most
pursued by regional power pools and organizations to date has been to
focus on the weakest link in the chain that fails and to replace it,
whether it is the transformer, transmission line, or the substation.
Building new generation won't cure a transmission bottleneck or make a
piece of equipment withstand the greater strain of a demand spike. Mr.
Chairman, unless we are to replace our entire electricity
infrastructure, this way of managing reliability will always sink to
the next weakest link. The weakest link has to be addressed, of course.
When a link breaks we have to fix it.
But a better way to proceed, Mr. Chairman, is to reduce the strain
on every link by lightening the load at the end of the chain. In many
of the reliability incidents and price spikes we have observed over the
past several years, the difference between a small increase in price
and a major spiral has been a small amount of electricity in real
terms. Energy-efficiency should play a major role in ensuring that the
supply of electricity meets the demand. It is in policy-makers'
interest and the interest of consumers to avoid being faced with
rolling blackouts, severe price increases, and other disasters. The
public benefits fund can contribute to the reliability of the system in
a cheaper, quicker, cleaner, more targeted way than a wholesale drive
to build more generation.
Earlier, I outlined how pursuing greater energy-efficiency is no
longer in the interest of generators or distribution utilities. That
does not apply in cases where the reliability of the system is in
question. We can look to California to supply the lesson that when
power is scarce, or the ability to get it to the right place at the
right time is impaired, the distribution utility faces significant
exposure to price gouging by generators. Energy saved through a public
benefits fund increases the stability of the system, thus lessening the
risk to all parties in the regulatory and distribution process for
electricity.
a balanced energy policy: we must address waste in the electricity
system
A federal public benefits fund is an aggressive, credible method by
which to capture energy savings in the electric system. This is the
kind of ambitious program that can deliver the kind of energy-
efficiency resources that will create a legitimately ``balanced''
national energy policy.
Mr. Chairman, if we pass by this huge potential for energy savings,
we will be denying electricity consumers the assistance they need to
control their own energy use, the savings to the economy and their
individual bills that is ripe for the taking, and the opportunity to
have their electricity needs met without the environmental damage
caused by the construction of more power plants than we really need.
Thank you for this opportunity to testify in support of the public
benefits fund proposal in S. 597. I'd be happy to take any questions
you might have.
The Chairman. Thank you very much for that testimony.
Mr. Rouse, why don't you go ahead.
STATEMENT OF JAMES B. ROUSE, ASSOCIATE DIRECTOR OF ENERGY
POLICY, PRAXAIR, INC., AND CHAIRMAN, THE ELECTRICITY CONSUMERS
RESOURCE COUNCIL
Mr. Rouse. Thank you, Mr. Chairman. I am the Associate
Director of Energy Policy for Praxair, a large energy intensive
producer of industrial gases which is in Danbury, Connecticut,
and I appear before you today as chairman of ELCON, the
National Association of Large Industrial Consumers of
Electricity which is based here in Washington.
Let me say with some pride, Mr. Chairman, that the major
concerns of ELCON members are nearly identical to those set
forth in your White Paper issued July 20. That is market power,
repeal the PUHCA reliability, transmission grid governance, and
the two additional categories, regional planning and siting and
market transparency rules.
ELCON strongly supports FERC authority to promulgate rules
for the independent operation of the grid and to compel
utilities to turn over control of the transmission facilities
to large regional independent organizations or regional
transmission organizations or RTOs. FERC's recent July 12 order
anticipates what the White Paper propounds and what you
included in the last Congress and S. 1273, Mr. Chairman.
Reliability will always be of paramount importance. ELCON was
an active participant in the NERC process and supported the
consensus language on reliability contained in S. 2071 last
year. In addition to the creation of new statutorily authorized
self-regulating organizations, any legislation must guarantee
non-discriminatory access to the grid and clarify the current
uncertainty about Federal and State jurisdiction over
transmission.
Market power will continue to be of intense interest as
you've heard earlier today. Where buyers and sellers are able
to engage in commercial transactions for supply sourcing, the
FERC will encourage the development of a workably competitive
market through setting of rates, terms and conditions for the
transmission of that power through--and through the oversight
of RTOs.
In turn, RTOs will have an independent market surveillance
function to monitor such markets for potential design flaws,
gaming behavior and the exercise of market power. That function
currently exists in the RTOs that have already been approved.
ELCON is also pleased to note the reference to ``demand
response mechanisms'' in the White Paper. ELCON has proposed
that FERC add a ``ninth function'' to the list of the eight
functions in Order 2000. This would require that markets for
customer load response be integrated with other FERC real time
markets.
Regional planning and siting of new transmission capacity
poses a challenge for you as legislators and policy makers
alike. ELCON believes that Congress should delegate to the FERC
the same authorities under the Federal Power Act with respect
to the siting of interstate transmission as FERC is currently
authorized under the Natural Gas Act with respect to interstate
natural gas pipelines.
As for transmission planning, expansion, and siting, ELCON
believes that any FERC siting authority could be seated to the
regional transmission organizations rather than creating a
duplicative entity such as a regional compact.
The RTOs can or can also oversee regional reserve
requirements, maintenance obligations and market monitoring
functions as I mentioned earlier. As with all other RTO
functions, FERC maintains its oversight role in this area.
Market transparency will clearly be a requirement for the
new regime and market participants will need real time
information on the regulated services including transmission
capacity, ancillary services, and line loading. The Energy
Information Administration and numerous commercial entities
should guarantee an abundance of non-proprietary market
information to encourage the efficient operation of the system
and also vigorous commercial activity among the participants.
Mr. Chairman, I would like to briefly address two of the
other provisions in the White Paper. Regarding the repeal of
PUHCA, in such eventuality, we need clear authority vested in
the FERC to prohibit anti-competitive practices involving
regulated utilities and their unregulated affiliates. And we
argue that optimally PUHCA repeal should not be effective until
competition on a nationwide basis is achieved.
And finally while on the subject of repeal of laws
beginning with the words public utility, any repeal of the
mandatory purchase provisions of section 210 of PURPA must
preserve the Federal guarantee of backup power at just and
reasonable rates and those States without reasonable real
customer choice. And there must remain the requirements for
interconnect to the grid for all co-generators just as there
would be for other suppliers of electricity.
Mr. Chairman, for the reasons set forth at greater length
in my written testimony, we believe this committee and this
Congress must enact strong comprehensive Federal legislation to
achieve workably competitive electricity markets and ELCON
stands ready as it has for a quarter century to represent its
members, to engage in the debate as we have and to propose
policy alternatives and to participate in this momentous shift
in the provision of an essential service which is electricity.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Rouse follows.]
Prepared Statement of James B. Rouse, Associate Director of Energy
Policy, Praxair, Inc., and Chairman, the Electricity Consumers Resource
Council
Good morning, my name is James B. Rouse, associate director, energy
policy for Praxair, Inc. Praxair is a large industrial gases company,
producing atmospheric gases: oxygen, nitrogen, argon and rare gases;
our process gases include hydrogen, helium and carbon dioxide. For us,
electricity is a raw material, constituting up to 70% of our operating
costs. We operate in some 44 countries and are the largest industrial
gases producer in North and South America. I am here today as chairman
of the Electricity Consumers Resource Council, or ELCON. ELCON,
established in 1976, is the national association representing large
industrial users of electricity. ELCON's member companies come from
virtually every segment of the manufacturing community.
ELCON's members operate in a competitive, international environment
and require an adequate and reliable supply of electricity at
competitive prices in a vibrant interstate marketplace. Large users of
electricity know very well that the decisions made in this Committee
and by Congress will have a direct impact on their businesses' well
being as well as business decisions. ELCON greatly appreciates the
opportunity to testify. ELCON and its member companies favor
competition over regulation and have long advocated truly open and
fully competitive electricity markets, including retail access
guaranteeing that all consumers have the right to choose their supplier
of electricity and electricity services. We also believe that, just as
is true for other energy products, a large national or even
international market with consistent rules and standards is optimal for
the sale and purchase of electricity. When it comes to electricity, we
are dealing with a commodity sold in interstate commerce. Our existing
electricity system clearly transcends state lines. We need a national
framework and a strong federal bill. Consumers should benefit from a
large, seamless interstate electricity market.
ELCON members continue to support competition. However, we would
assert that we do not have true competition anywhere. Several states,
in attempting to restructure, has simply deregulated, or in some cases
reregulated, existing monopolies. The failures to date, and California
is perhaps the most egregious but there are others, represent failures
of reregulation and failures of state legislative plans that included
too many political compromises. The experiences in California and
elsewhere cannot and should not be described as failures of
competition.
The major concerns of ELCON members are nearly identical to those
set forth in the chairman's ``White Paper on Electricity Legislation''
issued July 20, 2001. As we identified those issues in testimony before
this committee on April 20, 2000, they are the linked issues of Market
Power, Repeal of the Public Utility Holding Company Act (PUHCA),
Reliability, and Transmission and Grid Governance. The White Paper adds
two other categories: (1) Regional Planning and Siting; and (2) Market
Transparency Rules. Customer choice and retail access are wonderful
goals, but they are worthless if the transmission system, which will
remain monopolistic for many years, does not allow for the free and
non-discriminatory movement of electricity from seller to buyer. Given
that owners of monopoly transmission facilities will still exercise
market power--that is monopoly power--I cannot emphasize too strongly
that regulation is needed to ensure that the owners of the transmission
system do not use their position to the detriment of real competition.
We concur with the White Paper that FERC must have the authority
and be required both to (1) promulgate rules for the independent
operation of the grid and (2) compel utilities to turn over control of
their transmission facilities to independent Regional Transmission
Organizations, or RTOs. Such rules should preserve the reliability of
the grid and encourage the sale and transportation of electricity from
any seller to any buyer in an open, competitively neutral, and
nondiscriminatory manner.
FERC's recent order of July 12 on the RTO issue is a major FERC
initiative. FERC, for the first time, has clearly set forth its policy
that there should be large, regional RTOs: One to comprise what is now
the Western Interconnect; and three that comprise the Eastern
Interconnect. FERC has established mediation dockets to bring the
utilities together to establish RTOs for the Northeast and Southeast.
But we believe that utility membership in an appropriate RTO should not
be voluntary as provided for in Order 2000, but mandatory, and that
legislation should affirm FERC's authority to order utilities to join
regional transmission organizations. As an aside, in the last Congress,
the provisions of S. 1273, offered by Chairman Bingaman, best addressed
the question of RTOs. It granted FERC the authority to oversee the
creation of an RTO and compel utilities to turn over control of their
transmission facilities. Senator Bingaman deserves special praise for
being the first to introduce this concept in his earlier legislation,
and we are pleased he has reintroduced that same idea in this Congress.
ELCON has been an active participant in the NERC process and
supported the consensus language on reliability contained in S. 2071
last year on the condition that it be considered as part of a
comprehensive bill and not on a stand-alone basis. This position is
based on sound policy. While we recognize the need to establish a new,
statutorily authorized self-regulating reliability organization, such
action will barely begin to address reliability. Legislation to reduce
the potential for reliability problems must do more than simply provide
accreditation to a new oversight body. It must establish a framework
for appropriately-sized regional transmission organizations, it must
guarantee non-discriminatory access to the grid, and it must clarify
the current uncertainty about federal and state jurisdiction over
transmission. Moreover, it cannot give new market regulating authority
to those who now have, directly or indirectly, substantial market
power. We concur that legislation should require sanctions and
penalties for failure to comply with rules developed by a new electric
reliability organization and that the entire framework is subject to
federal oversight. ELCON is continuing to work with various
stakeholders in an effort to develop new language. It is becoming
increasingly clear that the ``consensus'' language approved in February
1999 is too complicated, too prescriptive, and too long. There have
been several new proposals put forth even in the last few weeks that
offer improved ways to establish a new electric reliability
organization.
Market power is a subject of intense recent interest, growing out
of the wildly fluctuating rates and volatile supply situation in the
West. Market power arises from several sources. Where there is an
imbalance in supply and demand, market power is often held by a few
producers who can demand higher rates during periods of shortage. Where
there is transmission congestion, the owner and operator of the grid
can favor his own generation affiliate in denying access to competitive
sources. Where the integrated system favors the native load utility
over competing generators, new entrants are discouraged. Where an
artificial power exchange is created for non-market purposes, true
competition is thwarted.
Markets will eventually be workably competitive when there is an
adequate generation supply in all sections of the country and where
that supply can move freely over a transmission system under control
and supervision of large RTOs. Transmission rates, terms and conditions
will be set by the RTOs and administered by the RTOs, subject to FERC
oversight. Any market operated by an RTO or on behalf of an RTO should
be subject to an independent market surveillance function to monitor
such markets for potential design flaws, gaming behavior and the
exercise of vertical, horizontal or localized market power. This
includes markets for transmission services, ancillary services and
power exchanges.
The White Paper posits that legislation should require the
Commission to take into account the impact of ``demand response
mechanisms'' on rates. ELCON has proposed that FERC add a Ninth
Function for Customer Load Response (CLR) curtailment service (in
addition to the Eight Functions set forth in Order 2000). This would
require that markets for CLR be integrated with other FERC real-time
markets. This would also ensure that such markets are reasonably
standardized in each RTO. Participation in the CLR market should be
voluntary and open to any customer.
Regional Planning and Siting for new transmission capacity poses a
challenge for policymakers. ELCON believes that Congress should
delegate to FERC the same authorities under the Federal Power Act with
respect to the siting of interstate transmission facilities as FERC is
currently authorized under the Natural Gas Act with respect to
interstate natural gas pipelines. ELCON agrees that a regionally based
approach to transmission planning, planning and siting is desirable.
However, the RTOs, rather than some new regional regulatory compact,
should be delegated with that responsibility, or as the White Paper
states, FERC should ``cede such authority to appropriately constituted
regional entities,'' which should be RTOs. They would also establish
and monitor regional reserve requirements, maintenance and market
monitoring functions noted above.
Besides the ongoing operation of the grid, RTOs should play a major
role in the planning of new and upgraded transmission facilities, as
required under Order 2000, but which authority would need be augmented
and reaffirmed in legislation. Regulated transmission providers are
entitled to a reasonable opportunity to recover all costs associated
with their prudently incurred investments, plus a return on those
investments that are deemed used and useful. Working through RTO
processes, transmission providers will be assured that all needed
expansions and upgrades will be fully compensated according to FERC
rules.
Market Transparency Rules are integral to the successful operation
of a workably competitive market. While proprietary information on
commodity pricing will continue to receive the protection it deserves,
market participants need real-time information on the regulated
services, including transmission capacity, ancillary services and line
loading. This will be necessary for buyers, sellers, grid operators and
regulators to assure that markets are indeed workably competitive on a
continuing basis. Short-term operational planning and long-term
capacity planning are both well-served by adequate information,
furnished by both the Energy Information Administration and also by an
expected plethora of commercial entities who are already vying for
customers in anticipating of the opening of markets.
The White Paper also addresses other ``Other Provisions.''
Regarding the repeal of PUHCA, we first emphasize that PUHCA is the
only federal consumer protection statute for electric utility
customers. We believe that, if PUHCA is repealed, we need clear
authority vested in FERC to prohibit any potential anti-competitive
practices involving regulated utilities and unregulated affiliates.
Rules are needed to address the operational unbundling of generation,
transmission, system control, marketing and local distribution
functions. State and Federal regulators must have complete access to
all books and records of all regulated entities and entities owned or
controlled by regulated entities. In addition, we argue that,
optimally, PUHCA repeal not be effective until all states have retail
access or until competition on a nation-wide basis is otherwise
achieved.
The White Paper calls for repeal of the mandatory purchase
requirements of the Public Utility Regulatory Policies Act (or PURPA)
of 1978. Many ELCON members cogenerate and sell electricity to
utilities as Qualifying Facilities (or QFs) pursuant to PURPA. Despite
its bad press, as long as consumers are held captive to monopoly
utilities, PURPA is an essential law. It has produced a broader, more
efficient base of electricity generation. Due to PURPA, electricity
capacity was added in smaller increments, thus not burdening users with
paying for generators that proved to be much larger than necessary. And
entrepreneurs with private non-regulated capital funded generation.
That having been said, the ``mandatory purchase'' provisions of
PURPA are an anachronism in a truly competitive market and should be
recognized as such. With regard to existing PURPA contracts, be they at
market or above today's market, no one is suggesting that such
contracts be rescinded. Existing PURPA contracts are and should be a
non-issue. The impact of repealing the mandatory purchase provisions of
PURPA on a prospective basis is virtually non-existent. The number of
new, uneconomic PURPA-based contracts being signed today based on the
often above market ``avoided cost'' formula is close to nil. In
addition, the much-maligned avoided cost principle is not to blame. If
properly implemented, it harms no one. Some states, for their own
reasons, set avoided cost at artificially high levels. Again, this is
no longer the case.
I hasten to add, however, that even without the use of these
mandatory purchase requirements, the majority of new capacity being
brought on line is from non-utility generation and that has been the
case over several years. PURPA has succeeded in demonstrating that
electricity can be generated by non-utility sources in an efficient,
reliable, and environmentally favorable manner. Some 25 years ago
utilities vehemently disputed what is now fact.
While the mandatory purchase provisions are no longer necessary in
a truly competitive electricity market, it is important to note that
PURPA and Section 210 are much more than simply mandatory purchase
requirements, including its requirements that utilities interconnect
with cogenerators. However, I cannot overemphasize the importance of a
federal guarantee for back-up power at just and reasonable rates in
states that remain non-competitive. Without such a guarantee,
cogenerators would be captive to unregulated monopolies that could
charge what they wish, and the cogenerators would have no alternative.
In states without real customer choice, retaining the federal guarantee
for back-up power now in PURPA is essential if there is to be any
investment in cogeneration capacity.
Over the past three decades, the growth of electricity-dependent
businesses and industry has been remarkable. In just the past five
years, we have seen demand far outstrip supply in many regions. While
the economy has become ever more electricity dependent, our
infrastructure, market mechanisms and regulations have not kept pace.
We need strong, but not excessive, federal regulatory authority to
guarantee that electricity is available throughout the nation on a non-
discriminatory basis. It is up to this Committee and other oversight
bodies to ensure that such regulation is not over-reaching, that it is
encouraging and not hindering true competition.
In conclusion, ELCON and its member companies favor a strong
federal bill so that all electricity consumers can enjoy the benefits
of competition. California notwithstanding, competition is coming. But
the reality is that we face a long transition period before we get
there. Truly comprehensive Federal legislation is needed to achieve
workably competitive electricity markets. States will continue to have
an important role, but that role does not extend to the regulation of
interstate commerce. And electricity is clearly interstate commerce.
That is why this Committee and this Congress must enact strong,
comprehensive federal legislation. ELCON stands ready as it has for a
quarter century to represent its members, to engage the debate, to
propose policy alternatives and to participate in a momentous shift in
the provision of an essential service, electricity.
The Chairman. Thank you very much for that testimony.
Mr. Ward.
STATEMENT OF STEPHEN WARD, PUBLIC ADVOCATE, STATE OF MAINE, AND
PRESIDENT, THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER
ADVOCATES
Mr. Ward. Chairman Bingaman, it's an honor, it's a
privilege to appear on this panel today on behalf of NASUCA,
the National Association of State Utility Consumer Advocates
for whom I serve as president. I've also served as Public
Advocate in the State of Maine since 1986.
Just since April of last year when I testified before this
committee on behalf of NASUCA, NASUCA's representatives have
testified on four occasions before committees of the House and
the Senate of this Congress pertaining to electric
restructuring and we are very happy to be invited here today.
In April 2000, the testimony I presented to this committee
included a consumer checklist of 12 items which we regarded as
the litmus test for desirable outcomes from a consumer's
perspective and I have attached that consumer checklist to the
written testimony which I furnished the committee.
Since 1996, NASUCA has adopted 16 resolutions that concern
restructuring of the electric industry and the creation of
competitive retail markets. Of these 16 resolutions, 10
directly address the topics that are in the White Paper which
has been circulated by the committee.
I am pleased to state that NASUCA's resolutions provide
strong support for most of the proposals in the White Paper.
For example, NASUCA's membership in 40 States across the
country strongly endorses the grant of FERC authority to NERC
or to North American Electric Reliability Organization, the
successor, to insure reliability in the Nation's electric grid
and to impose penalties when they are appropriate. NASUCA has
been a supporter of the NERC legislation that is before this
Congress.
Similarly, NASUCA has adopted resolutions in 1998 and 1999
that echo the White Paper's endorsement of functional
independence for independent system operators, for RTOs, and
for NERC from the preferences of any market participants. It is
a critical principle in our view to assure that consumers,
marketers, sellers and electricity markets all have confidence
that the grid is being operated without bias or without
preference.
Linked to this principle is the White Paper's proposal that
PUHCA not be repealed unless FERC receives enhanced authority
to address market power problems with particular authority to
examine the books and records of affiliates within a holding
company structure. We strongly support those suggestions.
It's been NASUCA's long term position on PUHCA repeal that
the removal of PUHCA protection should not occur without
development of adequate FERC oversight in competitive markets.
The principle underlying all of these resolutions is this.
The elimination of regulatory controls is not the same thing as
creating competitive markets. Until markets are workably
competitive, regulatory oversight is critical throughout any
transition period. Likewise, NASUCA has supported PURPA repeal
but only when markets are workably competitive.
In a resolution adopted last month at its midyear meeting
in Santa Fe, NASUCA took a further step and urged FERC not
simply to approve market-based rates whenever they are filed
with the commission in the case of any market that's
dysfunctional such as those in California. But instead to
require once more a cost basis for just and reasonable rates.
Until markets in States like California are workably
competitive, FERC should rely on the tried and true standard of
just and reasonable rates and not leave customers at the mercy
of a market-based rate.
That same resolution also called for FERC to address the
problem of market power and to force generators who exercise
market power to disgorge the profits associated with its use.
NASUCA strongly supports the grant of additional authority
to FERC to pursue market mitigation and other market power
remedies. Without those remedies, in the long run, consumers
can only lose in wholesale markets that are dysfunctional in
markets that are subject to gaming.
NASUCA has also adopted resolutions that are fully
consistent with the White Paper proposal on a public benefits
fund. We strongly support the implementation of a Federal fund
for vulnerable populations, low income in particular, and in
support of renewable generation and in support where necessary
of energy efficiency. In fact, NASUCA's members have been for
years strong supporters of energy efficiency efforts as an
alternative to new generation siting and to some extent
transmission siting.
With respect to the FERC, the proposal for FERC
jurisdiction over bundled transmission prices, and the proposal
for a Federal power of eminent domain for transmission line
siting, I have to report that NASUCA has no resolutions on
either of those points so I cannot present any consensus NASUCA
position today.
Finally, with reference to the White Paper's concluding
discussion about tax benefits and tax code changes, NASUCA has
adopted a resolution urging Congress to mandate the flow
through to retail customers in rates of any tax benefits
associated with generating units when they are sold. In a State
like Maine which divested its generating units, it turned out
that the tax benefits, the excess deferred income taxes, the
investment tax credits were captured by shareholders in a one
time windfall rather than being flowed through to rate payers.
This really is a billion dollar loophole and it is
incumbent I think on Congress to make some firm action in
amendments to the tax code.
In conclusion, the White Paper advances a series of
propositions which NASUCA supports. We urge your serious
consideration of the White Paper and are grateful for the
chance to contribute to this discussion. Thank you very much.
[The prepared statement of Mr. Ward follows.]
Prepared Statement of Stephen Ward, Public Advocate, State of Maine,
and President, National Association of State Utility Consumer Advocates
Chairman Bingaman, distinguished members of the Committee on Energy
and Natural Resources: I am Stephen Ward and have served since 1986 as
Maine's Public Advocate representing utility consumers before Maine's
Public Utilities Commission, before FERC, the FCC and the courts. I
also have served since March of 2000 as President of NASUCA, the
National Association of State Utility Consumer Advocates. NASUCA
consists of organizations charged by statute with the representation of
utility consumers and currently has members in 40 states. I also serve
as an appointed member of NERC's Market Interface Committee.
It is an honor and a privilege to appear on this distinguished
panel and I thank you for the extending this invitation to NASUCA and
its 43 member offices for whom I am testifying today. Just since April
of last year when I testified on behalf of NASUCA before this
Committee, NASUCA's representatives have testified on four occasions
before committees of the House or Senate on matters pertaining to
electricity restructuring. We are very happy to be invited once more to
provide the consumer's perspective at these hearings, as I will attempt
to do again today. In April of 2000 in my testimony before this
Committee, I presented NASUCA's ``Consumer Checklist'' of necessary
safeguards in any federal restructuring legislation. Because of
turnover on this Committee I thought it might be useful to provide a
copy of the ``Consumer Checklist,'' which is attached to this
testimony.
The Chairman's White Paper on Electricity Legislation seems to me
to an auspicious start in the process of marking up comprehensive
energy legislation. That is because the White Paper takes a broad
overview of the history and current functioning of utility electricity
markets, focusing as much on the forest as the trees. This is
appropriate in the case of a commodity like electricity that has so
many unique characteristics. Unlike virtually any other commodity, it
cannot be stored and therefore must have production match usage in
every moment of the day. Electricity is a commodity that, over the
years, has been heavily freighted with the public interest, benefiting
from the exercise of eminent domain in the construction of its
transmission lines and being subject to multiple expectations for
affordability, for low-income support and for protections against
disconnection. But most importantly, electricity is a commodity which
virtually every citizen, every family, every business depends on as a
necessity of life. For all of these reasons, it makes great sense to
proceed cautiously and with great care in undertaking fundamental
changes in this industry, by means of federal legislation. I urge you
not to hurry as you take up this task.
The White Paper also provides a very convenient framework for
discussion and analysis of key issues, laying out the issues in several
general areas (including ``Other Provisions'' and ``Tax Provisions'').
Since many of these issues correspond to proposals that have been
debated by NASUCA's membership in 40 states around the country, I can
provide commentary on some of the White Paper's proposals from NASUCA's
perspective. In other cases, NASUCA has adopted no resolution that is
directly germane to a proposal in the White Paper. In such cases, I
will note the absence of a NASUCA Position.
Since 1986, NASUCA has adopted 16 resolutions that directly address
the restructuring of the electricity industry and the creation of
competitive choices for consumers--large and small. Of these sixteen
resolutions, ten directly address desirable or necessary features of
federal law or regulation, as opposed to policy proposals that are
entirely within the scope of state jurisdiction. Probably the most
vexing aspect of any effort to transform a system of vertically
integrated utilities into a system relying in part on competitive
markets, it seems to me, is the inter-mixture of state and federal
responsibilities. As the Committee is fully aware, aspects of the
electric industry (such as retail pricing) have been entirely under
state jurisdiction since the first decades of the last century. It is
equally so that, since enactment of the Federal Power Act in 1935,
other aspects (such as interstate transmission pricing) have been
completely under federal jurisdiction. Any comprehensive effort to
restructure this industry must tread lightly on these jurisdictional
dividing line.
The White Paper proposes to reconfigure jurisdiction over all
transmission-related questions so as to make FERC's jurisdiction pre-
eminent. For a near-majority of states today where transmission rates
are bundled together with distribution and generation rates, however,
this proposal does represent a departure from the status quo. NASUCA
has no formal resolution addressing the question of whether bundled
transmission prices should be set by FERC in a way that pre-empts state
action. Due to the multiplicity of views within NASUCA, on the part of
states like Maine that have undertaken comprehensive restructuring and
as well for states in low-cost regions that have no incentive to
restructure, it is doubtful that NASUCA will ever adopt a final view as
to whether FERC authority over transmission should properly supersede
state authority. In any event, I won't offer one today.
Similarly, NASUCA has no formal position as to whether public,
cooperative and federal entities like TVA, REA cooperatives and
marketing authorities should be subject to FERC oversight under the
Federal Power Act. Speaking just for myself, however, it appears to me
to be difficult to establish workable protections against market power
and against malfunctions that jeopardize the reliability of the grid
without establishing broad and consistent authority within FERC across
all types of utilities public and private. NASUCA has taken a strong
stance in favor of granting FERC authority to require electric
utilities to join Regional Transmission Organizations and, to the
extent possible, enabling public entities like TVA likewise to
participate in the operation of regional RTO's. A NASUCA resolution,
adopted two years ago, recognizes the primacy of FERC jurisdiction over
RTO development but urges collaboration with state PUC's in formulating
common agendas for managing transmission congestion and developing new
transmission facilities.
With respect to the reliability proposals in the White Paper,
NASUCA has strongly supported the creation of an independent NERC
(North American Electric Reliability Council) that is not dependent on
the short-term preferences of any user of the transmission system. With
NARUC and other parties, NASUCA has endorsed the stand-alone NERC
legislation that is pending before Congress. In a 1998 Resolution,
NASUCA unanimously supported enactment of ``federal legislation that
would clarify FERC authority to review the reliability requirements
imposed by NERC (or any successor national organization) and to ensure
that such requirements are adopted and implemented in a manner that
benefits all consumers.'' Key among the interests that NASUCA has
advanced in three of its resolutions is the principle that for RTO's,
for ISO's and for NERC, Congress or FERC should assure the operational
independence of grid managers from players in national and regional
electric markets. One good reason for guaranteeing this independence is
to enable grid managers to act impartially with sanctions and
penalties, as an enforcement entity in the event of malfeasance or grid
disruption rather than merely as a scheduler of transaction in a
regional market. For this reason I applaud the White Paper's
suggestions on this point.
The White Paper's third major area addresses ``Rates and Market
Power'' and does so in a manner that, to me, may be too optimistic in
endorsing market-based outcomes. This section of the White Paper
doesn't appear to focus on what is unfortunate reality today:
competitive markets are not generating just and reasonable prices in
many hours of the year in Western markets, and in some hours of the
year in New York and New England markets. In view of the price spikes
and blackouts that have plagued California, I think it is premature to
base a discussion of rates and market power entirely on the hope that
markets can be made workably competitive. NASUCA addressed these issues
in a resolution adopted at its mid-year meeting last month. That
resolution urges FERC not to rely on market-based rates in situations
where markets are not functioning adequately but, instead, to use its
powers under the Federal Power Act to set just and reasonable rates
based on a cost analysis or other appropriate means of mitigation. In
essence, the resolution urges FERC not to accept the prices produced by
any market as necessarily just and reasonable but to investigate for
evidence of market power and marketing anomalies. Possibly the
difference between NASUCA's position and the White Paper is a question
of degree, or merely a matter of emphasis but, to my mind, this nuance
is an important one.
The final portion of the ``Rates and Market Power'' section
concerns market mitigation measures as ordered by FERC. We agree that
market mitigation (i.e. following up on evidence of market power or of
marketing anomalies with a formal investigation and, where warranted,
an enforcement action) is a critical aspect of discipline that keeps
bidders honest and helps markets function. To my mind, this mitigation
function is a key aspect of ISO operations, and shouldn't necessarily
reside at FERC rather than in the regions. At present, both ISO-New
England and the New York ISO have authority to reset any price that is
excessive or that results from market power. I don't think it makes
sense to take away such authority as already exists.
With respect to regional planning and siting, NASUCA has no
specific resolution that addresses the exercise of eminent domain for a
project under federal jurisdiction. As a general matter, it makes great
good sense to promote the coordination of state and federal siting
authority, wherever possible. But I doubt that NASUCA's members would
endorse the proposal that FERC receive eminent domain authority for
electricity comparable to what already exists for gas pipelines--and
certainly not unanimously. As a matter of practice, all of NASUCA's
resolutions are adopted by consensus, so I would be very surprised to
see a unified NASUCA position on a matter as controversial as a federal
transmission line siting.
The White Paper discusses the potential repeal of PUHCA and PURPA
on terms that are very close to NASUCA resolutions adopted in 1996 and
1997. NASUCA has explicitly endorsed adoption of a renewable portfolio
standard as a device for creating diversity in the nation's supply mix
and supporting new, non-polluting sources of generation. Historically,
NASUCA's members have been defenders of PURPA as a technique for
injecting competition into the closed operations of electric utilities.
NASUCA also has repeatedly testified in opposition to PUHCA repeal--at
least until new systematic protections against affiliate abuse and cost
shifting within holding companies are in place. Competition in
wholesale markets is too powerful a force to operate without the
structural restraints that PUHCA has imposed since 1935, in my opinion.
The last thing that we should be doing today is to assume that the
absence of regulation is the same as vigorous competition. As the
nation learned from Sam Insull 80 years ago, the absence of regulation
leads directly to unregulated monopoly power.
The White Paper also endorses the creation of a Public Benefits
Fund from which financial support can be drawn for a variety of
purposes including low-income assistance, conservation programming, and
R&D activities. States like Maine, since 2000, have had in place a
state-mandate for ratepayer-supported public benefits programs. They
should not see federal legislation disturbing or replacing these
mechanisms. Having said this, however, I am confident that NASUCA's
membership today would endorse the same approach as was adopted in a
1998 resolution: any comprehensive federal electricity legislation
should beef up support for ratepayer-funded weatherization, and for
targeted low-income support assistance in addition to the support
already provided through the LIHEAP and DOE Weatherization programs. It
is critical that, as markets evolve, the ability to afford electricity
not separate ``the haves'' from ``the have-nots.'' We cannot tolerate
having the nation's most vulnerable populations become the casualties
of competition.
Finally, and before closing, I should turn to the last substantive
set of issues raised in the White Paper, concerning changes in the tax
code. While it is true that the federal tax law is beyond the purview
of this Committee, it also is the case that tax policy establishes
long-lived incentives that directly affect investment decisions and, in
the case of utility plant, can affect the bottom-line earnings of
investors. Missing from the list of ideas that appear in the White
Paper's final paragraph is a proposal that NASUCA endorsed by
resolution last year and that also has received support from NARUC and
the American Public Power Association. The proposal is to require that
any tax benefits (so-called Excess Deferred Income Taxes and
unamortized Investment Tax Credits) that are on the books of an
electric utility for generating units that are divested by operation of
state law or sold voluntarily should be flowed-through to ratepayers in
lowered distribution rates and not be captured by the utility's
shareholders. Such a one-time windfall for shareholders was never
envisioned when the tax rate was lowered in 1986, was not sought by the
utilities and EEI at that time, and cannot be justified today. We urge
the Committee to recommend action to close this billion dollar
loophole.
In sum, it should be clear that NASUCA has formally endorsed many
of the specific proposals that appear in the White Paper. Dating back
to 1996, NASUCA's resolutions have anticipated key impacts on consumers
that may result from industry restructuring if regulators and
legislators are not vigilant. You are to be congratulated for the
breadth and depth of the White Paper's proposals. NASUCA as an
organization will make every effort to assist you in your deliberations
as you refine these proposals.
Thank you again for the opportunity of testifying today on behalf
of the nation's electricity consumers.
(attachment)
NASUCA Consumer Checklist for Federal Electric
Restructuring Legislation
No Federal Preemption: Permit, but don't require, retail
competition.
Stranded costs: Stranded cost issues should be left to the
states.
Market power: Allow FERC to remedy abuses of market power.
Transmission and ISOs: Allow FERC to require ISOs and remedy
transmission problems.
Reliability Standards: Allow FERC to review reliability.
Consumer Protection: Establish minimum federal standards for
consumer protection.
Universal Service: Adapt universal service standards and
principles, buy requirement.
Aggregation: Aggregation of customers should be encouraged.
Renewable Energy: Remove any barriers to net energy metering.
Mergers: Expand FERC merger authority and require a net be
benefit to consumers.
PUHCA: Competition first, then remove regulatory impediments.
PURPA: Competition first, then waiver of Section 210 must-buy
requirement.
The Chairman. Thank you very much.
Mr. Cook.
STATEMENT OF DAVID N. COOK, GENERAL COUNSEL,
NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL
Mr. Cook. Thank you, Mr. Chairman. I am general counsel for
the North American Electric Reliability Counsel. NERC commends
your leadership and this committee's attention to the
critically important issue of the reliability of the bulk
electric system.
NERC urges the Congress to enact reliability legislation in
this session of Congress. NERC in a broad coalition of State,
consumer and industry representatives are supporting
legislation that would transform the current system of
voluntary operating guidelines into a set of mandatory
transmission system reliability rules promulgated and enforced
by an industry based self-regulatory reliability organization
with FERC oversight in the United States.
The NERC legislative proposal has been included in both S.
388 and S. 597. It has also been introduced in the House. I'm
pleased to note that within the past 2 weeks, the Western
Governor's Association sent a letter to this committee in
support of the pending NERC legislative proposal.
For more than 30 years, this country has depended upon
voluntary compliance with reliability rules. The system has
worked very well and we have had an extremely reliable electric
system but the reliability rules have no enforcement mechanism.
Peer pressure has been the only means available to achieving
compliance.
As good as that system has been, the voluntary system will
not serve as well for the future. Here's why. The grid is now
being used in ways for which it was not designed. There has
been a quantum leap in the number of hourly transactions and in
the complexity of those transactions.
Transmission providers and other industry participants that
formerly cooperated willingly are now competitors. The rate
mechanisms that in the past permitted utilities to recover the
costs of operating systems reliably are no longer in place or
are inadequate given increased risks and uncertainties.
The single vertically integrated utility that formerly
performed all reliability functions for a particular area is
being disaggregated. Meaning that reliability responsibilities
are being divided among many participants. Some entities appear
to be deriving economic benefit from bending or violating the
reliability rules. Construction of additional transmission
capacity has not kept pace with either the growth and demand or
the construction of new generating capacity meaning the
existing grid is being used much more aggressively.
The result of all of this is that the transmission grid is
being increasingly stressed. NERC is seeing more congestion on
the grid for more hours of the day. NERC is also seeing
increased violations of its reliability rules.
Here are the goals for the NERC reliability legislation.
Mandatory and enforceable rules that apply to all operators and
users of the bulk power system in North America. The rules
would be fairly developed and fairly applied by an independent
industry self-regulatory organization with oversight by FERC in
the United States.
The proposal must respect the international character of
the interconnected North American Electrical Transmission
System. Regional entities will have a significant role in
implementing and enforcing compliance with those reliability
standards with delegated authority to develop appropriate
regional standards.
The White Paper distributed in advance of this hearing
proposes the following criteria for the reliability provision.
Legislation should authorize a system for assuring reliability
of the grid that is mandatory, that requires sanctions and
penalties for failure to comply with the rules that
institutions for that purpose develop, and that is subject to
Federal oversight.
The NERC legislative proposal included in both S. 597 and
S. 388 satisfies those criteria and NERC agrees with those
criteria but they are not the only relevant criteria. Two
others are necessary.
First, the bulk power system is a single very large machine
that spans the international border. The reliability
legislation must provide a mechanism for setting a single set
of reliability rules that are acceptable to regulators on both
sides of the border. Without having one set of regulators
impose its decisions on how the grid will be operated across
the border, the NERC legislative proposal satisfies this
criteria and by having a standard set in a single forum with
active participation by all interested parties on both sides of
the border, subject to appropriate oversight by the respective
regulators on each side of the border.
Second, the bulk power system is technically very complex
and demands a high degree of coordinated activity in order to
assure reliable operations. The reliability legislation must
provide a means for harnessing the collective engineering
expertise and collective market expertise of the industry in
fashioning a set of reliability rules that are compatible with
well-functioning competitive markets and also assure the
reliable operation of the transmission grid to support those
markets.
An industry self-regulatory organization provides an
effective and efficient mechanism for bringing that industry
expertise to bear on the task of setting the standards
necessary to assure the reliable operation of the bulk system.
FERC oversight in the United States assures that the self-
regulatory organizations' processes are fair and that the
reliability rules work in harmony with FERC's evolving
competitive market and RTO policies.
Although a broad coalition of State, consumer and industry
representatives are supporting passage of the NERC legislative
proposal, that support is not universal. NERC and its
supporting coalition are continuing discussions with those who
are not now supporting the legislation to determine whether
changes to the proposal could broaden the base of support even
further.
One of the criticisms in the legislative language in the
proposal now is that it is longer and more detailed than may be
appropriate for a legislative enactment. NERC is exploring
whether a shorter less detailed bill that nonetheless retains
the essentials needed for creation of an independent industry
self-regulatory organization will command at least the same
level of support as exists for the current version. Any shorter
version of reliability legislation must still satisfy the
legislative goals that I mentioned above.
Those discussions are continuing and we will keep the
committee informed as to their outcome. NERC commends the
committee for attending to the critical issue of assuring the
reliability of the interconnected bulk system as the electric
industry undergoes restructuring. NERC urges prompt action on
pending legislation that would allow for the timely creation
and FERC oversight of a viable self-regulatory reliability
organization.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Cook follows.]
