[Senate Hearing 107-240]
[From the U.S. Government Publishing Office]
S. Hrg. 107-240
BPA IN PROMOTING ENERGY CONSERVATION
AND RENEWABLES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON WATER AND POWER
of the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
TO RECEIVE TESTIMONY ON THE ROLE OF THE BONNEVILLE POWER ADMINISTRATION
IN PROMOTING ENERGY CONSERVATION AND RENEWABLES
__________
AUGUST 13, 2001
__________
SEATTLE, WA
Printed for the use of the
Committee on Energy and Natural Resources
_______
U.S. GOVERNMENT PRINTING OFFICE
77-096 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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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
------
Subcommittee on Water and Power
BYRON H. DORGAN, North Dakota, Chairman
BOB GRAHAM, Florida GORDON SMITH, Oregon
RON WYDEN, Oregon JON KYL, Arizona
TIM JOHNSON, South Dakota LARRY E. CRAIG, Idaho
DIANNE FEINSTEIN, California BEN NIGHTHORSE CAMPBELL, Colorado
MARIA CANTWELL, Washington RICHARD C. SHELBY, Alabama
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
Jeff Bingaman and Frank H. Murkowski are Ex Officio Members of the
Subcommittee
Deborah Estes, Counsel
Jonathan Black, Staff Assistant
C O N T E N T S
----------
STATEMENTS
Page
Cantwell, Hon. Maria, U.S. Senator from Washington............... 2
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 1
Hauser, Steven, Senior Energy Programs Manager, Energy Division,
Pacific Northwest National Laboratory, Portland, OR............ 39
Hickok, Steven G., Chief Operating Officer, Bonneville Power
Administration, Portland, OR................................... 7
Nelson, Sharon L., Member, Board of Trustees, North American
Electric Reliability Council, Princeton, NJ.................... 17
Shimshak, J. Rachel, Director, Renewable Northwest Project,
Portland, OR................................................... 44
Spigal, Harvard P., Partner, Preston Gates and Ellis, Portland,
OR............................................................. 13
APPENDIX
Additional material submitted for the record..................... 55
BPA IN PROMOTING ENERGY CONSERVATION AND RENEWABLES
----------
MONDAY, AUGUST 13, 2001
U.S. Senate,
Subcommittee on Water and Power,
Committee on Energy and Natural Resources,
Seattle, WA.
The subcommittee met, pursuant to notice, at 10:00 a.m. in
the Commission Meeting Room, Port of Seattle, Pier 69, Hon.
Byron Dorgan presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. This hearing will come to order.
My name is Senator Byron Dorgan, and I am chairman of the
Water and Power Subcommittee of the Energy Committee of the
U.S. Senate.
I am joined today by Senator Maria Cantwell from the State
of Washington, who also is a member of the Senate Energy
Committee, and we are pleased today to hold a hearing of the
subcommittee here in Seattle, Washington.
The energy situation in this country is interesting and
challenging, to say the least. All of us understand that there
are things happening in America today that literally require
the U.S. Congress to write a new energy plan. The House of
Representatives has written a new bill. We in the Senate are in
the process of writing a new energy bill, after which, of
course, there will be a conference. Senator Cantwell and I
participated with the Energy Committee in writing the first
title to that bill just prior to the August recess. We wrote
the research and development title, and following the August
recess we will reconvene and complete our work on the energy
bill.
It is quite clear not only from the standpoint of what has
happened in California, but what has happened in other parts of
the country as well, and also from the spreading from
California to the entire West, and especially the Northwest,
the energy situation in this country has been unstable, and we
need a new plan.
The Northwest has some peculiar, interesting and unique
characteristics about its' energy situation, and we do not want
to write an energy bill in the U.S. Senate without fully
understanding and considering the unique circumstances that
exist here in the Northwest. We have a substantial amount of
hydropower unlike most other areas of the country. You have
purchased power from the wholesale market to blend with that
hydropower and to extend that hydropower, and of course, as
that wholesale market has changed dramatically in California,
that has had a profound impact here on the Northwest power
supply and power price. My understanding is that you have been
challenged and confronted with some rather substantial
increases in electric rates recently, and perhaps again this
fall if my understanding is correct, and all of that leads to
the question what do we do about it? What kind of a sensible,
thoughtful, nation-wide energy plan can we construct that is
not only fair to the American people, but also is one that does
not have a ``yesterday forever'' flavor to it.