Prepared Statement of David N. Cook, General Counsel, North American
Electrical Reliability Council
summary
The North American Electric Reliability Council (NERC) urges
Congress to enact reliability legislation in this session of Congress.
NERC and a broad coalition of state, consumer, and industry
representatives are supporting legislation that would transform the
current system of voluntary operating guidelines into a set of
mandatory transmission system reliability rules, promulgated and
enforced by an industry-led reliability organization, with FERC
oversight in the U.S. NERC firmly believes steps must be taken now to
ensure the continued reliability of the electricity transmission system
if the Nation is to reap the benefits of competitive electricity
markets. The changes taking place as the electric industry undergoes
restructuring are recasting the long-established relationships that
reliably provided electricity to the Nation's homes and businesses.
Those changes will not jeopardize the reliability of our electric
transmission system IF we adapt how we deal with reliability of the
bulk power system to keep pace with the rest of the changes that the
electric industry is now experiencing.
NERC is a not-for-profit organization formed after the Northeast
blackout in 1965 to promote the reliability of the bulk electric
systems that serve North America. It works with all segments of the
electric industry as well as consumers and regulators to ``keep the
lights on'' by developing and encouraging compliance with rules for the
reliable operation of these systems. NERC comprises ten Regional
Reliability Councils that account for virtually all the electricity
supplied in the United States, Canada, and a portion of Baja California
Norte, Mexico.
reliability
Reliability means different things to different people. For the
consumer it could mean, ``Does the light come on when I flip the
switch?'' Or, ``Does a momentary surge or blip re-boot my computer or
cause me to lose a whole production run of computer chips I was
manufacturing?''
To NERC, reliability means making sure that all the elements of the
bulk power system are operated within equipment and electric system
thermal, voltage, and stability limits so that instability,
uncontrolled separation, or cascading failures of that system will not
occur as a result of sudden disturbances such as electric short
circuits or unanticipated failure of system elements. It also means
planning, designing, and operating each portion of the bulk power
system in a manner that will promote security in interconnected
operations and not burden other interconnected systems.
how the system works
California's experience with electricity has focused peoples'
attention on electricity issues in ways they never have in the past.
Because of that increased awareness, we can draw on the California
experience to understand more about how the bulk electric system really
works. California is not an island; it is part of a much larger
grouping of electric systems that we refer to as an Interconnection.
The North American grid is divided into three Interconnections that are
connected to each other by way of direct current ties. The Western
Interconnection includes not only California, but also the rest of the
United States from the Rocky Mountains to the Pacific coast, as well as
the Canadian provinces of British Columbia and Alberta, and a portion
of Baja California Norte, Mexico. The Eastern Interconnection includes
not only most of the United States east of the Rocky Mountains, but
also Canadian provinces from Saskatchewan through the Maritimes. The
third Interconnection comprises the Electric Reliability Council of
Texas. Attached to my testimony is a map depicting the three
Interconnections. The map also shows the ten NERC Regional Reliability
Councils.
Each Interconnection is a single very large machine. Power flows
freely throughout the grid in each of these Interconnections--there are
no valves or switches. With very limited exceptions, there is no
ability to direct, or route, power flows over a particular line;
instead, power flows over all lines in the system, according to the
laws of physics. All generators within an interconnection are
magnetically linked, in effect as though all the generators are on a
single shaft--all rotating at the same speed (think of a tandem
bicycle--the front and back pedals are linked together by a chain, and
rotate at the same speed; if one rider takes his feet off the pedals,
the other rider has to work harder to maintain the same speed). What
happens on one part of an interconnection affects the entire rest of
the interconnection. The frequency of the system in British Columbia is
the same as the frequency in Arizona, and also at all points in
between. When the frequency declines, because a large generating unit
trips off, the rest of the generators automatically and instantaneously
work harder to serve the customer demands.
The interconnected nature of electric system operations makes
possible the transfer of power from one area to another for economic
reasons as well as sharing resources in emergencies. California is a
summer-peaking area, and it normally imports surplus power from the
Pacific Northwest in the summertime to augment its own generating
resources. By contrast, the Pacific Northwest is a winter-peaking area,
and it normally imports surplus power from California in the
wintertime. Over the past year, this pattern of mutually beneficial
exchange has been disrupted. Load has grown throughout the West, and
other areas in the West have less power to export to California. In
addition, the Pacific Northwest and California both depend
substantially on hydroelectric power. Severe drought conditions this
year have seriously depleted the ability of the hydroelectric plants to
produce energy. Power exchanges can also take place between
Interconnections, but the capability to do so is limited by the
capability of the direct current ties that exist. For example, the
Western and Eastern Interconnections can exchange up to about 1,850 MW
in either direction, and the Texas and Eastern Interconnections can
exchange about 850 MW.
California has also demonstrated the limits on the transmission
system. Path 15 is a major transmission link between Southern and
Northern California. Earlier this year, on some days the California
Independent System Operator had to curtail firm load in Northern
California, even though additional generation was available in Southern
California to meet the load. Path 15 was loaded to its maximum safe
reliability limit and there simply was no way to move additional energy
into Northern California without risking the reliability of the entire
Western Interconnection.
Interconnected operations also mean that a disturbance occurring in
one part of an Interconnection can have adverse effects throughout the
Interconnection. The 1996 Western outage that affected San Francisco,
Los Angeles, and the desert Southwest and shut down the Diablo Canyon
nuclear power plant started with a tree contacting a power line in
Idaho. And whether an individual state chooses to open up to retail
competition or not, the electric systems in those states are still
connected together, and dependent on one another, as part of one
Interconnection.
The grid is generally operated in a first contingency mode, that
is, so that the grid can withstand the loss of any single transmission
line, generator, or transformer and remain stable and secure. That
means that all the remaining transmission lines will still be operating
within their own limits and that the failure of a particular element
won't cause a cascading, uncontrolled failure of the entire grid. When
a large transformer or generator fails or lightning strikes a power
line, as happens as a matter of course, the grid must be able to absorb
that loss without causing other elements to fail. Operating in this
manner preserves the stability of the grid, but it does sometimes place
necessary limits on the amount of power that can be moved from one part
of the grid to another.
This is the area where NERC's rules operate, setting the standards
by which the grid is operated from moment to moment, as well as the
standards for what needs to be taken into account when one plans,
designs, and constructs an integrated system that is capable of being
operated securely. The NERC standards do not specify how many
generators or transmission lines to build, or where to build them. They
do indicate what tests the future system must be able to meet to ensure
that it is capable of secure operation. Up to now, NERC's rules have
generally been followed, but they have not been enforceable. As more
entities become involved in the operation and use of the bulk electric
systems, and use these systems to full competitive advantage, NERC is
seeing an increase in the number and severity of rules violations.
Hence the voluntary approach is no longer adequate for maintaining the
reliability of the bulk power system. Just as the rest of the electric
industry is changing, the reliability infrastructure must change, too.
voluntary reliability rules will not work in a more competitive
electric industry
NERC's formation was the electric industry's response to
legislation that had been introduced in the Congress following the 1965
blackout in the Northeast that would have given the then Federal Power
Commission a central role in the reliability of the bulk electric
system. Instead of adopting that legislation, the country opted for a
voluntary industry-led effort. For more than thirty years, this
voluntary system has worked very well, and we have had an extremely
reliable electric system. But the reliability rules or standards have
no enforcement mechanism. Peer pressure has been the only means
available to achieving compliance.
As good as that system has been, the voluntary system will not
serve us well for the future. Here's why:
The grid is now being used in ways for which it was not
designed.
There has been a quantum leap in the number of hourly
transactions, and in the complexity of those transactions.
Transmission providers and other industry participants that
formerly cooperated willingly are now competitors.
Rate mechanisms that in the past permitted utilities to
recover the costs of operating systems reliably are no longer
in place, or are inadequate given increased risks and
uncertainties.
The single, vertically integrated utility that formerly
performed all reliability functions for an area is being
disaggregated, meaning that reliability responsibilities are
being divided among many participants.
Some entities appear to be deriving economic benefit from
bending or violating the reliability rules.
Construction of additional transmission capacity has not
kept pace with either the growth in demand or the construction
of new generating capacity, meaning the existing grid is being
used much more aggressively.
Not dealing with the reliability side of the business as the
industry restructures would be like the airlines switching to jet
airplanes without increasing the length of the runways.
what's happening now: demand and generation
A number of factors have contributed to our present circumstance.
First, demand has been steadily increasing. The consensus projection
for the average annual growth in both peak demand and energy use over
the next ten years is a relatively modest 1.9%. (Figure 1.) *
``Demand'' is a measure of the highest aggregate load that all
customers place on a system at a particular point in time. ``Energy
use'' is a measure of the total amount of electricity that all
customers use over a certain period of time (e.g., one year). The
projected growth in demand is similar to the projections of the last
several years. High and low bands around the base forecast show a range
of the forecast uncertainty to account for weather, economic growth,
industry deregulation, and other factors. Both peak demand and energy
projections are substantially below the actual growth rates experienced
over the last ten years as demand has been driven by extreme weather at
peak times and a strong economy. Actual demand and energy growth rates
experienced in the United States over the last ten years have been
closer to the projected high band rate of about 3% for both demand and
energy.
---------------------------------------------------------------------------
* Retained in committee files.
---------------------------------------------------------------------------
Second, in many parts of the country merchant generators are now
building new plants to meet that increased demand, in response to the
increased prices that we have been seeing in the wholesale electricity
markets. During the past ten years, generating capacity increased at
the rate of less than 1% per year, even while demand was growing at the
rate of 2.7% per year. That picture is changing, although in some parts
of the country supplies will be tight for the next few years. Over
20,000 MW of new merchant capacity came on line to serve demand in the
United States for the summer 2000. This year, New England has added
another 2,300 MW. The Electric Reliability Council of Texas has added
more than 6,000 MW. The East Central Area Coordination Agreement has
added more than 4,000 MW since last summer. A crucial 600 MW is being
added within New York City and Long Island. While that story is not
being repeated everywhere, even California is expected to have
significantly increased reserve margins within a few years.
what's happening now: transmission
The same is not true for transmission. Over the last ten years,
circuit-miles of high voltage transmission lines (230 kV and above)
increased at only 0.75% per year. Over the next ten years we are
projecting that circuit-miles of high voltage transmission will
increase a total of just 4.2%, or a rate of less than 0.5% per year.
Stated another way, in North America ten years ago we had a little less
than 200,000 circuit-miles of high voltage transmission lines. Right
now we have about 200,000 circuit-miles of those lines. And ten years
from now we are projecting that we will have just a little over 200,000
circuit-miles of high voltage transmission lines. For the most part,
the transmission dollars that are being spent today are to connect new
generation to the grid--they are not going to build major new lines to
strengthen the grid's ability to move large blocks of power from one
part of the country to another. That lack of additional transmission
capacity means that we will increasingly experience limits on our
ability to move power around the country and that commercial
transactions that could displace higher priced generation won't occur.
And, it will mean that areas experiencing supply shortages, like
California has, won't be able to count on other areas with ample
generating resources to help.
Moreover, the existing grid is being pushed harder and is being
used in ways for which it was not designed. Historically, each utility
built its system starting in the city-centers, because the early
generating stations were located close to load centers. As the cities
grew, the electric systems grew with them, spreading outward from the
center. The weakest part of the electric grid is generally at the
places where one system abuts another. Initially utilities installed
connections between two systems for emergency purposes and to share
generating reserves to keep costs down. Gradually those
interconnections were strengthened so that adjoining utilities could
buy and sell electricity when one had lower cost generation available
than did the other. But the systems were not generally designed to move
large blocks of power from one part of the country to another, across
multiple systems. Yet that is the way business is being conducted
today. The volume and complexity of transactions on the grid have grown
enormously since the advent of open access transmission.
Electric industry restructuring adds to the challenge. In the past,
a vertically integrated utility had complete responsibility for all
aspects of its electric system, from planning and building the
transmission system, through assuring that sufficient generation was
constructed, to operating and maintaining the transmission and
distribution systems, all to serve consumers in a designated area. With
restructuring, there may no longer be a designated group of consumers
for which to plan service. Instead, responsibilities to construct and
maintain generation, transmission, and distribution are being divided
among multiple entities and, in some cases, those responsibilities may
be falling between the cracks. Regional Transmission Organizations may
provide a means to reintegrate some of these functions. But the RTO
proposals that have been filed to date vary considerably in the extent
to which the RTO has the authority to plan and expand the transmission
system, not only to connect new generation, but to meet broader needs
of regional reliability.
The result of all this is that the transmission grid is being
increasingly stressed. That stress shows up in two ways. First, NERC is
seeing more congestion on the grid, for more hours of the day. Last
summer in the Eastern Interconnection there were substantial transfers
of power from north to south. Cooler temperatures in the north meant
that surplus generation could be sent to the south where the
temperatures were hot and natural gas prices were high. On many days
security coordinators had to invoke NERC transmission loading relief
procedures to curtail transactions that were overloading transmission
facilities between north and south. For generation sellers, these
curtailed transactions resulted in lost business. Buyers were forced to
replace these transactions with higher priced power, or in some cases,
to cut off power to certain ``interruptible'' customers. In addition,
what do not show up are the transactions that merchants or marketers
decided not to engage in because of the likelihood they would be
interrupted. Today, we know that those same transmission facilities are
fully subscribed for the coming summer, meaning we could see a repeat
of last year's pattern if we experience similar weather conditions and
fuel prices.
Second, NERC is seeing increasing violations of its reliability
rules. As I mentioned earlier, the grid is generally operated in a
first contingency mode, that is, so that the grid can withstand the
loss of its largest element and remain stable and secure. Last summer
there were a number of instances where operators allowed facilities to
remain loaded above their known security limits for extended periods of
time, placing the grid at prolonged risk of major failure. Some
entities have made the economic judgment that it is less costly to them
to violate the rules than to follow them. We have seen entities
improperly ``leaning on,'' or taking power from, the Interconnection,
causing unscheduled and unmanageable flows and potential voltage
problems. As the limits of the system are reached and transactions must
be curtailed, we are beginning to hear suggestions to relax the
reliability rules to allow higher flows to occur. In an interconnected
system, however, taking increased risks to allow some entities to
realize short-term economic gain affects not only the system where the
limit occurs, but also all the systems in the same Interconnection. For
example, in the 1996 outages in the Western Interconnection, customers
far away from the initiating problems were interrupted for significant
periods of time.
what's needed to assure bulk power system reliability in a more
competitive electricity market
We need legislation to change from a system of voluntary
transmission system reliability rules to one that has an industry-led
organization promulgating and enforcing mandatory rules, backed by FERC
in the U.S. In August 1997, NERC convened a panel of outside experts to
recommend the best way to ensure the continued reliability of North
America's interconnected bulk electric systems in a competitive and
restructured electric industry. On a parallel track, in the aftermath
of two major system outages that blacked out significant portions of
the West in July and August 1996, the Secretary of Energy convened a
task force on reliability, chaired by former Congressman Phil Sharp.
Both groups came to the same conclusion: The current system of
voluntary guidelines should be transformed into a system of mandatory,
enforceable reliability rules, AND the best way to accomplish that was
to create an independent industry self-regulatory organization,
patterned after the self-regulatory organizations in the securities
industry, with oversight in the United States by the Federal Energy
Regulatory Commission.
NERC and a broad coalition of state, consumer, and industry
representatives have been pursuing legislation to implement those
recommendations. That coalition includes the American Public Power
Association, the Canadian Electricity Association, the Edison Electric
Institute, Institute for Electrical and Electronics Engineers--USA, the
Large Public Power Council, the National Association of Regulatory
Utility Commissioners, the National Association of State Energy
Officials, the National Association of State Utility Consumer
Advocates, the National Electrical Manufacturers' Association, the
National Rural Electric Cooperative Association, the Northwest Regional
Transmission Association, the Transmission Access Policy Study Group,
and the Western Interconnection Coordination Forum.
On June 18, 2001, that coalition sent a letter to this Committee,
the House Energy and Commerce Committee, and the Administration in
support of the NERC legislative proposal embodied in both S. 388 and S.
597. On July 13, 2001, the Western Governors Association also sent a
letter to this Committee, the House Committee, and the Administration
in support of the pending NERC legislative proposal.
goals of reliability legislation
Mandatory and enforceable reliability rules
Apply to all operators and users of the bulk power system in
North America
Rules fairly developed and fairly applied
Independent, industry self-regulatory organization
Oversight within U.S. by FERC
Must respect the international character of the
interconnected North American electric transmission system
Regional entities will have a significant role in
implementing and enforcing compliance with these reliability
standards, with delegated authority to develop appropriate
Regional reliability standards.
the committee's white paper
The Committee has invited comment on whether the criteria set out
in the white paper that the Committee distributed are the appropriate
criteria for a reliability measure. The white paper states the
following criteria for the reliability provisions:
Legislation should authorize a system for assuring the
reliability of the grid that is mandatory, that requires
sanctions and penalties for failure to comply with the rules
that institutions for that purpose develop, and that is subject
to federal oversight.
The reliability title that is included in both S. 597 and S. 389
satisfies those criteria. But those are not the only relevant criteria.
The reliability provisions must also take account of two other factors.
First, the bulk power system is a single, very large machine that spans
the international border. Because it is a single machine, it must be
operated under a common set of rules on both sides of the border. The
reliability legislation must provide a mechanism for setting a single
set of reliability rules that are acceptable to regulators on both
sides of the border, without having one set of regulators impose its
decisions on how the grid will be operated across the border. The NERC
legislative proposal satisfies this criterion by having the standards
set in a single forum with active participation by all interested
parties on both sides of the border, subject to appropriate oversight
by the respective regulators on each side of the border.
Second, the bulk power system is technically complex and demands a
high degree of coordinated activity in order to assure reliable
operations. The reliability legislation must provide a means of
harnessing the collective engineering expertise and collective market
expertise of the industry in fashioning a set of reliability rules that
are compatible with well-functioning competitive markets and also
assure the reliable operation of the transmission grid to support those
markets. NERC's standing committees, subcommittees, and working groups
involve literally hundreds of experts in ongoing activity to develop
standards and monitor activity to assure the reliable operation of the
grid. An industry self-regulatory organization provides an effective
and efficient mechanism for bringing that industry expertise to bear on
the task of setting the standards necessary to assure the reliable
operation of the bulk power system. FERC does not now possess and is
never likely to achieve anything approaching that level of technical
sophistication. Having FERC itself set the reliability standards
through its rulemaking proceedings, even if based on advice from
outside organizations, converts matters that ought to be resolved by
those with technical engineering expertise and commercial expertise
into matters that are the province of the lawyers. These complex rules
need to be worked out together by all segments of the industry. FERC
was created for the purpose of economic regulation. It also has strong
competence in assuring fairness and openness of process and regularity
of proceedings. The combination of industry technical expertise to work
on substantive reliability rules and FERC oversight to assure due
process is an effective and efficient way to address the issues.
ferc should not be given the job of promulgating and enforcing
reliability standards
Because of FERC's limited jurisdiction and authority, because of
the international character of the North American grid, and because of
the technical expertise required to develop and oversee compliance with
bulk power system reliability standards, this is not a job that can
simply be given to FERC. FERC does not have clear authority over
reliability matters. Legislation that would have given FERC's
predecessor, the Federal Power Commission, plenary authority over
reliability matters was introduced in Congress following the Northeast
blackout in 1965, but that legislation was not passed. Instead, the
electric industry took on responsibility for assuring the reliability
of the interconnected bulk power system. NERC was formed in 1968 to
lead that industry effort.
The most direct statement in the Federal statutes on this subject
is found in section 209(c) of the Public Utility Regulatory Policies
Act, and it provides only for the making of recommendations with
respect to industry reliability standards:
The Secretary, in consultation with the [Federal Energy
Regulatory] Commission, and after opportunity for public
comment, may recommend industry standards for reliability, to
the electric industry, including standards with respect to
equipment, operating procedures and training of personnel, and
standards related to the level or levels of reliability
appropriate to adequately and reliably serve the needs of
electric consumers. The Secretary shall include in his annual
report--
(1) any recommendations made under this subsection or
any recommendation respecting electric utility
reliability problems under any other provision of law,
and
(2) a description of actions taken by electric
utilities with respect to such recommendations. (16
U.S.C. Sec. 824a-2, emphasis added)
FERC also lacks jurisdiction over approximately one-third of the
transmission facilities in the United States. It lacks jurisdiction
over facilities owned by municipalities and state agencies, rural
electric cooperatives that have Rural Utility Service financing, the
Federal power marketing administrations (such as the Bonneville Power
Administration and the Western Area Power Administration), the
Tennessee Valley Authority, and utilities within the Electric
Reliability Council of Texas.
As discussed above, a further impediment to FERC's acting directly
on reliability matters is that the grid is international in nature.
There is strong Canadian participation within NERC now, and that is
expected to continue with the new organization. Having reliability
rules developed and enforced by a private organization in which varied
interests from both countries participate, with oversight in the United
States by FERC and with oversight by Canadian regulators in Canada, is
a practical way to address the international character of the grid.
Otherwise, U.S. regulators would be dictating the rules that Canadian
interests must follow--a prospect that would be unacceptable to them.
There are also efforts under way to interconnect more fully the
electric systems in Mexico with those in the U.S., primarily to expand
electricity trade between the two countries. This is one element of the
President's National Energy Policy. With that increased trade, the
international nature of the self-regulatory organization will take on
even more importance, further underscoring the necessity of having such
an organization, rather than FERC, set and enforce compliance with
overall grid reliability standards.
Having an industry self-regulatory organization develop and enforce
reliability rules under government oversight also takes advantage of
the huge pool of technical expertise that the industry currently brings
to bear on this subject. FERC does not now have the technical expertise
and resources to take on that effort, and it would not be cost-
effective for it to do so. FERC's strong competence lies in assuring
fairness and openness of process and regularity of proceedings. The
combination of industry technical expertise to work on substantive
reliability rules and FERC oversight to assure due process is an
effective and efficient way to address the issues.
status of reliability legislation and rtos/isos
Last year, the Senate adopted the NERC legislation as S. 2071, but
the bill died in the House. Senator Smith reintroduced that legislation
this year (S. 172). In addition, the NERC legislation (including
provisions addressing coordination with regional transmission
organizations (RTOs)) has been included as part of both Senator
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). Similar
language has been introduced in the House of Representatives by Mr.
Wynn (H.R. 312).
The pending legislation addresses the role of both independent
system operators (ISOs) and RTOs, as well as the role of state
commissions. Independent system operators and regional transmission
organizations fall within the defined term ``system operator'' in the
pending legislation. As system operators, both ISOs and RTOs would be
obligated to comply with established reliability rules, just as other
kinds of system operators and other users of the bulk power system
would be obligated to comply with those rules. In Order No. 2000, FERC
stated that RTOs must perform their short-term reliability functions.
An RTO is directed to notify the Commission immediately if
implementation of those or any other externally established reliability
standards would prevent it from meeting its obligation to provide
reliable, non-discriminatory transmission service.
The issue of coordinating the reliability-related activities of the
new electric reliability organization envisioned by this legislation
and RTOs arose during last year's legislative efforts. NERC worked with
FERC, PJM, the California Independent System Operator and several
others to address that issue. We agreed to specific language to address
that issue, and that language has been incorporated in both Senator
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). It is
also included in the bill pending in the House of Representatives (H.R.
312).
The NERC reliability legislation also addresses the role of state
commissions. The legislation gives the new electric reliability
organization authority to set and enforce rules for only the bulk power
system. Eighty percent of power outages take place on local
distribution systems, and those remain wholly under state jurisdiction.
Language has been included to make clear that issues concerning the
adequacy and safety of electric facilities and services, matters
traditionally within the purview of state commissions, remain with the
state commissions. The new reliability legislation specifically would
not preempt actions by a state commission with respect to the safety,
adequacy, and reliability of electric service within that state, unless
the state's actions were inconsistent with reliability rules adopted by
the new reliability organization. Those provisions were worked out with
representatives of the states. Both Senator Bingaman's and Senator
Murkowski's bills contain that language.
NERC strongly urges you to adopt legislation containing these
reliability provisions in this session of Congress. That will enable
the industry and the regulators to develop an independent self-
regulatory organization and infrastructure to enforce the reliability
rules and keep the grid secure.
current industry discussions of legislation
Although a broad coalition of state, consumer, and industry
representatives are supporting passage of the NERC legislative
proposal, that support is not unanimous. Just as NERC and its coalition
worked with state regulators in 1999 and with the RTO representatives
last year, NERC and its supporting coalition are continuing discussions
with those who are not now supporting the legislation to determine
whether changes to the proposal could broaden the base of support even
further. One of the criticisms of the legislative language is that the
proposal is longer and more detailed than may be appropriate for a
legislative enactment. NERC is exploring whether a shorter, less
detailed bill that nonetheless retains the essentials needed for
creation of an independent industry self-regulatory organization will
command at least the same level of support as exists for the current
version. Any shorter version of reliability legislation must still
satisfy the legislative goals that I mentioned above. Those discussions
are continuing.
FERC's recent RTO orders do not change the need for Congress to
enact reliability legislation. Those orders, even assuming their goal
of fewer, larger RTOs is ultimately realized, do not address any of the
reasons why we are seeking that legislation. Those orders cannot confer
jurisdiction that FERC does not now have, either over reliability
matters or over non-jurisdictional entities. Those orders do not
address in any way the international nature of the interconnected grid.
Furthermore, they do not provide FERC with the resources or technical
competence to undertake the task of setting and enforcing reliability
rules itself. Even if FERC's vision were someday completely realized,
there would be six (not four) RTOs in the United States. Northeast,
Southeast, Midwest, Florida, ERCOT, and West. The Canadian provinces
and Mexican states are not accounted for. It is also questionable
whether all non-jurisdictional transmission-owning entities will join
an RTO. Finally, there is the question of the time it will take for the
RTOs that FERC envisions will actually come into being. With the
additional uncertainty generated by those orders as to who will
ultimately operate and plan transmission, it is more important than
ever that an industry-led self-regulatory organization be created to
establish and enforce reliability standards applicable to the entire
North American grid, regardless of who owns or manages it. Because FERC
will provide oversight of the self-regulatory organization in the U.S.,
FERC can ensure that the self-regulatory organization's actions and
FERC's evolving RTO policies are closely coordinated.
conclusion
NERC commends the Committee for attending to the critical issue of
assuring the reliability of the interconnected bulk power system as the
electric industry undergoes restructuring.
A new electric reliability oversight system is needed now. The
continued reliability of North America's high-voltage electricity
grids, and the security of the customers whose electricity supplies
depend on them, are at stake. An industry self-regulatory system is
superior to a system of direct government regulation for setting and
enforcing compliance with grid reliability rules. Pending legislation
would allow for the timely creation and FERC oversight of a viable
self-regulatory reliability organization. The reliability of North
America's interconnected transmission grid need not be compromised by
changes taking place in the industry, provided reliability legislation
is enacted now.
The Chairman. Thank you all very much for that excellent
testimony. Let me just follow up, Mr. Cook. You pointed out a
concern which I have had with the legislation that was
consensus legislation from your group in that it was not
simple. It's a lot of detail in there and more detail than is
common for legislative provisions. I'm encouraged to hear that
you're working to see if something a little more streamlined
could be adequate to the purpose and agreeable to your members.
Since this committee is going to be trying to mark up
legislation when we come back in September, will you have
anything by the time we come back in September that we could
work with.
Mr. Cook. I certainly hope we can, Mr. Chairman. I think
your indication of the timetable will provide a spur to the
efforts of that group to come together. It is certainly my
intention to be able to come back to you with something. I
believe it is possible to streamline that language and still
retain the essence of the proposal we are supporting.
The Chairman. Thank you. Commissioner Nugent, let me ask on
this issue of regional authorities, you suggest that regional
authorities over planning and siting of transmission should be
voluntary and that FERC should have this backup role. Are there
going to be areas where there is no regional entity that
develops and if so, what do we do about that?
Commissioner Nugent. The very fairly widely across the
country but across the country it is apparent that there is
cooperation among the State commissions. I think you are likely
to have a strong response. If you feel the response from State
commissions is inadequate, I would consider if I were you where
you are in perhaps making that a stronger requirement. I don't
think we ought to be establishing parallel organizations. Let
me suggest how this might work.
A witness, Mr. Rouse, suggested that responsibility for
developing some transmission planning and so on be delegated by
the FERC to the RTOs. Frankly I would think RTOs if they come
into full play are the place we ought to do that planning and
develop the details on that and they would suggest it for
subsequent review by a regional organization. That regional
organization ought to operate within the framework of advising
the FERC on the outcome of it. I would think that the FERC
would be wise to give great deference to the detailed solutions
developed by those regional organizations and ultimately
implement them as long as they're consistent with the policies
that you set here and are further elaborated by the FERC. Is
that your response?
The Chairman. Yes, that's helpful. Mr. Ward, in your
testimony, you suggested additional protections for consumers
are necessary before we repeal PUHCA as I understand it.
Particularly protections against costs subsidy and cost
shifting. Do you think that FERC would need additional
authority above what we talk about in this White Paper? Have
you had a chance to really look at the White Paper from that
perspective as to whether we are contemplating enough authority
for FERC at the present time?
Mr. Ward. I haven't made a study of the Federal Power Act
from that perspective in terms of analyzing whether PUHCA's
repeal would necessitate amendments to the Federal Power Acts
to provide that kind of protection for consumers from cross
subsidies. So I can't give you a legal opinion.
I certainly think the White Paper is moving in the right
direction in saying that any PUHCA repeal should be
conditional. It should not be flash, cut, shift into
unregulated holding company arrangements.
The Chairman. All right. Mr. Dushaw, would eligibility for
training programs and retraining programs for displaced workers
be something that should be considered under this public
benefits fund in your view? Does that solve some of the
problems that you alluded to in your testimony about some of
the downsizing and displacement of workers in this industry?
Mr. Dushaw. It would be extremely helpful. I don't know--I
can't say, Mr. Chairman, whether the downsizing has hit bottom
or not. I rather doubt it. I think the industry is going to
take on a different character with a lot of outsourcing of work
but retraining for those who are displaced under a definitive
program would be most helpful. But really what's needed in
terms of reliability is training of tomorrow's work force and
putting some characteristics on that training.
The Chairman. Okay. Well, thank you, I understand,
Commissioner Nugent, you have a plane you have to catch and we
would excuse you at this point. Thank you very much for coming.
Commissioner Nugent. Thank you.
Senator Wyden. Mr. Chairman.
The Chairman. Senator Wyden, did you have a question of
Commissioner Nugent before he left?
Senator Wyden. I did and just very briefly, Commissioner,
as you know Senator Burns and I have been very involved in the
effort to try to get more information to the public at a time
when clearly energy is being commoditized and we've got trading
floors in this country, the ENRON trading floor, the Reliant
Energy, Dynergy, and Duke Energy and these huge trading floors
and yet it's not really possible for people to get good
information. Not proprietary confidential issues but basic
information in order to make these markets work better. I just
would like to know whether you think that that is generally
important for State regulators whether regulators now have
access to all of the data that they need to assure that
electric power systems are functioning properly and whether you
think on balance, this is a constructive effort that Senator
Burns and I are making?
Commissioner Nugent. It is clearly a constructive effort
that you and Senator Burns are making here, Senator. Let me--
there's really two pieces to that. There are data out there
that we do get but we're facing delays of 90 days to 6 months
which are intended to protect market so the timely delivery of
the data that has been typically available is of great concern
to State regulators.
The second question is we're learning on this, too, and
doing investigation to find out just what it is that we have to
learn to be able to give the public the judgment that the
markets are operating fairly. So we're not even fully sure yet
what the data are that we will ultimately need to be able to
track it. It is absolutely critical I think to the extent that
at least at the State level, that the schemes to go forward
with retail power markets are based on wholesale markets, that
the public have the assurance that the watchdogs that they
employ on their behalf to scrutinize the operation of the
market which of necessity requires access to the data have
access to those data and be able to scrutinize them and respond
to them.
Senator Wyden. Are there any concerns--as you know my staff
has been working very closely with your organization. Are there
any concerns that you all have at this time about the direction
Senator Burns and I have been going?
Commissioner Nugent. I would probably take it yet a step
further and that is I would also make some sensitive
information, one that might be used on the part of someone if
it was available in the full public domain to be able to gain
the system. I would make that available to State commissions
under protective order. I mean you gentlemen are lawyers. You
know what restrictions there are on that. We have a long
history of accepting sensitive information, protecting that
information and utilizing it in the public interest. I think an
appropriate addition to make those--that access available would
be useful.
Senator Wyden. Well, you've got to get a plane and Mr. Ward
has been very helpful. I just think that this is exactly what
is needed right now, given the direction that we're going in
terms of the energy field. Energy is being commoditized. It is
clearly being subject to a whole host of markets and if people
really believe in fair competition, they've got to want to get
this information out.
And what we do in our legislation, Mr. Nugent, Senator
Burns and I give FERC the authority to delay or withhold
information release when immediate release could result in
market manipulation but have taken the position that you
reflected, that as a general rule there is no good reason to
delay or withhold access to this information from regulators to
the public as long as everybody gets access to it and that to
me is what you need to make markets work.
So I'll let you run to the plane and thank you very much
for the cooperation you've shown us and Mr. Ward as well. Your
organization has been very helpful and I thank you, Mr.
Chairman.
The Chairman. Thank you very much. Did you have other
questions of any of the other witnesses?
Senator Wyden. No, Mr. Chairman.
The Chairman. Let me thank Commissioner Nugent but also all
of the rest of you. I think the hearing's been good. The
testimony is very useful to us and we will take it into account
as we try to move forward with legislation.
The hearing is adjourned.
[Whereupon, at 12:15 p.m. the hearing was recessed, to be
reconvened on July 26, 2001.]
NATIONAL ENERGY ISSUES
----------
THURSDAY, JULY 26, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:48 a.m. in room
SH-216, Hart Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Why don't we go ahead and start the hearing.
This is the second day of hearing intended to prepare the
committee to address the pressing needs we have seen clear
evidence of in our electricity markets.
If there's one thing we should learn from what happened in
California and the west coast is--this past year--is that a
functional wholesale market in electricity is important and
necessary. Another thing we probably learned is that we do not
have one, at least in the West. So as I indicated yesterday at
our hearing, I believe the time for studying these issues is
drawing to a close. It's time for the committee and the
Congress to act to ensure that electricity markets work to
provide dependable, affordable clean energy essential to the
Nation and to our economy.
We're happy that today we have two panels. The first is our
Secretary of Energy, Minerals and Natural Resources from the
State of New Mexico representing the Western Governors
Association. Jennifer Salisbury made an effort to be here for
the hearing yesterday and was not able to get here due to the
plane difficulties. I wish the FERC would solve that problem
for us as well.
And then our second panel is made up of the FERC
Commissioners. I look forward to hearing from all of them as to
their views as to the legislative proposal that we have put
forward in the form of a White Paper, whether that provides the
necessary tools that they would need to adequately do their
job. I've been encouraged by the direction of some of the
recent orders that have come out of FERC, and we'll have a
chance to ask about those orders as well.
Let me ask Secretary Salisbury to come forward if she would
right now and summarize your main points, we will include your
full statement in the record, but if you could give us a short
version of what you think it's essential that we know,
particularly from the perspective of the Western Governors
Association, that would be very useful. Thank you.
Senator Craig. Mr. Chairman?
The Chairman. Yes. Oh, excuse me, I forgot to have an
opening statement. Go ahead.
Senator Craig. That's all right. I have a brief one.
The Chairman. Go right ahead.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. I'm going to have to leave here at 10
o'clock, and I apologize, because this is a most important
hearing, and I'm glad to see a full force FERC here and in
attendance.
Let me say, Mr. Chairman, that on April 10 at the height of
the problems in California and the Western Pacific Northwest
region of our country, Senator Feinstein was working hard to
find a solution. A Senator from Oregon was working hard--many
of us were--to get ourselves through the summer and at the same
time deal with what was a most dysfunctional market.
On April 10, at that time, the FERC came to Boise and
listened to the 11 Western States. New Mexico was there. And it
was obvious to all of us who were in attendance and who stayed
throughout that hearing that we did, in fact, have a broken
market in the West at that point in time.
California had failed to act in ways that they now have
acted. FERC had not yet acted but was finding bases from which
to act under the law to begin to help shape. And you've
mentioned in your opening statements that, in fact, they have
acted, and I agree with you. I think some of those decisions
and orders that are out and effective or before us for comment
have also helped shaped the market in a substantially improved
way. What is a broken market is a market that is now appearing
to function. Although certainly damaged, it is beginning to
work in a much better basis.
During that whole period, of course, what I was concerned
about--I think what the Western States and Oregon and
Washington and Idaho were concerned about--and Montana--was how
we cope in this situation with a hydro-based system in a
drought environment. Well, it looks like we may work our way
through that this summer now thanks to everyone working
together and thanks to the FERC looking at it, sensitizing
themselves and moving in decisive ways.
That doesn't mean that we have now solved the problems. It
certainly doesn't, because there clearly is a supply situation
out there and a transmission system that needs rapid
improvement. All of those things are a part of what we will
look at. I am pleased that you are holding this hearing today,
and I think it's very important that we stay fully engaged with
the FERC. They have substantial authority in these most
important areas, and they are using it in many ways that I
think are positive. In some ways I don't agree with, but at the
same time, they're doing what we expected them to do and what
the law requires them to do. Thank you.
The Chairman. Thank you very much. I think rather than have
opening statements by the other members, let me just--we'll add
a couple of minutes onto each member's questioning time so that
they can make any additional statements that they would like.
Secretary Salisbury, why don't you go right ahead with your
testimony.
STATEMENT OF JENNIFER SALISBURY, SECRETARY OF ENERGY, MINERALS
AND NATURAL RESOURCES, STATE OF NEW MEXICO, ON BEHALF OF THE
WESTERN GOVERNORS' ASSOCIATION
Ms. Salisbury. Thank you very much, Mr. Chairman. As the
chairman mentioned, I'm here on behalf of the Western
Governors' Association. The Western Governors' Association is
composed of the 18 Western States, including all the States
represented here this morning, as well as the territories of
Guam, the Commonwealth of the Mariannas, and American Samoa.
The WGA, if you didn't already know, operates by consensus
and through policy resolutions adopted at its meetings. So what
I testify about today is directly related to a policy that has
been formally adopted by the member governors.
Before I address the three items discussed in the
chairman's White Paper, I would like to reemphasize the
uniqueness and separateness of the power grids serving North
America. The one serving the West--the Western
interconnection--fully integrates the Western States, Western
Canada and Northwest Mexico.
There are few ties currently between the Western
interconnection and the other two interconnections. This means
that what happens in the West--a power outage in New Mexico,
for example--will not impact Connecticut.
The grids have evolved differently as well. The Western
grid is defined by long distances between load centers, whereas
the Eastern grid more resembles a tight-knit network.
Other differences are apparent. Unlike the East, as you all
well know, in the West, vast tracts of land are owned by the
Federal Government. This obviously creates different
transmission siting issues. The point I'm trying to make is
that we hope the legislation that this committee crafts will
recognize these differences that already exist, because we
don't believe one-size-fits-all legislation will work.
Now let me turn to three specific issues raised in the
White Paper and on which the Western governors have taken a
specific position.
First, the White Paper states that the FERC should have
jurisdiction over all transmission, whether bundled or
unbundled. To the extent this means the FERC would now have
jurisdiction over all retail access questions, Western
Governors would oppose.
Western Governors have taken the position that such issues
as to whether a State should go forward with retail access, not
go forward, and the timing when certain classes of consumers
are offered retail access, are best left to the States. In
other words, these are State prerogatives.
Second, Western Governors support a new approach to setting
and enforcing reliability standards. This approach is embodied
in the consensus legislation advanced by the North American
Reliability Council or NERC. Governors recognize that voluntary
compliance, which has worked so well in the past, will not
continue to work well in the new environment we've entered.
Yes, FERC must be given enforcement oversight, but that
does not mean that it should have absolute authority in setting
the standards. Instead, Western Governors have enunciated three
principles that should guide reliability legislation.
One, deference must be given to standards adopted within
and for the Western interconnection. Two, implementation and
enforcement of standards must be delegated to the West. Three,
States must have a role. The NERC consensus legislation
contains all three of these principles. Our bottom line, retain
the central provisions of last year's bill that provides for
deference, delegation and a State's role.
Stated another way, we oppose proposals to centralize
decisions at FERC. The agency lacks the time, the resources,
expertise and first-hand knowledge of the conditions in the
West to manage reliability of the Western power grid. Besides,
the process that we're advocating we think will work with our
international partners.
As a footnote, Western Governors support efforts to ensure
the availability of information on loads, facilities and
generation. Better data should mean better reliability of the
grid.
The third issue that I'd like to discuss, Western Governors
have been proactive in addressing transmission needs of the
Western interconnection. They understand adequate transmission
is critical to maintaining the reliability of the grid as well
as enabling competitive wholesale electricity markets.
The White Paper discusses the need for Federal eminent
domain in order to build new transmission. Western Governors
oppose giving FERC this authority. Siting has already been a
State issue. In addition, we don't believe there's sufficient
evidence to even support the need for centralization of land
use type decisions. No Western State in our knowledge has ever
denied a permit for interstate transmission lines.
It's also important to note that the major challenge facing
siting issues in the West rests with Federal land managing
agencies. The Federal Government, as you all know, owns
significant portions of land in Western States--45 percent in
California, 83 percent in Nevada, and 34 percent in my own
State of New Mexico.
The President has issued an executive order directing
Federal agencies to expedite energy related projects. We
believe this could go a long way towards solving any problems
that currently exist to site transmission on Federal lands.
While Governors don't believe the case has been made for
Federal jurisdiction, Western Governors still recognize there
is a need for States to examine their own siting and permitting
processes. Doing so should result in higher quality and more
timely decisions on transmission line proposals.
To reiterate, Governors firmly believe that granting FERC
siting authority--even as a backstop--is not needed in the West
and should not be part of the committee's legislation.
In summary, we applaud the White Paper for highlighting the
challenges of today's electricity markets. And to reiterate,
first, Western Governors oppose giving FERC jurisdiction over
bundled transmission. Second, support reliability legislation
similar to that which passed the Senate last year. And third,
Western Governors oppose granting FERC eminent domain authority
for transmission lines.
That concludes my testimony, Mr. Chairman. I would be happy
to answer any questions.
[The prepared statement of Ms. Salisbury follows:]
Prepared Statement of Jennifer Salisbury, Secretary of Energy, Minerals
and Natural Resources, State of New Mexico, on Behalf of the Western
Governors' Association
Thank you Mr. Chairman. I am the Secretary of Energy, Minerals and
Natural Resources of the State of New Mexico. I am representing the
Western Governors' Association. I also sit on the Board of Directors of
the Western Interstate Energy Board, the energy arm of the Western
Governors' Association, and am a member of the Committee on Regional
Electric Power Cooperation (CREPC) CREPC is unique in North American in
that it includes all of the state and provincial agencies with electric
power responsibilities within an entire interconnection.
In crafting legislation, the Committee should keep in mind that
North America is served by three essentially electrically-separate
power grids. Within the Western Interconnection, the western states,
western Canadian provinces and northwest Mexico are fully integrated.
However, there are few ties between the Western Interconnection and the
other interconnections. Generators are synchronized within
interconnections but not between interconnections.
The geography of the system is important, because it defines the
practical maximum extent of the power markets and the impacts of power
outages. An event in British Columbia cause blackouts in Arizona, but
an outage in Arizona cannot impact states in the Eastern
Interconnection.
The Eastern and Western grids have developed different features.
The western grid is defined by long distances between load centers and
often between generation and load centers. The Eastern grid more
resembles a tight-knit network of transmission. As a result, the
maintenance of stable voltage in the system is often the constraining
factor in the operation of the Western grid, while the thermal limits
of lines is the typical constraining factor in the Eastern grid.
As a result of these differences, institutions and practices \1\ to
address electric power issues have evolved differently in the West than
to the East.
---------------------------------------------------------------------------
\1\ For example, the Western industry has relied on rating the
capacity of transmission paths under different system conditions and
limiting the use of paths to their rated capacities. Because paths are
not similarly rated in the Eastern Interconnection, the industry relies
on Transmission Loading Relief (TRLs) in the East to force users to cut
back power transfers when reliability is threatened.
---------------------------------------------------------------------------
Another reality differentiating the East and the West is the vast
ownership of land in the West by federal agencies. This land ownership
pattern creates different transmission facility siting challenges than
in the East.
We recommend that federal legislation recognize these electrical,
geographic and institutional differences and resist the temptation to
adopt federal government-centric, one-size-fits-all ``solutions.'' I
think the experience in western power markets over the past year has
illustrated the limits of policy made in Washington, D.C. for the West.
Mr. Chairman, your ``White Paper on Electricity Legislation''
provides a good overview of current public issues resulting from the
new electricity markets. I will address two items in your white paper--
reliability and regional planning and siting--and will cite the
position of Western governors on other issues raised in the white
paper. My comments are based on existing policy of the Western
Governors' Association in Resolution 00.009 ``A Competitive and
Reliable Western Electric Power System'' (see http://www.westgov.org/
wga/policy/00/00009. htm) and the recommendations that emerged from an
Energy Policy Roundtable the governors held in February (see http://
www.westgov.org/wga/press/energy agree.htm0 and a Transmission
Roundtable held in May (see http://www.westgo.org /wga/initiatives/
energy/review draft transmission.htm).
reliability
The electric reliability system in the West has worked remarkably
well over 30 years. The system of voluntary standards set by the
Western Stations Coordinating Council, the only regional reliability
council in the Western Interconnection, has been effective in keeping
the lights on. This system has included investor-owned utilities,
municipal utilities, rural cooperatives, public utility districts,
federal power marketing administrations, as well as Canadian and
Mexican utilities. State public utilities commissions have relied on
these regional standards in their decisions. However, with the
emergence of competitive electricity markets it is well recognized that
we cannot rely on voluntary compliance with standards into the future.
Since 1997, western governors have urged the enactment of federal
reliability legislation to provide a legal underpinning for enforcing
reliability standards. As a stop-gap measure, the West hat implemented
a system of contracts to make standards enforceable. Most control areas
in the West have executed the contracts, a few have not. However, such
a contract enforcement system is not a long-term substitute for federal
legislation.
In 1997 and again last year, Western governors called for a new
approach to setting and enforcing reliability standards that includes a
public process for setting standards, review of standards by states,
application of standards to all users of the grid, enforceable
sanctions for non-compliance with the standards, mandatory membership
by operators of the gild in regional reliability councils, and joint
state/federal government oversight of the processes used to establish
and enforce reliability standards. In 2000, the governors urged the
``organization of regional advisory bodies of affected states and
Canadian provinces to advise regional and North American organizations
and the Federal Energy Regulatory Commission (FERC) and appropriate
Canadian and Mexican regulatory authorities . . . FERC should defer to
the advice of such regional advisory bodies when advisory bodies cover
an entire interconnection.''
Through extensive on-going collaborative efforts between the
Western states/provinces and the Western electric power industry, three
principles have been developed that guide our views of federal
reliability legislation.
(1) Deference must be given to standards adopted within and
for the Western Interconnection.
(2) The implementation and enforcement of standards must be
delegated to the West.
(3) States must have a role in the process.
On July 11, 2001, WGA Chairman Governor Kempthorne conveyed to the
Committee the governors' views on federal reliability legislation. (See
attached letter.) \2\
---------------------------------------------------------------------------
\2\ The letter can be found in the appendix.
---------------------------------------------------------------------------
The Western states, provinces and industry have worked over the
past three years to streamline and consolidate existing industry grid
management institutions into one new entity, the Western Electricity
Coordinating Council. The governors have called for the expeditious
establishment of the new institution. FERC is scheduled to act on the
proposed WECC this week and, assigning FERC approval, WECC will be
operational later this year. The new institution is designed to rapidly
implement the provisions of federal reliability legislation.
Through extensive work with the North American Electric Reliability
Council (NERC), the central elements of what the West needs are
included in the NERC consensus legislation that the Senate passed last
year. The NERC language provides for deference to standards that cover
an entire interconnection. It provides for delegation of implementation
and enforcement functions to a regional entity, such as the WECC, that
is much closer to the issues then a North American body or FERC. It
provides for a state advisory role and enables FERC to defer to such
advice when given on an interconnection-wide basis. This approach
builds on substantial existing technical expertise in the industry and
states and does not require the establishment of a large new federal
bureaucracy.
In WGA Resolution 00-009, the governors said: ``Federal agencies
and federal legislation should facilitate effective decision-making by
the states and empower the states, with the cooperation of other
regional stakeholders, to create regional mechanisms, where
appropriate. to address transmission, reliability, market power and
other regional concerns. FFRC should be required to defer to the
decisions of such bodies.'' The regional advisory body concept is a
stop in this direction.
We strongly urge this Committee to retain the central provisions of
last year's bill that provide for deference, delegation and a state
role.
We oppose proposals to centralize decisions on reliability at FERC.
The agency has neither the time, resources, expertise nor first-hand
knowledge of conditions to the West to efficiently manage the
reliability of the western power system.
regional planning and siting
Western governors have been proactive in addressing the
transmission needs of the Western Interconnection. They recognize that
an adequate transmission system is necessary to maintain the
reliability of the gird and enable competitive wholesale electricity
markets. At their February 2, 2001 Energy Policy Roundtable, the
governors highlighted the need for an adequate energy delivery
infrastructure. On May 9, 2001 the governors held a transmission
roundtable and focused on three questions:
1. What transmission enhancements are needed in the West?
2. How can needed transmission enhancements be financed?
3. How can needed transmission enhancements be expeditiously
permitted?
The governors recognize that we cannot wait until Regional
Transmission Organizations are in place and functioning before
beginning to answer these questions. The uncertainty created by federal
policies has led to a near-moratorium on transmission investment.
As a step toward addressing the question of what transmission
enhancements are needed, western governors established a work group
headed by Jack Davis, CEO of Pinnacle West, and Commissioner Marsha
Smith of the Idaho PUC, who also chairs the Committee on Regional
Electric Power Cooperation, to develop a ``conceptual'' transmission
plan. This plan is designed to begin to scope out the transmission
needs of the region. It is the beginning, not the end of needed
analysis. Such a global view is needed, given that most transmission
work now being done is driven by narrow transmission requests made of
utilities under Section 211 of the Federal Power Act. The conceptual
plan should be completed in the next week and presented to Western
governors at their meeting in August.
There is much discussion in the Committee's white paper and
elsewhere of the need for federal eminent domain in order to enable new
transmission to be constructed. The record in the West provides no
evidence supporting the need for new centralization of land use
decisions that are more properly made in the West based on intelligent
tradeoffs of needs and values. To our knowledge, no western state his
ever denied a permit for an interstate transmission line. In the West
at least, the idea of federal domain is a solution looking for a
problem. As this Committee knows, federal primacy in natural gas
pipeline siting and safety has not been a panacea for ensuring a well-
functioning energy infrastructure.
The major challenge of siting of transmission in the West rests
with federal land management agencies. The federal government owns vast
tracts of land to the West (e.g., the federal government owns 83% of
the land in Nevada, 65% of Utah, 63% of Idaho, 53% of Oregon, 50% of
Wyoming, 46% of Arizona, 45% or California, 36% of Colorado, 34% of New
Mexico, 29% of Washington, and 28% of Montana.) Federal land management
agencies operate under a myriad of laws.
Because few new transmission lines have been proposed in the West
over the past decade, siting add permit review processes have become
rusty. The President's Executive Order 13212 directing federal agencies
to expedite energy-related projects provides needed direction. However,
the agencies also need adequate resources to execute their
responsibilities.
States also need to reexamine their siting and permitting processes
to enable higher quality and more timely decisions on transmission line
proposals. Such timely action is essential in the faster-moving
competitive electricity market.
The draft Conceptual Transmission Plan that the governors ere
reviewing recommends that all siting review processes be streamlined
and coordinated to enable timely construction of transmission. State
review processes should address both local and Western Interconnection
needs, and federal agency review processes should be coordinated
internally as well as with State and Tribal authorities.
To advance these goals, the Committee may want to:
(1) Authorize the establishment of joint siting processes
among states and federal land management agencies;
(2) Direct federal agencies to participate in joint review
process and ensure that states can, at their request, be
cooperating agencies in all transmission project EISs; and
(3) Fund these cooperative siting processes.
Granting FERC siting authority, even as a backstop, is needed in
the West and should not be part of the Committee's legislation.
other issues in the white paper
The existing policies of the Western Governors' Association do not
address all of the issues in the white paper. Following are the
policies of Western governors that bear on the other issues raised in
the white paper.
Transmission Jurisdiction: The governors believe that all segments
of the Western industry, including investor-owned utilities, public
power, federal power marketing administrations, power marketers and
brokers, and independent power producers, should participate in the
competitive wholesale market (Resolution 00-009).
Western Governors have urged the Western electric power industry,
in cooperation with Western states and the federal government, to:
support the formation of cost-effective Regional Transmission
Organizations to maintain and enhance system reliability; examine and
mitigate market power; and facilitate efficient power transactions in a
restructured industry. (Resolution 00-009) Western states have made it
a priority to work with the industry to resolve issues that arise at
the boundaries of RTOs. However, as FERC was told at a meeting in March
2001, western states do not believe that a FERC-mandated west-wide RTO
is the most efficient means of achieving a seamless transmission system
throughout the Western Interconnection.
The governors have supported the elimination of release to
distributed generation, including barriers to interconnection to the
grid (February 2 recommendations from the Energy Policy Roundtable).
Rates and Market Power
Western governors have urged the federal government to work with
states to develop effective approaches to mitigate market
power.(Resolution 00-009). Western governors have called for sending
consumers more accurate and timely price signals. Such price signals
are an effective means of mitigating market power. (Recommendations
from February 2 Energy Policy Roundtable). Closer collaboration between
FERC and the western states in decisions on whether to authorize
market-based rates and the degree to which western markets were
competitive may have helped to mitigate the crisis over the past year.
Member Transparency Rules
Three of the recommendations from the governors' Energy Policy
Roundtable addressed the urgent need to improve the quality of
information for policy makers and market participants. The governors
are encouraging the creation of a centralized Western interconnection-
wide database that tracks prospective demand, and tracks generation and
transmission facilities under construction, that are permitted, in the
permitting process, or under consideration. They support efforts to
ensure the availability on loads, transmission, and generation where
necessary for ensuring the adequacy, efficiency and reliability of the
grid. They have identified an immediate need to assess natural gas
supplies and deliverability in the West.
A federal government-only information system may not provide states
or market participants sufficiently detailed or timely information to
ensure efficient electricity markets.
Additional Issues
Consumer protection: Western governors have urged Western public
utility commissions and Attorneys Generals to examine whether new
measures are needed to protect electric consumers in a more competitive
market and educate consumers on their rights and risks under a
competitive electric system.
Tax provisions: Western governors have written the Treasury
Department urging that the tax-exempt status of public power entities
not be jeopardized if such entities provide their existing transmission
assets to an independent system operator.
conclusion
The Committee's white paper correctly highlights the challenges of
the new realities of electricity markets. Congress needs to address
these challenges. However, Congress needs to avoid imposing a federal-
government-only approach to these challenges.
Federal legislation must recognize the fundamental electrical
realities of separate and international power grids. This is
particularly critical in the West where the transmission system in
western states, western Canada and northwest Mexico is highly
integrated.
Federal legislation must also recognize that the Federal Energy
Regulatory Commission does not have the time, resources, expertise or
local knowledge to single-handedly manage the western electric power
system. The legislatively simple solution of ``give FERC more
authority'' will not result in an electric power system that meets the
needs of the West at lowest cost.
We urge the Committee to:
Approve federal reliability legislation similar to that
which passed the Senate last year that provides for deference
to decisions made in the Western Interconnection, delegation of
implementation responsibilities to a Western reliability
organization, and a role for states through the establishment
of State Advisory Bodies.
Not grant FERC eminent domain for transmission lines.
The Chairman. Thank you very much for your testimony.
Before I begin any questions, let me just see if Senator
Murkowski had any opening statement he wished to make.
Senator Murkowski. No, Mr. Chairman, I really don't. I
believe this is pretty much a continuation of what we began
yesterday, and I think it's very important. As I indicated
previously, I believe pretty much in market competition, not
more regulation and not shifting jurisdiction from the States
to the FERC.
I can't help but make another attempt to alert my
colleagues and the general public. This is a clipping, Iraq
missile nearly hits U.S. spy plane yesterday. U.S. U2 spy plane
was attacked by the Iraqis, and the missile almost hit the
aircraft--said that it exploded behind the pilot and was done
without the sophistication of an on-target radar with this
aircraft at 70,000 feet.
My point is, Mr. Chairman, it's just a matter of time
before Saddam Hussein is going to take down one of our
aircraft. We've had over 230,000 sorties over Iraq supporting a
no-fly zone. The irony of that is that we're now importing not
750,000 barrels a day but a million barrels a day from Iraq. I
find that unconscionable in relationship to what it's costing
American taxpayers and the lives that we're putting at risk
when we clearly have an opportunity next week in the House and
later on in the committee to address the merits of reducing our
dependence on imported oil by stimulating domestic production
here in the United States and particularly in my State of
Alaska. And there's absolutely no question--no question at
all--that we don't have the scientific technical capability to
do it safely. Thank you.
The Chairman. Thank you. Let me ask a few questions on the
basis of the testimony you've given us. On this issue of
eminent domain, your position--the position of the Western
Governors--is that there should be no eminent domain authority
at FERC and also that there should be no eminent domain
authority at any regional--in any regional organization. What
is your thought as to whether or not States should be
encouraged or directed in some way to abide by decisions of
regional organizations as to transmission?
Ms. Salisbury. Mr. Chairman, this is a little bit difficult
for me this morning. I apologize, but I'm only reflecting what
we've taken a stated positive position on. It's my
understanding that the issue that you just raised will be
addressed at the August meeting. We--it's an interesting idea.
We just have not formally talked about it.
I think, at least at this time, we don't believe there's
been a case stated for giving--for jurisdiction--for changing
the system so much. It would really be a huge change in the
policies that we've all operated under for a long time.
The Chairman. Let me ask about these bottlenecks that we
here in the committee have been hearing about--bottlenecks in
the Western transmission system. This notorious path 15 line,
for example, some witnesses have mentioned as many as 43
constraining points in the Northwest that constrain the ability
to move power around adequately.
If there's no need for any additional authority at either
the Federal or regional level, what is preventing the
resolution of these problems? I saw something in the news this
morning about Secretary Abraham had come out and said that the
Department of Energy was going to take the--had taken the
initiative to try to get this line 15--path 15 line--fixed.
You say there's no evidence that there is a need for
putting additional authority at FERC or anywhere but at the
State level, how do you explain these constraint points?
Ms. Salisbury. Well, I think there are constraints, and I
would say that the Western Governors would argue that we need
to reexamine all of our process that we've developed to try to
get at more coordination, better coordination, and work--and
this may be what the chairman was talking about a little bit
earlier, some sort of regional groups to get at this in a
better way.
What I was referring to, though, is that, at least at this
point, the States have never denied a permit for an interstate
transmission line--at least in the West they have not. And so
to argue that the FERC now needs to be given jurisdiction over
this issue doesn't seem to be appropriate.
The Chairman. Do you think the fact that the States have
not denied permit applications is clear evidence that there's
no need for any more general planning or siting authority?
Ms. Salisbury. Mr. Chairman, I think the Western Governors
would say yes, there is no need for existing authority for
eminent domain. Planning, I don't believe we've taken a
position on that.
The Chairman. Okay. Senator Murkowski.
Senator Murkowski. I'd like to expand on that, because I
want to make sure that we understand this for the record. In
your statement, you state--and I quote--``The White Paper
states''--and you're referring to the White Paper that majority
has proposed--``The White Paper states that FERC should have
jurisdiction over all transmission whether bundled or
unbundled.'' And then you say, ``To the extent this means that
FERC would now have jurisdiction over all retail access issues,
Western Governors would oppose.'' And you expanded in your oral
statements, and again, you address your justification that the
systems work, and you've been able to accommodate the request.
Is that the only reason or are there others that you would deem
to oppose any effort to have FERC have jurisdiction over all
transmission?
Ms. Salisbury. Mr. Chairman, Senator Murkowski, the
transmission--the bundled and unbundled--Western Governors have
always taken the position that retail access issues, whether to
grant retail access, the timing of retail access, is a decision
that's better left to the States.
So to the extent that turning over jurisdiction for
transmission--this is different from the siting issue, the
bundled and the unbundled--and it would back door retail access
questions to FERC, Western Governors have taken a position
opposing this.
Some States in the West do not want retail access. Just as
an example, my own State of New Mexico had passed a bill a year
or so ago, and this past year, because of the situation in
California and elsewhere in the West, delayed implementation of
retail access for 5 years.
Senator Murkowski. I want to point out simply that this, I
think, is one of the fundamental differences that exist in the
two bills that have been submitted as comprehensive bills by
Senator Bingaman and myself, and we do appreciate the fact that
I happen to agree with you starts the morning off all right for
me. But nevertheless, we should point out our differences,
because those are the areas that we're going to have to work
towards compromise and a resolve.
The Chairman. Thank you very much.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Yesterday, Miss
Salisbury, the president of the National Association of
Regulatory Commissioners endorsed legislation that Senator
Burns and I have introduced that would make it easier for the
States to get key information about electric power production,
transmission past schedules and flows that are so essential to
making markets work.
I think this legislation very much tracks the kind of
comments that you've made, and it would just be helpful if we
could get your thoughts on the idea on the need for more market
transparency and more information on these issues.
Ms. Salisbury. Mr. Chairman, Senator, the Western
Governors, at a meeting that it had--a roundtable meeting that
it had in February--as one of its--I guess the--what it
released as far as additional steps that needed to be taken,
did state affirmatively, and I will quote, ``that Western
Governors support efforts to ensure the availability of
information on loads, transmission and generation when
necessary for ensuring the adequacy, efficiency and reliability
of the grid.''
We recognize, and I think the Senator's already stated he
recognized that there is definitely a need for more, better,
quicker data to make decisions. And I think the Western
Governors would work with that and probably support
legislation.
Senator Wyden. We'll work closely with you. Mr. Chairman, I
too have to go on to a hearing. I just wanted to make a brief
statement about a matter that involves FERC. As our colleagues
know, I put up on my web site various oil industry documents
that describe some very troubling refinery practices that deal
with this price manipulation issue.
Today with FERC, we're going to be looking at whether
electricity or natural gas supply was manipulated to inflate
the price. FERC has asserted that there is no evidence now of
price gouging.
Given that, I'm troubled by the fact that the network news
the other night reported on a secret FERC investigation that
found that two companies were keeping powerplants out of
service to raise electricity prices.
It was also reported that FERC sealed the records and that
the documents would not be released, and in fact, Commissioner
Massey, who is here today, opposed sealing the documents. So I
hope to get back, Mr. Chairman, but if I don't, I just want to
be on record as saying that I hope that FERC will work with
this committee to provide these documents that the network news
is now saying provide tangible evidence of manipulation of
supply and electricity prices. I think it's important for the
committee to decide these matters themselves after we make
arrangements to look at it in a way so that if there are
propriety issues that those matters can be protected. And I
can't stay this morning, but the reason Senator Burns and I
have introduced this legislation is that we've got to prevent
gaming, and getting more information out will help prevent
gaming. But until that time, when you've got FERC sealing
records and you've got people with credibility like
Commissioner Massey saying that they're opposed to sealing the
records, I think this committee's got an obligation to dig
further. And I thank you, Mr. Chairman, for the extra time to
make the point that normally I wouldn't have done on Miss
Salisbury's watch.
The Chairman. Thank you very much.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman. Thank you, Miss
Salisbury. I agree with you, certainly, on the bundled
transmission oversight and those kinds of things. Is California
part of this governors group?
Ms. Salisbury. It certainly is, Mr. Chairman, Senator, and
California's actively participated on these electricity issues.
Senator Thomas. Was there an appeal to FERC and to the
Federal Government to do things a little bit contradictory to
what Governors have agreed to?
Ms. Salisbury. Well, Mr. Chairman, Senator, I think we've
tried really hard in the policy resolutions to reflect the
positions on these issues that I've raised. There has--there is
no policy resolution on the price cap issue, and I think that's
where maybe the Senator's going is that there is a divergence
of opinion on whether price caps are appropriate, and some
Western Governors have said they are, and some have said they
are not.
Senator Thomas. Right, I understand. Well, the point,
though, is if you know--if you want to keep the jurisdiction
and the decision making locally, which I agree to, then you
can't turn to somebody else when you have a problem to come in
and resolve it. So I believe--what does the--do the Governors--
have they talked some about strengthening the transmission
within the RTO, within the Western area? Obviously transmission
is one of the difficulties. We would like to ship more power
from Wyoming outside of the State--transmission there. The
Governors have any idea where they want to go? Do they have a
plan? Do they have any vision of the future?
Ms. Salisbury. Mr. Chairman, about, oh, I don't know, 2 or
3 weeks ago--maybe it's been a little bit longer than that--
Western Governors did meet on the transmission issue
specifically. They're just about ready to release a report.
It's not available yet, and that's why I don't feel free to
discuss, because--and I apologize again that I'm constrained by
what I testified to----
Senator Thomas. I understand.
Ms. Salisbury [continuing]. Yes, very concerned. It will be
an issue that's addressed at the meeting--the annual meeting--
that the Governors hold in August.
Senator Thomas. Well, I'm just hopeful that not only do you
have a report on what the situation, but more importantly, do
we begin to have some vision as to what we think needs to be
done and to begin to make recommendations as to how we do it.
Would you think that generally a interstate national grid
that would bring together the RTOs of the various regions and
allow for the movement of merchant power to move nationwide?
Would that be something the Western Governors would agree to?
Ms. Salisbury. Mr. Chairman, Senator, I don't know at this
time. I understand that it is enormously expensive to do that,
because there are not many ties now between and among the three
grids. And so I think what the Governors are trying to do, and
it's reflected in the policies, is to deal with the reality as
it exists today in our new markets.
Senator Thomas. I'm sure that's true, and I'm getting to
almost have a thing about this. But that's what we're doing is
reflecting now on where we are. The reason for reflecting where
we are is to try and determine where we need to go to solve the
problem. And I guess that's what I'm really interested in us
doing. And I'm going to have to go to another hearing too, so I
hope the FERC folks will also, instead of just talking about
where we are and what we do next week, what is it that we need
to do over time to be able to deal with our obvious problem?
And that is, we're changing the way we do electricity. We're
changing from the idea that you used to generate almost
entirely for your own service area. Now you're generating
independently, and if that's going to work--and we think it
is--they you have to be able to move the product and get it
into the places where it goes. But I don't hear people talking
about what's the resolution to that. And I wish--and I hope
you'll take that back to the Governors and say look guys, we
need--or ladies or whoever they are--we need a little bit of
vision of where we're going. And thank you so much for being
here. I appreciate it.
The Chairman. Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman. If I
may, I'd like to welcome you very much. Miss Salisbury, may I
reserve my time for the FERC Commission?
The Chairman. Sure.
Senator Feinstein. Thank you very much.
The Chairman. Senator Cantwell, did you have questions?
Senator Cantwell. Likewise, Mr. Chairman.
The Chairman. Senator Landrieu.
Senator Landrieu. Likewise, Mr. Chairman.
Senator Murkowski. You're getting off easy.
The Chairman. Senator Murkowski.
Senator Murkowski. I won't take much time.
Unfortunately, Senator Wyden isn't here, and I didn't want
to interrupt him, and then he had to go to a hearing. But I
think it's important to keep these things in perspective. The
allegations associated with consciously taking down plants and
profiteering and so forth, we can be critical of one phase, but
somebody's got to stand up for the other points that are
relevant. And I'm looking at an article here that was forwarded
to me, breaking news, and it says--reports--`State grid
operator behind plant's output swings.'
I don't know the facts here--maybe we can get into them
when FERC comes in--but, you know, there's a general
assumption, I think, that's left an impression that somehow the
utilities are responsible for taking a plant down,
profiteering--whatever the allegation might be. We don't get a
chance to go in, and I don't think it's our job to point
fingers.
But nevertheless, I think it's important to point out that
in this particular article, the operator of the State's power
grid has acknowledged that it was responsible for swings in
production at a powerplant that Governor Gray Davis held as an
example of price gouging by out of State energy companies.
Let's be fair, and let's make sure that the media--which
has an obligation as an investigative agency--does balance on
these things. Just to point out one way--and I'm a little
frustrated here--we can spend a lot of time witch hunting
around here, but we have a shortage of supply in this country,
and doing this kind of witch hunting, I think is necessary for
FERC and the appropriate agencies, but it's up to us to
increase the supply of energy, and I think we should spend a
little more energy doing that.
I'm sorry that you had to hear my tirade. It has nothing to
do with you, but I agree with your testimony and the Governors
and certainly wish you a good day and thank you.
Ms. Salisbury. Thank you.
The Chairman. Well, thank you very much for testifying. We
appreciate it.
Ms. Salisbury. Thanks, Mr. Chairman and members of the
committee. I'm happy that they were interested in hearing from
the Western Governors.
The Chairman. Thank you. Do the Eastern Governors have the
same opinion, do we know?
Ms. Salisbury. They could?
The Chairman. Could you arrange it?
Ms. Salisbury. I won't even attempt that one.
The Chairman. Why don't we ask the second panel--the FERC
Commissioners--to please come forward, and we will hear their
testimony. If each of you could come up, we'd appreciate it.
Senator Murkowski. Mr. Chairman, I'm going to have to
excuse myself. I have to introduce a couple of nominees at the
agriculture hearing this morning at 10:30, so I wanted to wish
my friends from FERC hello. Although we're not real close
friends, I want to make sure the records notes that. Got to be
careful around here. And furthermore, I would hope that they
would respond to the question by the Senator from Oregon, since
I probably won't be here to ask it.
The Chairman. All right, we will ask them to do that. Why
don't we start out--I think probably the way to proceed is to
start with Commissioner Hebert as the Chairman and hear his
views. And if he could just--I think as always here in the
committee, we will take all written statements you have and
include them in the record, so if you could just summarize the
main points you'd like to make. And then maybe after
Commissioner Hebert, Commissioner Breathitt, Commissioner
Massey, Commissioner Wood, Commissioner Brownell--why don't we
do that? Go right ahead. Mr. Chairman, thank you for being
here.
STATEMENT OF CURT HEBERT, JR., CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Hebert. Thank you, Senator Bingaman, Mr. Chairman. I
appreciate that. Members of the committee, Mr. Chairman, good
morning and thank you for the opportunity to speak today on
legislative proposals relating to restructuring of the electric
utility industry.
The guiding principle for restructuring legislation should
be to provide a foundation for the development of robust
wholesale competition in the electric industry. This would
provide electric customers with supply sufficient to meet their
energy needs at the lowest reasonable cost.
The Commission remains committed to developing market-
oriented policies that promote the addition of necessary
transmission and generation and that allow for the detention
and remedying of any anti-competitive behavior.
Legislation should help ensure that transmission owners and
operators have economic incentives to operate and expand the
transmission grid to meet the needs of all consumers and other
market participants.
Order 2000 encourages the formation of regional
transmission organizations--as we call them, RTOs. The industry
has responded positively with innovative efforts to develop
efficient and non-discriminatory RTOs, because they make
economic sense, not because of a legal mandate.
We need to rely on competition instead of traditional
regulation wherever possible. Existing laws that hinder
competition, such as PUHCA and PURPA, need to be modified or
repealed. And I noticed that was mentioned in the White Paper,
and I think that is absolutely on target.
The Commission has no direct statutory authority to
promulgate and enforce a set of mandatory reliability
standards. Possible approaches to reliability include enforcing
standards through identified performance-based measures or
through voluntary contracts. Congress should understand,
however, that mandatory reliability rules alone are not enough
to ensure reliability of the grid.
Finally, the problems experienced in California and the
West were not caused by any inadequacies in the Federal Power
Act regarding rates and power. Preventing such problems in the
future is not dependent on adding to the Commission's authority
or obligations.
Consistent with existing statutory authority, the
Commission has issued dozens of orders in recent months that
have acted to transform the market institutions and rules that
help produce higher prices and create reliability uncertainty.
The Commission has made it clear that it will actively
monitor the competitive operation of wholesale markets and that
it will remedy any form of anti-competitive conduct that it
detects. And the Commission has acted decisively to lower and
stabilize electricity prices.
Indeed, just yesterday the Commission sought to bring
regulatory and investment certainty to Western markets by
issuing an order on refunds for prior months. Specifically, the
Commission adopted a price methodology for determining refunds
or offsets based on its earlier price mitigation orders and a
report from its Chief Administrative Law Judge and established
separate evidentiary proceedings for spot market purchases in
California and in the Pacific Northwest.
Market participants need to understand that the cloud of
refund uncertainty which has inhibited the type of investment
in supply and deliver infrastructure that is essential to
keeping rates low and ensuring competitive options in the long
term, will lift at some point.
It is important to recognize the primary source of recent
problems in Western energy markets. Demand kept growing, but
supply did not, Mr. Chairman. The long-term solution to these
problems is to have the balancing of supply and demand done by
the marketplace--not by the Federal Government.
I am happy to support legislative initiatives that serve to
develop truly competitive markets that will serve the interests
of all market participants. Thank you for your time, and I look
forward to your questions.
[The prepared statement of Mr. Hebert follows:]
Prepared Statement of Curt Hebert, Jr., Chairman, Federal Energy
Regulatory Commission
I. Overview
Mr. Chairman and Members of the Committee, good morning. Thank you
for the opportunity to speak today on legislative proposals relating to
restructuring of the electric utility industry.
Our fundamental electric utility laws were enacted during the Great
Depression. These laws made sense in their time, when competition in
the industry was more a theory than a reality. These laws were meant to
provide a regulatory substitute for competition. Today, however, these
laws often have the ironic effect of preventing the development of
competition, harming the very consumers they were supposed to protect.
I believe the guiding principle for restructuring legislation
should be to provide a foundation for the development of a robust
wholesale competition in the industry, thereby providing electric
customers with supply sufficient to meet their energy needs at the
lowest reasonable cost. This principle requires different approaches in
the transmission and generation parts of the industry.
Transmission will have to remain regulated for the foreseeable
future. However, transmission must become a stand-alone business and
respond to the market. Legislation should help ensure that transmission
owners and operators have economic incentives to design, build,
operate, and expand the transmission grid to meet the needs of all
consumers and other market participants.
In contrast, in the wholesale power sector, we need to rely on
competition instead of traditional regulation wherever possible.
Existing laws that hinder competition need to be modified or repealed.
While the Commission stands ready to intervene in power markets when
market rules or other factors lead to unjust and unreasonable prices,
legislation reducing the existing barriers to entry will minimize the
need for such efforts in the future.
ii. transmission jurisdiction
In 1996, the Commission adopted Order No. 888, requiring all public
utilities to offer nondiscriminatory, open access transmission service
over facilities they own, control or operate. This service has been a
major factor in the growth of wholesale competition in the past few
years. Most wholesale buyers and sellers now have many more trading
options than they had in the past.
In late 1999, the Commission adopted Order No. 2000, encouraging
the formation of regional transmission organizations (RTOs). The
industry generally responded positively, with innovative efforts to
develop large, efficient and nondiscriminatory RTOs. The Commission,
too, has worked hard to give the industry timely and constructive
guidance on the development of RTOs. If properly constituted and truly
independent, RTOs can help address and eliminate remaining obstacles to
competition and make the markets more efficient, for the benefit of
electricity consumers in all states. Indeed, RTOs support wholesale
competition and, where states choose to pursue it, retail competition.
But even in the absence of retail competition, consumers will benefit
from increased competition in wholesale markets. For example, RTOs can
be structured to eliminate ``pancaking'' of transmission rates, better
manage transmission congestion, and facilitate transmission planning
across a multi-state region. There is still a lot of work to do, but I
remain confident that we will reach our RTO goals.
I see no need for enactment of legislation allowing FERC to mandate
the formation of RTOs. The industry is already forming RTOs because
they make economic sense, not because of a legal mandate. If RTOs did
not make economic sense, then nothing would be gained by requiring
their formation. I am particularly pleased to see that transmission
owners, with the urging of (rather than a directive from) the
Commission, increasingly are reaching the conclusion that a particular
type of RTO a stand-alone, truly independent transmission company will
best serve the interests of consumers and the market as a whole.
Some argue that the Commission's jurisdiction should be expanded to
include all transmission by non-public utilities. However, proposed
RTOs in various parts of the country are making efforts to include the
facilities of non-public utilities. If the industry succeeds in
including the facilities of non-public utilities in RTOs, there may be
no need for legislation broadening Commission jurisdiction over non-
public utilities. The priority for Congress now should be to reduce or
remove any legislative barriers to RTO participation by non-public
utilities.
I also do not see a need for legislation requiring FERC to adopt
uniform rules on interconnections. The development and implementation
of broad RTOs will, in turn, promote the development of standardized
and non-discriminatory interconnection procedures. A truly independent
RTO has every incentive to maximize throughput and no incentive to
hinder the interconnection of new generation.
iii. reliability
The recent changes in the electric power industry have increased
the incentive for, and frequency of, violations of reliability rules
adopted by the North American Electric Reliability Council (NERC).
Unfortunately, NERC lacks authority to enforce its rules. As a result,
the issue confronting the industry is whether federal action on
reliability is necessary.
The Commission has no direct statutory authority to promulgate and
enforce a set of mandatory reliability standards. While reliability
issues sometimes fall within the Commission's ratemaking jurisdiction,
the Commission in those cases does not decide whether the reliability
of service is acceptable per se. Rather the Commission decides whether
the rates, terms and conditions of service are just, reasonable and not
unduly discriminatory or preferential from a commercial perspective.
The lack of federal authority to address reliability issues, and
increasing concern about the shortcomings of the traditional voluntary
approach to reliability issues, have led some in the industry to seek
other approaches. One approach to enhance reliability and promoting
customer accountability is to give energy providers an incentive to
provide reliable, efficient service. Conventional pricing methods do
not provide adequate incentives. It is my preference to afford
utilities some type of performance-based measure of accountability to
their customers and their regulators. Consistent with its existing
authority, the Commission could tie earnings and profits to
reliability-based and performance-based criteria.
Another approach that has been pursued is enforcing reliability
standards through contracts. Public utilities may voluntarily include
reliability-related provisions in contracts or tariffs filed with the
Commission because they affect or relate to the rates, terms and
conditions of jurisdictional service. If reliability provisions in
Commission-jurisdictional contracts are accepted and on file with the
Commission, the Commission can enforce the reliability-related
provisions against public utility parties to the contracts.
A system of such contractual arrangements has been established by
utilities in the Western Systems Coordinating Council (WSCC), the
regional reliability council for the Western United States. The
effectiveness of the WSCC arrangement and the Commission's ability to
enforce it have not been fully tested. But, a voluntary contractual
regime is not the simplest or most effective means of establishing and
adequately enforcing reliability standards. It depends solely on the
willingness of public utilities to make voluntary filings and, even
then, it may not capture the electric facilities of non-public
utilities. Reliability is at risk to the extent that not all market
participants are covered by the same requirements.
Another approach to ensuring reliability is enacting federal
legislation. This year, on May 17, the Administration released its
National Energy Policy Report. The Report recommends that the President
direct the Secretary of Energy to work with the Commission to improve
the reliability of the interstate transmission system and to develop
legislation providing for enforcement by a self-regulatory organization
subject to the Commission's oversight.
I believe a legislative approach may be preferable to the
contractual approach discussed above. I take no position, however, on
whether the legislation should be based on the proposal supported by
NERC or any other version of reliability legislation.
Congress should understand, however, that mandatory reliability
rules alone are not enough to ensure the reliability of the grid. In
its Order No. 2000 on RTOs, the Commission set out at length the need
for an RTO to ensure reliability in each region. In particular, RTOs
must have the authority to ensure the short-term reliability of the
regional grid and must be responsible for planning, and for directing
or arranging, necessary transmission expansion and upgrades that will
enable it to provide efficient and reliable transmission service.
As discussed below, we also need to find ways to encourage and
facilitate the construction of new transmission facilities. And, of
course, we must have adequate generating resources. The Commission is
continually reassessing its existing regulations and policies to
promote market entry and the removal of regulatory barriers to enhanced
competition in the wholesale supply and interstate delivery of energy
products and services. For example, on March 14, 2001 and May 16, 2001,
the Commission issued orders removing regulatory obstacles and
providing incentives to increased energy supply and reduced demand in
California and the rest of the West.
iv. power sales rates and market power
While not the focal point of today's hearing, the problems recently
in the electricity markets in California and the Western United States
are an inescapable background to some of the legislative proposals now
being considered. Those problems have led many to argue that the
Commission needs additional statutory authority or obligations to
ensure that wholesale prices remain just and reasonable.