It is clear to me that an energy plan must require some
additional use of coal, that is digging, and discovery of oil
and natural gas, that is drilling. So digging and drilling is
part of a national energy plan, provided that we do that with
thoughtful safeguards and thoughtful environmental protection,
but if our energy plan is simply drilling and digging and
nothing much more than that, it is truly only ``yesterday
forever,'' and that will not in my judgment represent the best
interests of this country.
If I might just for a moment digress to say that my first
car was a 1924 Model-T Ford that I bought and restored when I
was a young boy, and it is interesting to me that you put
gasoline in the 1924 model car exactly the same way you put it
in a 2001 model car. Nothing much has changed in 76 years, and
a week ago I was able to drive a fuel cell car, a car that puts
hydrogen and air in one end, and out comes electricity and
water. It is quite remarkable, and my hope is that our energy
bill will not only be using coal, using clean coal technology,
finding more oil and natural gas in environmentally sensitive
ways, but also a plan that produces new opportunities for
conservation, a plan that provides more renewable and limitless
energy supplies, and one that promotes more efficiency. All of
these elements must be part of a thoughtful energy plan, and
let me again say that we cannot write an energy plan that is a
national plan without understanding the unique characteristics
of certain regions, and this region is certainly a region that
has those unique characteristics, and Senator Cantwell has
asked that we hold this hearing, and I am very pleased to do
that for the purpose of making sure that the interests here are
represented in the writing of a new energy plan.
We are joined by a professional counsel, the counsel of the
Senate Energy Committee, Deborah Estes, and Jonathan Black, who
is with the Energy Committee and helps us arrange hearings.
We are holding hearings in various parts of the country
prior to the September completion of the writing of the energy
bill, and as I said, I am very pleased to be here, and now let
me call on my colleague, Senator Cantwell, for any comment she
might have.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR
FROM WASHINGTON
Senator Cantwell. Thank you, Chairman Dorgan, and thank you
for holding this hearing in the State of Washington to talk
about how the Northwest fits into a larger energy bill and how
we preserve some of the key interests of the Northwest in
moving forward in a national energy policy.
I do have comments that I will submit for the record, so
that I, we can get onto some of our panelists today, but I do
want to make a few comments.
First of all, I want to thank you for spending your recess
time in the Northwest to learn more about the unique reliance
of our region on hydro and how we move forward on diversifying
that and preserving our system at the same time.
I also want to thank you for your interest in the other
problems in the State of Washington. This Water and Power
Subcommittee, I am sure, could be of great assistance in the
future to some of the challenges we are also seeing on the
water issue, and I will submit some testimony on that, and from
my understanding, the Northwest owes a great deal of thanks to
you for yesterday throwing out the first pitch of the Mariner
baseball game. That saved the Northwest from three losses in a
row. Something that is very important for us. So thank you for
being part of our winning baseball season, and thanks, I guess,
initially go to your wife, who is an Everett native, for
constantly bringing you to the Northwest to pay attention to a
variety of our issues.
Today we are here to hear from a distinguished panel of
people about the incredible challenges we face in the Northwest
in regards to the energy challenges. We have seen in the last
year some of our consumers facing as much as 50 percent rate
increases with additional challenges this fall as Bonneville
Power Administration implements its 46 percent rate increase.
You will hear from some of the panelists today about how we
have maneuvered through that very difficult situation, and my
hat is off to the many people who have worked together on
conservation and curtailment programs and to the public who has
weathered this very trying time, but we are here today to also
talk about how we move forward on a 21st century energy policy
that will allow smart technologies, conservation and new
sources of energy to be part of the 21st century energy plan.
Mr. Chairman, I am starting on the process with Senator
Murray, who also sends her thanks and well wishes for being in
our State to focus on this issue. She and I have been working
on a variety of things related to what may become a Northwest
title to the energy plan, something that will include
reauthorization of the REPI program, so that we continue to
focus on renewable resources, making sure that BPA gets the
borrowing authority it needs to continue to make sure that
transmission needs are addressed in the Northwest, and the
issues of hydro relicensing to make sure that that process is a
more expeditious process in the future. These are all important
issues to the Northwest and are critically important to the
economy.
I think the main challenge that you will hear today is
given our 70 percent reliance on hydropower in the State of
Washington, given the fact that we just have suffered the
second worst drought on record, how do we move forward with an
energy plan that allows the great Northwest economy that you
can see basically on these placards behind you, technology,
power, agricultural, and transportation to benefit from an
energy plan that moves us forward.
So again, I thank you for holding this hearing today, for
bringing the Water and Power Subcommittee to the State of
Washington to understand the unique challenges that we will
face in putting together a Northwest title and an energy
package that meets the economic needs of this region. So thank
you.
[The prepared statement of Senator Cantwell follows:]
Prepared Statement of Hon. Maria Cantwell, U.S. Senator
From Washington
Thank you, Mr. Chairman, and welcome to the great state of
Washington.
My friend and colleague Senator Murray asked me to extend her
greetings as well, to express her appreciation for your interest in
this vital Northwest issue, and to offer her apology for not being able
to attend today's hearing due to a scheduling conflict.
Mr. Chairman, I also want to thank you for taking time from your
own busy recess schedule in your home state of North Dakota to come and
learn about energy policy in the Northwest--and what the Northwest's
unique experience can contribute to the national debate.
As you know, the Senate Energy and Natural Resources Committee has
already started marking up comprehensive new energy legislation that
will provide the foundation of the United States' energy policies and
practices for many years to come.
How the Northwest fits into the new national paradigm without
sacrificing its traditional leadership on renewable energy resources,
conservation and energy efficiency, and what the nation can learn from
the Northwest experience, are both vital questions that must be
considered in that debate.
These are also questions that have sweeping ramifications for the
economy of my state and my constituents' way of life.
We've all heard a lot lately about energy problems, and you'll hear
more about those today. But our region, and our nation, must begin to
take a close look not only at where we are today and how we got here,
but also at where we want to be tomorrow and what we must do now to
achieve that goal.
At today's hearing, Mr. Chairman, you will hear about more than the
Northwest's energy problems. You'll also hear about opportunities, and
about energy solutions being developed here that may have national
applications.
In our discussion today, I believe there is a guiding principle we
should follow. It is that the Northwest's system of low-cost, reliable
power should foster a thriving, diverse economy; one that benefits all
of our region's interests--commercial, residential, industrial and
agricultural.
This principle is the bedrock of our regional economy and has
yielded a proud history. As we look to the future, we must recognize
the changing demands on this system and the changing national landscape
around it, but there is one thing we must not allow to change: the
fundamental value that has made this region great.
The Northwest power system has built our region, and it has served
as a model for the rest of the country on many fronts. We'll hear about
several of those innovations today, including such things as smart-grid
technologies and the next generation of renewable energy resources.
As the Western energy crisis has made us all too aware, the health
and efficiency of power markets has a direct impact on jobs and
paychecks, the environment, and our quality of life. Here in the
Northwest, we have a unique energy history centered on the Bonneville
Power Administration (BPA)--an invaluable public resource charged with
allocating output from the region's federal hydroelectric dams.
BPA and the low-cost hydropower it provides to domestic consumers,
agriculture, business and industry has long been the engine driving our
thriving regional economy. We should view this hydropower as a solid
foundation on which to build. But as the demand for power has continued
to grow and other pressures on our energy system have increase, we must
look toward diversifying our generating resources.
On a related note, Mr. Chairman, the Subcommittee on Water and
Power possesses jurisdiction over many other water issues that our
region faces--with the competing demands of fish, people, agriculture
and industry. While media coverage of the drought in Washington state
has focused on the Yakima Basin and other areas in eastern Washington,
we face upcoming water shortages in many of our western Washington
communities, such as Issaquah, Kent and Sumner.
While short-term assistance is needed in our eastside agricultural
communities, both sides of the state will benefit from longer-term
planning that can apply creative solutions. These include:
Building inter-ties between existing systems.
Innovative reclamation projects like that of the Lakehaven
Utility District in Federal Way, which may help maintain stream
levels during droughts and recharge the aquifers without using
additional surface water.
Enhanced storage projects such as Tacoma Public Utilities'
Howard Hansen Dam, which better serve both people and fish.
A rededication to all forms of water conservation, including
the leadership being shown by many of our irrigation districts
throughout central and eastern Washington.
Indeed, water use issues are one of the most complex and difficult
challenges facing our region, and they are an important part of our
deliberations on energy policy here in the Northwest. As you know, Mr.
Chairman, the comprehensive energy legislation that we will continue to
work on when Congress reconvenes in September will include language on
electricity--a topic of paramount importance for this region, given our
reliance on BPA and the hydro-rich nature of our energy resources.
It is my hope that parties within the region will use this
opportunity to join together to retain the benefits of our existing
system. But as the Western energy crisis has clearly demonstrated, we
must also keep our eyes focused on the future. We need to devise both
regional and national solutions that will prevent this type of crisis--
and the resulting economic devastation--from happening again.