I disagree. Since I became Chairman in January of this year, the
Commission has used its existing authority firmly and effectively to
mitigate prices in Western markets. The Commission has issued dozens of
orders this year involving wholesale markets in California and the
West. As a result of those orders and other factors, prices in those
markets are continuing to decline substantially.
The problems in California were not caused by any inadequacies in
the Federal Power Act regarding rates and market power, and preventing
such problems in the future is not dependent on adding to the
Commission's authority or obligations. Instead, such arguments merely
distract us from the primary source of the problems: demand kept
growing, but supply did not.
The long-term solution to these problems is to have the balancing
of supply and demand done by the marketplace, not the government. While
the Commission has acknowledged and addressed the need for short-term,
market-oriented price mitigation in California and the West, these
measures must not become permanent crutches. We must find market-driven
ways to promote new sources of supply and transmission, and encourage
appropriate conservation by consumers. Price mitigation should continue
no longer than absolutely necessary, and should be replaced as soon as
possible by full reliance on market-based outcomes.
v. regional transmission planning and siting
Since the Commission adopted its open access requirements in 1996,
the use of the interstate transmission grid has grown dramatically.
Also, wholesale markets have become much more regional than local,
encompassing large multi-state areas. Unfortunately, however, the grid
has not been expanded commensurately. Thus, the grid increasingly is
pushed to its operational limits, and transmission constraints
frequently prevent the most efficient use of generation facilities. The
institutional structures for planning and expanding the grid are not
meeting our needs.
In planning grid expansions, we need to move toward a more regional
approach. I believe RTOs can fulfill this role. By definition, RTOs
will encompass large trading areas. An RTO-based planning process will
allow all market participants within these areas to express their needs
and concerns. Since RTOs must be independent of market participants,
all participants will be assured of a nondiscriminatory planning
process. RTOs that are based on the model of a stand-alone, for-profit
transmission company will be particularly motivated to expand the grid
when appropriate to maximize transmission throughput, and thus,
transmission revenue.
The authorization and siting of grid expansions has generally been
performed under state law. While some argue that state authorities are
too parochial to perform this responsibility well in today's regional,
multi-state markets, I am not so persuaded. However, a federal backstop
role may be appropriate in certain circumstances. For example, Congress
could reasonably decide to establish a federal siting process, subject
to certain limitations, if an RTO is unable to obtain siting
authorization from a State within a specified time.
vi. market transparency rules
In the past, utilities had little or no reason to keep their costs
and transactions confidential. Utility prices were fully regulated on a
cost-plus model, and competition was generally insubstantial. In
today's competitive markets, however, confidentiality of price and
customer information can be critical to a utility's success.
The Commission has seen increasing struggles among industry
participants on how to reconcile the need for confidential information
in competitive markets with a statutory and regulatory framework
premised on full disclosure of cost and price information. It is not
yet clear to me how best to reconcile these tensions. One approach the
Commission has used is to require disclosure of bids in centralized
trading markets, but only after a lag of several months. Other
approaches may be feasible, too, so long as they reasonably balance the
needs of competitors to preserve commercially-sensitive information
with the needs of regulators and the public for information to ensure
that jurisdictional rates remain just, reasonable and not unduly
discriminatory or preferential.
vii. other provisions
A. PUHCA
The Public Utility Holding Company Act (PUHCA) requires registered
holding companies to submit to extensive regulation by the Securities
and Exchange Commission. PUHCA also generally requires holding
companies to operate an ``integrated'' and contiguous system. As a
result, PUHCA encourages concentrations of generation ownership and
control in local markets that are inconsistent with competition and
discourages asset combinations that could be pro-competitive. PUHCA may
also provide a significant disincentive for investment in independent
transmission companies that would qualify as RTOs. Under PUHCA, any
entity that owns or controls facilities used for the transmission of
electric energy--such as an RTO--falls within the definition of a
public utility company, and any owner of ten percent or more of such a
company would be a holding company and potentially could be required to
become a registered holding company. This could serve as a significant
disincentive for investments in independent transmission companies that
qualify as RTOs.
PUHCA was enacted primarily to undo harms caused by byzantine
holding company structures that no longer exist. In the decades since
PUHCA was enacted, utility regulation has increased substantially,
under the Federal Power Act, federal securities laws and state laws.
PUHCA has outlived its usefulness, and now does more harm than good.
PUHCA should be repealed.
B. PURPA
The Public Utility Regulatory Policies Act (PURPA) was enacted in
the late-1970s, in the aftermath of that decade's energy crises. The
legislation's goal was to remove impediments to the use of cogeneration
and renewable-based generation, and promote their use by allowing such
generators to require utilities to buy their power at the utilities'
avoided costs.
Today, the impediments addressed in PURPA are gone (although other
impediments may exist, such as the need for grid expansion). Also,
PURPA's ``forced sale'' requirements are no longer necessary, in light
of the availability of open access transmission, to promote the
development of competition, and more often serve to distort competitive
outcomes. Congress should repeal PURPA, while ``grandfathering''
existing PURPA contracts.
viii. conclusion
We need less, not more, regulation in the generation business.
However, we will continue to regulate transmission for the foreseeable
future, while encouraging transmission to become a stand-alone business
and respond to the market. Congress must focus on removing impediments
to the competitive restructuring that is taking place. Outdated laws,
such as PUHCA and PURPA, are hindering effective restructuring. The
best way for Congress to help electricity consumers is to promote
wholesale competition through the legislative changes described above.
The Chairman. Thank you very much for your testimony.
Commissioner Breathitt, why don't you go ahead.
STATEMENT OF LINDA BREATHITT, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION
Ms. Breathitt. Mr. Chairman and members of the committee,
thank you for inviting me to appear before you this morning to
discuss the need for Federal electricity restructuring
legislation, and in particular, the committee's White Paper on
electricity legislation.
The committee is to be commended for advancing the
discussions on how best to achieve the restructuring that is
needed in the U.S. electric industry in order to arrive at
competitive and efficient wholesale and retail electricity
markets.
I believe that Federal electricity restructuring
legislation is needed to address important and unresolved
issues in the electric industry and to enable the FERC to
advance its goals of achieving fair, open and competitive bulk
power markets.
In order to achieve these overarching goals, Federal
legislation must address several specific policy areas. The
White Paper correctly identifies many of these key elements.
Regarding transmission jurisdiction, I agree with the
conclusion in the White Paper that the Commission's
jurisdiction to require open access should be extended to
public, cooperative and Federal utilities. I have said that
before in this committee in April, 2000.
I also agree with the White Paper's premise that
legislation would be needed to affirm the Commission's
authority to order utilities to join RTOs. If the Commission
determines that it must resort to mandatory RTO participation,
such legislation would allow the Commission and the industry to
avoid costly and time-consuming litigation of our authority in
this area.
Regarding reliability, I believe that legislation is needed
to replace the current voluntary system with one in which a
self-regulated independent reliability organization with
oversight by the Commission establishes and enforces mandatory
reliability rules.
Such a change is necessary to ensure a reliable and
competitive bulk power market in the evolving electric power
grid and the ever-increasing transactions going over it.
On the issue of transmission siting, I would go further
than the white paper goes. I agree with the basic premise that
the goal of a national transmission grid may be unattainable
absent a new approach. I believe legislation is needed to grant
the Commission eminent domain authority over the siting of
electric transmission facilities similar to the authority the
Commission exercises with respect to the siting of interstate
gas pipelines.
I'm not advocating that we have siting authority for
electric distribution lines or powerplants. The States are best
suited to that. My written testimony goes further into my
rationale for not exactly agreeing with the regulatory compact
approach.
Finally, I agree with the White Paper's conclusion that
current tax code restrictions will prevent public power
entities from engaging in certain restructuring efforts, and I
believe the tax code's private use restrictions on the
transmission facilities of public power entities financed by
tax-exempt bonds may prevent the transfer of operational
control over these facilities to a for-profit transmission
company.
So I believe it's crucial that public power entities
participate fully in RTOs, and new legislation should help
eliminate these tax restrictions.
In conclusion, Mr. Chairman and members, I urge Congress to
focus its attention over the coming months on these and related
policy areas in order to achieve competitive and properly
functioning electric markets that will ultimately provide real
benefits to American consumers. Thank you for inviting me this
morning.
[The prepared statement of Ms. Breathitt follows:]
Prepared Statement of Linda Breathitt, Commissioner, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Committee, I appreciate this
opportunity to appear before you today to discuss proposals relating to
comprehensive electricity legislation. Today's hearing is timely
because there is a real need for Federal legislation to address
important and unresolved issues in the electric industry, such as
reliability, jurisdiction, transmission siting, and tax restrictions.
In addition, legislation is needed to ensure that the Federal Energy
Regulatory Commission has sufficient authority to continue its efforts
to establish fair, open and competitive bulk power markets.
The ``White Paper on Electricity Legislation'' prepared by Chairman
Bingaman provides a good starting point for a discussion of these
legislative needs and objectives. I believe the White Paper correctly
identifies many of the key elements that federal legislation should
address, including: (1) transmission jurisdiction; (2) reliability; (3)
transmission siting; (4) market rules; (5) PUHCA and PURPA issues; and
(6) tax code restrictions. Congress must focus its attention on these
and related policy areas in order to achieve competitive and properly
functioning electric markets that will ultimately provide real benefits
to American consumers.
transmission jurisdiction
The White Paper suggests that the Commission should have
jurisdiction over all transmission, whether bundled or unbundled, and
that the Commission's jurisdiction should be extended to public,
cooperative and federal utilities. This is an essential element for any
proposed energy legislation.
Full, non-discriminatory open access to transmission services is a
necessary condition for the development of competitive wholesale bulk
power markets. However, certain impediments to full open access remain.
One such impediment is that a significant portion of the nation's
transmission grid is owned and operated by utilities not subject to
FERC's open access requirements. I would support legislation that
extends the Commission's open access regulatory authority to non-public
utilities that own, operate, or control transmission facilities,
including Federal Power Marketing Administrations, the Tennessee Valley
Authority, municipal utilities, and cooperatively-owned utilities. I
note that S. 1273, introduced in the 106th Congress by Senator
Bingaman, would extend Commission authority in this manner. I have
previously stated this sentiment in testimony before this Committee on
April 27, 2000.
The Committee's White Paper also calls for legislation affirming
the Commission's authority to order utilities to join regional
transmission organizations (RTOs). In the Commission's Order No. 2000,
issued on December 20, 1999, we concluded that the Commission has
sufficient authority, pursuant to the Federal Power Act, to order a
public utility, on a case-by-case basis, to participate in an RTO upon
finding, and where supported by the record, that the public utility is
engaging in unjust, unreasonable, unduly discriminatory or
anticompetitive practices, and that participation in an RTO is a
reasonable remedy for such behavior. However, the FPA is not express
with regard to the Commission's authority to order utilities to
participate in RTOs. Therefore, I agree with the premise in the White
Paper that legislation is needed to affirm the Commission's authority.
If the Commission determines that it must resort to mandatory RTO
participation, such legislation would allow the Commission and the
industry to avoid costly and time-consuming litigation of the
Commission's authority.
Finally, the White Paper states that interconnection rules should
be clarified in order to ensure that new sources of generation are able
to interconnect to the transmission system. I agree with the contention
that interconnection-related issues need to be addressed. In recent
orders we have stated our intent to evaluate in the near future the
importance of standardizing interconnection policies and procedures.
reliability
The White Paper contends that legislation should authorize a system
for assuring the reliability of the grid that: (1) is mandatory, (2)
requires sanctions and penalties for failure to comply with reliability
rules, and (3) is subject to federal oversight. I believe that the
voluntary reliability system, which has been in place for over three
decades, should be replaced with one in which a self-regulated
independent reliability organization, with oversight by the Commission,
establishes and enforces mandatory reliability standards. I believe
such a change in the manner in which the reliability of the
interconnected grid is overseen and managed is required in order to
ensure a competitive bulk power market. S. 2071, a stand-alone measure
to promote the reliability of the nation's transmission system which
was approved by the Senate during the 106th Congress, established such
a self-regulated independent reliability organization, with oversight
by the Commission. S. 388 and S. 597, introduced in the current
Congress, include similar provisions. I wholeheartedly support these
provisions.
transmission siting
I agree with the basic premise articulated in the White Paper that
the goal of a national grid may be unattainable absent a new approach
to transmission planning, expansion, and siting. Currently, under the
Federal Power Act, the Commission has no role in the permitting and
siting of new transmission facilities. I believe that shortages of
transmission are no longer just single state issues; instead, these
shortages have become interstate commerce issues that must be addressed
by the federal government.
The White Paper proposes to use federal eminent domain as a
backstop to a cooperative, regionally-based approach to transmission
and siting issues. In essence, the proposed legislation would grant
FERC eminent domain authority, which we, in turn, would be allowed to
cede to regional regulatory compacts. My primary concern with this
approach is that it could result in costly and inefficient duplication
of processes, records, and efforts by the various decisional
authorities involved in transmission siting. As we have seen with the
Commission's hydro power licensing program, for example, it is very
difficult to build speed into a process over which several entities
exercise jurisdiction. While the Commission has made great progress in
streamlining cumbersome processes in this regard, I would caution the
Committee about initiating a new regime for transmission siting that
could easily be mired in bureaucratic wrangling.
My recommendation would be for FERC to be granted Federal eminent
domain authority similar to the authority the Commission exercises with
respect to the siting of interstate natural gas pipelines under the
Natural Gas Act. The Commission could build into its implementation of
such legislation procedures to ensure cooperation and regional input. I
believe this more centralized approach is necessary from an efficiency
standpoint, and will result in less bureaucracy, more timely decisions,
and lower costs for transmission providers and consumers. Furthermore,
I am not advocating that the Commission should have siting authority
for electric distribution lines or power plants. I believe the states
are best suited to make those determinations.
market transparency rules
The White Paper asserts that FERC and the Energy Information
Administration should be granted clear authority to collect and publish
appropriate transactional data, while protecting proprietary
information. I strongly believe that transparency acts as an effective
deterrent to market power by allowing regulators and the public to
monitor the marketplace for abuses. The lack of accurate, timely, and
easily accessed pricing information can impede competition and
liquidity; and for that reason, I have supported many FERC initiatives
aimed at expanding the range of publicly available transactional
information. I am pleased that the Committee recognizes the
relationship between strong market transparency rules and effective
regulation.
puhca and purpa issues
The White Paper proposes the conditional repeal of both the Public
Utility Holding Company Act (PUHCA) and the mandatory purchase
requirements of the Public Utilities Regulatory Policy Act (PURPA). The
repeal of PUHCA would be subject to the Commission being given enhanced
authority to address market power problems, and both the Commission and
the states being given greater access to the books and records of
holding companies. The repeal of PURPA's mandatory purchase requirement
would be subject to new provisions that would remove disincentives for
renewable generation sources. I support the prospective repeal of PUHCA
on the condition that the Commission and state authorities have
sufficient access to books and records of all companies in a holding
company system. I also support an unconditional prospective repeal of
the mandatory purchase requirement in Section 210 of PURPA.
tax code restrictions
Current tax laws impede certain public power and cooperatively-
owned utilities from fully participating in the development of regional
transmission organizations. One such example is the Internal Revenue
Service Code's ``private use'' restrictions on the transmission
facilities of public power entities financed by tax-exempt bonds. Such
restrictions may prevent the transfer of operational control of
existing transmission facilities financed by tax-exempt bonds to a for-
profit transmission company. I believe it is crucial that public power
and cooperative entities, which constitute such an important part of
the nation's electric system, participate fully in RTOs. In fact, in
Order No. 2000, the Commission stated explicitly that a properly formed
RTO should include all transmission owners in a specific region,
including municipals, cooperatives, Federal Power Marketing Agencies,
Tennessee Valley Authority and other state and local entities.
Participation by these entities will enhance the reliability and
economic benefits of RTOs.
The Committee's White Paper notes that tax code restrictions will
prevent public power entities from engaging in certain structural
changes and states that these provisions should be repealed. I agree
with this finding and urge Congress to take the necessary steps to
eliminate these and other impediments to the formation of fully
functioning RTOs and electric markets.
conclusion
Comprehensive federal electric legislation is needed to address
important and unresolved issues in the restructuring of the electric
industry. The Commission must have sufficient authority to advance its
goals of achieving fair, open and competitive bulk power markets.
Current impediments to the development of such markets must be removed
as quickly as possible so that the intended benefits of restructuring
for the American consumer ultimately may be realized.
The Chairman. Thank you very much.
Commissioner Massey, why don't you go ahead?
STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Massey. Thank you, Mr. Chairman and members of the
committee. It's my pleasure to appear before you this morning.
Thank you for the invitation.
I found the White Paper to be exceptionally well done, Mr.
Chairman. I thought it provided a very persuasive rationale for
a number of legislative changes. I'm tempted to say I endorse
it word for word and just shut up, with one exception. I would
grant siting authority to FERC similar to what we have with
respect to natural gas pipelines.
Over the past 5 years, we've sited about 12,000 miles of
new interstate pipelines that will serve the market well. No
similar expansion of the transmission grid on the electric side
has occurred, and it's in many States extraordinarily difficult
to site transmission.
Until this problem is solved, we're simply not going to
have well-functioning markets that benefit consumers. But let
me mention a few issues that are highlighted by the White Paper
that I strongly agree with.
We need one set of rules for all interstate transmission.
Thirty percent of the facilities are exempt under existing law
because they're TVA facilities, muni facilities and so forth.
That creates a patchwork that does not support a competitive
market.
No. 2, all transmission, whether bundled or unbundled,
should be subject to FERC jurisdiction. That does not mean that
we have to have the decision-making authority over retail
access. Simply giving us jurisdiction over all transmission
does not mean that a State has to move to retail choice, nor
does it mean that FERC can order a retail choice.
We need clear authority to form and shape RTOs. We're
making a lot of progress in this area. I think if the industry
got a strong, clear message from Congress that the formation of
large RTOs is in the public interest, it would be
extraordinarily helpful in getting this done quickly.
Likewise, I believe Congress should send a clear message
that we need nationwide standardized generation interconnection
policies and practices. Interconnection legerdemain is anti-
competitive and makes it difficult for generators to get sited.
I think this is a difficulty for generation in many areas of
the country. It's a particularly difficult problem for
distributed generation as well. So I support the White Paper in
this respect.
I agree with my colleagues that Congress should create a
framework for mandatory reliability standards in the industry.
I makes no sense in this competitive era to have an industry
that is governed by voluntary standards for reliability. I
think that is a big problem.
In the area of rates and market power, I would amend
section 206 to give the Commission clear authority to order
refunds whenever it finds that rates charged were unjust and
unreasonable. As you could see in yesterday's order, section
206 means that we cannot go back to June, July, August, or
September of 2000 and order refunds even though it was very
clear that prices during those months were unjust and
unreasonable. The restrictions of section 206 prohibit us from
doing so.
The Commission needs civil penalty authority if we're going
to be the tough cop on the beat. We have some civil penalty
authority with respect to the natural gas industry. We need it
for the electric power industry. In the merger area, we need
authority over generation mergers, over holding company
mergers, and over all vertical mergers regardless of how they
are structured.
I would give the Commission direct authority to mitigate
market power. Right now our authority is generally a
conditioning authority, and it's a substantial authority. Part
of the problem is political will. It's not legal constraints.
But it would be helpful if the Commission had direct authority
to mitigate market power.
It would be helpful if the Congress expressed its interest
promoting in markets that have a high degree of demand
responsiveness. I do not believe that we're ever going to deal
with the issue of market power effectively or high prices
effectively until there is a robust demand response when prices
get high. Congress should recognize this fact and direct FERC
and the States to work together to solve this problem.
I've given you my thoughts on transmission siting. I know
that's a very contentious issue, and it is the one issue on
which I have some disagreement with the White Paper. Otherwise,
I agree with what the White Paper says about PUHCA and PURPA
repeal, its comments on renewable resources, providing
information to consumers, and the repeal of tax provisions that
inhibit structural changes in the market. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Massey follows:]
Prepared Statement of William L. Massey, Commissioner, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Committee on Energy and Natural
Resources, thank you for the opportunity to testify on comprehensive
electricity restructuring legislation. Let me state at the outset that
I have reviewed Chairman Bingaman's excellent White Paper and agree
with all of its recommendations, save one: I would recommend that
Congress transfer jurisdiction over the siting of interstate
transmission to the Commission, an agency with explicit interstate
responsibilities.
With notable exceptions such as PURPA and EPACT, the legal
framework that governs the electricity industry is now more than sixty
five years old and assumed an old fashioned cost of service regime.
Simply stated, the Commission does not have all of the tools it needs
both to promote large regional markets and to protect the public
interest. I would like to underscore a number of legislative changes
that are critical to achieving the goal of well functioning competitive
markets that yield substantial consumer benefits.
transmission jurisdiction
A. One Set of Rules
Congress should place all interstate transmission under one set of
open access rules. That means subjecting the transmission facilities of
municipal electric agencies, rural cooperatives, the Tennessee Valley
Authority, and the Power Marketing Administrations to the Commission's
open access rules. These entities control 30% of the nation's
electricity transmission grid. Their current non-jurisdictional status
has resulted in a patchwork of rules that hinder seamless electricity
markets. Markets require an open non-discriminatory transmission
network in order to flourish.
In addition, all transmission, whether it underlies an unbundled
wholesale, unbundled retail, or bundled retail transaction, should be
subject to one set of fair and non-discriminatory interstate rules
administered by the Commission. This will give market participants
confidence in the integrity and fairness of the delivery system, and
will facilitate robust trade by eliminating the current balkanized
state-by-state rules on essential interstate facilities.
B. Regional Transmission Organizations
While the Commission has made substantial progress in forming the
Regional Transmission Organizations that are critical to the
competitive market place, our hand would be strengthened by a clear
declaration by the Congress that these institutions are in the public
interest and should be formed. One appropriate action would be to give
the Commission clear authority to order the formation of such
institutions in compliance with Commission standards. I firmly believe
that large RTOs consistent with FERC's vision in Order No. 2000 are
absolutely essential for the smooth functioning of electricity markets.
RTOs will eliminate the conflicting incentives vertically integrated
firms still have in providing access. RTOs will streamline
interconnection standards and help get new generation into the market.
RTOs will improve transmission pricing, regional planning, congestion
management, and produce consistent market rules. We know for a fact
that resources will trade into the market that is most favorable to
them. Trade should be based on true economics, not the idiosyncracies
of differing market rules across the region. A clear message from
Congress would certainly speed the formation of these critical
institutions.
C. Generation Interconnection
I would recommend that Congress direct the Commission to adopt
uniform nationwide standards that streamline the process of
interconnecting generators to the grid. The Commission has taken some
steps in this direction by encouraging utilities to file their
interconnection rules, but more must be done. Generation siting
decisions should not depend on how easy it is to hook up in a
particular region or with a certain transmission provider. Standardized
and uniform rules promulgated by the Commission are necessary.
reliability
We need mandatory reliability standards. Vibrant markets must be
based upon a reliable trading platform. Yet, under existing law there
are no legally enforceable reliability standards. The North American
Electric Reliability Council (NERC) does an excellent job preserving
reliability, but compliance with its rules is voluntary. A voluntary
system is likely to break down in a competitive electricity industry.
I strongly recommend federal legislation that would lead to the
promulgation of mandatory reliability standards. A private standards
organization (perhaps a restructured NERC) with an independent board of
directors could promulgate mandatory reliability standards applicable
to all market participants. These rules would be reviewed by the
Commission to ensure that they are fair and not unduly discriminatory.
The mandatory rules would then be applied by RTOs, the entities that
will be responsible for maintaining short-term reliability in the
marketplace. Mandatory reliability rules are critical to evolving
competitive markets, and I urge Congress to enact legislation to
accomplish this objective.
rates and market power
A. Refunds
I believe the Commission needs additional authority to properly
address the issue of refunds for unjust and unreasonable wholesale
electricity prices. Section 206 of the Federal Power Act limits a
refund effective date to not earlier than 60 days after a complaint is
filed or an investigation is started. Whether the Commission can order
refunds retroactively from the refund effective date is an issue that
is still before the Commission. I note, however, that in an order
issued November 1, 2000, the Commission observed that the Federal Power
Act and the weight of court precedent strongly suggest that retroactive
refunds are impermissible. I recommend clear statutory language that
would allow the Commission to order refunds for past periods if the
rates charged are determined to be unjust and unreasonable. Limitations
on how far back in time the Commission can order refunds may be
appropriate.
B. Civil Penalties
I recommend that the Commission be given authority to assess civil
penalties against participants that engage in prohibited behavior in
electricity markets, such as anticompetitive acts and violations of
tariff terms and conditions. If the Commission is to be the ``cop on
the beat'' of competitive markets, we must have the tools needed to
ensure good behavior. Refunds alone are not a sufficient deterrent
against bad behavior. Simply giving the money back if you are caught is
not enough. The consequences of engaging in prohibited behavior must be
severe enough to act as a deterrent.
C. Mergers and Consolidations
To ensure that mergers do not undercut our competitive goals, the
Commission's authority over mergers involving participants in
electricity markets must be strengthened in a number of ways.
Consolidations of market participants can have adverse consequences to
the functioning of electricity markets. The Commission's detailed
experience with electricity markets and its unique technical expertise
can provide critical insights into a merger's competitive effects. The
Commission's authority to review mergers should be strengthened to
ensure that all significant mergers involving electricity market
participants are reviewed.
I recommend that the Commission be given direct authority to review
mergers that involve generation facilities. The Commission has
interpreted the FPA as excluding generation facilities per se from our
direct authority, although that interpretation is currently before the
courts. It is important that all significant consolidations in
electricity markets be subject to Commission review. For the same
reason, the Commission should be given direct authority to review
consolidations involving holding companies.
I am also concerned that significant vertical mergers can be
outside of our merger review authority. Under the current section 203
of the FPA, our merger jurisdiction is triggered if there is a change
in control of jurisdictional assets, such as transmission facilities.
Consequently, consolidations can lie outside of the Commission's
jurisdiction depending on the way they are structured. For example, a
merger of a large fuel supplier and a public utility would not be
subject to Commission review if the utility acquires the fuel supplier
because there would be no change in control of the jurisdictional
assets of the utility. If the merger transaction were structured the
other way, i.e., the fuel supplier acquiring the utility, it would be
subject to Commission review. Such vertical consolidations can have
significant anticompetitive effects on electricity markets. Those
potential adverse effects do not depend on how merger transactions are
structured, and thus our jurisdiction over those transactions should
not depend on how they are structured. Therefore, I recommend that the
Commission be given authority to review all consolidations involving
electricity market participants.
D. Market Power Mitigation
Market power still exists in the electricity industry. The FERC,
with its broad interstate view, must have adequate authority to ensure
that market power does not squelch the very competition we are
attempting to facilitate. However, the Commission now has only indirect
conditioning authority to remedy market power. This is clearly
inadequate. Therefore, I recommend legislation that would give the
Commission the direct authority to remedy market power in wholesale
markets, and also in retail markets if asked by a state commission that
lacks adequate authority. For example, such authority would allow the
Commission to order structural remedies directly, such as divestiture,
needed to mitigate market power.
E. Demand Responsiveness
Markets need demand responsiveness to price. This is a standard
means of moderating prices in well-functioning markets, but it is
generally absent from electricity markets. When prices for other
commodities get high, consumers can usually respond by buying less,
thereby acting as a brake on price run-ups. If the price, say, for a
head of cabbage spikes to $50, consumers simply do not purchase it.
Without the ability of end use consumers to respond to price, there is
virtually no limit on the price suppliers can fetch in shortage
conditions. Consumers see the exorbitant bill only after the fact. This
does not make for a well functioning market.
Instilling demand responsiveness into electricity markets requires
two conditions: first, significant numbers of customers must be able to
see prices before they consume, and second, they must have reasonable
means to adjust consumption in response to those prices. Accomplishing
both of these on a widespread scale will require technical innovation.
A modest demand response, however, can make a significant difference in
moderating price where the supply curve is steep.
Once there is a significant degree of demand responsiveness in a
market, demand should be allowed to bid demand reductions, or so called
``negawatts,'' into organized markets along with the megawatts of the
traditional suppliers. This direct bidding would be the most efficient
way to include the demand side in the market. But however it is
accomplished, the important point is that market design simply cannot
ignore the demand half of the market without suffering painful
consequences, especially during shortage periods. There was virtually
no demand responsiveness in the California market. Customers had no
effective means to reduce demand when prices soared.
It would be helpful for Congress to send a message that instilling
a significant measure of demand responsiveness into electricity markets
is in the public interest. I would recommend that legislation strongly
encourage FERC and state commissions to cooperate in designing markets
that include demand responsiveness. This would help to ensure just and
reasonable wholesale prices and would be an effective market power
mitigation measure.
transmission siting
I would recommend that Congress transfer to the Commission the
authority to site new interstate electric transmission facilities. The
transmission grid is the critical superhighway for electricity
commerce, but it is becoming congested due to the increased demands of
a strong economy and to new uses for which it was not designed.
Transmission expansion has not kept pace with these changes in the
interstate electricity marketplace.
Although the Commission is responsible for well functioning
electricity markets, it has no authority to site the electric
transmission facilities that are necessary for such markets to thrive
and product consumer benefits. Existing law leaves siting to state
authorities. This contrasts sharply with section 7 of the Natural Gas
Act, which authorizes the Commission to site and grant eminent domain
for the construction of interstate gas pipeline facilities. Exercising
that authority, the Commission balances local concerns with the need
for new pipeline capacity to support evolving markets. We have
certificated well over 12,000 miles of new pipeline capacity during the
last six years. No comparable expansion of the electric grid has
occurred.
I recommend legislation that would transfer siting authority to the
Commission. Such authority would make it more likely that transmission
facilities necessary to reliably support emerging regional interstate
markets would be sited and constructed. A strong argument can be made
that the certification of facilities necessary for interstate commerce
to thrive should be carried out by a federal agency.
market transparency rules
I agree with the White Paper's recommendations in this area.
miscellaneous provisions
I agree with the remainder of the White Paper's recommendations
with respect to the repeal of PUHCA and PURPA, and with respect to
renewable resources, information to customers, a Public Benefits Fund,
and the repeal of tax provisions that inhibit structural changes in the
market.
conclusion
I stand ready to answer questions and to assist the Committee in
any way. Thank you for this opportunity to testify.
The Chairman. Thank you, very much.
Commissioner Wood, why don't you go ahead.
STATEMENT OF PATRICK WOOD III, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Wood. Thank you, Mr. Chairman, Senator Feinstein. I
think in reading the White Paper, it just occurs to me that
anywhere you plant the flag is going to be a battleground, so
you might as well go ahead and plunge deep in the pro-
competition, pro-customer territory and plant it deep. And
that's where they'll start nibbling.
I think issues like transmission siting, FERC's
jurisdiction over bundled rates, reliability--all these are
going to be fought, so we might as well plant the flag deeply
where it ought to end up for the good of the public. And I
applaud this paper and am heartened when I read it, and I read
it after I read the President's energy strategy and look at a
bi-partisan, almost seamless web of how to get from the battle
raging around your feet to a vision of the future that is
sustainable and makes this a country that we're proud of.
I was young FERC staffer here in 1992 when the President's
father signed the Energy Policy Act, and there weren't a whole
lot of electric provisions in that act, but there were a few.
And those were pretty clear in my mind. I think they're clear
as I read them now, nine years later, about the vision of
Congress at that point to get to a competitive power market
from coast to coast.
We've got a long way to go to get there. I think the
legislation authority--and my colleague Bill Massey just said
this--the legal authority is there. The reaffirmation of that
by the current Congress would certainly strengthen the
Commission's hand in doing the difficult tasks of converting
the vision into reality. And so in that regard, while I do
believe the Commission has relatively broad power to enact the
vision of a competitive market that works for the benefit of
both investment and of the customer, any affirmation of that by
this Congress would certainly help.
The specific issue of an RTO--I guess I've thought about it
in a little bit different framework than some of the debate has
gone, and so I want to just throw that into the discussion. An
RTO--Regional Transmission Organization--of which--as this
Commission laid out 2 weeks ago--there would be five in this
country--the four FERC jurisdictional and the one in Texas--
that they would have really four principal goals. And they
would fall under one roof, which I think is the distinction
between some of the talk on reliability being over here and
siting authority here.
I think the Regional Transmission Organization is a
recognition of the realities of physics reflecting the
interstate nature of most of the power grids in this continent
and the political sensitivities to not federalize every problem
but to look instead at an in-between step, which is an
empowered regional organization, as our prior witness talked
about, which dealt with the issues unique to that region of the
country.
So the four things I would see these RTOs doing--which are
largely captured by the Commission's order last year in Order
2000--are first of all, implementation of the NERC type
reliability functions, not as a stand-alone group but as part
of what an RTO does. It looks at the day-to-day reliability of
the grid to make sure that lines don't get overloaded, that
sufficient voltage support is existing around the entire grid.
Secondly, that competitive open access of the 1992 act is part
of the reality there.
Those two things sometimes come in conflict. The
reliability needs and the competitive open access needs some
time are in tension. And I think those need to be dealt with
under the same roof so that those balances and trade offs and
analyses can be made together.
Thirdly and importantly as we've seen particularly out in
the West, a goal of the RTO should be resource adequacy. We're
not just talking about whether there are enough power plants.
That's certainly a big part. But also; are there sufficient
natural gas pipelines? Is there sufficient access to coal
resources or to renewable resources? Is there--as we've talked
about many times before this committee and at the Commission--
is there sufficient demand side participation in the market.
Bill just mentioned that in his comments as well.
The fourth goal of the RTO should be transmission planning.
Is the grid robust enough? At that point, I guess I would vary
a little bit from both the white paper and my colleagues to say
that the RTO really is the one in charge of making sure the
grid works. So if the RTO thinks there needs to be a
transmission line from this part of Montana to that part of
Idaho, theirs should be the dispositive voice. It has to go
through regulatory approval at the State level--or the FERC as
a backstop I'm relatively indifferent to--but if the RTO is the
one directing where transmission planning goes for the
foreseeable future, that is the appropriate body that balances
the right interest.
So putting these all under one roof makes a lot of
difference, I think. In diagnosing the California problem, one
of the things that hasn't been talked about was the multi-
headed master. You have the PUC here, the Energy Commission
here, siting authorities here. You have a couple of FERC
jurisdictional entities--the ISO and the PX--over here. You
have a reliability council, the Western Systems Coordinating
Council. A bunch of independent organizations that no matter
how many times you tell them to work together, they really have
their own institutional kind of inertia and don't work together
well.
I think the ``it's their problem'' approach has been really
just been frustrating, and we're part of the problem, I will
confess. But I do think that a vision of the world that puts
these under one body to which both you and we can hold them
accountable for the fulfillment of a broad panoply of market
goals is a very important vision. And I applaud my colleagues
for the vision that we took two weeks ago to really set that
future up. It's going to need some backstopping from Congress
without question.
I just think if a dozen countries in Europe can pull
together, overcome language and cultural differences to put
together an international grid, we certainly ought to be able
to do this. And I look forward to working with you all to get
there.
[The prepared statement of Mr. Wood follows:]
Prepared Statement of Patrick Wood, III, Commissioner, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Committee, thank you for the
invitation to appear this morning. I share the view that the nation
needs a robust, affordable, reliable electricity sector. Almost ten
years after Congress laid out a vision of competitive power markets in
the 1992 Energy Policy Act, the goal is largely unfulfilled. There are
some well-functioning competitive power markets in the nation, but most
of the nation's customers are not in them.
I believe the FERC has sufficient statutory authority to do much to
fulfill Congress' vision already, but, based on personal experience as
a state regulator in Texas, a ringing legislative reaffirmation of this
goal, either through clarifications or changes in the law, or more
informally, through hearing such as this one, will speed the advent of
coast-to-coast competitive power markets.
To address the points in the Chairman's recent White Paper.
1. transmission jurisdiction
It would simplify and clarify FERC's ability to create truly open,
competitive electric markets if FERC has clear authority over all
interstate transmission. Unless every transmission owner participates
in Regional Transmission Organizations (RTOs) of some sort, there will
remain barriers of legality, cost, and time that will slow the entry of
new generators and increase the wholesale and retail costs of
electricity. This should not be viewed as a raid on state jurisdiction,
but a necessary step to provide some needed certainty for investment in
this crucial industry. Transmission is a critical component of the
electric power industry, but on average, it only makes up about 5-7
percent of the total retail cost of electricity. Having one agency
making the calls on cost recovery and nondiscriminatory treatment of
customers makes a lot of sense.
I wholeheartedly agree that interconnection rules and procedures
should be standardized, to minimize the cost and barriers for new
generation. A related issue is how costs of new interconnection should
be borne my colleagues and I have already agreed to address both of
these issues more globally in the near future. I also believe the FERC
has a leadership role to play in establishing interconnection rules and
procedures for small-scale, distributed generation as well.
2. reliability
Maintaining grid reliability is a basic duty of utilities. Over the
years, industry members have devised a number of standards that govern
reliable operation of the grid. More often, in recent years, pure
reliability standards have come under some tension with the needs of a
robustly competitive marketplace. Combining the responsibility for
balancing reliability and competitive open access in the regional
transmission organizations makes a lot of sense. FERC should be given
clearer authority to enforce (either through the RTOs, or directly, if
necessary) all rules against any party who fails to adhere to the
standards.
3. rates and market power
Without question, FERC should promote competitive markets; I doubt
an additional legislative mandate is required. Workable competition in
a market is a prerequisite for deregulation of an electricity market,
and adequate infrastructure and balanced market rules are the defining
characteristics of workable competition. FERC has a number of tools
already to ensure that these events occur in the correct sequence, but
one additional tool might be helpful: the ability to assess
administrative penalties for violations of the law or Commission rules.
(This would also encompass reliability infractions mentioned above).
Vigilance is the price of liberty. FERC must watch over these
markets as the cop on the beat walks through neighborhoods to keep them
safe. In recent weeks, the FERC has made notable strides toward meeting
this challenge but more work will be required. We must have ongoing,
aggressive, sophisticated market surveillance together with RTOs and
state regulators. We must couple this with the understanding of how to
know when a market is working properly, how to diagnose when and how
markets go awry, and how to intervene in ways that are effective
without destabilizing future investment in the sector.
Markets work far better when all buyers and sellers see accurate
price signals. Because this necessarily involves both state and federal
regulators, coordination is necessary to pursue a host of customer-
focused goals: demand-side resource participation in power markets;
combined heat and power and classic energy conservation measures;
access to advanced technologies such as real-time and demand-metering,
distributed generation, and energy storage; and other measures that
give customers more control and options over their energy use and its
costs.
4. regional planning and siting
Transmission investment is more than just who sites the facility;
it involves a full and engaged process of planning, consultation and
execution. Placing the responsibility for regional transmission
planning in the hands of RTOs makes a lot of sense as RTOs will have
the clearest view of what new transmission is needed to facilitate
competition and enhance reliability. A proper balance of state and
federal responsibility might go something like this: the regional RTO
makes a pure engineering determination that a specific need exists for
certain amounts of transmission in certain portions of the grid. Either
a competitive process or a direct designation is used to determine who
will build such a facility. Then the relevant state or states focus on
line routing and environmental issues, ideally through a multi-state
regional regulatory process. Given the urgent need for many new
transmission lines to relieve reliability constraints or economic
constraints in the national grid, some time limit for action could be
placed upon these state-specific approvals--for instance, if a state or
regional transmission authority has not acted upon a transmission
project within one year of the filing date, then the case should be
sent up to FERC for formal review.
5. market transparency rules
Workable markets rest on a foundation of good, accessible and
timely information. If there is too little information available to
market participants, players' decisions may be poorly founded and risks
and their costs increase as they leave money on the table. Other
information crosses the line into strategic, business-critical data
that helps individual competitors more than it helps the market as a
whole. Overall, we need to create market rules and authority that
assure the collection and fair dissemination of market-supporting data
on market transactions. But we should rethink which data we need and
how we collect, process and use these data it does no good if we
collect the wrong information, or collect it so late and hold it for so
long that it has no value to market participants. I do not have any
specific recommendations at this time, but I will be working with my
fellow commissioners and staff at FERC to better understand what we
need to do to improve market information and transparency.
6. tax provisions
It is important that tax laws are not used as excuses by certain
market players to not move aggressively toward competitive power
markets. In that regard, proposals to address public power and
cooperatives' private use restrictions and investor-owned utilities'
current disincentives to transfer transmission assets to RTOs should be
addressed in legislation.