While the national spotlight has been trained on California, the
Pacific Northwest has been enduring severe economic impacts from this
crisis: retail rate increases that have created hardships for both
consumers and businesses, and job losses that already number in the
tens of thousands. While prices have stabilized throughout the West,
the worst is not yet over for this region. BPA will put in place a 46
percent wholesale rate increase this October.
Ironically, one of the most telling things about the severity of
this crisis is that BPA's 46 percent rate increase actually came as a
relief to Northwest ratepayers, who were expecting a 250 percent
increase. In addition, no one is quite certain how our region will fare
during the winter peak heating season, when supply is expected to be
tight up and down the West Coast.
As a member of the Senate Energy and Natural Resources Committee,
and this subcommittee, I have worked to draw attention to the unique
circumstances of the Northwest and how the current crisis is affecting
Washington state residents, industries and communities.
I will not dwell on those impacts today, because many in this room
are all-too-well acquainted with those problems, having felt them
personally at home and at work. I am pleased that Mr. Hickok of BPA is
here to testify today, however, because I believe Bonneville has a
compelling story to tell about precisely how California's flawed
partial restructuring, combined with the drought, caused significant
damage to the Northwest energy industry and economy.
At the same time, the circumstances that rendered BPA and our
region susceptible to these impacts need further exploration. Under
law, BPA is charged with supplying our entire region with ``adequate,
efficient, economical, and reliable'' power.
Particularly in light of this crisis, I believe it's time for the
Northwest to take a hard look at whether BPA has the tools it needs to
fulfill this mandate. If the answer is yes, then how should BPA's
resource acquisition and allocation policies be reformed to better
accomplish this goal? If the answer is no, then how can the situation
be remedied through federal electricity legislation?
Enhancing the reliability of our national and regional grid seems
to be yet another part of the equation. The Northwest's transmission
system is already severely constrained, and without significant
infrastructure improvements it's not clear whether we will be able to
get the additional generation on line that is so sorely needed to
remedy the West's supply-and-demand imbalance. I look forward to
hearing testimony today on the best way to address the issue of
reliability--particularly for the Northwest--since it is yet another
component of the legislation this Committee will consider next month.
In the 1970s, our nation experienced an energy crisis of similar
proportions. Yet, as one elementary school student pointed out to me
this spring, it doesn't seem as though the lessons we should have
learned back then truly stuck. Thirty years have now passed, and in the
interim the advent of new technologies and innovations have made the
promise of a cleaner, more efficient and reliable energy system a real
possibility.
Here in the Northwest--with BPA at the helm--we have historically
been leaders in renewable energy development, conservation and energy
efficiency. I believe that part of the solution for the Northwest
includes diversifying our region's energy supply, which will render us
less susceptible to drought. It's clear that we need a diversified
energy portfolio that includes more traditional forms of supply.
Increasing natural gas pipeline capacity in the Northwest will be key
to serving the many plants that are planned for construction in the
region--so long as the proper pipeline safety regulations are in place.
But the value of renewables to complement our existing hydro system
cannot be overestimated. Just last week I visited the Stateline Wind
Project outside Walla Walla, Washington. When it is complete, it will
be the West's largest wind farm, generating more than 260 megawatts,
enough energy to power more than 60,000 homes. The project is scheduled
to go online by the end of December to take advantage of the existing
wind energy tax credit, which expires at the end of the year.
Wind energy grows increasingly cost-competitive, and there are
parts of Washington and other Western states with tremendous wind
resources. These projects also provide an additional source of income
to farmers, who lease land to developers while retaining the right to
grow crops or graze cattle alongside the wind generators--an important
benefit to the hard-pressed agricultural industry.
To continue supporting projects like Stateline while a market for
wind energy is being created, I believe Congress must extend the
existing tax credit. Further, to encourage public utilities--which
can't take advantage of tax credits--to think more creatively about
diversifying their energy supply, I am sponsoring a bill that will
reauthorize the Renewable Energy Production Incentive, or REPI. The
REPI program provides public utilities, rural co-ops and tribal
governments, which account for about 25 percent of the nation's
electric utility industry, with a direct, 1.5 cents/KWh payment for the
generation of renewable power.
I also believe we must continue to vigorously pursue research and
development initiatives that will make our existing energy
infrastructure more efficient, more receptive to the addition of
distributed power resources, and more reliable. Northwest businesses
are global leaders in software and telecommunications, and I believe
there is significant promise in bringing some of these technologies to
bear on our power transmission grid.