7. other
I have been of several minds about the best location of customer
protection duties such as customer information labeling and slamming/
cramming prevention. Rather than house these duties at the Federal
Trade Commission, I think they might fit better at the FERC. This would
be good not only for the issue, but for the FERC. As state commissions
do, FERC would benefit from being closer to the people directly
impacted by our regulation. It also makes ``good government'' sense to
have one federal agency overseeing electric matters, not several. A
regulator that has all aspects of an industry under its umbrella can
generally be more effective and efficient in balancing the many
interests involved.
The Chairman. Thank you very much.
Commissioner Brownell.
STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION
Ms. Brownell. Thank you, Mr. Chairman. The good news about
responding to such a well thought out paper is that it's easy
to agree. You've made our job easier, and being last in a list
of smart colleagues makes it that much easier.
I just want to comment on a couple of things. The first is
why we must change. I really applaud the efforts of the
committee to grapple with the issues of transforming energy
markets. Balancing competing agendas and leading the charge is
neither easy nor neat.
Many people have asked you and raised with us why we have
to change at all. And I think we have to remind ourselves that
this country has enjoyed a standard of living that is
unparalleled precisely because it has been willing to take
risks, embrace change and leverage its intellectual assets.
It would be a tragedy to let jurisdictional differences,
regional differences, get in the way of a vision that would
make us miss the opportunities created by the advances in
technology that have transformed so many other industries.
Without a coherent integrated national energy policy and its
associated legislative and administrative changes, we will
disadvantage our industries, our environment, and our
constituents.
I want to quote from the New York Times yesterday from a
professor commenting on the changes in New York. 'Every process
of change reaches a point where it all comes together and
accelerates exponentially, and we've reached that point with
electricity. In 5 years we won't even recognize the landscape.'
Frankly, if you do your job and we do our job, I hope we
don't recognize the landscape next year. Let me comment on just
a couple of the high points of your White Paper and a couple of
additions.
As my colleagues have said, and I think Pat articulated
extremely well, the critical nature of RTOs to a variety of
issues--planning, reliability, long-term vision, and in fact,
building out an infrastructure, which is so critical in
creating the certainty that will attract the investment to do
that.
We may debate on what they should look like and how they
should work, but we must get to those, because you can
understand that they are fundamental to any transformation of
the market. And we can structure regulatory oversight
committees. We can have regulatory compacts. But we must
empower the FERC, by reaffirming its power to create these RTOs
and the rules that regulate them.
Part of the change that we are seeing and certainly
recommending such as the repeal of PURPA and PUHCA, will also
require us to strengthen our market monitoring. And I would
like to suggest that, in fact, we will need additional tools,
and we may come to you and ask for those tools. We do need
civil penalties. We need to have the ability to cause pain, and
we need to stop whatever abuses may be happening in the market
as quickly and as efficiently as possible.
Part of that is also empowering us to get additional
information from all the entities playing in the market. I
think--I have not seen the legislation that's been introduced,
but transparency is important, is critical, and everyone must
be willing to share those documents.
I would also add that one of the regional opportunities for
cooperation is for us to develop market monitoring systems and
share them with both the States and the regions. States are
really resource poor and may not be able to develop the tools
that they need to look at what's happening in their own market.
So I think there are lots of opportunities for us to work
together there.
We've talked about standardized interconnections and
uniform business rules. The market doesn't work unless everyone
has to play by the same rules, and we are truly disadvantaging
the introduction of new technologies by the lack of
interconnection standards. So I would--we have certainly all as
a group I think committed to moving forward with those
principles--but I think it's important that you speak on those
principles.
I appreciate the concerns that some of the regions have
expresses and certainly some of your members have expressed
about he cost benefit analysis of RTOs. And it may be that the
committee wants to empower DOE or some other entity to support
an independent evaluation of cost benefit analysis among the
regions.
We need to get comfortable. We are comfortable that those
benefits are there and benefits that we have not yet seen. But
it's certainly important that everyone understand what these
benefits may bring over time. And it may take time. I
understand we're asking people to change their way of thinking
and change their way of doing business. We know why we have to
do it. Let's perhaps provide people with better information
about what the costs really will be. Thank you.
[The prepared statement of Ms. Brownell follows:]
Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Committee, good morning. Thank you
for opportunity to testify before you today on the various energy
restructuring legislation pending before your Committee. I strongly
believe that the goals of any new legislation involving energy
restructuring should be to facilitate the development of competitive
regional energy markets and the removal of any barriers, regulatory or
otherwise, to the development of such markets, while allowing the
Commission to perform effective market monitoring. We must also create
a regulatory environment which ensures reliability and investment in
infrastructure.
I want to applaud the efforts of this Committee to grapple with the
issues of transforming energy markets. Balancing competing agendas and
leading the charge for change is neither easy nor neat. Many people
wonder why we have to change at all, particularly after events of the
past year. We must remind ourselves that this country has enjoyed a
standard of living that is unparalleled precisely because it has been
willing to take risk, embrace change, and leverage its intellectual
assets. It would be a tragedy to ignore the opportunities created by
the advances in technology that have transformed so many other
industries like communications and transportation. Without a coherent,
integrated national energy policy and its associated legislative and
administrative changes, we will disadvantage our industries, our
environment and our constituents. I urge us all to share a sense of
urgency to do what needs to be done to move forward. There are many
ways to address the issues of transforming markets. I will address some
of the most important.
The Public Utility Holding Company Act (PUHCA), enacted during the
Depression, and the Public Utility Regulatory Policies Act (PURPA),
enacted during the Carter Administration, are impediments to
restructuring that, in my opinion, should be repealed. Among other
things, PUHCA requires that utility holding companies that are required
to register (because they do not meet any one of the exemptions
enumerated in the statute) submit to heavy-handed regulation by the
Securities and Exchange Commission, including seeking permission for
many activities that companies engage in during the ordinary course of
their business. PUHCA also subjects holding companies to requirements
that they operate an ``integrated'' and contiguous system and does not
adequately address the relatively new phenomenon of ``convergence''
mergers between gas and electric utilities. While PUHCA was a necessary
reaction to abuses that existed a half-century ago, it has outgrown its
purposes, and equally important, no longer reflects the utility
industry of today, including the rapid rise of non-vertically
integrated energy companies.
As just one example of PUHCA's perverse effects, because of the
provisions for foreign utilities, the statute causes foreign companies
to buy here and U.S. companies to invest overseas. Investment decisions
should flow from economics, not from an outdated statute.
PURPA also needs repeal. PURPA requires utilities to buy from
alternate energy sources at what are frequently quite high prices.
PURPA was enacted in response to a perceived need to reduce dependence
on oil for electric generation, and it was thought that this kind of
subsidy would help accomplish that result. Now, 22 years later, when a
gas-fired generator can be on-line in less than two years, and many
advances are being made in distributed generation, PURPA's subsidies
for certain types of generation no longer is rational.
Having stated that I believe that PUHCA and PURPA should be
repealed, I also believe that we should listen to the concerns of
those, like the rural CO-OPs, who are asking us to replace the
safeguards, however flawed, that these statutes were intended to
provide. It is a change in approach that I have in mind. Instead of
relying on heavy regulation, safeguards should be a product of a market
oriented approach. We must do everything possible to encourage advances
in technologies, particularly renewables, and investment in
infrastructure in order to bring them to market as quickly and
efficiently as possible. We must also do everything possible to promote
transparency and uniform business rules in order to guard against
manipulation. We must do everything possible to enhance our market
monitoring and enforcement capabilities in order to react and remedy
any market abuse. Responses must swift and certain.
There are a number of ways to accomplish this changed approach. I
strongly support legislation affirming the Commission's authority to
require the formation of RTOs and to shape their configuration
according to the characteristics outlined in Order No. 2000. Large,
regional, independent RTOs can improve grid reliability by facilitating
transmission planning across a multi-state region, create better
pricing mechanisms such as eliminating ``pancaking'', improve
efficiency through better congestion management, and attract investment
in infrastructure by facilitating regional consensus on the need for
construction. RTOs play an important role in assuring reliability. I
recognize that markets do have different characteristics and I do not
dismiss those differences. We must work collaboratively with the
stakeholders to determine where those differences are real and where
they are merely the basis for barriers to entry. Ultimately, however,
large regional RTOs must be formed in a timely manner.
I also strongly endorse creating standardized interconnection rules
and uniform business rules. Where rules are standardized, there is less
room for manipulation. I believe that all interstate transmission
facilities should be under one set of open access rules, including the
facilities owned and/or operated by municipals, cooperatives, the
Tennessee Valley Authority, and the federal power market
administrations. These entities, which together control approximately
1/3 of the nation's transmission grid, currently enjoy non-
jurisdictional status. Placing all facilities under the same set of
rules will eliminate disparities in treatment that operate as
disincentives to open access, and better ensure seamless electricity
markets.
I must emphasize that it is imperative that we place all
transmission, whether related to unbundled wholesale, unbundled retail,
or bundled retail transactions, under one set of non-discriminatory
open access rules. Our experience since the issuance of Order No. 888
indicates that it is no longer necessary to segregate the transmission
for native load. Having all transmission under one set of rules will
eliminate a patchwork of state rules regulating ``retail transmission''
and better ensure a properly functioning and transparent transmission
grid. We must ensure, however, that we do not interfere with state
oversight of retail and consumer responsibilities.
I believe that the Commission must be given ultimate authority over
the siting of transmission facilities. At the time that the Federal
Power Act was enacted, it was appropriate to defer to the individual
states for siting transmission facilities within their borders. Times
have changed, however, and today, there have been major technological
advances in transmission that have created interstate superhighways.
State-by-state siting of such transmission superhighways is an
anachronism that impedes transmission investment and slows transmission
construction. It is possible for one state to veto a desperately needed
transmission project. The best solution to this dilemma is through an
interstate regional compact or properly functioning RTO, with
significant input of the states, to be the first stop for siting
approval. However, at some point, it may be necessary for the
Commission to make the final determination. Therefore, I would suggest
that the Commission act as a backstop. In other words, grant the
Commission siting authority over interstate transmission comparable to
the interstate natural gas pipeline siting authority in Section 7 of
the Natural Gas Act after we have determined ``need'' on the basis of
an evidentiary record. This is one way in which interstate transmission
expansion can keep pace with generation.
A final piece to the puzzle is the market monitoring and
enforcement capabilities. The Commission's ``tool kit'' must be
strengthened to facilitate the Commission's expanded role in monitoring
for, and mitigating, market power abuse. I believe that the Commission
needs to develop and expand its market monitoring expertise. The
Commission can tap the existing expertise of other federal agencies,
and perhaps even private organizations, that are experienced in market
monitoring. It can also seek consultants with expertise in electronic
trading and market simulation. In either case, it comes down to
funding. As the markets we regulate change, we must be prepared to
change our regulatory tools. The Commission should be given sufficient
funding to ensure that it can hire, train, and retain personnel skilled
in market monitoring and market power mitigation or buy expertise on a
short-term basis as needed. Legislative solutions must be coupled with
the Commission's ability to acquire the necessary talent that can
implement its new responsibilities.
I am also of the opinion that market monitoring should not solely
be the Commission's responsibility. We should involve the states in a
serious discussion of whether combined state and federal action is
necessary when market power abuses are occurring in both retail and
wholesale markets. It should involve the RTOs. I intend to explore such
creative approaches as the development of regional oversight
committees, which work with existing regional coordination councils or
other similar entities, including state regulators, to better assist
the development of workably competitive markets. We should explore the
development a coordinated system whereby we share standardized
information thereby reducing both the administrative and cost burden on
the respective agencies and stakeholders. We must leverage our
resources in concert with the states, particularly with regard to
information sharing. Further, we must be certain we are asking the
right questions. We must clear about what constitutes market power. We
must understand the changing nature of the transactions (e.g., on-line
trading). We must use the information effectively.
I believe that the Commission must have timely and reliable data
and information to have an effective market monitoring program. There
are many different players in the energy markets, many that have not
traditionally been subject to our jurisdiction. A significant amount of
relevant information about the operation of markets is in the
possession of these entities. At times, there has been a reluctance to
cooperate and provide the necessary information. It may be appropriate
to clarify that the Commission has the authority to seek the
information necessary to perform its statutory responsibilities from
either jurisdictional or non-jurisdictional sources. Transparency is
impossible without the involvement of all market participants.
Naturally, the necessary companion to market monitoring is
enforcement. There has historically been a reluctance to apply
traditional antitrust doctrine, including penalties, to electric and
gas markets, since they were not competitive markets, but were subject
to pervasive regulation and sanctioned monopoly structures. That should
no longer be the case as we move further and further down the path to
de-regulation and restructuring. The enabling statutes the Securities
and Exchange Commission and the Federal Communications Commission
provide for a range of enforcement measures, such as civil penalties,
which I believe may be appropriate for the Commission. I would suggest
consideration of a significant civil penalty to indicate to market
participants that we take violations of the Federal Power Act and
Natural Gas Act seriously, and are prepared to remedy such violations
above and beyond our refund authority, which is statutorily limited. We
must also act swiftly and with certainty to respond to market abuses.
Markets are fragile and prolonged problems will destroy the market and
the confidence of consumers.
The work that you have done is quite extensive and I could probably
expound forever, but I believe these are some of the most important.
Thank you for asking for my input on these critical issues. I stand
ready to assist your Committee in your deliberative process. I again
thank the Committee for this opportunity to testify.
The Chairman. Thank you. Thank you all very much for the
excellent testimony. One thing I wanted to inquire about is the
statement that Secretary Salisbury, who was just ahead of you
as a witness here, testified to saying that the Governors--the
Western Governors--were opposed, as I understood her testimony,
to any siting authority being provided at FERC and one of the
reasons she gave was that there are no applications, as far as
they can tell, no instance where an application to build
transmission lines has been turned down. Is that your view of
things, or is this--and is that--is that really an adequate
indicator of whether or not the job of getting an adequate
transmission system in place is being carried out? Is the fact
that State commissions have not turned down applications a
determinative on that issue? Commissioner Hebert, do you have a
view on that?
Mr. Hebert. Mr. Chairman, with all due respect, I will be
glad to comment on what you told me. I was not here to hear her
testimony. I did read her testimony before I came here.
I don't think whether something has been done or not done
is ever determinative on why something beyond that should be
done or not done. Whether or not we move forward with siting
authority, I don't know. This year, I guess I've testified
before this committee a half a dozen times, and I have
repeatedly said, it is my thought that as we move forward with
regional transmission organizations, that those organizations
would have some input and would certainly be, I think, in the
best position to decide what has to be done when it comes to
interstate siting of transmission. FERC can always be the
backstop, but it is very important as we deal with State
commissioners, which mean, in the end, that we deal with State
Governors as well, that we at least give some deferential
period to them and allow them to act.
If there have been no applications that have been denied
for transmission, it at least means that the ones that have
been applied for have been dealt with, hopefully,
appropriately.
What it does not suggest or, better, what it does not
answer, is whether or not the proper incentives and
opportunities are out there to promote such filings for
certificates of eminent domain and moving forward with siting.
I don't think we have appropriately done that at FERC. I
don't know that the States have done that, but we certainly
have to do a better job ourselves at FERC to try to make people
understand that what is best for America is as much of a
seamless grid as possible that physics and economics will
allow, and you've got to build out the transmission system to
do that. We need investment in those systems. But just because
the Federal Government gets siting of electric transmission
does not necessarily mean it will be done right.
The Chairman. Commissioner Breathitt.
Ms. Breathitt. Mr. Chairman, I have one comment to add to
this discussion. When I was chairman in Kentucky at the PSC, we
had several instances where applications were withdrawn, so the
Commission never ended up acting, and I haven't done any
research on my own to see how many applications have gone
forward in the States for transmission siting, but I do know
anecdotally that they take a long time, but I also don't know
how many applications never make it to the decisional stage and
are withdrawn because of siting difficulties and problems.
The Chairman. Okay. Anybody else want to comment on that?
Mr. Hebert. Mr. Chairman, if I may, I would be glad to get
the staff to look into whether or not what Commissioner
Breathitt has just spoken to has happened and give you some
information on that.
The Chairman. Yes. Anything you could tell us. I guess my
sense is that what we're talking about in terms of having an
adequate national transmission system, we may not be able to
say that we have an adequate national transmission system as
long as nobody files an application to improve it. I mean, it
may be that there is a responsibility beyond just sitting back
and waiting for a permit to be requested.
Mr. Massey. May I comment, Mr. Chairman?
The Chairman. Yes. Go ahead.
Mr. Massey. It may be that applicants are discouraged and
frustrated and feel like it's so difficult to get transmissions
sited in many, many parts of the country that it's not worth
filing the application. I think there's a great sense of
frustration in the industry out there that it's very difficult
to get transmission facilities sited, and there are examples in
various parts of the country of how difficult it is for a State
to grapple with a proposed transmission project necessary for
the interstate market, but that may not provide direct benefits
to that particular State. It seems to me, that is the
fundamental difficulty here. We're moving to regional markets.
We need at least regional solutions, as your bill proposes, and
I would take it a step further and say there ought to be
Federal siting. There ought to at least be some way to break
the logjam. If facilities are necessary for regional markets to
thrive, then it seems to me that is precisely what your White
Paper is all about. If those facilities are necessary, there's
got to be a way to break the logjam and to get them sited.
Maybe a Federal backstop role.
The Chairman. Mr. Wood.
Mr. Wood. The problem that hasn't been addressed is, who's
doing the applying for? Today it's regulated utilities who
really are going through a tremendous gauntlet to do something
that they probably won't get direct corporate benefit from, as
in days of old, but they're helping build an international or
an interregional grid, basically tying from their utility to
another utility, so that a competitor, somebody they don't even
care about or really like, can benefit from it. So, I mean,
there's not a tremendous incentive in the first place. Now,
some utilities actually are trying to look broadly and think,
``I don't want to impede anybody,'' but it's not in their
natural corporate interest to do anything to beef up the grid
kind of around the edges. They just want to make sure it's good
in downtown Houston, around the edges, but not really tying the
whole grid. It's the problem we had back in the ERCOT region,
with our utilities--it's hard to go through landowners. It's
hard to take the PR hit for new wire construction. These guys
are all trying to get into the retail market, so they don't
want to have their corporation have a bad image with
landowners. There are a lot of incentives to just not filing in
the first place, which is where Linda was going with her
response.
Mr. Hebert. Mr. Chairman, if I might add one thing to that,
and I think Commissioner Wood pointed out something that is
really extremely important to talk about as you move forward
here. The complexity of the issue has changed. For instance,
ERCOT is a great example. When you take a transmission line and
you run it from Austin to Houston, Texas knows they're going to
benefit from that line. When you take it and you run it from
Idaho to Montana, the question arises as to who benefits, how
much, and what is the cost of such benefit? So, the complexity
of the issue as to the siting of that transmission has changed,
which is going to make it more difficult.
Ms. Brownell. I would add Mr. Chairman, that it speaks to
the need, then, for a new approach, and as controversial and
difficult as this is, it's pretty clear to me that when the
market has identified, as it clearly has, that there is need
for additional transmission in a number of places, and no one
is stepping forward to build that, that there are lots of
signals out there that suggest, ``do not apply.''
The Chairman. Okay.
Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman, and I'm
very pleased to see all the Commissioners here. I want to thank
them because I wrote to them a letter awhile ago and asked for
any suggestions they might have with respect to improving FERC,
giving it additional authority.
I want to just speak bottom line for a minute. My
observation of FERC is that it has been a toothless tiger. I
would oppose any increased jurisdiction until FERC really had
the regulatory authority that's adequate and effective to do
its job, and that means, Senator Wyden referred to the CBS
Report. I spoke about the Williams A.E.S. issue on the floor
some months ago. I find it unconscionable that the public will
never really know, because all the evidence is sealed in that
case, that a company that has admitted to telling operators at
a plant owned by A.E.S. that Williams could provide a financial
incentive to extend the outage. That's unconscionable. It's
unconscionable that all this stuff is sealed, and I believe
that you can never do the job you're meant to do unless you
have the real disincentive to abusive behavior on the part of
the companies, and I--well, to make a long story short, I'm
very grateful Mr. Wood, Mrs. Brownell came in yesterday and we
spent some time. Commissioner Massey, you took some time and
really very thoughtfully addressed my concern. I'd like to
enter into this record a copy of your letter to me dated July
13, and I think your letter really gets to the heart of the
issue in terms of the things that I'm interested in, which is
giving the FERC the teeth it needs to deal with what has been a
swashbuckling industry with very little real customer loyalty
we have found in California, and I want to work with the
chairman and other members of this committee to include some of
Commissioner Massey's concepts wherever we can.
I'm very heartened to hear that three Commissioners have
now said that they would support civil penalties to insure that
there is an adequate penalty for bad behavior, and I hope that
that will be part of our energy bill, and that the FERC will
move expeditiously in that direction.
Secondly, the natural gas market. FERC has very little
authority to oversee natural gas markets. Virtually everybody
in California's bill has gone up two-thirds over the natural
gas issue. The natural gas issue has actually caused
refinancing of companies, has caused employees to lose their
jobs, has caused companies to go in for refinancing. I pointed
out at an earlier hearing, C&H Sugar, whose average gas bill
was $450,000 a month, at one point was paying $2 million a
month. They had to let employees go. They had to shut down.
They had to go in for bridge financing. That shouldn't happen,
and FERC ought to have the authority to move like this and see
that it doesn't happen, and they do not today.
So, I want to see that there is transparency in these
markets among the various players in multiple States.
Thirdly, I think FERC should be given oversight over online
trading of natural gas and electricity. In many cases, it's the
only trading entity that knows the prices sellers are willing
to bid and buyers are willing to pay for a given energy
commodity, and I've heard many allegations that these
transactions drove up the price of natural gas at the
California border and elsewhere this past winter.
Fourth, as Commissioner Massey's letter points out, FERC
needs direct authority to mitigate market power. FERC doesn't
have the tools to prevent excessive power costs, and it's my
hope that FERC will reevaluate the criteria it uses to permit
market rates in the wholesale marketplace, and also in retail
markets, if asked by a State commission. The aim of this
clearly is to prevent manipulation and to encourage responsible
competition.
Fifth, FERC doesn't have sufficient authority to review
mergers. I agree with Commissioner Massey that involve
generation firms. Significant mergers dependent upon how they
are structured, Commissioner Massey points out, are outside of
FERC jurisdiction. That's just an invitation to structure your
merger this way and get out of FERC jurisdiction.
Additionally, I am very concerned that FERC does not have
the needed authority to regulate transactions and agreements
among holding companies and their subsidiaries or between
affiliated companies. I think if the Congress is to repeal both
PUHCA--well, particularly PUHCA, FERC should be given the
authority to deal with these complex interactions. I'm very
pleased three Commissioners have also talked about and agreed
on the transparency of data, as well as changing FERC's refund
authority for electricity rates, which I think is
extraordinarily important.
The San Diego marketplace went through, you know, a six
time increase in rates. It was incredible what happened. Rates
were way up. The wholesale rates were way up at 3 a.m. in the
morning, and yet the present rule doesn't allow you to go back
to include your refunds to that entire regional area. That's a
mistake. We ought to change it.
Now, California's present position is that it will fight
any inclusion in an RTO, and the reason is, because it feels
it's been a victim and it doesn't have recourse for remediation
of abuse. Until FERC can provide this recourse--or can provide
remediation of abuse, I can do nothing but support California
in this regard. You know, if you can solve that problem, then I
think California will change its mind and perhaps join a
regional transmission system.
I'd like to ask this question, particularly as it relates
to the secrecy of the settlement agreements, that as long as
they're secret, serve as no disincentive to any other company
to go out and try the same thing. I mean, they're going to
profit much more than they're going to have to settle. I'd like
to ask this question of the Commission: Do you believe that the
results of investigations and the evidence should be made
public in this regard? Let's start with the Chairman. Mr.
Hebert.
Mr. Hebert. I think we should follow the practice of
settlements, which is, follow the stipulation of the
settlement. As an attorney, I will tell you that there is much
to be gained from settlement processes, especially when it
comes to expediting putting things behind us. As you know,
we've become a litigious society, so anything we can do to move
us forward in that regard I think is beneficial.
I do, however, understand your concern in wanting to know
what the information was behind that. Do let me say this,
though: I actually see AES Williams as something very positive
that I think you should all know about, and that is this.
There's been much in regard to FERC's inability to do things
outside of the 60-day period. I have testified time and again
that, in fact, this Commission has tools in regard to behavior
that it deems to be illegal through anti-competitive behavior,
contractually against the contract, filed tariffs, filed rates,
anything in that regard. As you know, the AES Williams
settlement was one that dates back previous to the 60-day
period. It was in the summer of 2000, so I understand your
concern. I understand wanting to see the information. Senator,
you and I have met several times and I truly believe the
settlement process does bring benefits, and I do think it is a
good indication that FERC is, was, and will continue to be,
vigilant even 24/7 outside of that 60-day period.
Senator Feinstein. The problem is, all we've got is, we
have to take your word for it.
Mr. Hebert. I understand.
Senator Feinstein. There's no way to examine what happened,
and, you know, I'm not saying I doubt your word, but I'm
saying, it isn't good enough in this kind of situation.
Mr. Hebert. I understand that.
Senator Feinstein. So, I wonder if I could just hear
quickly from other Commissioners. I just want to know, ``yes''
or ``no''----
Mr. Hebert. Well, that's fine.
Senator Feinstein [continuing]. Do you think this
information should be made public? Mrs. Brownell, let's begin
and go right down the line.
Ms. Brownell. Okay. Senator, I agree with the Chairman that
the settlement process is important and critical. I wish all
the California participants would get back there and try and
settle what we've been trying to help them with, but the
reality is, you're right. The environment is, at this point, so
poisoned, and the credibility of many of the participants is so
damaged that, for me, I believe it is important that the
appropriate enforcement actions with the appropriate record
built, need to be made public so that we can, frankly, build
back our own credibility and that of the market participants,
because everybody is not guilty.
Senator Feinstein. Commissioner Massey.
Mr. Massey. Senator, in the California debate, I have
always felt that the question of withholding was a core
question. We had before us a live case with very interesting
evidence, and I think the public interest would have been well
served by having that record made public.
Senator Feinstein. Ms. Breathitt.
Ms. Breathitt. Yes. Senator, I wanted to add that--this
particular case--had the Commission chosen to open the
settlement to the public could have caused the parties to
renege on the settlement which resulted in about $8 million and
could have gone to trial, and when we go to trial, withholding
cases are very, very difficult to prove. So, this was much more
complicated than saying, ``Yes, let the information out,''
because it could have ended up going to trial, and then we
could have ended up with--we could have ended up losing,
because withholding cases are so hard to prove.
We have a tough enforcement chief at the Commission. I
would like for you to meet her sometime. She made a very
compelling argument for upholding the confines of this
settlement. I spent a lot of time on this case.
Senator Feinstein. All right. I had an answer to Mr.
Hebert.
Mr. Wood.
Mr. Wood. I would tell him it's better to lose, and I don't
know if this was one of those cases, because I wasn't here
looking as close as Linda, and Curt, and Bill did at the
evidence, but the--sometimes the evidence says more than even a
judge can conclude, and I think that's where you're going. A
few heads on the stakes around the campfire make all the
animals behave a lot better in the forest, and I think this may
well be, certainly in the front end of the transition of the
competition. Maybe in the more mature market you would do
private settlements.
Senator Feinstein. All right. I appreciate that. We don't
quite have three Commissioners, but if it were in legislation,
perhaps we might get it done, so I will press for that because
I strongly believe that the lesson learned is as important as
the penalty in this case, and you can't learn the lesson unless
everybody knows clearly what it is that you did.
The other point I'd like to make to you, Mr. Chairman, is,
I have real concerns right now about extending FERC
jurisdiction over all transmission rate making and access
issues, wholesale and retail. I don't want to get into a war
right now with the co-ops and the munis, and as you know, we
have--we'll have their very strong opposition. I know when we
tried to put together our cost-based rates legislation, I think
it could end up defeating anything that we might be able to do,
so my emphasis is on giving this Commission teeth, bringing
sunshine to the debate, seeing that they have civil penalties,
seeing that they can give the refunds way back, seeing that
they can move expeditiously. I don't want to see another time
when the Chairman of the Commission has to bring in 16 boxes
and put them before us and say, ``This is why we can't do
something.'' And I'd just like to respectfully suggest that we
direct our policy to that end. Let's get them so that they can
function in what has been a swashbuckling marketplace in an
effective and appropriate manner.
I thank you very much.
The Chairman. Let me just clarify. I don't think that in
our legislation, our White Paper, we're not suggesting that
we're trying to get FERC into the business of retail rate
making and distribution. We're trying to give them authority so
that the transmission system works, and anybody who is involved
in the transmission of power we think should be subject to
their jurisdiction.
Senator Feinstein. Now, that's a fine point that we need to
talk about a little bit.
The Chairman. I agree.
Senator Feinstein. Thank you.
The Chairman. Senator Landrieu.
STATEMENT OF THE HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Mr. Chairman, I appreciate it. I'm sorry
I had to step out for a meeting with constituents, but I've
been following both these hearings, yesterday and today, with
great interest and have read and reviewed a lot of the
testimony, and I guess it's appropriate to follow up on the
Senator from California's comments and the Chair, to say that I
am prepared and will be dropping legislation on this Electric
Transmission Improvement Act. The Electricity Transmission
Improvement Act is what we're calling it, a clear, straight-
forward name. We tried to think of something a little more
creative, but--but we've been so busy, but I want to thank you
all for your testimony today, and in writing, about the
importance of trying to develop in this Nation, despite the
obvious pockets of objection and push-back that will come, the
need to open up this transition grid. Based on the very good, I
think, white paper that our chairman has produced about the
history of the way our electricity system was developed in this
Nation and how it was, not regional but very parochial, and
while it served this Nation in a great and terrific manner for
so many decades, clearly it is apparent, and through the
testimony that you have given, you've helped make it even more
apparent that we need a new regime, and so this bill attempts.
It doesn't go as far as some people want us to go, Mr.
Chairman, and it doesn't go far enough in other people's mind.
But just to summarize that this open access issue is addressed
by giving States and the RTO's the opportunity to do what they
need to do and, if not, it's sort of a backdrop for FERC to
step in and to provide the transmission grid that this Nation
desperately needs as a foundation of our economic growth in the
future.
There is some strong language on siting. We would give FERC
clear jurisdiction to be a backdrop. If siting States and
regions can't do their siting within 180 days, the bill says
that FERC can then step in and try to put down rules and
regulations for siting of the power lines. It also establishes
incentives for the transmission grid to be increased. Our
demand has grown four fold and the capacity for transmission
has only been a very small percentage. I mean, it's outstripped
it four to one. This bill attempts to address incentives for
the transmission grid, and then the interconnection standards.
We have a patchwork. It's a process now. It will give FERC the
opportunity to make more standard those provisions.
So, I look forward to--I'm going to probably drop this bill
in looking for co-sponsors, and based on some of the testimony
I've heard today, I think we can build a consensus around a
piece of legislation on the transmission grid which, Mr.
Chairman, I hope will serve as a key component of our whole
energy policy, because in hearing, after hearing, after
hearing, there is enough testimony on the record to indicate
that we just have got to move a little--a lot further than we
are today.
So, I commend this for my colleagues and look forward,
Senator Feinstein, to working with you. I know that munis and
co-ops have some reservations, of course, because their
interest has been very parochial, and for good reason. That's
the way the system was designed, but we need to create an
interstate highway system just like the highway system that our
automobiles and trucks and business people, large and small,
can bring their products to market, can move goods, can create
the kind of economy, and our electricity system is no less
needy of that kind of system, and we have developed over the
century a very good partnership between States and local
governments and the Federal Government to create this
interstate system for our, you know, transit. We need to have
the same sort of cooperative effort in designing this system
for our electricity and the flow of power. Whether it is
produced from clean coal, nuclear, oil, gas, or alternatives,
whatever this committee decides and Congress decides is the mix
of supply, you still need an open transmission grid to get it
from the source to the consumer, and I think it's a very
important component, and I just encourage us all to--I'm going
to lay this bill down as, hopefully, some sort of--hopefully--a
compromise to build on some common ground, and I'm going to
ask, not today, but for each of you all to submit in writing
your thoughts about what is in here, what is not in here, and I
look forward to working with you all to provide you the legal
authority you need to help us to do that.
With respect to all the regions and to all the States, and
to the munis and the co-ops, we have just got to make this
highway work for our country.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
Let me begin by commending FERC's decision yesterday to
establish a special evidentiary hearing into what have been
skyrocketing electricity prices that have plagued the Northwest
for the last year. As you are well aware by now, Washington
State has been hard hit by the Western energy crisis, which has
really taken an enormous toll on our consumers and businesses,
and a variety of sector of our State economy.
I believe that this new evidentiary proceeding will confirm
what has seemed to be obvious to many residents in my State, as
they've seen as much as a 50 percent increase in their utility
bills, that there have been, in fact, unjust and unreasonable
rates.
In addition, I am pleased that the Commission has at least
taken notice of the structural differences between the
Northwest and California energy markets. While we, in the
Northwest, rely on bilateral forward contracts rather than a
centralized ISO, our prices have moved in lock step with those
charged in the California spot markets.
Now that we, in the Northwest, have been given the
opportunity to plead our case, I hope that the customers of our
hardest hit utilities will ultimately see refunds for those
unjust and unreasonable rates, whether through FERC or through
a settlement process that might play out here in the next
several weeks.
The truly daunting reality for the pacific Northwest is
that we have not yet seen the worst of this issue, given that
Bonneville Power Administration has a 46 percent rate increase
to take place later this fall, and that our peak energy usage
in the Northwest doesn't really occur until the winter heating
season, so it is my hope that refunds for our region can either
alleviate some of the pain our residents have already felt, or
prevent them from having more pain inflicted upon them.
Along those lines, I hope that FERC will also take into
account that fact that many northwest utilities, especially
BPA, have gone to extraordinary lengths in helping with the
California crisis, even, at times, to the detriment of the
reliability within our own region, and some of those have not
been repaid by the sales to the California entities.
I'm very appreciative of the steps that FERC has taken in
showing a commitment to help right the wrongs visited upon the
Northwest by last year's--by the last year's runaway prices,
and I'm pleased today that the Commissioners have, I think,
finally acted to highlight the need to restructure our
electricity system so that energy suppliers will never be able
to create the sort of dysfunctional atmosphere in which we have
all been so impacted by.
I would like to, if I could, ask the Commissioners, Mr.
Chairman, about a couple of things specific to the order, and
then some broader questions as it relates to our hearing this
morning, but first I noticed in the hearing--the order document
from yesterday, on page 38, regarding the Pacific Northwest
proceedings, that the proceeding is--and I'm reading from the
document--``The proceeding is intended to facilitate the
development of factual record on whether there have been unjust
and unreasonable charges for spot market bilateral sales in the
northwest for the period beginning December 25, 2000 through
June 20, 2001.''
So, if members of the Commission could comment on that, I'm
assuming in that recognition that there is, in fact, a
different market functionality in the Northwest, that spot
market bilateral sales in the Northwest basically include some
of the longer term contracts, or depending on how you wanted to
find them, shorter contracts that were sales made during this
time period that are different than how you have been viewing
the California situation and California refunds.
Mr. Hebert. Well, the problem that you get into with the
Pacific Northwest is, they don't have a 24-hour spot trading
market, as does California, and you pointed that out, and
that's correct. This Commission has been very focused on trying
to make certain that at the most opportune times for market
manipulation, that FERC intervenes. That is exactly what the
price mitigation was all about. I continue to believe that that
24-hour period is what this Commission should be focused on.
Now, not having a 24-hour spot product that you trade in
the Pacific Northwest presents some difficulty in establishing
facts when it comes to establishing what the refund criteria,
if any, would be, so that is what that language is in there
for. I think you will find, as you talk to the other
Commissioners, there is some agreement and there is some
disagreement as to what direction we should go in there, so I
think it would be fair to let them answer, as well.
Ms. Brownell. Senator, I think if you also look at the
footnote on page 43, it acknowledges that, in fact, there are
differences, and it is our hope that what those differences are
may be clearer from the evidentiary proceeding, and the
Chairman is right, there is still discussion and debate going
on, but it was clear to me--I can speak for myself--that there
are differences and we need to look at that in a different way.
Where that evidence takes us, however, remains to be seen, so
we implore the parties to get it all out and make their case.
Mr. Massey. Senator, it seems to me that the dysfunctional
California markets had a huge impact on the Pacific Northwest
that played out through bilateral contracts, and our order says
explicitly that what is a spot market sale in the Pacific
Northwest may be different. We may define it differently, and
we tell the judge to accept evidence on that question.
My own view is that contracts in the range of a month or
even longer would qualify as spot sales in the Pacific
Northwest, and I said that yesterday. For the record, our order
intends to open this issue up, but it is somewhat ambiguous
about what a spot market sale is. In the Pacific Northwest,
we're counting on a record to be developed.
Senator Cantwell. Commissioner Wood or----
Ms. Breathitt. Senator, I would just like to read one
sentence from the order that says, ``We direct all parties to
the Puget Sound Complaint proceeding to participate in the
proceeding and to focus on settling past accounts related to
spot market sales in the Pacific Northwest.'' We tried to be as
precise as we could about what that means to the Northwest. I
am confident that the proceeding will at least give parties if
not the perfect result that they wanted, will give them the
forum in which to settle these past accounts which is due
process and it should be fair.
Mr. Wood. Your specific question about what is spot
market----
Senator Cantwell. Well, my specific concern is that the
Northwest utilities and Northwest consumers who have seen
prices go from $26 a megawatt during this time period to $500 a
megawatt are not penalized on coming up with a solution simply
because they don't run an ISO like California, and because--and
I guess I think it speaks somewhat to the potential limitations
or concerns about FERC moving forward if we can't make
decisions that recognize the differences between these markets
when unjust and unreasonable rates have occurred. So, I'm
taking your order as to mean that you are--that the judge has
discretion to determine that there are longer term contracts
that could attract the spot market and that these contracts,
just because they didn't operate under an ISO functionality are
unjust and unreasonable during this time period.
Mr. Wood. I think clearly the intent of the footnote 74
that I believe Nora referenced a moment ago, which reads,
``What is a spot market sale for bilateral transactions in the
Pacific Northwest may differ from what is a spot market sale in
the California ISO and PX organized spot markets'' was really
an indication that there's plenty of room to look at this a bit
differently in the Northwest proceeding.
Senator Cantwell. Thank you. If I could, following up on
this issue, as we look at the larger restructuring issue, part
of the challenge for us in the Northwest being 78 percent hydro
dependent and the fact that we have the worst, or second worst,
drought on record, part of this is planning for the future,
having--then going out to the spot market, which was seeing
exorbitant prices obviously made it a very complex year for us.
How, in looking at these issues on restructuring, what are some
of the Commissioners' ideas on further safeguards, whether
through FERC or whether through different entities, to make
sure that the planning process, given a hard environmental
hydro years, would be a way, or for anybody who may not be
hydro related, but are forced to go out on the spot market and
higher peak times.
Mr. Massey. Senator, let me say--and this may be
politically unpopular in the Pacific Northwest and in the
West--but I think the ultimate solution is a single RTO for the
Western interconnection that plans for the entire Western
interconnection. This is the way to solve that problem.
Senator Cantwell. And what functionality would--I mean, we
obviously are hearing a lot about an RTO and I think if you
said today to people in the Northwest, ``Hitch your wagon to
the California ISO and let's create a regional situation,'' I
don't think people would be very comfortable with that. I'm not
even sure California would be comfortable with that.
The issue is, what can we do to require utilities to have
more predictability for hard economic times? And, of course, we
want to assume that there's a stable market operating and, yes,
that's a larger question about how we--what are the safeguards
or the empowerment as we've heard discussed from our colleagues
today, everything from transparency to the transmission grid,
but what is that certainty on backup plans? I equated to FDIC
insurance that banks have, and when there's a run on a bank,
they have a backup plan on how they're going to deal with it so
that consumers are protected. So, what is our equivalent in
this situation?
Mr. Wood. Traditionally in the regulated environment, there
is a requirement on every utility to have 15 percent, or some
percent, more under contract or under ownership of generation
than it needed for the hottest or coldest, whichever the
climate is, day of the year, so that it always had that
insurance policy on top of what it needed.
In the more competitive markets, those regulatory mandates
have taken more the format of a tradeable right that a
generator can sell for the obligation to deliver power 3 years
from now for that 15 percent, or whatever it may be, and that's
sold to a retail provider today. California did not have such a
requirement at all. Looking back, I think everybody is kicking
themselves that there wasn't a build-ahead requirement, but in
the Eastern markets, in fact, we were dealing with orders just
this week, looking at what they call installed capacity, ICAP,
it has various other names, but they are probably not the
perfect mechanism out there yet, but it's one of those probably
critical lists of five things we've got to do to put into
regional planning across the country to make up for what
happened out there.
Hydro is unique because it can go away pretty fast, unlike
natural gas. Three years ago, we had--with the merger of
railroads, we had some coal dislocations. Gosh, who would have
thought coal would have become undependable for awhile, but
we've probably got to factor in the probability of
unavailability for each one of these resources when we're
figuring out that 115 percent. In hydro this year, at 46
percent of what it was two years ago, looks--it's pretty
variable and I think in future planning, we've got to account
for that.
Ms. Breathitt. Senator, what I would add to what my
colleagues have just said is--and you're probably doing this in
the Pacific Northwest because you are 76 percent dependent on
hydro which is so--which succumbs so to weather, and snow, and
rainfall, that the Pacific Northwest look at diversifying its
energy portfolio so you, over time, reduce the dependency on
perhaps hydroelectricity to include perhaps more natural gas,
more clean coal, more renewables, coupled with demand reduction
and conservation. That would be--and then picking up on Pat
Wood's comment of a reserve margin, which I'm sure--I think you
have in the Northwest with the WSCC.
Senator Cantwell. Yes, but a 15 percent reserve, which most
of these people had, didn't last them very long.
Mr. Hebert. Let me get a couple of things that I think
are--you should definitely know about. I do think the single
RTO for the West is critically important. What we have all
learned from this--understanding Senator Feinstein's concerns
about how we do that--I am certainly sympathetic to that, but
it's important that we do all learn from this. I mean, it's one
thing to listen; it's another to learn, and let's learn, and
what we have learned is, in fact, that the Northwest and
California help and hurt one another, depending upon their
actions.
Having said that, if you have an RTO that is set up so as
to plan in such a way that it will have as much free-flowing
transmission as possible, it will have the installed capacity
that is necessary to get it through the bad years, I think
that's very important, but it also brings up a couple of other
things, and Commissioner Breathitt touched on it.
The fact that you are so dependent on one single source
leads you down that path a little bit. I will tell you that due
to the dependence on hydro and the fact that hydro is such a
cheap, in the end, or less expensive form of energy, not to
mention all the very positive things when it comes to
emissions, but it has made it very tough for gas and pipelines
to come out there and compete. When you have very good hydro
years, the pipeline companies don't do very well, so you might
want to think about, and certainly it's something that I
continue to talk about, incentives for the pipes so that we're
not so dependent. Now, that is not to say that you can do with
less hydro, because I think quite the opposite. I think you
need as much hydro as you've got, and I think you need to
squeeze every megawatt possible out of that hydro, but I think
you also need some gas and maybe some clean coal technologies,
anything that is going to bring you additional capacity.
Having said that, you're in a period where the relicensing
of those hydro facilities is critically important. It is also
critically important that that be expedited and it not be
weighed down and it not be stopped through a regulatory
framework. We are committed to that. We will continue to do
that, and, hopefully, we will help the Northwest get on their
feet. I think you do know and understand that we are committed
to that.
Senator Cantwell. I don't think that we've ever missed an
opportunity, when the Secretary of Energy was here, to
encourage him in his dialogues and discussion with Canada,
British Columbia and Alberta about the large reserves of
natural gas that they have there that could be an aid to the
West.
Commissioner Brownell, do you want to comment on that?
Ms. Brownell. Senator, I do. I certainly think that my
colleagues have covered the gamut of opportunities to address
the issues in the Northwest, but I want to comment on the
concerns that you have expressed, Senator Feinstein have
expressed, about a Western RTO.
We recognize that there are dramatic dysfunctionalities in
the markets, and we recognize that we need to fix those
incrementally before we suggest that a westwide RTO would be
perfectly suited to addressing these problems. So, we also need
to understand that there are different levels of maturity in
different markets that require different responses. The
Northeast, being that much more mature, is probably more ready
for an RTO on a larger scope than the West is. But I do think
it's important because we're looking at a planning function
that is very clearly more critical than we ever knew of, as we
begin to move forward in thinking in terms of regional planning
and how we might get there, both in the short term and the
longer term. So, we can't let today's problems make us--force
us into decisions that, for the long term, are not good, and
therefore that planning function at the RTO level, I think, is
critical.
Senator Cantwell. Well, and I just want to note that within
the region that the reciprocal agreements that we have with
Washington--the Northwest has with California now on power that
have worked well for many years, but the issue is creating a--
making sure there's a functional market and what the unique
impacts are within each region.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Feinstein, I know you had a matter you wanted to
follow up on. Why don't you go ahead and do that.
Senator Feinstein. Thanks very much, Mr. Chairman.
I may have misspoke by saying that we didn't have three
votes on the Commission to make investigative data public. My
staff informs me that I missed something, Ms. Brownell, that
you said you would support it.
Ms. Brownell. I would. I mean, retroactively, I could not
undo a settlement, but going forward, I absolutely would
support it.
Senator Feinstein. That's good. Then we have three votes
for that, as well. So, I would like to, if I understand it, as
the Commission this question. There are three votes, as I
understand it, on additional authority with respect to--well,
making--moving up, the Rule 206 rule on refund authority to the
date of filing the complaint. Is that a correct assessment?
Ms. Breathitt. I think that's what I said in my letter to
you.
Senator Feinstein. Yes, right, and I think others--
Commissioner Massey, you suggested that----
Mr. Massey. I would go further back than that. I think FERC
ought to have the refund authority any time it determines that
prices are unjust and unreasonable, going back retroactively
with some reasonable limitation, of course.
Senator Feinstein. All right.
And Commissioner Wood.
Mr. Wood. I have not spoken on it, but I would agree with
what Commissioner Breathitt just said, that certainly on the
date of filing, from that day forward is a pretty clear signal
to the person you're filing against that their behavior is
under potential refund obligation.
Senator Feinstein. Now, I haven't asked this question, but
how about making it retroactive?
Mr. Wood. Prior to the date of the complaint? We had this
discussion yesterday at the Commission meeting with a bright
woman on our staff talking about what do we have today? If they
had violated a tariff, and from this point forward, I think all
the market based pricing certificates that we've granted that I
think some of you have not been real happy that we've granted
on the market basis, could have a conditional amendment that
would provide a sort of a hook, that, in fact, you have
violated a preexisting tariff. That's a little different and
that would give you the ability to go--if you broke something
that you promised you wouldn't break 10 years ago and you broke
it eight months ago, when you file a complaint really doesn't
matter. If it's a new issue, like what we saw with the San
Diego Gas and Electric filing last August, then that becomes
subject to a specific new complaint, so the bottom line is, we
do have more authority to go back currently than we had
expressed in the section 206 complaint, but it has not been
found, and I think we looked for a way to look for it to go
back before August of last year. Going forward, we can
condition certificates so that there is an earlier-in-time-
bright-line point.
Senator Feinstein. Obviously the reason I'm raising this is
that the San Diego situation just sort of stands out there like
a----
Mr. Wood. Right.
Senator Feinstein. It's almost unfair.
Mr. Wood. I agree with the----
Senator Feinstein. I'm trying to see if the Commission can
take any action in that regard,
Mr. Massey. I agree with you. Any time prices are
determined to be unjust and unreasonable, there ought to be
refunds available. It's unconscionable that we cannot go back
to last June--June of 2000--and order refunds for prices that
were clearly out of control and unjust and unreasonable, and
that is an issue that needs to be addressed. I think the first
complaint was probably filed in late June or early July. By the
time we got around to addressing it with the 60-day buffer
zone, it was October 2, but that's a good 4 months of out of
control prices with no remedy, that's number one.
No. 2, the Commission allowed sales at market based prices
with virtually no conditions attached to that certificate.
There was a condition against affiliate abuse. There was no
condition in those tariffs against withholding a generation.
That seems unbelievable to me, but there was absolutely no
condition.
Mr. Hebert. We have since changed that.
Mr. Massey. We have since changed it for the Western
interconnection as of April 26, 2001, but there ought to be a
national standard, and as the Commission updates its market
based pricing standards, and there's probably a majority of the
Commission that's willing to do that, we ought to include the
conditions that are necessary to protect the public interest.
Senator Feinstein. Well, I'd like to ask you to do so. I
think that would remedy a major inequity if this could go back
into the year 2000 which, after all, it was in the early point
there where some of the biggest spikes were, you know, where
some of the most egregious happenings took place, and nothing
is going to happen, so it's sort of like the old adage of
closing the barn door after the horse is out and I'd like to
make the request that the Commission--and we will do so in
writing, as well--take a look at that.
If anyone would like to respond, please.
Mr. Hebert. Yes. I have actually a response and a couple of
questions, one to something you mentioned a little while ago on
market power, and the other on your question as to the
settlement, and I want to make sure I understand your question
properly and the direction that you believe the majority of the
Commission may be taking.
Is it your understanding, then, that the majority of this
Commission will not accept settlements that do not disclose the
reason for those settlements and the facts of that case?
Senator Feinstein. Of course, now, you're putting it in the
negative.
Mr. Hebert. No. I'm just asking.
Senator Feinstein. What I'm saying is, that the--this is a
public Commission that the evidence on which you base decisions
should be made public so that everyone can look at it. I mean,
this is not something that's operating in the private sector.
This is a public sector effort, and as such--see, there's no--
part of what I'm aiming at is to create a disincentive for bad
behavior, and the disincentive is, everybody is going to know
about it, the credibility and integrity of the company is
affected. I think that's appropriate in this kind of case.
Mr. Hebert. I want you to know, I do not disagree with
anything you're saying as to the importance of people seeing
things, but I will tell you, for someone who has committed many
hours of--every day in the last 6 months to try to turn this
thing around, that every now and then the opportunity to trade
certainty for uncertainty versus protracted litigation is so
strong that I think this Commission must do that, and I think
we will see that again in the future, and it is my hope that
this Commission will not turn its back on accepting settlements
to give certainty to this industry to try to turn things
around. That is my only thought.
The other thing--I guess you can come back to it, because
it doesn't have anything to do with this--has everything to do
with market power that you brought up, and I'd like to comment
on that.
Senator Feinstein. Fine. Fine.
Ms. Breathitt.
Ms. Breathitt. Senator, I was just sitting here listening
and thinking. The question in my mind is, is the embarrassment
factor going to achieve our goal of stopping withholding? Is
that going to be more effective than going to trial?
Senator Feinstein. May I answer that?
Ms. Breathitt. Yes, because I don't know the answer to
that, and I think that's what you're asking.
Senator Feinstein. The answer, I think--all right. I think
Mr. Wood answered that question. It may be worth going to
trial, even if you lose, to let all of this be out there.
Ms. Breathitt. I was just trying to think through whether
the embarrassment factor gets us where we want to go as opposed
to proving actual instances and having a legal predicate upon
which to move forward.
Senator Feinstein. I can tell you, over and over in the
California situation. As you know, ENRON had to be subpoenaed
and resisted providing data, and I gather they're now going to
do it, and everything is a fight. Everybody on the other side
says, ``Oh, there's no smoking gun. We did nothing wrong.''
Well, look, in my heart of hearts, I know plenty was done that
I would consider wrong, but you can't get to it unless you've
got somebody that--unless a whistle blower comes forward.
Now, you can't have this kind of situation that, for
justice, the only hope is a whistle blower, which is, today,
the situation in California. There has to be the ability of the
regulatory authority to make these things public, and currently
there is not, and that's why I think we had such egregious
behavior on the part of the generators, because it was no lose
for them, and if you combine this with the lack of
transparency, when it's the--when the online dealing takes
place and the natural gas at the border--I mean, you've got a
very complicated and an impossible situation for anybody really
to sort out.
Mr. Hebert. It is perplexing, because I guess somehow I
haven't heard what I thought I've heard, because I have been
thinking over the last couple of months that, with all
deliberate speed and almost at all cost, we should put the
California and the Northwestern matter behind us, try to get
that settled, and I guess now what I'm confronted with is, if
tomorrow this Commission is presented with a settlement with
all parties in California and the Northwest, and all those
parties agree that they want to settle as to the amount, but
they do not want to disclose why that amount was there and what
the activities behind that were, you're saying you would rather
this Commission say no to that, that we want the ALJ to hear
the case, perhaps a hearing before the Commission, and
inevitably, surely, before the full Circuit----
Senator Feinstein. No.
Mr. Hebert [continuing]. Which is a much longer duration. I
mean, that's the trade-off.
Senator Feinstein. It is also costly for the companies. I'm
not sure that this really is the trade-off. I'm not sure. I
understand it in the private sector when there's a lawsuit and
the parties come together and they have a settlement and that
settlement is a secret settlement, but this isn't the private
sector.
Mr. Hebert. I don't disagree with that.
Senator Feinstein. I have a real problem because of what
has been going on with the State legislature has been trying to
do, and the difficulty in being able to do it. Now there's
someone you can go to all in secret, you can work out your
deal, nobody ever knows what really happened. That's wrong, Mr.
Hebert. It's wrong, particularly, when you have companies
laying off people because they can't afford the rates. I mean,
I remember talking to the Sempra people about what was
happening at 3 a.m. in the morning.
Mr. Hebert. I'm not disagreeing the right and the wrong of
that with you. What I'm disagreeing with you about is the
opportunity for this Commission to provide certainty and get
settlements and issues behind it and move forward. That is all
I'm disagreeing with you about.
Mr. Massey. May I comment, please? It seems to me that the
difficulty this Commission faced over the whole past year is
our credibility. Were we actually doing what needed to be done?
Were we tough-minded enough? Were we serious enough to solve
this problem? And in that context, a big case involving
withholding, with very interesting evidence, comes before us
and we bury the evidence and it hurts our credibility and makes
it look like we're conspiring with the industry. Your comment
is dead on. We would have been better off to spread that
evidence on the record through litigation. That would have been
much more valuable than the $8 million that we got.
Senator Feinstein. My time is up. I want to thank the
Commission.
The Chairman. I'm going to have to terminate the hearing. I
want to thank all Commissioners. I think it's been very useful
testimony. I think you've brought out some very useful points
and we want to stay in close touch with the Commission to work
with them in developing legislation that is in the best
interest of the country.
Thank you all very much.
[Whereupon, at 11:52 p.m. the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Portland General Electric Company,
Portland, OR, August 31, 2001.
Hon. Jeff Bingaman,
Committee on Energy and Natural Resources, Democratic Staff, U.S.
Senate, Washington, DC.
Dear Chairman Bingaman: In response to your letter of August 20,
2001, I am enclosing my responses to the questions submitted by the
office of Senator Larry Craig.
Thank you for the opportunity to provide additional information.
Very truly yours,
Julie Keil,
Director, Hydro Licensing.
Responses of Julie Keil to Questions From Senator Craig
Question 1. Ms. Keil, I have read some testimony containing
anecdotal evidence reflecting the apparent Department of the Interior
belief that since no licensee has refused to accept or surrender a
license immediately after issuance, these licensees must have economic
value.
When your Company, or any utility company considers refusing to
accept a new license for an existing project don't you have to factor
in the costs of tearing down that project and is it fair to say that
licensees are often confronted with simply choosing the lesser of two
economic disasters?
Answer. When confronted with a license that it believes to be
uneconomical, a licensee faces an impossible choice. It can either
continue to produce electricity at the site, a losing proposition. Or
it can surrender the license, also a losing proposition. The cost to
surrender a license and remove a project can be enormous. In addition,
agencies frequently demand additional mitigation for the removal
itself, adding to the burden. In today's regulatory environment, there
is little assurance that surrender and removal costs can be recovered
in a utility's rates.
Question 2. In reviewing all of the 246 relicense proceedings in
which a license was issued or declined between October, 1986 and
January of this year, FERC, in its 603 report, found an average annual
generation loss of 4.3%. Some may claim that this figure is
insignificant. I disagree. In today's megawatt-thirsty climate, that is
a significant amount of power that is being lost. However, as a
licensee, you are familiar with other factors that impact a project's
economic viability. Can you describe what peaking power is, and how the
loss of that flexibility affects revenues and the stability of the
electric grid?
Answer. Electrical systems must exactly match generation and demand
on an instantaneous basis. Needless to say, demand is variable. It
varies throughout the day; in most service areas there is a morning
peak and an early evening peak in usage. In addition, demand varies
seasonally. Historically, for example, the Pacific Northwest has been
considered to be a ``winter peaking'' system, due to low use of air
conditioning and the relatively high use of electric space heat.
Peaking power, then, is the ability of the grid to respond to these
peaks in use, both daily and seasonally. Hydro, with its ability to
store electricity in the form of water in reservoirs is the most
flexible and economic way to meet peak loads. Units at hydroelectric
projects can be stopped and started more quickly than thermal units and
with less damage to the machinery.
If operational flexibility is lost at hydroelectric projects, it
must be replaced with other resources. Often this replacement
generation is gas fired, which is a much more expensive way of meeting
this system need.
If the flexibility of hydro projects is lost to the system and is
not replaced, the result is that the system can no longer meet peak
loads, which can result in blackouts.
Question 3. Some within the environmental community have criticized
the hydro industry as ``a solution looking for a problem.'' From your
perspective, having invested millions of dollars in your own
relicensing efforts, how do you respond to that statement? Are you
searching for a problem?
Answer. PGE has invested many thousands of dollars and hours of my
time to seek reform of the system under which we currently license and
relicense hydroelectric projects. It serves no one well. It costs too
much, raising the cost of a critical service to our customers, and it
takes too long, increasing uncertainty and delaying important
environmental protection and enhancement measures. While we believe
that the process should permit every interest to be represented, at the
end of the day, someone has to make a decision.
Question 4. I wonder if you could talk a little about the role that
hydropower plays in the Western electricity grid and, specifically, how
the current hydro licensing process currently hinders, or might hinder,
your abilities to provide consumers with a reliable, reasonably priced,
supply of electricity?
Answer. As I discussed above, hydropower is critical to a reliable,
reasonably priced electricity system. It provides 70% of the capacity
in the Pacific Northwest and accounts for approximately 24% of
California's total electrical generation capacity. Flexibility and
capacity are often victims of the relicensing process. The benefits are
hard to quantify and almost impossible to see in surveys of licensing
outcomes. The seemingly innocuous demand for ``natural'' river systems
and hydrographs threatens to strip the system of this valuable
component.
I think it is worthwhile pointing out that the flexibility of hydro
power projects is important to the viability of other renewable
resources. Wind power, for instance, requires back up from the hydro
portions of the grid in order to make a useful contribution to
electricity supply.
Question 5. American Rivers claims that hydro licensing improvement
would ``upset the delicate balance between hydroelectric generation and
wildlife habitat and river front economies.'' In your opinion, does
this ``delicate balance'' exist?
Answer. No, I do not believe that a delicate balance exists. It is
perhaps true that when projects were originally constructed, the focus
was on providing electricity rather than environmental protection. Now,
however, the pendulum has swung too far in the other direction. The
relicensing process is driven by agencies with mandatory conditioning
authority who have no ability, under their existing statutory
authorities, to consider the cost of their demands to the electric
system to residential customers or to businesses. Licensing decisions
should be made in the public interest, in its broadest sense.
Question 6. In recent press releases, American Rivers has stated
that ``our rivers are already giving us all the electricity they can.''
Do you agree with that statement?
Answer. No, I do not agree. There are many opportunities for
project improvements and additions that would have little or no
environmental impact. In addition, there are many dams that are not
currently equipped with generation capability. The uncertainty and
expense of the licensing process is a major factor in our failure to
capture these opportunities.
______
Federal Energy Regulatory Commission,
Washington, DC, September 10, 2001.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Thank you for your August 20, 2001 letter
forwarding questions from Senator Ron Wyden, for the record of your
Committee's July 19, 2001 hearing on proposals relating to the
Commission's hydro relicensing procedures. My answers to those
questions are enclosed.
I hope that my responses are helpful. If you need additional
information, please do not hesitate to let me know.
Sincerely,
J. Mark Robinson,
Director, Office of Energy Projects.
[Enclosure.]
Responses of J. Mark Robinson to Questions From Senator Wyden
Question 1. The Idaho National Engineering Laboratory released a
study finding there are potentially thousands of megawatts of untapped
hydropower at existing hydro facilities. This untapped power could
become available by installing additional turbines or more efficient
turbines. Given the relatively minimal environmental impacts of these
improvements and the need for alternatives to gas-fired plants,
streamlining the process for licensing improvements to existing hydro
facilities is one of the greener alternatives available to help meet
the region's needs. What, if anything, is the Commission doing to
streamline the process for installing additional turbines or more
efficient turbines at existing dam sites?
Answer. The Commission is taking steps to ensure that this occurs.
In 1991, the Commission initiated a program for capacity and efficiency
upgrades at existing projects through streamlining its procedures and
minimizing pre-filing requirements, with the objectives of promoting
domestic energy production, encouraging utilities to evaluate
investment in energy efficiency and making more efficient use of the
nation's existing hydroelectric resources. The Commission ultimately
revised its regulations (18 C.F.R. Sec. 4.201(b)), so that many
capacity upgrades are considered routine maintenance that do not
require Commission approval. Many licensees have already taken
advantage of this opportunity, and continue to do so when it is
economically practical.
On March 14, 2001, the Commission issued its Removing Obstacles To
Increased Electric Generation And Natural Gas Supply In The Western
United States Order (Docket No. ELO1-47-001). One key component of the
order was increasing generation at existing Commission-licensed
hydropower projects, consistent with protecting environmental
resources. The Commission stated that installation of additional
turbine generators was one way of providing additional generation at
existing hydropower projects. The Commission also called for
conferences to be held in the Western Systems Coordinating Council
region focused on improving the energy situation in the Western states.
Commission staff held conferences in Portland, Oregon, and
Sacramento, California. As a result of the conferences, the Commission
received four applications to amend licenses by adding small
hydroelectric turbine-generator units to existing facilities. The
Commission has authorized two of these amendment proposals, a 70-
kilowatt (kW) turbine-generator unit at the Pelton-Round Butte Project
No. 2030 and a 437-kilowatt turbine-generator unit at the LaGrande
development of the Nisqually Hydroelectric Project No. 1862. Two
additional proposals to install small hydroelectric units at the Rock
Island Project No. 943 (700 kW) and the Rocky Reach Project No. 2145
(800 kW), both located on the Columbia River, are currently pending at
the Commission.
Question 2. The Commission's report to Congress under Section 603
of the Energy Act of 2001 recommends that the Clean Water Act be
amended to limit water quality certification to a subset of water
quality parameters. Does FERC believe that it knows better than the
states as to how to protect and restore water quality for a state?
Answer. FERC believes the states are properly the leaders in
setting water quality standards such as the physical and chemical
composition of water. However, to the extent that the Federal Power Act
requires the Commission, in issuing hydropower licenses, to balance the
various beneficial public uses of waterways, including power and
development and environmental uses, the Commission continues to work in
partnership with the states, as well as with other federal agencies,
Indian tribes, non-governmental organizations, and other stakeholders.
Commission staff believes that all of these parties have valuable
contributions to make to the licensing process.
Pursuant to the Clean Water Act, the states play an important role
in establishing objective standards for the physical and chemical
composition of water (dissolved oxygen content, pollutant-levels,
temperature, etc.). Commission staff is concerned that, to the extent
that states utilize their authority under the Clean Water Act to
require conditions beyond the physical and chemical composition of
water, such as those dealing with recreation and fish and wildlife
requirements, it makes it difficult, if not impossible, for the
Commission to perform the balancing required by the Federal Power Act.
Question 3. The report suggests that states be prohibited from
requiring ``instream flows.'' Does FERC believe that good water quality
can be achieved without water quantity? How do you achieve water
quality standards for temperature without increasing flows?
Answer. Clearly water quality and quantity are related, however,
the determination of flow requirements can be an issue that does not
have water quality impacts. Water quality is generally addressed with
numeric temperature and dissolved oxygen criteria in certifications.
Water quantity requirements often bear no relationship to these water
quality standards, but rather are designed to address particular uses
of the waterway, such as fish habitat or boating.
In fact, there are a number of ways to meet water quality standards
without imposing water quantity requirements. For example, many
reservoirs stratify thermally, particularly during the summer when high
river water temperatures are of concern. In such cases, cooler summer
water in the rivers downstream may be achieved through selective
withdrawal of cold, deep reservoir water, rather than necessarily
increased flows. This method may allow for a smaller amount of water to
be released to meet water temperature standards, and result in water
being available for other purposes, such as filling a reservoir for
summer recreation use or peak generation. Similarly, if project works
are integral with the dam (i.e., there is no bypassed reach), selective
withdrawal into the turbines may eliminate the need to require spillage
to meet water quality standards. Likewise, myriad aeration techniques,
such as turbine venting, can be used to meet dissolved oxygen standards
downstream, without requiring additional flows.
It is nevertheless true that providing sufficient quantities of
water for beneficial public uses is extremely important, and balancing
the use of water is studied carefully by Commission staff in all
hydropower licensing proceedings. Indeed, the Commission includes
minimum flow conditions for purposes such as fish and wildlife,
recreation, and aesthetics in virtually every license it issues.
Appendix II
Additional Material Submitted for the Record
----------
Western Governors' Association,
Washington, DC, July 11, 2001.
Hon. Jeff Bingaman,
Chairman, Senate Committee on Energy and Natural Resources, Dirksen
Senate Office Building, Washington, DC.
Hon. Frank Murkowski,
Ranking Minority Member, Senate Committee on Energy and Natural
Resources, Dirksen Senate Office Building, Washington, DC.
Dear Senators Bingaman and Murkowski: We urge the Congress to
support the rapid enactment of federal electricity reliability
legislation that provides for delegation and deference to decisions
made within an electrical interconnection and authorizes the
establishment of state advisory bodies. Such provisions are embodied in
the consensus legislation prepared by the North American Electric
Reliability Council. This legislation has bi-partisan support. The
provisions passed the Senate last year and are included in numerous
bills in this Congress. Western governors expressed our support for
such legislation a year ago in the attached resolution. We reiterated
our position in the recommendations from the February 2, 2001 Western
Governors' Association Energy Policy Roundtable and again during a
Western Governors' Association Transmission Roundtable on May 9, 2001.
The enactment of federal reliability provisions that reflect the
position of Western governors is vital to assuring reliability in the
Western Interconnection. We urge you to support rapid action to enact
such legislation.
Sincerely,
Dirk Kempthorne,
Chairman, Western Governors' Association.
[Enclosure.]
POLICY RESOLUTION 00-009
A Competitive and Reliable Western Electric Power System
Approved June 13, 2000
SPONSORS: Governors Johnson and Geringer
a. background
1. The Western electric power system is experiencing fundamental
change driven by customer demands for choice, lower cost generation,
and state and federal regulatory reforms to enhance the competitive
wholesale Western electricity market.
2. The Western electric power industry is central to the region's
economy. As the regional power outages of July 23, and August 10, 1996
highlight, the Western economy is dependent upon a reliable supply of
electricity. Annual expenditures for electric power in the West are
over $700 per capita or $63 billion. This is more than the gross output
of the agriculture, forestry, and fisheries sectors combined.
3. The Western region has the second highest regional average
electricity rates in the nation. But retail rates vary greatly from
state to state. The Western region contains states with the lowest
retail rates in the nation, as well as states with rates significantly
higher than the national average.
4. The Western electric power industry is very diverse. Investor-
owned utilities, publicly-owned utilities, and federal power marketing
administrations all play major roles in supplying electricity and
providing transmission in the region. Seventy investor-owned utilities
provide nearly 70 percent of the West's electric supply. Nearly 1,000
publicly owned systems, including public power districts, rural
electric cooperatives, municipals, and regional, and federal systems,
provide about 30 percent of the West's electricity. Non-utility power
suppliers, power marketers and brokers, and load aggregators are adding
to the diversity of the electric power industry.
5. Past Western state utility policies have been instrumental in
(a) cutting the cost of energy services through cost-effective
conservation investment, (b) expanding the production of electricity
from abundant Western renewable resources such as wind, geothermal and
solar, (c) fostering industry-sponsored research and development, and
(d) helping low-income consumers pay their electricity bills. However,
the methods by which these policies promoting social objectives have
been implemented may not be sustainable in a competitive industry. New
approaches will be required.
6. The federal government has acted to open access to the high
voltage transmission system, a necessary step in promoting wholesale
competition. In 2000, Congress is expected to consider legislation that
could expand competition in the wholesale electric power industry.
7. Nearly every Western state is evaluating or has acted on
regulatory or legislative proposals that would change the existing
structure of the electric power industry.
8. The Western electric power system is increasingly challenged by
load growth and expanding power sales across the transmission system.
Recent analyses show an increasing probability of power outages in the
next few years.
b. governors' policy statement
1. Western Governors support expanded competition among electricity
generators to lower electricity costs to Western consumers. Impediments
to increased competition among generators need to be removed. The
Governors believe that all segments of the Western industry, including
investor-owned utilities, public power, federal power marketing
administrations, power marketers and brokers, and independent power
producers, should participate in the competitive market, at least at
the wholesale level. The decision whether to require or allow
participation in a retail competition program, and the form and timing
of participation in retail competition should depend upon
determinations made at the state and local levels. Western Governors
also support further implementation of access to the Western
transmission grid on a non-discriminatory basis.
2. Western Governors recognize that the Western electric power
system is a highly integrated interstate grid. In order to maintain or
enhance reliability, this ``interstate highway of electrons,'' which
moves at the speed of light, requires a high level of coordination
among those using the grid, as well as the cooperation of those in each
state and in the federal government charged with the responsibility for
oversight of the various elements of the system.
3. The transition to a more competitive market must ensure
continued reliability and safety in the provision of electric power
service. Western Governors encourage private sector solutions that
promote system reliability. New approaches to establishing and
enforcing regional reliability criteria need to be adopted. These new
approaches should include federal legislation that, consistent with the
Governors' policy statement 10 below, provides for:
a. Use of a public process for setting reliability criteria.
b. Review of proposed reliability criteria by states.
c. Application of reliability criteria to all users of the
grid.
d. Enforceable sanctions for non-compliance with reliability
criteria.
e. Mandatory membership by operators and users of the
transmission grid in regional reliability organizations.
f. Deference by a North American electric reliability
organization to interconnection wide standards and practices
developed in the West.
g. The organization of regional advisory bodies of affected
states and Canadian provinces to advise regional and North
American reliability organizations, the Federal Energy
Regulatory Commission (FERC) and appropriate Canadian and
Mexican regulatory authorities on the governance of a regional
reliability organization, proposed reliability standards and
their enforcement, and fees to support system reliability
activities. FERC should defer to the advice of such regional
advisory bodies when the advisory bodies cover an entire
interconnection.
4. To protect reliability in a competitive market, Western
Governors urge the expeditious establishment of a single Western
Interconnection Organization that promotes efficient electricity
markets, ensures reliability, increases the effectiveness of the
institutional support structure, eliminates overlap or duplication of
effort among grid management organizations and provides for a clear
determination of authority and responsibility. States should be members
of the Board of Directors of the organization.
5. Western Governors also support the development of new market
mechanisms to enable retail consumers to receive appropriate price
signals so that they can effectively participate in the power market
and thereby help ensure system reliability at the lowest reasonable
cost possible. The Western Governors also recognize that exporting
efficient, low-cost generation will enhance reliability.
6. Western Governors urge the Western electric power industry, in
cooperation with Western states and the federal government, to support
the formation of cost-effective Regional Transmission Organizations to
maintain and enhance system reliability, examine and mitigate market
power, and facilitate efficient power transactions in a restructured
industry.
7. Western Governors support the adoption of ``system benefit''
charges to continue appropriate support of social purposes, including
acquisition of cost-effective energy conservation, research and
development, expanded use of renewable energy resources, and low-income
assistance.
8. Western Governors urge the federal government to work with the
states to develop effective approaches to mitigate market power.
9. Western Governors urge Western state public utility commissions
and Attorneys General to examine whether new measures are needed to
protect electricity consumers in a more competitive market and educate
consumers of their rights and risks under a competitive electric
system.
10. Western Governors urge the federal government to refrain from
adopting preemptive legislation that would impose a ``one-size-fits-
all'' approach to the restructuring of the electric power industry that
fails to recognize the unique characteristics of the Western electric
power industry. No action by Congress or FERC should abridge the
existing powers and authorities of state and local governments. Any
action taken by Congress should enable states to restructure the
electric industry, but not impose a mandate on states to do so.
Congress should ensure that federal institutions, such as the power
marketing administrations, participate in regional actions to promote
competition, such as the creation of Regional Transmission
Organizations system operators. Additionally, any federal legislation
must retroactively include state actions to establish retail
competition.
11. Federal agencies and federal legislation should facilitate
effective decision-making by the states and empower the states, with
the cooperation of other regional stakeholders, to create regional
mechanisms, where appropriate, to address transmission, reliability,
market power and other regional concerns. FERC should be required to
defer to the decisions of such bodies.
c. governors' management directive
1. The Committee on Regional Electric Power Cooperation (CREPC), a
joint working committee of the Western Interstate Energy Board and the
Western Conference of Public Service Commissioners, is directed to work
with the Western industry and the federal government to achieve the
policies set forth herein. CREPC is to report on the progress in
implementing these policies.
______
Nuclear Energy Institute,
Washington, DC, July 18, 2001.
Hon. Frank H. Murkowski,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Murkowski: This month, the United States will continue
to negotiate an appropriate global response to the issue of climate
change at the Sixth Conference of the Parties in Bonn, Germany. Nuclear
energy is the most effective technology to reduce greenhouse gas
emissions in the industry sector. I enclose for your consideration a
letter from the international nuclear energy industry asking that you
support nuclear energy as part of the solution to reducing greenhouse
gases and other air pollutants.
Each year, the use of emission-free nuclear electricity around the
world avoids billions of tons of carbon dioxide, the most prevalent
greenhouse gas. Nuclear energy technology reduces more carbon dioxide
emissions than any other method in the U.S. voluntary program to reduce
this greenhouse gas. In the United States alone, nuclear energy
accounts for nearly 70 percent of all emission-free electricity
production. Overall, nuclear energy is a source of electricity
production for one out of every five homes and businesses in the United
States.
On behalf of my colleagues in the global energy industry who have
signed the enclosed letter, I encourage you to support a global
recognition of the need for expanded nuclear energy production to avoid
greenhouse gas emissions. Nuclear energy is part of the solution for
any regime that seeks to improve our air quality.
Sincerely,
Joe F. Colvin,
President and CEO.
[Enclosure.]
An Open Letter to Governments Around the World
11 July 2001
World demand for electricity will continue to increase as
population grows and countries develop and expand their industrial
base. All methods of electricity generation have some impact on the
environment. As representatives of the international business
community, we recognize our global challenge is to minimize this impact
while satisfying the electricity needs of all peoples of the world.
Nuclear power plays an important part in meeting this challenge
because it provides much needed electricity, protects the environment,
and supports sustainable development. Prevention and management
technology needed to protect all affected environmental media is either
in use or available. And nuclear electricity generation avoids the
emission of greenhouse gases, thus playing a key role in limiting
potential climate change, particularly in the developed world where
significant emissions reductions are sought.
Continued safe, effective use of nuclear electricity and further
development of advanced nuclear power plant technology are an integral
part of the international effort to manage risk from global warming. We
encourage you to support policies that give every country engaged in
greenhouse gas control programs the right to access all technologies as
needed, including nuclear electricity.
Nuclear is a necessary and uniquely effective part of the solution.
Parties to the UN Framework Convention on Climate Change should
acknowledge nuclear electricity as an acceptable energy and
environmental resource that successfully avoids greenhouse gas
emissions. This will ensure that global-emission control programs are
flexible and preserve the right of individual countries to make their
own energy and development choices.
[Note: This letter has been signed by 93 CEOs and leaders of the
nuclear industry world-wide].
______
Forest Stewards Guild,
Sante Fe, NM, July 27, 2001.
Senator Jeff Bingaman,
Hart Office Building, Washington, DC.
Dear Senator Bingaman: On behalf of the Forest Stewards Guild, I
would like to submit comments regarding the Forest Resources for the
Environment and the Economy Act (S. 820) for consideration by the
Senate Energy and Natural Resources Committee. The Guild is an
organization of practicing foresters and other resource management
professionals. The mission of the Guild is to promote ecologically
responsible resource management that sustains the entire forest across
the landscape.
Carbon sequestration is increasingly recognized as a critical goal
of forest management, and we applaud the Senate's initiative to promote
this goal and institute effective steps for monitoring success. S. 820
has a number of merits that constitute critical steps in developing a
productive national approach to carbon sequestration. However, the bill
also proposes a number of features that can potentially subvert truly
effective carbon storage efforts and/or sidetrack and impair national
policy on carbon storage.
In particular, we would call your attention to the following:
Section 2 contains problematic language and definitions. In
particular, ``Forest Land'' is defined in such a way as to enable the
classification of virtually any land in the country as forest land.
This definition should establish a time frame for the presence of
forest land within at most several decades in order to more effectively
focus efforts.
In Section 4, in the Definitions proposed in the language for the
new Sec. 1600 of Title XVI of the Energy Policy Act of 1992, in items 2
and 3, forest products are included as potential carbon stores. While
some forest products may be appropriately classified as carbon stores,
this classification requires much more explicit guidelines and
standards for ``durability,'' or the length of time that carbon would
be stored. For instance, there is a considerable gulf between how long
carbon will effectively be stored in a paper bag or even a sheet of
plywood as opposed to a framing timber. Moreover, standing timber is
generally easy to keep track of, while forest products can be highly
mobile--how can we effectively monitor the durability of many forest
products that may undergo accelerated decay due to fire, demolition,
rot and many other processes?
In Section 4, item 5(b), there is a proposed requirement that the
Secretary of Agriculture report within a year on the amount of carbon
in the National Forest system, potential benefits to water and wildlife
as well as the global carbon budget, and an assessment of impacts of
forest management factions on a comprehensive range of forest
management objectives. Given the inadequacies of current national
timber inventories and federal monitoring performance, these reporting
requirements seem unreasonable at best. A rough estimate of amount of
carbon being stored on the national forests would be a tall order on
its own, but would at least provide a clearer focus.
Section 5, item (c)(1), on eligible carbon activities lacks a
definition of ``sustainable management activities.'' There is a wide
diversity of perspective on this issue within the nation and the
professional forestry community--this term provides little guidance for
prioritizing loan monies. The lack of rigorous standards, definitions,
and guidelines for actual forest management practices in the bill
leaves the door open for a wide range of activities whose inputs may
actually increase carbon outputs rather than storage. Reliance on
chemical herbicides, pesticides, fertilizers, heavy machinery, and so
forth carry a carbon ``cost'' of their own. These costs are typically
heaviest in short-rotation tree plantation systems. Such costs are
substantially minimized or eliminated through approaches to forest
management that rely on significantly less industrial inputs.
Interestingly, the argument in favor of short-rotation tree plantation
systems as opposed to long-rotation natural forest management is
typically an economic one--yet this bill seems to target the former
system as opposed to the latter as if in need of government subsidy. If
the short rotation systems are not paying off economically, perhaps
they should be eschewed, in as much as they are largely devoid of
ecological value as well.
Section 5 also emphasizes under-producing or understocked forest
lands, while it lacks any mention of forest lands being managed with
activities that maximize carbon storage for the longest possible time.
This is a very important point, given that late successional forest
stands and old growth store considerably more carbon than tree
plantations, but often carry additional costs to land owners who manage
for them that tree plantations do not. Moreover, the current emphasis
of the bill seems to reward past poor management, while overlooking the
investment of time and energy by landowners who have developed and are
maintaining well-stocked, mature timber stands through good management.
A fundamental decision needs to be made as to whether the objective
of this bill is to store carbon or support pre-commercial timber
harvest activity that may or may not result in significant benefits for
carbon storage. Because the focus of the bill is ostensibly carbon
storage, we would urge the Senate to clearly set priorities for the
nation on this issue. By emphasizing short-rotation tree crops as the
answer-to-carbon sequestration, this bill in its current state would
set an inappropriate trajectory for carbon storage efforts--one that
has already met with significant global resistance. The Guild believes
that the best all-around way to store carbon and provide ecological and
long-term economic benefits is to manage forest stands on a long
rotation basis, using site-appropriate species mixes. The bill should
be revised to directly address, prioritize, and offset the costs
carried by landowners managing for long rotations and maximum carbon
storage. Support to forest management approaches that result in less
carbon storage, such as short-rotation industrial tree plantation
management, and the mass production of forest products of limited
durability, should be de-emphasized. If economics are driving decisions
to pursue short rotation forest management systems, then they should
pay for themselves without taxpayer subsidy.