During mark-up of federal energy research and development
legislation earlier this month, I sponsored a bipartisan amendment with
Senator Gordon Smith of Oregon, directing the Department of Energy, in
cooperation with industry, to explore these new applications.
Mr. Chairman, it is often said that crisis breeds ingenuity, and it
is clear to everyone here today that Northwest consumers and businesses
have been hard-hit by skyrocketing energy prices. It is my hope that
this hearing will begin a serious discussion that will allow the
Northwest to seize the opportunity presented by federal legislation to
preserve the benefits of our existing system, while also cementing our
role as a region with innovative solutions to help meet our nation's
energy needs.
Again, I'd like to thank you, Mr. Chairman, for holding this
hearing, the Energy Committee staff for their work on this hearing, and
the witnesses for appearing here today.
Senator Dorgan. Senator Cantwell, thank you very much. It
is going to be very helpful to have Senator Cantwell on the
Energy Committee as we write this legislation, and we are
delighted she is there, and are, of course, working as well
with Senator Murray on these issues.
We have a first panel today composed of Mr. Steve Hickok,
Chief Operating Officer, Bonneville Power Administration,
Portland, Oregon, Ms. Sharon Nelson, member of the board of
trustees, North American Electric Reliability Council,
Princeton, New Jersey, Mr. Harvard Spigal, partner, Preston
Gates and Ellis in Portland, Oregon, and we will ask that you
summarize. Traditionally, we try to have testimony last no
longer than 5 minutes, and we have a light. There is not a trap
door through which you will fall if you go over, but it allows
us more time for questions if you are able to submit your
entire statement for the record.
Mr. Hickok, this has been a remarkable and interesting time
for Bonneville Power. I am sure you would agree. You have
testified before the Energy Committee on a number of occasions.
We appreciate you being here today, and why don't you proceed?
STATEMENT OF STEVEN G. HICKOK, CHIEF OPERATING OFFICER,
BONNEVILLE POWER ADMINISTRATION, PORTLAND, OR
Mr. Hickok. Thank you, Mr. Chairman, Senator Cantwell. I am
the Chief Operating Officer of Bonneville.
Before coming to work for Bonneville in 1981, I was the
staff director for the Republican side for the U.S. Senate
Subcommittee on Energy and Natural Resources. Hardly a man or
woman is now alive who remembers those famous days and years,
but I frequently look back at that period of time, in the late
1970's. I look at some of the aspects of PURPA, the Powerplant
and Industrial Fuel Use Act, the entire U.S. Synthetic Fuels
Corporation effort, and am reminded of the extremes we can go
to sometimes when we get infrastructure wrong. Infrastructure
is that basic fabric that underlies American commerce and
really supports our society. When something is wrong in that
area, the response gets pretty emotional. The Acting
Administrator, Steve Wright, and I have frequently been asked
to come to the annual meetings of business associations this
year on the west coast. I think every one of those associations
wants a utility executive to come to the meeting and explain
just what the heck is going on with electricity. And, those
invitations come across with a certain amount of emotion.
I will submit for the record a standard response that I
usually make in answering questions about what happened and how
we got into this as well as a copy of my written statement for
the record. I will also summarize one of the things we did back
in the late 70's when Congress passed the Pacific Northwest
Electric Power Planning and Conservation Act. I submit that is
one of the things we got mostly right. It is the act that
created for Bonneville a utility service obligation in the
Pacific Northwest, something we did not have before then. Prior
to the passage of that Act, Bonneville disposed of Federal
hydro, such as it was available, almost as if it were a surplus
Federal commodity. But the 1980 Act made Bonneville the
backstop for supply in the Northwest and required us to serve
the retailing utilities. We're a wholesaler. It required us to
supply the power requested by retail utilities for their firm
power loads and it defined conservation as a power resource.
Now, there were a number of utilities at the time in the
country that were doing conservation, but largely they were
doing it as a low-income assistance kind of a program. But, the
Act was an unabashed, purely economic effort to develop
conservation as a power plant. If it was less expensive to free
up a kilowatt hour with an existing user than to invest in the
new power plant, we did that. I was hired on at Bonneville in
1981 as the first vice-president in charge of conservation and
renewables development for Bonneville, and we literally wrote
the book on how to develop conservation as a power plant. We
had to define it; we had to understand it in terms of what it
was doing in our system, its energy and capacity factor,
reserve requirements, and so forth. Because if you are going to
invest in conservation, you have got to be sure it is there
from a reliability standpoint when you need it.