Sincerely,
Mary Chapman,
Director.
______
State of Oregon,
Office of the Governor,
Salem, OR, July 30, 2001.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, Washington, DC.
Re: Written testimony on S. 71, subtitle C of title VII of S. 388, and
title VII of S. 597
Dear Mr. Chairman: Thank you for the opportunity to comment on
three bills related to the licensing of hydroelectric projects. I
regret that Oregon was unable to testify in person at the July 19, 2001
Subcommittee hearing, but offer this letter and its attachment as
written testimony for the record.
The bills and respective titles on which you requested comment
include: S. 71, The Hydroelectric Licensing Process Improvement Act of
2001, introduced by Senator Craig; subtitle C of title VII of S. 388,
The National Energy Security Act of 2001, introduced by Senator
Murkowski; and title VII of S. 597, the Comprehensive and Balanced
Energy Policy Act of 2001, introduced by Senator Bingaman.
Of the three bills, I believe that S. 597 holds the most promise
for improving the licensing process. S. 597 makes two process changes
whose merits are clear, and requires further study of ways to improve
the licensing process. The process changes should enhance the quantity
and efficiency of power production and promote the health of rural
economies without adversely affecting natural resource protection. The
study requirement is consistent with GAO findings that existing
information is inadequate to determine the best way to improve the
licensing process. Further comments on this bill are included in the
attachment to this letter.
The provisions of S. 71 and subtitle C of title VII of S. 388 are
substantially the same. Although these two bills may prevent some loss
of power production and reduce some costs to power producers, I believe
they will do so at a cost to taxpayer's and natural resources that is
not in the public interest. My concerns are explained further in the
attached statement.
I hope you find these comments useful, and encourage future
collaborative approaches to improving the licensing process.
Sincerely,
John A. Kitzhaber, M.D.,
Governor.
[Enclosure.]
Statement of Hon. John A. Kitzhaber, M.D., Governor of Oregon
Content of this Statement: This document details some of the
reasons that I do not believe S. 71, The Hydroelectric Licensing
Process Improvement Act of 2001 and subtitle C of title VII of S. 388,
the National Energy Security Act of 2001 are in the public interest.
The statement also explains my support for the two process changes
proposed by S. 597, the Comprehensive and Balanced Energy Policy Act of
2001, and proposes some modifications to the study provision of that
bill.
Importance to Oregon: Hydroelectric licensing is important to
Oregon because the outcome of relicensings over the next ten years will
have important implications not only for consumers, but also for the
State's land, air, and water resources. In the next ten years, more
than ten hydropower projects within the state will be involved in the
relicensing process. Although these relicensings should not
significantly affect the short-term scarcity of energy faced by many
Western states, we recognize the importance of hydroelectric power in
the state's energy portfolio. Hydropower is important as a source of
renewable energy that can track demand.
Just as the energy produced by hydropower is important to the
state, the quality of the natural resources that are impacted by
hydroelectric projects is also important. The quality of natural
resources is fundamental to both the State's economy and our identity
as Oregonians. A 1995 consensus report by more than 20 Northwest
economists found that protection of the natural environment is critical
for maintaining the economies of the northwest states. They found that
businesses are drawn to the Northwest because employees want to move
there, and that people want to move there because of the quality of the
natural environment.
Most of the projects with expiring licenses in Oregon were
constructed in an era when economic development was given priority over
protection of natural resources. These projects do not meet modern
environmental standards. Some examples of the impacts caused by these
projects include: dams form impoundments that can dramatically impact
the river system by precluding movement of fish, changing water
temperature, and trapping and altering sediment transport; penstocks or
power canals on many projects divert water out of the natural channel,
bypassing miles of river that receive very little water; and turbines
kill some of the fish passing through them.
The Public Interest: Oregonians are interested in developing and
maintaining a diverse economy, while protecting the natural resources
that traditionally served as the base for both our economy and our
quality of life. We necessarily view hydropower in a context that
includes economic and social values beyond just those related to power
production. We believe that the Federal Power Act (FPA), as modified by
the Electric Consumers Protection Act (ECPA) also recognizes this need
to accommodate diverse values.
The FPA gives FERC responsibility to balance power-related
interests, but limits its ability to ``balance away'' certain resource
protection requirements that are best evaluated in contexts broader
than just power production. Under the FPA, resource agencies with
mandatory conditioning authority set a ``floor'' of natural resource
protection, above which FERC is free to make economic tradeoffs to
ensure an efficient and plentiful power supply. The agencies who
provide the floor for the energy sector are the same ones who provide
the floor for other economic activities such as agriculture, forestry,
and urban development. This promotes a level playing field across
sectors. To encourage local involvement and decision-making, these
authorities are vested in federal and state agencies according to their
respective expertise and geographic scope.
In Oregon, State and Federal agencies have used their respective
authorities in a collaborative and productive manner. While we haven't
always agreed on every issue, better outcomes have resulted from our
discussions. Oregon state agencies have relied on specific expertise
that the federal agencies bring to the licensing table, such as fish
passage design and geomorphologic process evaluation, to assist us in
making better recommendations for protection and mitigation measures at
a project. FPA Section 18 fishway authority has been a critical federal
tool for helping meet state goals, and Section 4(e) authorities can
serve to backstop state recommendations under FPA Sections 10(a) or
10(j). For this reason, the three bills under discussion are of
particular interest with respect to protection of Oregon's fish and
wildlife resources.
Specific Concerns with S. 71 and subtitle C of title VII of S. 388:
Although the goals of these two bills are laudable, I believe the
provisions of the bills will create inefficient use of government
resources and will result in undesirable reductions in natural resource
protection.
As an example of the inefficiency the bills will produce, one
section requires that agencies such as NMFS and USFWS consider diverse
factors such as economic values, air quality, irrigation, and drinking
water supply when writing license conditions. Unfortunately, these
agencies have neither the expertise, nor the information required to
evaluate such factors. There are other agencies who already have
responsibility and expertise to evaluate and condition for those
factors. For example, the Oregon Department of Environmental Quality
has obtained federal delegation under both the Clean Air and Clean
Water Acts to protect air and water quality. It is neither practical or
useful for other agencies to make their own independent determinations
concerning these issues during licensing.
As another example of inefficiency, another requirement of these
bills is that consulting agencies must take into account the mandatory
conditions of other agencies. While this seems reasonable, the bills
later add a process requirement that conditions be submitted to the
applicant 90 days prior to the filing of a license application. At this
point in the process agencies cannot know how the applicant proposes to
operate the project under the new license, nor how it should best be
conditioned. Agencies don't have enough information to determine their
own conditions--much less to conform them to other agencies' mandatory
conditions. The likely outcome is that conditions would have to be
written and fully justified twice, creating extra work with little
payoff.
In addition to the above-mentioned problems, the two bills will
result in inadequate protection of natural resources. By requiring
federal resource agencies to meet untenable process standards and to
base their conditions on a balance of factors outside their expertise
and traditional jurisdiction, the bills will greatly diminish those
agencies' ability to write defensible conditions. Defensible conditions
are important for a number of reasons, including the fact that the
bills provide that these conditions may be contested by the applicant
to an outside reviewer. The difficulty is compounded by a stipulation
in the bills that if the outside reviewer does not act within 180 days,
the conditions lose their mandatory character and may be regarded as
discretionary by FERC. Because the resource agencies have no ability to
ensure timely action on the part of the external reviewer, this is a
serious loophole.
When the process requirements of S. 71 and S. 388 are combined with
their focus on economics, the bills effectively remove the natural
resource protection floor provided by ECPA, and reduce the ability of
agencies to balance the burden of resource protection across sectors,
leaving others to repair damage caused by the hydropower industry.
Where this damage can't be repaired, it may deprive future generations
of the opportunities and quality of life that is their proper heritage.
S. 71 and subtitle C of title VII of S. 388 have other troubling
provisions. This document doesn't address them all, but presents two
science issues as further examples: 1) the bills require that agencies
base their conditions on ``current empirical data or field-tested
data.'' This limitation precludes use of historical data and
statistically modeled projections and is therefore inconsistent with
good science. Good science makes use of all accurate data and available
statistical tools. 2) The requirement that conditions be subjected to
peer review is unrealistic and unnecessary. ``Peer review'' normally
refers to the process a scientific article goes through before being
published in a scientific journal. In order to meet this requirement, a
whole new consulting industry would be needed. Such review would be
costly and would delay issuance of licenses. The review is not needed,
because review is already provided within agencies and among the
parties to licensing processes.
Comments on S. 597, The Comprehensive and Balanced Energy Policy
Act of 2001: The two process changes made by this bill should minimize
generation and revenue losses, help agencies better perform their jobs,
and give a boost to some rural economies.
The provision that allows applicants to contest a condition that
they believe is inefficient to the agency that prescribed the condition
has several merits. It retains authority in the agency where the
expertise and responsibility resides, provides an avenue to ensure that
project improvements are made as inexpensively and efficiently as
possible, and ensures that improvements are adequate to meet resource
protection standards. However, I would like to propose one slight
amendment: In order to provide the prescribing agencies with the
information they need to make scientifically sound decisions on
alternative measures, such as alternative fishways, I recommend that S.
597 be amended to include the language in H. 2587, which requires the
applicant to provide supporting evidence to the prescribing agency when
an alternative is proposed: Additionally, I recommend that this section
clarify that supporting information should be provided during the pre-
filing consultation process currently in place under FERC rules. These
changes are consistent with the Federal Power Act, in that applicants
are required to conduct studies necessary for determining appropriate
mitigation for project impacts at licensing.
The provision that directs fees paid to FERC away from the general
Treasury, and to the agencies that work on the projects should increase
the ability of agencies to participate early and adequately in
licensing processes. The authority granted to spend some of the funds
on job training, and for rural community and project-environment
improvements should further the effectiveness of dollars spent on
mitigation.
The provision that requires FERC to gather more information should
prove useful. However, I suggest that the data for collection include
characterization of the reason for delays associated with Clean Water
Act compliance. FERC's 603 Report identified issuance of Clean Water
Act Section 401 Certificates as a major source of delay in the
licensing process. Apparently, FERC did not investigate the reason for
the reported delays, but attributed them to state requests that
applicants withdraw and refile their applications.
In fact, the idea that applicants withdraw their Clean Water Act
certifications to give states more time to act is both
counterintuitive, and contrary to our experience. In a comment letter
to FERC during the development of the report, the Oregon Department of
Environmental Quality expressed frustration with the fact that the
State has no recourse when applicants withdraw and refile their
applications for certification. The letter also mentioned that of the
[then] five applications for 401 Certification received by the State in
the current relicensing class, all have been incomplete. Two were
withdrawn at the applicant's initiative to serve the applicant's
purposes, and two were denied because of incompleteness. One
application has been withdrawn and resubmitted twice. The (third) draft
of that application was acknowledged by the applicant to be incomplete
upon submittal.
There is a need to determine whether delayed issuance of 401
Certifications is due to applicant failure to provide necessary
information in a timely manner, or whether states are the cause of the
delay. Once this information is known, further analysis will be needed
to determine the reasons for the delays, regardless of the degree to
which various parties are responsible.
Finally, I'd like to note that asking FERC to identify and solve
problems with the licensing process when FERC is a key player in that
process is less than desirable. I believe that the task would be better
assigned to an outside agency with expertise in program evaluation such
as the General Accounting Office, and that the timeframe for the study
should be increased to one year to allow for a more thorough analysis.
The study would be even further enhanced if state agencies were listed
among those to be consulted during study development.
______
Statement of Dr. William T. Hogarth, Acting Director, National Marine
Fisheries Service, National Oceanic and Atmospheric Administration,
Department of Commerce
This Statement provides the views of the National Oceanic and
Atmospheric Administration (NOAA) on S. 71, the Hydropower Licensing
Process Improvement Act of 2001, and S. 597, the Comprehensive and
Balanced Energy Policy Act of 2001. It also provides recommendations
for legislation to improve the hydroelectric relicensing process.
role of the national oceanic and atmospheric administration (noaa) in
hydropower relicensing
The National Oceanic and Atmospheric Administration, via the
National Marine Fisheries Service (NOAA Fisheries), is responsible for
conserving and managing anadromous and marine fish resources and their
habitats, in accordance with several statutes, as discussed briefly
below.
The Federal Power Act (FPA) provides the Secretaries of the
Interior and Commerce with the authority to prescribe fishways at
hydropower projects licensed by the Federal Energy Regulatory
Commission (FERC), and provides NOAA Fisheries, FWS, and state resource
agencies with the authority to submit recommendations for fish and
wildlife habitat protection. The Magnuson-Stevens Fishery Conservation
and Management Act requires Federal agencies to consult with NOAA
Fisheries if their actions may adversely affect essential fish habitat.
The Fish and Wildlife Coordination Act requires Federal agencies to
consult with NOAA Fisheries and FWS if their action modifies a water
body. The National Environmental Policy Act provides a mechanism that
enables NOAA Fisheries, other resource agencies, and other stakeholders
to provide comments on Environmental Assessments and Environmental
Impact Statements prepared for hydropower project licensing decisions.
Finally, the Endangered Species Act requires Federal agencies to
consult with NOAA Fisheries or FWS if their action may affect listed
species or their habitats.
hydropower effects on fish and associated habitat
Although hydropower is cleaner than fossil fuel and nuclear power,
it is not free from adverse environmental effects, and can have
significant impacts on anadromous fish and their habitats. Pacific and
Atlantic salmon, shortnose sturgeon, American shad, and many other fish
species depend on access to upriver habitat to complete their
lifecycles. Habitat alteration, impeded fish passage, degraded water
quality, and compromised flows are significant adverse effects of dams
on river systems.
Many dams were constructed before their effects on river systems
were fully understood, and before key environmental laws were in place.
Many lack adequate fish passage and other environmental protection
measures, and will have to come into compliance with current
environmental laws and FPA mandates upon relicensing. Fortunately,
these impacts can-be greatly reduced by including state-of-the-art fish
passage facilities and other measures to ensure adequate resource
protection. Given the large number of license expirations in the next
decade, there is an unparalleled opportunity to modernize projects and
provide fish and habitat protection measures.
national energy policy
The new National Energy Policy provides recommendations to the
White House and Congress to improve hydropower licensing, and addresses
issues that relate to NOAA Fisheries' role in the licensing process.
The Department agrees that the process can be improved, and has worked
to develop administrative reforms and legislative recommendations to
achieve a better, more efficient licensing process. These reforms are
discussed below.
recent administrative reforms
NOAA Fisheries has been working with FERC, other Federal resource
agencies, and stakeholders to streamline and improve the hydropower
relicensing process. These efforts include participating in the
Interagency Task Force to Improve Hydropower Licensing Processes (ITF),
developing a proposed interagency policy on section 18 Fishway
prescriptions, and participating in the National Review Group (NRG) of
the Electric Power Research Institute (EPRI). Through these cooperative
efforts, we have made considerable changes to the process that will
improve hydropower relicensing.
Interagency Task Force to Improve Hydropower Licensing Processes
The ITF was formed in October 1998 to develop practical ways to
improve the licensing process. It was a coordinated effort between
FERC; the Departments of Commerce, the Interior, Agriculture, and
Energy; the Environmental Protection Agency; and the Council on
Environmental Quality. Seven ITF reports recommend substantial
administrative measures to make hydropower licensing more efficient.
The Department of Commerce (Department) has committed to implementing
these reforms, as have the other member agencies. Federal agencies held
a series of implementation workshops throughout the country, and
continue to ensure that the reforms are administered agency-wide.
Section 18 Fishway Interagency Initiative
On December 22, 2000, The Departments of Commerce and the Interior
published a proposed Interagency Policy on section 18 fishway
prescriptions. NOAA Fisheries and the Fish and Wildlife Service are
continuing to work on this document which will provide clearer guidance
for the prescription process and improve consistency between the
Departments of Interior and Commerce.
Electric Power Research Institute National Review Group (NRG)
The NRG is a working group consisting of representatives from the
hydropower industry, environmental interests, states, FERC, and four
Federal agencies (NOAA, EPA, USDA, and DOI). During 1999 and 2000, this
group met regularly and developed a report, ``Hydro Relicensing Forum:
Relicensing Strategies,'' that provided a set of voluntary best
practices for all stakeholders in hydropower relicensing. The NRG is
proceeding with a new phase of meetings to pursue further collaborative
means of improving the licensing process.
noaa comments on s. 71 and s. 597
S. 71 and S. 597 contain several provisions that would affect the
way NOAA Fisheries takes part in licensing and relicensing by FERC of
non-federal hydropower projects. Some provisions are already addressed
by administrative reforms, some represent positive steps toward an
improved relicensing process, and others would add delay to the
process. Listed below are common themes in the bills.
Alternative Fishways
Section 701 of S. 597 allows licensees to propose an alternative
fishway prescription, and directs the Secretary of the appropriate
Federal agency and FERC to accept the alternative, if the Secretary
determines that it provides equal or greater fish passage, is based on
sound science, and will either cost less to implement or result in less
loss of generating capacity than the fishway prescription deemed
necessary by the Secretary. The Department recommends that the licensee
proposing the alternative fishway be required to provide substantial
evidence supporting the alternative fishway. Supporting evidence is
necessary to allow the Secretary to make a reasoned decision. In
addition, the Department recommends that the licensee be required to
submit alternative prescriptions early in the pre-filing stage, and no
later than 60 days following submission of preliminary prescriptions.
This would prevent a situation in which the Department, the licensee,
FERC, and other parties spend years developing a fishway prescription
only to have that work negated by an alternative presented late in the
process. Further, the bill text should be changed to indicate that it
would be an applicant, not necessarily a licensee, submitting the
alternative fishway. The Department also notes that the ITF
administrative reforms already commit NOAA Fisheries to considering the
least cost alternative, if it provides adequate fish passage.
Deadlines
S. 71 imposes deadlines and penalties that may have detrimental
effects on NOAA trust resources. Section 4 removes NOAA Fisheries'
authority to prescribe fish passage if NOAA Fisheries misses a deadline
for submitting final conditions. Although a lack of reasonable
deadlines often leads to delay in the licensing process, NOAA Fisheries
believes that this severe penalty is not productive to the process and
ultimately compromises the health of fish and habitat resources. The
Department has nothing to gain by missing deadlines and, in fact, the
longer a licensing proceeding takes, the longer the fish and associated
habitats are without protections.
Relicensing Study
Section 703 of S. 597 requires FERC to conduct a study of all new
licenses issued for existing projects since January 1, 1994. NOAA
Fisheries supports this provision but suggests that the data gathering
should continue beyond one year to ensure accurate and useful data
reporting. We also suggest that FERC develop the study methodology in
consultation with the Federal resource agencies. This data could be
used in the future as a basis for modifying the licensing process to
increase efficiency and decrease cost. The General Accounting office
noted that FERC's record keeping and reporting mechanisms are
inadequate, and section 703 could greatly improve the current system of
maintaining records.
Coordinated Environmental Review Process
Section 33 of S. 71 establishes a single National Environmental
Policy Act (NEPA) process, to be conducted by FERC, and bars consulting
agencies from performing individual NEPA reviews. NOAA Fisheries
supports a single, consolidated NEPA review, and already relies on
FERC's NEPA analysis that includes our recommendations and fishway
prescriptions. The Department would like to have the option of being a
cooperating agency with FERC. However, FERC's interpretation of its ex
parte communication requirements concludes that by becoming a
cooperator in the NEPA process, an agency forfeits its right to appeal
a license decision. NOAA Fisheries believes that FERC should be
provided with a legislative exemption from ex parte communication
prohibitions, for the specific case of allowing agencies to become NEPA
cooperators without losing their right to appeal licensing decisions.
This would improve the entire licensing process by allowing a
collaborative approach.
noaa fisheries proposals for legislation
NOAA Fisheries submits the following recommendations for
legislation to improve the licensing process. As stated previously,
NOAA Fisheries has already implemented several administrative reforms
that make a better, more efficient licensing process, and recommends
the following legislative measures to further improve the process and
encourage more efficient utilization of our natural resources.
1. NEPA cooperator/intervenor status
Participation of the resource agencies as cooperators in NEPA
development would improve the relicensing process by 1) allowing FERC
and other resource agencies to work together on resource protection
issues, 2) decreasing the likelihood of future intervention and/or
appeal by cooperating agencies, and 3) making the relicensing process
more efficient.
FERC interprets its ex parte rules such that Federal agencies
cooperating on developing NEPA documents are precluded from intervening
in the proceeding for which the NEPA document is developed. To preserve
the right to subsequent appeal, Federal agencies currently choose to
not participate in the NEPA process as a cooperating agency.
Recommendation
NOAA Fisheries recommends amending the Federal Power Act section
797(c) by adding the following to the end of the paragraph, ``Any work
with the executive departments and agencies of the federal government
as cooperating agencies on an environmental assessment or environmental
impact statement in the NEPA process, developed pursuant to the
National Environmental Policy Act, is exempt from ex parte
communication prohibitions. Executive departments and agencies of the
federal government may become NEPA cooperators without losing their
right to intervene and appeal licensing decisions.''
2. Deadlines
FERC's regulations implementing the Federal Power Act provide a
number of deadlines for participants in the licensing process. However,
FERC itself has no deadlines, which often causes delay in the process.
The National Energy Policy specifically encourages FERC to adopt
internal deadlines. Particular areas of concern for resource agencies
include lack of a deadline for completion of the final environmental
analysis or environmental impact statement, and lack of a deadline for
FERC to complete its analysis of requests for rehearing.
Recommendation
NOAA Fisheries recommends that Congress require FERC to promulgate
regulations that provide deadlines for itself.
3. Annual licenses
FERC's ability to easily issue annual licenses contributes to delay
because there is little incentive for an applicant to complete the
licensing process by the time the old license expires. These annual
licenses have no new conditions for resource protection and are merely
extensions of the expired license. Delays may postpone the costs of
implementing new resource protection measures, but harm fish and
associated habitat, and increase uncertainty for all involved.
Recommendation
NOAA Fisheries recommends that Congress require FERC to amend its
regulations to place strict limits on the issuance of annual licenses.
Specifically, FERC should develop guidelines to determine situations in
which there is a demonstrated need to grant an annual license. These
situations could include new information becoming available, a need to
provide a supplemental environmental analysis or environmental impact
statement, or other circumstances beyond the control of the applicant.
In addition, NOAA Fisheries recommends that Congress provide the
appropriate resource agencies authority to provide interim mandatory
conditions in annual licenses, for resource protection purposes. These
interim conditions should be measures that require minimal capital
expenditures, such as minimum stream flows, or other measures to
protect fish and associated habitat.
4. Studies
Disagreements between NOAA and applicants about studies are a major
source of delay. NOAA has committed, via the ITF documents, to provide
a clear link between study requests, project impacts, and resource
management goals and objectives; and to take cost into consideration.
Recommendation
NOAA recommends that Congress require FERC to amend its prefiling
regulations to require applicants to conduct requested studies in a
timely fashion, if NOAA Fisheries and other agencies submit study
requests that provide a clear nexus between studies, project impacts,
and resource management goals and objectives.
conclusion
The hydropower licensing process is complicated, and can take years
to complete. An abundance of license expirations in the next several
years demands that the process become efficient and effective for all
stakeholders. Administrative and appropriate legislative reforms such
as those outlined above can create an efficient and effective process.
Additionally, incentives to replace older power generating units with
new energy efficient ones should help increase power production with no
harm to the environment.
Thank you for the opportunity to provide testimony on these
important issues.
______
Statement of Donald Sampson, Executive Director, Columbia River Inter-
Tribal Fish Commission, Portland, OR
Thank you for the opportunity to offer testimony regarding Senator
Bingaman's hydroelectric relicensing bill, S. 597, and Senator Craig's
hydroelectric relicensing bill, S. 71. My name is Donald Sampson; I am
the Executive Director of the Columbia River Inter-Tribal Fish
Commission (CRITFC) in Portland, Oregon. I believe we share common
desires to find solutions to our national energy problems that are
affordable and environmentally sound. The CRITFC tribes are developing
a tribal energy vision and have the expertise and the resources
available in the Northwest to alleviate the region's energy shortages.
Additionally, tribes and tribal lands across the nation hold vast
resources and stand ready to offer solutions to the nation's energy
problems. At the same time, the tribes are prepared to be good stewards
of the land and plan for the long-term sustainability of the national
economy through wise energy planning.
Formed by resolution of the Nez Perce Tribe, the Confederated
Tribes of the Umatilla Indian Reservation, the Confederated Tribes of
the Warm Springs Reservation of Oregon, and the Confederated Tribes and
Bands of the Yakama Nation, the Columbia River Inter-Tribal Fish
Commission provides coordination and technical assistance to ensure
that the resolution of outstanding treaty fishing rights issues
guarantees the continuation and restoration of our tribal fisheries
into perpetuity. Since 1979, CRITFC has contracted with the BIA under
the Indian Self-Determination Act (Public Law 93-638) to provide this
technical support. The tribes' technical experts have identified where
federal and state resource managers have fallen short in protecting and
restoring the habitat and production of all salmon stocks. Wy-Kan-Ush-
Mi Wa-Kish-Wit, the Spirit of the Salmon, the tribes' restoration plan,
the only gravel-to-gravel salmon restoration plan in the Columbia
Basin, identifies threats to salmon, proposes hypotheses based upon
adaptive management principles to address those threats, and provides
specific recommendations and practices that must be adopted by natural
resource managers to meet treaty obligations. Wy-Kan-Ush-Mi Wa-Kish-Wit
can be viewed at www.critfc.org. These four tribes have rights reserved
by treaty with the United States of America \1\ to take fish destined
to pass the tribes' usual and accustomed fishing places. This right
covers fish originating in the Columbia River Basin. Protection and
enhancement of those streams that provide spawning and rearing habitat
and migration corridors for these fish are of critical importance to
the tribes and the region. The CRITFC provides technical and legal
support to the tribes to carry out those goals.
---------------------------------------------------------------------------
\1\ Treaty with the Yakama Tribe, June 9, 1855, 12 Stat. 951;
Treaty with the Tribes of Middle Oregon, June 25, 1855, 12 Stat. 963;
Treaty with the Umatilla Tribe, June 9, 1855, 12 Stat. 945; Treaty with
the Nez Perce Tribe, June 11, 1855, 12 Stat. 957.
---------------------------------------------------------------------------
In 1855, the United States entered into treaties with the Nez Perce
Tribe, the Confederated Tribes of the Umatilla Indian Reservation, the
Confederated Tribes of the Warm Springs Reservation of Oregon, and the
Confederated Tribes and Bands of the Yakama Nation to ensure the mutual
peace and security of our peoples. For the four tribes' cession of
millions of acres of land, the United States promised to protect and
honor the rights and resources the tribes reserved to themselves under
those treaties. Those resources, among them our most treasured
resource, the salmon, are being destroyed largely by hydroelectric
projects on the Columbia and Snake Rivers. The salmon are also
imperiled by relicensing processes at those dams that seek to delay
necessary environmental analysis and changes to hydro structures and
operations under the Federal Power Act. Existing license holders, who
use process and delay to shortchange environmental protections
necessary to insure the continued existence of salmon, are trampling
upon our rights, our culture and our religious beliefs that are tied to
the salmon.
The Treaty Tribes grow weary when our expertise to protect our
treaty resource is ignored, when our input in public processes is
ignored, when our negotiations lead to settlements and those
settlements are ignored, when our good faith efforts to cooperate and
participate in decision-making forums are ignored, and when the
treaties signed by the U.S. Government are ignored in order to protect
the unreasonable economic interests of dam owner/operators. The
Columbia River Treaty Tribes will strongly oppose any effort to
expedite the dam relicensing process that will lessen environmental
analysis and protection of salmon at hydro projects as well as any
effort to diminish tribal and public input during relicensing. The
Columbia River Treaty Tribes will oppose any effort to cripple the
jurisdiction of the federal agencies that have the trust responsibility
to protect reservation lands and fish and wildlife through mandatory
license conditions. Any compromise of the Department of Interior's
authority under Section 4(e) of the Federal Power Act to protect
reservation lands and treaty resources will obstruct the obligation of
the United States to ``secure'' our treaty rights. Any compromise of
fish and wildlife agencies' authority under Section 18 of the Federal
Power Act to prescribe fishways to protect treaty resources will also
be seen as an attempt to interfere with our treaty rights. Reducing
cost and time in relicensing at the expense of the public, the natural
resource or the federal agencies with jurisdiction will be seen as an
abrogation of duty and the treaties entered into between the tribes and
the United States government.
With that being said, the CRITFC tribes are developing a Northwest
Tribal Energy Vision that will simultaneously provide the region with
affordable energy solutions while taking energy policy and development
off the backs of salmon and off the Columbia and Snake Rivers. Our
energy solutions complement the national recommendations of the Inter-
Tribal Energy Network. Tribes currently have twenty percent of the
Nation's energy resources on their lands. However, on average, tribal
citizens spend more of their income on energy, have the highest
percentage of homes without electricity, have the least control over
quality of service, and are experiencing two to three times the
national population growth. Northwest Treaty Tribes, along with the
aforementioned impacts, are losing their treaty-reserved salmon
resources to poor energy planning and policy.
Through the national Inter-Tribal Energy Network, draft legislation
has been introduced that will help the nation address its energy
shortages through development of tribal energy resources that are cost
effective and offer opportunities for joint partnerships; will help
tribes serve tribal members with reliable energy; will foster economic
development on tribal lands and promote sovereignty and self
sufficiency. The draft legislation envisions establishing an Office of
Indian Energy in the Department of Energy. Critical to this
recommendation is significant funding made available to the Office of
Indian Energy for tribes to ascertain their energy resources and the
best way to develop those resources. Also vital is the ability to bring
resources on-line in an expedited fashion using interagency cooperation
while protecting environmental quality.
The Northwest Tribal Energy Vision is premised on the idea of
promotion of energy development that will serve Northwest energy needs
while protecting the tribes' treaty-reserved resources. It allows for
faster siting of projects with enhanced value on tribal lands; allows
for distributed generation opportunities to meet rural loads; allows
for opportunities for transmission siting on tribal lands; and
addresses key fundamental concepts to protect the tribes' treaty
rights. Energy policy and development must not continue to diminish the
tribes' treaty-reserved resources. Energy policy and development must
get off the Columbia and Snake rivers. Energy policy must get off the
backs of salmon. Our treaty-reserved resources continue to be
sacrificed for the sake of bad energy planning.
The current energy problem exists because of poor planning. Poor
planning has pushed salmon to the brink of extinction and will cause
further environmental degradation. Salmon's rapid decline has been
known for decades and yet new energy development to meet demand has
lagged. Substantial generation in California has been curtailed in
order to drive up prices, but it could alleviate immediate pressures to
run the Columbia River without regard to salmon if that generation was
made available at a reasonable price. The lack of adequate
precipitation is always a potential limiting factor and contingencies
have not been developed to adequately mitigate for that risk. As
American Rivers has so aptly pointed out in their testimony, the facts
simply don't support FERC's claims that there is either an energy
crisis or a hydroelectric relicensing crisis. We must not lose the
protections built into our system of laws to care for our public
resources. The current hydroelectric relicensing bills would cast aside
the public resource protections that have served us well for decades.
The tribes are concerned that the hydroelectric power industry is
not availing itself of the opportunities during relicensing to make
their projects more responsive to the public interest. There are
innovations that will both protect our waterways and deliver power, but
the industry seems more intent on maximizing their profits at the
expense of the public resource. Congress must take into account the
needs of the public waterways to remain healthy, to protect the public
trust, to respond to the nation's need for a diverse energy plan and
the federal government's responsibility to honor its treaties to the
Columbia River Treaty Tribes. Congress must not maximize the profits of
the hydro license holders at the expense of our nation's public
waterways; must not maximize the profits of an industry that has made
billions of dollars while paying no fee for the use of the public
resource.
The current hydro relicensing bills tend to focus on the resource
agencies for costs and delays in the relicensing process. The bills
tend to consolidate authority with FERC. FERC's claimed ability to
assume the authorities of the resource agencies is unsupported by
recent analysis by the GAO and counter to the reasoning for mandatory
conditioning authority set forth in the Federal Power Act (FPA). It
also abolishes the system of checks and balances necessary within our
system of government to protect the public interest and consolidates
the authority within an agency that often takes little notice of
petitions, complaints, comments, analyses and dialogue. The FERC does
not have the expertise of the resource agencies to determine conditions
for hydro licenses.
While we often talk specifically about salmon and the Northwest,
our input can be generalized to the entire nation; the future direction
of hydropower raises fundamental questions concerning the health of our
public waterways. We must make extremely careful decisions today, as
they will affect us for the next 50 years and beyond. We risk losing
important species as a result of our decisions. We risk losing our
heritage as a result of decisions made today. We are asking for vision,
for forward-looking farsightedness. We are rushing headlong into public
resource over-appropriation in the guise of so-called wise economic
use. This over-appropriation only serves to set up frustration among
competing users, leads to depletion and exhaustion of the public
resource, causes environmental degradation for which mitigation
measures are inadequate, and denies significant benefits to future
generations.
In our treaties--signed by the United States and ratified by this
body, the Congress--our tribes were promised the right to fish for
salmon now and forever into the future. Yet we are currently faced with
amendments to the FPA which give unreasonable influence to those that
can afford to stack the record for decsionmaking in their favor by
using exorbitant financial resources and self-interested lobbying
efforts. This does not protect the public resource or our treaties. The
current bills offered by Senators Bingaman, Craig and Murkowski provide
for less protection of public resources while hamstringing the federal
agencies that are charged with protecting those public resources.
States and federal agencies are in the field where the dams are and
have the expertise necessary to protect the public resources in their
charge. These agencies should be better funded to provide the input
necessary under the law. Their responsibilities are outside of FERC's
area of expertise. Shifting their authorities to FERC would concentrate
decisionmaking in Washington, D.C., instead of in the states where the
dams exist, and it would preclude open and honest discussions in local
communities. If anything, the FPA should be amended to allow for more
balanced competition for hydro licenses. Competition for licenses
should award the entity that is the most able and willing to protect
the public's resources in the long run while providing cost-effective,
reliable power.
specific comments
Senator Craig's Bill, S. 71
Despite continued voluntary fishery closures and reductions by the
tribes, and significant reductions in the other ocean and in-river
fisheries, anadromous fish stocks continue to decline. Recent analysis
by the National Marine Fisheries Service indicates the Mid-Columbia
River stocks are declining at a rate similar to the Snake River stocks.
Snake River stocks are projected to be functionally extinct by 2016.
That is only three or four life-cycles away. Many of the stocks in the
Columbia River Basin are listed under the Endangered Species Act as
threatened or endangered. Many more stocks are on their way to being
listed under the ESA. A number of stocks have already gone extinct.
Dams on the Columbia and Snake Rivers and tributaries have been and
continue to be the major factor in this decline. While hydropower has
brought energy benefits to the country, there was very little foresight
as to the environmental consequences when the dams were built. Dams
cause significant damage to aquatic and riparian environments by
altering the physical, chemical and biological processes of river
systems. We have learned much since these dams were first licensed. And
now that dams are in the relicensing cycle, we must apply what we have
learned to make the dams more suitable to what we now understand. S. 71
will make it more difficult, if not impossible, for federal and state
agencies to ensure that the operators of hydroelectric power facilities
adequately mitigate for or minimize their impacts.
Section (b). Factors to be considered
S. 71 attempts to redefine the public interest standard articulated
in the Federal Power Act and by the Supreme Court \2\ in Sections
(b)(1) A, B, and C. These sections fall short of the recognized public
interest standard, mentioning only that the consulting agency must
consider the impacts of the condition on economic and power values,
electric generation capacity and system reliability, air quality
(including consideration of the impacts on greenhouse gas emissions),
and drinking, flood control, irrigation, navigation, or recreation
water supply. Conspicuously missing from this list are many of the
resources for which the resource agencies are required to protect by
law. Project applicants are not required to report economic information
about their projects. How will a resource agency measure economic
impacts of their conditions without economic project information? The
answer is that the analysis will be meaningless. S. 71 does not mention
the original purposes of Sections 4(e) and 18 of the FPA; to protect
and utilize reserved lands and to ensure that fish can pass and survive
hydroelectric projects. These proposed amendments would require the
resource agencies to ignore the resource they are required to protect
while obliging the agency to look more closely at the factors in
Sections (b)(1) A, B, and C. The consulting agencies would be required
to do more process in areas where they do not necessarily have
expertise. This would expend precious financial resources in a time
when agencies are already underfunded.
---------------------------------------------------------------------------
\2\ Udall v. Federal Power Commission, 387 U.S. 428 (1967). ``The
test is whether the project will be in the public interest. And that
determination can be made only after an exploration of all issues
relevant to the `public interest,' including future power demand and
supply, alternate sources of power, the public interest in preserving
reaches of wild rivers and wilderness areas, the preservation of
anadromous fish for commercial and recreational purposes, and the
protection of wildlife.'' Udall, at 450.
---------------------------------------------------------------------------
Then S. 71 would require the FERC to do the same analysis if
requested by the applicant under Section (h)(1). The public interest
standard would be based on (b)(1) Sections A, B, and C and not on the
original meaning of the public interest standard as defined by the
Supreme Court. This would result in duplication of effort, waste of
resources, and a fundamental shift from protecting natural resources to
protecting the hydropower owner's financial opportunities.
It would also undermine the purpose of Section 100) of the FPA. S.
71 would require FERC to balance recommendations made by state and
federal fish and wildlife agencies under 100) to protect, mitigate and
enhance fish and wildlife and their habitat using the new public
interest standard as described in sections (b)(1) A, B, and C. This is
unacceptable.
These provisions in S. 71 and similar bills in the House and Senate
would change the FPA substantially so that the resource agencies could
no longer protect the resource needs or trust responsibilities to the
tribes and the public. The underlying resources must be protected and
the FPA recognizes this. This bill would require undue procedural
burdens on the resource agencies that would subordinate their statutory
obligations under the FPA.
Section (b)(2). Documentation
This section requires the consulting agency to create written
documentation outlining how it has complied with Section (b) above.
Courts have long held that mandatory conditions must be supported by
substantial evidence in the FERC record. This renders Section (b)(2)
unnecessary and duplicative. The Columbia River Treaty Tribes oppose
this section.
Section (c). Scientific Review
This section requires each mandatory condition to be based on
current empirical data or field-tested and to be subjected to peer
review. The addition of scientific review would produce further delays
in an already lengthy process. It is also duplicative because the
federal agencies presently consider results of peer reviews and base
their decisions on the best available science. Additional review would
be costly and time consuming. The federal agencies already directly
involve applicants when developing fishway prescriptions. Applicants
can provide their own scientific analysis and peer reviews and the
federal agency gives that information appropriate consideration in
final decisions. S. 71 would lengthen the process unnecessarily. The
Columbia River Treaty Tribes oppose this section.
Section (e). Administrative Review
This section would require the resource agency to submit their
mandatory conditions to the applicant at least 90 days before the
applicant has filed its application for a new license. This begs the
question, how can agencies write license conditions for a project that
has no application and how can the agency know when 90 days will run?
Without an application on file, FERC will not have begun to scope their
environmental analysis. This makes it unreasonable to require agencies
to submit conditions at this stage of the process.
The section also allows the applicant to obtain review by an
Administrative Law Judge (ALJ) or other independent review panel to
determine the reasonableness of a condition or whether the condition
complies with the new public interest standard set forth in Section
(b)(1) A, B, and C. The use of an ALJ or other independent reviewing
body to determine the reasonableness of a proposed condition is
inappropriate because they will not have the resource agencies'
expertise nor the mandated authority to protect the resources under the
FPA. Furthermore, it is infeasible for resource agencies to provide
conditions 90 days before the applicant files for a license because the
agency will not have the necessary information to make the proper
conditioning decision. Of course, this would also mean the ALJ or
reviewing body would not have information available on economic or
energy values for the project as required in this section.
Additionally, under this section, if the ALJ or reviewing body
takes longer than 180 days to make a decision, this section states that
FERC can treat the condition as a recommendation. This invites
manipulation of the process by the applicant to overturn the resource
agencies' mandatory conditioning authority. Fish passage measures would
be frustrated in clear contradiction to the purpose of the Sections
4(e) and 18 of the FPA as well as the public interest standard as
recognized by the Supreme Court. The Columbia River Treaty Tribes
oppose this section.
Section (f). Submission of Final Condition
This section sets a deadline of up to one year for submission of
mandatory conditions after FERC gives notice the license application is
ready for environmental review. The deadlines imposed by this section
do not take into account FERC's own NEPA analysis timelines. The result
of FERC missing the deadline would affect the fishery resources
negatively. A mandatory condition could not be finalized if FERC had
not completed a draft NEPA analysis within the one year deadline and
FERC's analysis is often delayed more than a year. Now, the resource
agencies have the opportunity to modify prescriptions based on
information developed during FERC's NEPA analysis. The deadlines
imposed by this section would change this capability.
Furthermore, the default option in (f)(3) would deny the consulting
agency the ability to make mandatory conditions if the deadline is not
met. Fishery resources could suffer considerably if deadlines beyond
the control of the resource agency are not met. Again, this measure
puts the burden on the resource and particularly fish and wildlife.
This would encourage applicants to delay providing information to the
resource agencies and increase the possibility of missing deadlines and
causing default. The Columbia River Treaty Tribes oppose this section.
Section (g). Analysis by the Commission
This section would require FERC to conduct economic analysis of
each mandatory prescription to determine whether it would make the
project uneconomic as well as require FERC under (g)(2) to measure all
10(j) recommendations against the new public interest standard list
proposed in (b) A, B, and C and the new scientific review in (c). This
would require the resource agencies to duplicate analysis covered in
FERC's NEPA analysis. While it is appropriate for the resource agencies
to base their recommendations and conditions on their expertise, the
resource agencies do not have access to the types of information that
FERC applies to balancing. To require the resource agencies to comply
with this section will deplete their already limited resources,
duplicate effort, and require the agencies to go outside their area of
expertise. The new public interest standard set forth in S. 71 does not
comport with established Supreme Court law or with the FPA. The
Columbia River Treaty Tribes oppose this section.
Section (h). Commission Determination of Effect of Conditions
This section again contravenes the public interest standard as set
forth in the FPA and by the Supreme Court. The ability of an applicant
to request a determination that a mandatory condition meets the new
public interest standard set forth in (b)(1) renders the broader public
interest subservient to the needs of the owner. This is unreasonable
and a threat to the resources the federal agencies are obligated to
protect. The Columbia River Treaty Tribes oppose this section.
Section on Conforming and Technical Amendments
This section amends Sections 4(e) and 18 of the FPA. This section
is unnecessary because Sections 4(e) and 18 of the FPA should not be
revised. To do so under S. 71 would be to reverse needed environmental
regulation of hydropower projects and cripple the resource agencies'
ability to protect the resources they are obligated to protect by law.
The Columbia River Treaty Tribes oppose this section.
Coordinated Environmental Review Process
This section mandates that FERC shall conduct a single consolidated
environmental review and that the resource agencies shall not perform
any environmental review performed by FERC. Resource agencies must
conduct environmental analysis to determine the nature and
applicability of the conditions they may impose. It is inappropriate to
prohibit the resource agencies from performing any environmental review
of the conditions they may require. The Columbia River Treaty Tribes
oppose this section.
This section also grants FERC the ability to set deadlines for
submission of comments on the environmental documents. This section is
unnecessary because the Council on Environmental Quality already
provides deadlines for comments on NEPA documents.
Study of Small Hydroelectric Projects
The FERC already has a procedure for streamlined review of small
hydro projects. Where this section diminishes the role of the resource
agencies it is unsupportable. Small hydro can have huge impacts on fish
and wildlife and this section should not impair the resource agencies'
ability to protect the natural resources within their responsibility.
senator bingaman's bill, s. 597
Section 701, Alternative Conditions
The tribes are very concerned whenever jurisdiction is taken away
from the federal agencies with mandatory conditioning authority or
whenever more process is required of these federal agencies without the
necessary funding or expertise to carry out the mandate. This provision
would create excessive strain on the federal agencies to determine
which alternative condition was best. This could produce significant
delays in the relicensing process. It also creates the opportunity for
entities with unlimited funds to manipulate the process with multiple
alternative conditions that the federal agency would then have to,
corroborate. This creates a situation of the haves overpowering the
have nots. This would not protect the public resource or the public
interest, only those that have the deepest pockets. The sound science
provision would lead to confusion and litigation. The substantial
evidence standard should be retained in all provisions of this law. In
general, the tribes oppose this section.
Section 703, Resource Studies
Determinations on which studies and information are necessary to
make decisions under Sections 4(e) and 18 of the Federal Power Act
should remain with the resource agencies empowered to protect the
resource. These determinations should not be given to the FERC. The
resource agencies have the expertise to protect the resources in their
charge and the trust responsibility to protect tribal lands and
resources.
Section 704, Joint Agency Procedures, Relicensing Study
The tribes do not oppose this section per se. However, this study
should not be used to change the nature and extent of the mandatory
conditioning authority of the resource agencies. Current hydroelectric
licensees have used the public waterways for decades and have reaped
great financial benefit. Now that relicensing is taking place, it is
time for evaluation of the public resource. Additional protective
measures are necessary. The treaty resources of the CRITFC tribes need
the protections promised under the Federal Power Act as carried out by
their trustees, the federal resource agencies. Attempts to change this
recognized duty is tantamount to abrogation of the tribes' treaty
rights. As we have seen the tribes' and the public's resources
decimated by hydroelectric projects, it is time we thought about
shorter license duration with more flexible license conditions in order
to protect the tribes' treaties and the public interest. It is time to
change our heavy reliance on hydroelectric power and develop a more
sensible, more diverse electric energy future that does not overburden
our nation's waterways. The tribes are committed to planning for that
future and have developed a Northwest Tribal Energy Vision for the
Columbia River that can restore the health of our rivers while
maintaining a reliable and affordable electric energy system. This kind
of forward planning is possible in all regions of the nation. We would
be glad to share this vision and planning with the Committee.
conclusion
There is an existing statutory framework for hydroelectric dam
relicensing that is sound and workable. S. 71 and S. 597 propose many
``reforms'' that either do not make sense, elicit delay as a tactic by
the applicant, create delay within the framework of the bill, create
new unneeded procedural hoops, and take away authority and expertise
from federal agencies. For these reasons, the Columbia River Treaty
Tribes oppose S. 71 and S. 597. Wherever shortcomings may exist in the
current process, solutions should be crafted administratively and with
substantial public input. The federal government must protect the
public resource of our waterways. Further degradation is unacceptable
and will be vigorously opposed by the Treaty Tribes. Again, thank you
for this opportunity to provide the views of the Columbia River Treaty
Tribes on this proposed legislation; please contact me, staff at the
CRITFC, or staff at one of CRITFC's member tribes for additional
comments.
______
Statement of the American Petroleum Institute
The American Petroleum Institute is a national trade association
representing 400 companies engaged in all aspects of the oil and
natural gas industry. Our members have a unique perspective on the
issue of potential climate change because of the unique role we play in
society. First, we have been heavily involved in efforts to improve the
energy efficiency of our operations and these efforts contribute to
avoiding greenhouse gas emissions. Second, our members have significant
experience at decision-making in highly uncertain environments with
relatively long-time frames--not unlike the climate change issue. And
third, our members are technological innovators and are actively
involved in research and development on many new technologies that
result in new efficiencies.
Two central elements of the climate change issue are complexity and
uncertainty. These elements are echoed in the recent report of the
National Academy of Sciences, Climate Change Science: An Analysis of
Some Key Questions. While this insightful report addressed a large
number of specific aspects of the issue, a key finding for those with
the difficult task of developing policy and legislation is the
following:
Because there is considerable uncertainty in current
understanding of how the climate system varies naturally and
reacts to emissions of greenhouse gases and aerosols, current
estimates of the magnitude of future warming should be regarded
as tentative and subject to future adjustments (either upwards
or downwards).
The National Academy of Sciences also sought to ``articulate more
clearly the level of confidence that can be ascribed to those
assessments [of climate change] and the caveats that need to be
attached to them. This articulation may be helpful to policy makers as
they consider a variety of options for mitigation and/or adaptation.''
Based on API's unique perspective and the cautions suggested by the
National Academy of Sciences, we recommend these principles for a sound
approach to the long-term issue of potential climate change:
Advance scientific understanding of potential global climate
change in order to calibrate and adapt future policies
accordingly;
Promote advanced, energy-efficient technologies and
sequestration options as part of a long-term, low-cost
strategy, without government selection of ``winners and
losers'';
Remove regulatory impediments to the rapid adoption of
energy-efficient technologies and capital stock turnover;
Identify and expand cost-effective, near-term voluntary
actions to mitigate greenhouse gas emissions;
Avoid damage to economic growth posed by mandatory policies
involving unrealistic near-term emissions targets and
timetables or energy consumption taxes;
Export advanced, energy-efficient technologies to the
developing world through financing incentives and reduced
export barriers, while protecting property rights;
Promote global participation to address this challenge most
cost-effectively.
Following these principles, common sense efforts should be able to
identify a wide range of near- and long-term opportunities that address
cost-effective methods to mitigate emissions, improve our understanding
of climate science, and accelerate the research, development and
dissemination of advanced energy technologies on a global basis.
API and its members are already undertaking actions reflecting
these principles. For example, in early 1999, in response to findings
that there were wide variations in the ways that API member companies
estimated greenhouse gas emissions data, API established a Greenhouse
Gas Estimations Methodology Working Group to develop a consistent
industry methodology.
This extensive effort reached a milestone earlier this year when
API published a new Compendium of Greenhouse Gas Emissions Estimation
Methodologies for the Oil and Gas Industry. The Compendium was the
result of intensive work by API and it member companies and documents
calculation techniques and emission factors available for developing
greenhouse gas emission inventories for carbon dioxide and methane. The
estimation techniques cover the full range of oil and gas industry
operations--from exploration and production through refining to product
marketing--including emissions from transportation of crude oil,
natural gas and petroleum products.
This Compendium:
Provides examples of the types of greenhouse gas emission
sources that should be considered in developing an inventory;
Describes the segments of the oil and gas industry that
should be involved in developing an inventory and provides an
expansive list of potential emission sources for each industry
segment;
Describes in general terms the calculation techniques that
can be used in developing an inventory and the technical
considerations pertaining to standard conditions and common
unit conversions;
Presents specific methodologies that can be used for
developing an inventory, with extensive exhibits to demonstrate
preferred and alternative calculation methods; and
Provides case studies, using the methodologies provided to
develop illustrative inventories for typical oil and gas
industry facilities.
A copy of the Compendium is attached * to this submission and
demonstrates the scope and complexity of the oil and gas industry
efforts to estimate emissions at the facility and company level. The
Compendium is available in paper and CD-ROM versions and is currently
in a one-year test phase. Based on the results of that test phase, the
Compendium may be revised if necessary. To our knowledge, this is the
first industry-wide, detailed effort of its kind.
---------------------------------------------------------------------------
* Retained in committee files.
---------------------------------------------------------------------------
API member companies are also undertaking a wide variety of actions
to address potential climate change issues. Among the many actions our
members are undertaking are the following:
Participation in a variety of government programs such as
Natural Gas STAR for operational efficiencies, Vision 21 for
ultra-clean integrated energy plants, and Energy Star Buildings
program to improve commercial building efficiency.
Research options for handling quantities of associated
natural gas that is produced where there is no market for the
gas. Alternatives to venting and flaring include conversion to
liquids as well as reinjection.
Expanding corporate energy management programs and
institutionalizing efficiency efforts company-wide.
Undertaking co-generation technologies at refineries and
similar facilities to generate electricity and process heat/
steam simultaneously for substantial increases in efficiency.
Research and testing of geologic sequestration of carbon
dioxide to verify under what circumstances carbon dioxide
storage is safe and reliable.
Capturing carbon dioxide from the production of synthetic
natural gas from lignite and using it for reinjection to
enhance oil recovery while reducing carbon emissions.
Supporting projects that use forests to sequester carbon
dioxide and simultaneously provide a wide range of other
environmental and ecological benefits.
Providing funding for expansion of fundamental research on
climate change.
Undertaking research and development projects for more
efficient capture of carbon dioxide from turbine exhaust, plus
sequestration options for carbon dioxide.
Undertaking basic research on fuel cells to significantly
increase automotive efficiency and reduce greenhouse gas
emissions.
Supporting research on other automotive technologies such as
direct-injection diesel.
Undertaking research, development and marketing of renewable
technologies like solar power and geothermal power.
We note that API's recommended principles for climate policy and
the many actions being taken by API and its members include
similarities to provisions of the proposed legislation being addressed
by this Committee. For example, one provision seeks federal agency
review of regulations and standards to determine if they act as
barriers to market entry for emerging energy-efficient technologies
such as fuel cells, combined heat and power, or distributed generation.
Another provision supports research and development efforts to improve
the efficiency and safety of natural gas transportation and
distribution, and for distributed energy resources. Another looks
closely at forest resources and carbon sequestration, including the
methodologies for reporting, monitoring and verifying voluntary carbon
storage activities. Finally, another would seek better information and
understanding of the costs of different options to mitigate U.S.
greenhouse gas emissions, particularly those that are cost-effective,
voluntary and technologically feasible.
Climate change is an issue of extreme complexity and uncertainty.
It involves our evolving understanding of natural climate and man's
potential impact on climate, and unknowables about population levels,
standards of living, technologies and energy supplies, not just in the
U.S. but globally--and not just in the next 10 or 20 years, but 100 or
more years into the future. Finding an approach that promotes a
flexible and creative global path, without locking-in excessive short-
term costs, is a tremendous challenge. We support your efforts to find
that path.
______
Statement of Hancock Natural Resource Group
The Hancock Natural Resource Group (HNRG) is a wholly owned
subsidiary of John Hancock Financial Services. HNRG has been in
business for 15 years and is the world's largest forestry investment
management organization. It currently manages about 3 million acres of
forest land, valued at $2.7 billion in the United States, Canada and
Australia.
HNRG has been active in the area of carbon sequestration for the
past year. In June of 2000 we announced the establishment of a new
carbon program to design financial products related to carbon
sequestration by forests for business and institutional investors. Our
program is now in operation and currently offering two financial
products, one in the United States and one in Australia. These
investments are based on pooling equity by private investors and
establishing a portfolio of reforestation projects on areas of marginal
agriculture land across the United States and Australia, respectively.
We believe strongly that forests provide an important range of
environmental services to society, including water quantity and quality
regulation, wildlife habitat and conservation, and carbon
sequestration. We are encouraged at the growing trend for these
environmental services to be linked with emerging commercial
environmental markets. In particular the emphasis on utilizing the
power of the marketplace to find low cost solutions to reducing net
greenhouse gas emissions will significantly enhance the attractiveness
of forest investment.
In bill S. 820, there are really three key elements. The first is
to improve our ability to account for the carbon sequestration
occurring in U.S. National Forests. The recent reductions in timber
harvesting from those forests will likely lead to an extension of
carbon storage, and it is important that the U.S. government be able to
monitor those changes.
The second area relates to the establishment of an Advisory Council
to oversee the development and implementation of guidelines for carbon
accounting in forests. A body such as this is critically important to
creating consistency in the measurement and verification of carbon
stock changes in forests.
Finally the bill establishes the basis for cooperative agreements
and Federal-State loan programs to non-industrial private landowners to
encourage reforestation and improved forest management practices. This
should have the effect of assisting with the cost of reforestation or
improved management by small private landowners who otherwise would not
have the resources to undertake these important activities.
In general, HNRG is supportive of the aims and mechanisms included
in bill S. 820, although our primary recommendation would be for a
strengthened role for the private sector in funding and managing the
emerging business of carbon sequestration. Much of the basis of future
efforts to address climate change will rely on the ability of private
capital to invest in new technologies and methods of carbon
sequestration. Emissions trading markets will stimulate this
investment, as the value of carbon emissions and sequestration will
become transparent. Thus capital investment will be able to factor in
additional revenue from carbon trading.
While enhanced carbon sequestration in U.S. National Forests will
contribute substantially to national efforts to reduce net greenhouse
gas emissions, it is unlikely to play a role in a future emissions
trading regime. Unless the government intends to auction carbon credits
from national forests, actions by private sector investors will be
needed to generate sufficient carbon offsets to create market liquidity
and to reduce the price of traded emissions reductions.
Governments can stimulate early private investment in this area by
establishing standards for carbon accounting, by establishing legal
registries for carbon credits, and by recognizing that any credits
registered will be usable in future emissions trading regimes. In most
cases the single most important constraint to the investment of private
capital in carbon sequestration is the uncertainty of what will count
against a future regulatory or trading regime.
Government loans to private landowners should also be designed to
stimulate the private production of carbon credits for use in future
emissions trading regimes or against future carbon dioxide emission
regulation. In most cases, we expect that the carbon stocks being built
up through enhanced reforestation or forest management activities will
be pooled by financial intermediaries. This pooling approach will help
to address risk factors in regards to fire, insect and disease damage,
or climatic events.
In carbon pooling however, the participants will need to have
ownership of the rights to the carbon sequestration in their forests.
Where a government lien encumbers those rights it will make it
difficult for intermediaries to register the carbon sequestration
credits and sell them on the market. Another key point for a robust
emissions trading regime is the need for the sellers of carbon
sequestration credits to be financially strong. Markets recognize this
through financial ratings. In many cases the financial rating of a
financial intermediary will have a bearing on the price paid for the
carbon sequestration credits by the market. Carbon pooling entities
that reduce risk factors and underwrite the long term guarantee of the
permanence of the credit will lead to a higher price being paid for
credits.
In summary, we believe that the government can stimulate greater
private investment in carbon sequestration by creating standards for
carbon accounting and creating early certainty of the future value of
carbon sequestration credits. As with many areas of private investment,
the reduction of risk and uncertainty is paramount to creating investor
confidence.
Thank you for the opportunity to provide these comments.
[Attachment.]
Key Principles for Carbon Sequestration Component of a U.S. National
Climate Change Action Registry Design
a. general points
1. The registry should create confidence in the business community
that any legally registered credits will apply against any subsequent
national regulation of carbon dioxide emissions
2. The registry should create a standardized definition and
measures for ensuring that all tons of carbon dioxide whether from
sequestration, certified reductions or other offsets are treating as
equal and exchangeable.
3. The registry should be voluntary, but should create limits on
what types offsets and credits will be included in the registry.
4. For carbon sequestration, the concepts of additionality,
permanence and leakage should be addressed.
b. specific points
1. Modular design, with standards established for each module. For
Sinks the modules could be:
i. Reforestation
ii. Agricultural soil sequestration
iii. Extending carbon sequestration in existing forests
iv. Conservation of forests with documented threats of
deforestation
2. Each form of offset should have sufficient rigor in its
definition, baseline, measurement accuracy, inventory control, and
verification to be fungible. In other words a tonne of any form of
sequestration must meet a threshold which makes it the same as any
other ton.
3. Addresses permanence by linkage of credits to pools or entities
that can demonstrate the rights or ownership of carbon in the areas
having been used as the basis for registration. This means that an
entity who wishes to produce carbon credits from forests, must have
some demonstration of unique ownership, and carries the ongoing
responsibility for those credits. While the total stock of carbon can
vary from place to place the sum of the carbon stocks, minus any
baseline stocks, must be protected or offsets purchased.
4. Addresses sustainable development by having the endorsement of
the government in the country where the project is located.
5. Addresses additionality as follows:
i. For reforestation, must provide air photos to demonstrate
that the area was cleared land, under non-forest land use
before reforestation.
ii. For agricultural soil sequestration, must demonstrate
statistically the soil carbon content to a depth of 1 m.
Credits are provided only for statistically demonstrated
increases.
iii. For existing forests, must identify the land area
concerned and present a statistically robust estimate of carbon
stocks.
iv. For conserving forests threatened by deforestation, this
must be substantially documented, independently reviewed on a
case by case basis, endorsed by the national and/or sub-
national government authorities and then protected. In these
areas, the issue of leakage must be specifically addressed. If
ever in future the forests are cleared or otherwise impacted
these credits must be fully bought out of the system. These
forests are the most difficult to integrate into the system, as
they are based on some intangible decisions. These forests must
also address the issue of leakage, where protecting one area
simply leads to accelerated deforestation elsewhere.
6. Baseline year: This should be 1990, or point of project
commencement. Where land use change is occurring, the year 1990 should
be used to prevent clearing and reforesting of forest being eligible
for crediting.
7. Definition of product. A standard based on an Environmental
Management System or Total Quality Management System can be used for
each form of sequestration credit. These systems require documentation
of policies, planning, inventory, modelling, continuous improvement
systems, etc. They can be the basis of verification and auditing of
carbon stocks.
8. The product is a ton of sequestration, vintaged by the year in
which it is activated, and serialized. The tons are certified by the
registry based on independent verification of the estimates by
accredited third parties.
9. The registry must list serial numbers of tons, by vintage years,
and additionally indicate the land base associated with those tons. It
should encourage pooling, by also ensure that the linkage between which
tons link to which land pool is clear. It should also provide for
extinguishment of the tons in emissions trading, ``green product''
promotions, or other purposes.
10. The governance of the system should be based on a steering
committee of government, business, academics and conservation movement
specialists in this area. The steering committee would endorse the
standards for each module, would accredit verifiers, would accredit
carbon pool managers, would oversee registry operations, would resolve
disputes, and would approve policies for ongoing auditing of the carbon
stocks in the registry. The steering committee could be appointed by
the Secretary of Commerce or another government figure.
11. Ultimately the register should include both emissions and all
forms of offsets in a fully fungible system that would underpin
regulation and/or trading.
12. Entities placing offsets into the registry, must also be
accredited by the steering committee. The key criteria would be
expertise, systems, financial solvency, and good character.
13. In the event that a carbon pool manager became bankrupt, the
registry would immediately take control of the carbon rights associated
with the pool.
14. The ultimate accountability for the carbon stocks and the
credits is with the carbon pool manager. Any decision by the steering
committee, subject to appeal, can require the carbon pool manager to
make good on carbon stock shortfalls, or provide additional
documentation or reverification of the carbon stocks at any time.
15. The steering committee, subject to government approval, may
also enter into bi-lateral arrangements with carbon pools in other
countries or with international carbon pools, assuming accounting,
verification, documentation and third party government endorsement.
16. In the event that the government changes rules or standards in
a way that impacts negatively on the carbon pool managers, compensation
will be payable.
17. The operation of the registry will be funded by government for
a five year trial period, and then the registry will fund its own
operations by a fee for registration of new credits.
______
Statement of Sharon Kneiss, Vice President for Regulator Affairs,
American Forest & Paper Association
The American Forest & Paper Association appreciates the opportunity
to provide testimony to today's meeting of the Subcommittee on Energy
and Air Quality.
The American Forest & Paper Association represents more than 240
member companies and related associations that engage in or represent
the manufacturers of pulp, paper, paperboard and wood products.
America's forest and paper industry ranges from state-of-the-art paper
mills to small, family-owned sawmills and some nine million individual
woodlot owners.
The U.S. forest products industry is vital to our Nation's economy.
We employ 1.5 million people and rank among the top ten manufacturing
employers in 42 states, with an estimated payroll of $51 billion. Sales
of U.S. forest and paper products top $250 billion annually in the
United States and export markets. Products from America's forest and
paper industry represent more than eight percent of our country's
manufacturing output.
s. 820 and forestry issues
AF&PA has been engaged in the issue on the role of forests and
global climate for more than a decade. We have sponsored research
through the technical research arm of the industry, supported efforts
of the U.S. Forest Service and cooperated with many agencies on
programs to improve the understanding of forests and their role in
mitigating carbon dioxide buildup.
Senate bill 820 introduced by Senator Wyden (D-Or) and co-sponsored
by Senator Craig (R-ID) represents a good first step in bringing the
issue of forest carbon sequestration to the forefront of America's
potential response to programs that will reduce the build-up of carbon
dioxide concentrations in the atmosphere. Forests provide enormous
benefits. Only recently has carbon dioxide removal by forests been
recognized as a major co-benefit to the environment in addition to
wildlife habitat, water quality, recreation, aesthetics and other
resource amenities. As Congress proceeds to create forest carbon
sequestration economic and environmental opportunities, the AF&PA
membership believes that forest management must be a driving force in
improving forestland health and productivity. Incentives that encourage
forest stewardship, improve land management practices and prevent the
further conversion of forestland to other uses will provide multiple
benefits including carbon storage. It is important to not lose sight of
the contribution that existing managed forests make in the global
carbon cycle. They contribute mightily to the global carbon balance and
should not be taken for granted or dismissed. I will come back to these
concepts at the end of this section. However, I would like to take the
opportunity to comment more directly on the concepts contained in S.
820.
S. 820 is much broader than assessing ``opportunities to increase
carbon storage on national forests derived from the public domain.'' It
includes recommendations on amending the Department of Energy's 1605(b)
reporting guidelines, incorporates opportunities for non-industrial
private forest landowners to take advantage of loan programs,
establishes an advisory board to provide recommendations to the
Secretary of Agriculture on carbon storage from management actions,
defines terms and concepts and emphasizes the development of project-
based accounting systems.
The provisions that would amend the carbon monitoring and
verification guidelines under Title XVI of the Energy Policy Act of
1992 should examine and compare existing project-based guidelines to
determine which methods are most accurate, cost-effective, transparent
and verifiable. Because carbon may become a market commodity to buy and
sell, it is important that the trading system be based on sound
technical footing. A ton of carbon in one part of the country or the
world must be equivalent to a ton of carbon measured in another region
of the country or the world.
Monitoring and verification of carbon on a project specific basis
is essential. The private sector needs certainty when investing in
carbon sequestration projects. Certainty in this case includes
verification of the carbon offset credits, value of the carbon credits
and a proper accounting system to ensure valid carbon transactions.
AF&PA notes that a national accounting system is critically
important but is not addressed in the legislation. Presently, the U.S.
Forest Service (USFS) provides estimates of carbon sequestration on all
managed forestlands in the United States, including public and private.
These estimates are based on forest inventory data collected through
the Forest Inventory & Analysis Program of the USFS. Carbon projections
are estimated by using a combination of sophisticated timber supply,
area projection, wood use and carbon content models. These estimates
must provide a reliable prediction of current and future carbon
sequestration in the forest strata including soils, understory,
overstory, and trees. The models are the basis for estimating the long-
term storage of carbon in wood and paper products and in landfills.
This is extremely important information particularly when there is a
lack of reliable published research estimates. The failure to account
for the long-term storage of carbon overestimates worldwide carbon
dioxide emissions by ten percent.
Understanding the existing forest base can shed important light on
how to improve existing forest management practices for the retention
of carbon and what opportunities exist to enhance the existing forest
land base to store more carbon. AF&PA suggests increasing funding
levels to the Forest Inventory & Analysis (FIA) Program contained
within the USFS Research program as specified in USFS/National
Association of State Foresters Memorandum of Agreement and endorsed by
the Second Blue Ribbon Panel on FIA. This data collection and analysis
program, recently amended in the 1998 Farm bill by Congress, called for
annual data collection with a completed cycle in each state every five
years. We strongly support this effort. It provides the underlying data
not only for carbon sequestration but also provides the core
information on forest resource trends. It is not possible to separate
site-specific project level accounting from the implications of what
occurs outside of a project boundary. Altering forest management
practices, reducing harvest levels or preserving forest acreage in a
specific location could have an impact on forestlands outside the
project boundaries. This is known as leakage. AF&PA agrees that
harvesting and regeneration will be displaced to other locations. A
comprehensive national model such as the one developed by the USFS must
be well funded to monitor trends in forest sequestration and carbon
storage reservoirs to understand the impacts this will have on
atmospheric carbon dioxide levels and carbon storage in forests. We
urge that the USFS Research program be adequately funded to conduct
regular updates of forest carbon sequestration and develop the
appropriate software and model links to improve the accuracy and
technical elements. The model, known as FORCARB, was the basis for the
U.S. State Department's submission to The Hague at the Conference of
the Parties negotiations in November 2000 on the Kyoto Protocol.
While S. 820 does begin a process for establishing project specific
guidelines to determine carbon sequestration, the development of a
carbon market trading system, issuance of carbon credit certificates
and other carbon credit banking systems need to be considered. For the
private sector to make these types of investments there needs to be
certainty on the regulatory rules, financial market rules and
transferability of credits must be known. We have to ensure the
government does not subsidize activities that could undermine private
investments. The payback periods are long and extend beyond the normal
three to five year return period for most private capital investments.
It is important that a free market system develop with appropriate
verification procedures that ensure the credibility of the carbon
financial instruments.
There are a couple of other considerations AF&PA believe are
important for your subcommittee and the Senate to consider as domestic
and international policies are developed to determine what market
opportunities forests will have in reducing atmospheric concentrations
of carbon dioxide. The role of this nation's existing forests has been
dismissed because of an assumption that they are removing carbon
dioxide from the atmosphere ``anyway.'' Given the dramatic changes in
forest ownership, stewardship, population increase and urban and
suburban growth and development over the past decade makes the
continuity of forest land use less than a certainty. According to
figures developed by the USFS, existing forests currently remove
seventeen percent of total U.S. greenhouse gas emissions per year. We
believe that with active and sustainable forest management of the
existing forest base, these figures can increase and assist the nation
in a balanced approach to stabilizing or reducing atmospheric carbon
dioxide buildup. The committee should seriously consider how the
forests of today can be more actively managed to increase carbon
sequestration and prevent emissions through and improved productivity.
To this end, we would urge the Committee to increase funding for forest
productivity research in tree physiology, biotechnology and soil
productivity as outlined in a compact with the Department of Energy in
the Agenda 2020 industry partnership program.
It is also important to briefly mention the significant inequities,
lack of incentives and scientific misunderstanding of how the Kyoto
Protocol (KP) undervalues and creates significant distortions for
existing forests and what it could mean for the United States. Under
the terms and conditions of the Protocol, only new forests established
after 1990 on lands not in previous cover would be eligible for carbon
credits. However, the carbon credits accrued would only be for the tree
growth between 2008 and 2012. If you established a ``new'' forest today
the only carbon credits potentially awarded would be for the
incremental growth during that time period. While the nation would not
receive any carbon credit for existing forests to achieve the KP
targets the U.S. would be obligated to maintain the same level of
carbon stock as in 1990 or further reduce emissions to meet the agreed
upon international targets. There is no possibility to receive credit
to absorb carbon dioxide from the atmosphere but significant
liabilities and disincentives. This is neither a fair or balanced
carbon accounting system. In addition, the KP ignores the scientific
validity and positive contribution that existing forests have on
atmospheric carbon dioxide levels. The other misunderstanding and
scientific misconception of the KP is the role of avoiding tropical
deforestation. Under the KP, ``avoidance of deforestation'' is
considered a carbon sequestration activity. AF&PA and the forest
research scientific community would consider these activities to be an
avoidance of emissions, not sequestration. Most of these tropical
ecosystems are in highly mature states and older age class structures.
They are more likely to leak carbon as these stands breakdown. Under
the rules being considered for the KP, these existing systems would be
awarded carbon credits for avoiding deforestation. Again, from a
scientific viewpoint a growing and sustainably managed forest can
remove significantly more carbon dioxide from the atmosphere than the
mature systems although we recognize these forests as repositories of
huge quantities of carbon. The inequities in awarding credits for
``new'' forests or for ``avoidance of deforestation'' will have adverse
consequences and spill over effects for the existing forest base and we
think this should receive considerable thought.
We have more specific comments on the bill regarding the make-up of
the advisory council membership, loan programs, financial incentives to
grow carbon and land. We would be willing to sit down with you and
members of the committee to discuss these at your convenience.
______
Statement of Dr. Aaron Rappaport, Forests and Climate Campaign
Coordinator, American Lands Alliance
Mr. Chairman and Members of the Committee, the American Lands
Alliance is grateful for the opportunity to submit testimony for the
record of your July 24 hearing on issues and legislation connected with
the problem of global warming. We are also grateful for interest on the
part of the Committee in the issue of forest carbon sequestration and
commend Senator Wyden and Senator Craig for their efforts to develop
legislation to encourage such activities.
I would like to note at the outset that some of the most difficult
and contentious environmental issues in the United States today involve
the protection of habitat for threatened and endangered species on
private land. American Lands believes carbon sequestration offers a
partial escape from the current gridlock around these habitat issues.
Both the protection of natural ecosystems and long rotation forestry
reduce emissions of carbon dioxide (CO2). If these benefits
were officially recognized by American climate policy then voluntary
landowner conservation activities would be eligible for the financial
rewards that are generally proposed to encourage a decrease in our
nation's CO2 output.
Such a mechanism for encouraging badly needed conservation
activities has the added benefit of potentially involving little or no
net cost to the federal treasury. In most climate policy proposals,
over-emitters of CO2 provide the funds to encourage others
to under-emit, through mechanisms such as balanced tax incentives and
disincentives.
In this context I will confine the rest of my testimony to comments
on the legislation that Senator Wyden and Senator Craig have developed,
S. 820 or the ``Forest Resources for the Environment and the Economy
Act''. Since the July 24 hearing date, this bill has been combined
virtually unchanged with Senator Brownback's ``Carbon Conservation
Incentive Act'', S. 785, into S. 1255, the ``Carbon Sequestration and
Reporting Act''. Thus, comments on S. 820 remain applicable to S. 1255.
specific comments on s. 820
In general S. 820 as currently written appears to not focus on
creating the incentives for voluntary landowner conservation activities
that carbon sequestration is capable of providing. Indeed, the bill
appears to go so far as to exclude the creation of reserve areas, such
as riparian buffers to protect salmon streams, from eligibility for its
revolving loan program. Even if such habitat protection is eligible,
the bill's emphasis is clearly strongly in favor of reforestation
rather than the creation of fish and wildlife reserve areas and the
promotion of long rotation forestry.
To more fully achieve the conservation potential of carbon
sequestration policy, we suggest the following changes:
1. The Purposes section should emphasize the protection of habitat
for species listed under state and federal endangered species acts.
Similarly, the definition of a Forestry Carbon Activity in the bill
should require that these have a positive impact on habitat for listed
species.
2. The list of governmental entities involved in the revolving loan
fund should broaden beyond the Secretary of Agriculture and State
Foresters to include the U.S. Fish and Wildlife Service, the National
Marine Fisheries Service, and their state equivalents.
3. A broader set of stakeholders should have representation on the
Forest Carbon Advisory Council that S. 820 establishes. As currently
construed the Council fails to include representatives from such
stakeholders as the commercial and recreational angling industries, the
tourism industry, and municipal water boards. On the governmental side
of the Council, we believe it wise to include representatives from the
National Oceanographic and Atmospheric Agency, U.S. Fish and Wildlife
Service, the National Marine Fisheries Service, and their stateside
counterparts. As an alternative, the Council could be redesigned to be
a technical advisory panel made up of independent academic scientists.
4. The bill should establish a legal standard to prevent both its
loan fund and guidelines from encouraging environmentally destructive
silvicultural methods. These include the heavy application of
fertilizers, pesticides, and herbicides, and the use of monoculture
plantations and genetically engineered trees.
5. Sections of S. 820 that appear to directly exclude the creation
of forest reserves from the bill's revolving loan program should be
changed. Currently, loan funds may only cover costs associated with
planting trees (Section 5 (c)(8)) and only projects that allow ``a
variety of sustainable management alternatives'' (Section 5 (c)(1)(C))
qualify for loans. Thus, the single activity of reserve-creation
appears to be ruled out.
6. More weight should be given to forest protection in the bill's
basis for establishing a formula to govern the distribution of loan
funds. As currently written this basis appears strongly weighted
towards tree planting rather than forest protection. (See Section 5
(b)(8)(B)(ii).)
7. Loan funds should be fully available for states that lack large
areas of federal forest. Indeed, the need for forest conservation is
even more acute in these states than in those containing abundant
federal land. As currently written, the bill virtually excludes states
with little federal forest from eligibility for loan funds by awarding
these preferentially to states that have experienced significant
declines in timber industry employment due to decreases in logging on
federal lands. (See Section 5 (b)(8)(B)(iii).)
8. The bill should call for forest greenhouse gas accounting
standards that include all greenhouse gasses, rather than just
C0CO2. This would ensure that NOCOx emissions
from the use of fertilizers are properly accounted for.
9. The bill should raise its standard for canceling loans in return
for permanent conservation. We commend Senators Wyden and Craig for
this section of the bill but urge that the current standard, which is
protection ``at a level above what is required under applicable
federal, state, and local law'', be raised considerably to better
achieve the double win for landowners and the environment that carbon
sequestration could provide.
10. The bill should recognize that immediate emissions reductions
are more valuable than future ones. This is recognized by, for
instance, ton-year carbon accounting methods.
In conclusion, I would like to thank the Committee Members once
again for this opportunity to testify and for their interest in forest
carbon sequestration.
______
Statement of David Silverstein, on Behalf of the Southern Appalachian
Biodiversity Project, Asheville, NC
I am writing on behalf of the Southern Appalachian Biodiversity
Project to urge the U.S. to not replace old growth stands of forest
with young Kyoto stands, and oppose the construction of more dams, as
part of the Clean Development Mechanism designed to meet the goals of
the Kyoto Protocol.
A myriad of scientific studies now indicate that old growth forests
are far more efficient at sequestering carbon than younger, monoculture
tree farms. See, for example, Ernst-Detlef Schulze, Christian Wirth and
Martin Heimann in the 22 Sep 2000 issue of Science, at pp. 2058-2059.
Schulze et al., found that ``the accumulation of carbon in a permanent
pool increases exponentially with stand age.'' This will ``continue to
contribute to a stable part of soil organic carbon unless disturbed by
harvest or fire.'' Thus, ``replacing unmanaged old-growth forest by
young Kyoto stands, as well as the harvesting of previously unmanaged
old-growth forest stands as part of forest, management, will lead to
massive carbon losses to the atmosphere mainly by replacing a large
pool with a minute pool of regrowth and by reducing the flux into a
permanent pool of soil organic matter. Hannon et al. have demonstrated
that cutting of old growth forests will release carbon sequestered over
the course of 200 years in some cases. M.E. Hannon, W.K. Ferrell, J.F.
Franklin, Science, Vol. 247, pp. 699-702. In that study, Hannon et al.
determined that nearly 70% of the carbon accumulated in a tree from
sequestration is emitted into the atmosphere within 10 years after the
tree is cut down. Even if old growth stands are cut down and replaced
by young Kyoto stands, it can take decades before enough carbon is
absorbed by the new stand to equal the pulse of carbon re-released into
the atmosphere when larger, older trees are cut. In fact, Schulze et
al. demonstrated that, with increasing life-span of the stand,
proportionally more carbon can be transferred into a permanent pool of
soil carbon (passive soil organic matter or black carbon). Since ``time
without disturbance is required to channel carbon through its cycle
into a nonactive pool of soil organic carbon and the production of
black carbon depends on biomass'', old growth forests play an
invaluable role in the sequestration of carbon.
Also, the best scientific information available indicates that dams
cause as much or more greenhouse gas emission as burning fossil fuels.
The June 1st edition of New Scientist magazine reported that much of
the greenhouse gas is generated by organic matter washed into a
reservoir and from the decay of submerged forests. Since ``stagnant
water produces the worst emissions because the decaying vegetation'',
the reservoirs release carbon dioxide and methane. According to that
study, a reservoir will produce more methane than the river did before
the dam was built. ``Greenhouse gases are emitted for decades from all
dam reservoirs in the boreal and tropical regions for which
measurements have been made. This is in contrast to the widespread
assumption that such emissions are zero,'' the Commission added.
Thus, the promotion of management practices that replace old growth
stands with fast growing tree farms, and the building of new dams, we
will actually contravene the anticipated aim of the Kyoto Protocol. In
general, over-emphasizing carbon sinks will not adequately address the
global warming problem. According to Professor John Shepherd, director
of Britain's Tyndall Centre for Climate Research, shifting the emphasis
to carbon sinks is diverting the talks from the main issue of cutting
emissions. Carbon sinks only partially compensate for fossil fuel
emissions; it has been estimated that sometime within the next century
our forests will serve as a net carbon source rather than a net sink.
According to Shepherd, the maximum that could be absorbed by carbon
sinks would only be equivalent to a quarter of that needed by 2050 to
prevent major rises in global temperature. If the anthropogenic
production of greenhouse gasses continues to increase at current rates,
then it will be inevitable that we will saturate and overwhelm our
carbon sinks and will be powerless to stop or reverse global warming.
Rather than creating more loopholes for polluting industries, SABP
demands-that the U.S. argue forcefully for the reduction of carbon
emissions from fossil fuel consumption, preserve all of our old growth
forests, and allow the younger, less developed forests to achieve old-
growth status.