Now, fast forward to 1992. Congress passed the Energy
Policy Act in that year and set the electric utility industry
on a course to the restructuring that we are now in the middle
of. Congress basically said that we could separate electricity
into a juice business and a wires business, with the wires
being the natural monopoly. It said that if the wires business
is operated as an open-access common carrier, we can develop a
competitive wholesale market environment for sellers and buyers
of electricity. In fact, in the West, which was surplus in
capacity in the early and mid-1990's, this created a commodity
environment. Bonneville was able to access markets in the
western interconnection we had never had access to before, and
our competitors were able to sell into the Northwest, which had
been our backyard. In a surplus commodity environment, prices
went into the tank. The next generation of power developers
were supposed to be the merchants--not necessarily the
integrated utilities who had the load serving obligation--but
they didn't build the next generation of power plants. There
has been hardly a dime's worth of power developed in the whole
West coast since 1992.
We got way behind the eight ball in terms of supply, and
one of the things that Bonneville noticed about the competition
was that it did not have the cost of conservation in its
megawatts. It did not have the ``negawatts'' in the
``megawatts,'' and Bonneville, which did, was viewed as
uncompetitive. In fact, the Northwest Governors in their
Comprehensive Review in 1996 decided that Bonneville should not
acquire power resources anymore to serve load, that it should
basically stick to what it had, and that others would be out
there building power plants. Our customers rushed off to that
admittedly wonderful, short-term market. But, what a difference
a few short years makes. They all have come storming back to us
for service. When we offered contracts for 2002, those
customers who had gone off into the short-term market,
basically taken service off of Bonneville, came back demanding
the full extent of Bonneville's legal obligation to serve them.
We found ourselves with 11,000 megawatts of business in 2002,
and only about 8,000 megawatts of supply. When we turned to
develop that supply, buying from the market the supplies that
are necessary to make up the 3,000 megawatt gap, California
imploded, and about that same time the drought hit the west
coast.
In short, there are two things going on. First, there is
the immediate drought situation. We got through this winter by
basically buying out large industrial users of electricity,
because it was cheaper to do that than buy power on the spot
market. Second, as we turned to the prospect of developing
supplies for the next 5 years, we found that in the first
couple of years there just is not enough new supply coming on
line to do much about the picture, at least from a reasonable
price standpoint. California locked up a lot of power in long-
term contracts that it signed just within the last year. So we
again turned to the demand side of the equation, and working
with our direct-service industries and with our utility
customers, we backed about 2,000 megawatts of the demand off of
the Bonneville system for 2002. Basically, that is how we
handled the short-term supply crisis. But if I were to leave
you with one strong message this morning that message would be
that there is a long-term problem. We actually did not get into
this shortage situation overnight, even though it almost seems
like it sprang up on us overnight.
One of the things that was masking the problem West-wide
was the fact that the Northwest has had good-to-fabulous water
for the last 6 years. When we have good or better water, it
affects the spot market price throughout the entire Western
interconnection. The drought just ripped the mask off the
supply problem. As we walked into this winter, we and everybody
else in the Northwest, which is hydro-dominated, were buying
heavily in that market, and we realized just how short we were.
There are three issues that are in front of us: first is
infrastructure, meaning both the demand-side investment,
notably conservation measures that can contribute to this, as
well as the supply side. Also needed are the transmission
lines, the gas lines and the power plants.
Second is the adequacy of the grid, whether you are talking
about reliability; wholesale market efficiency; access for
customers; transparency of markets; congestion management; the
operating efficiency of the grid; the expansion, who is going
to do it and what is the least cost expansion; and getting the
right price signals for the grid. These problems are with us in
spades right now. RTO's, regional transmission organizations,
are the answer, but not just any RTO. One of the things that
California showed us is how not to form an RTO, and the
California ISO is not the model we would suggest. But a
correctly formed regional transmission organization can address
each of the seven or eight problems that I just ticked off, and
we believe it is absolutely essential for the security,
stability, and efficiency of the grid.
The third issue is retail engagement. Wholesale and retail
markets are disconnected. We deregulated our way halfway into
the middle. We have got a competitive market environment at
wholesale. We do not at retail. There just is not any demand
response to ten jillion dollar per megawatt-hour power at
wholesale. I'm not saying that retail needs to experience real
time pricing. If somebody wants to buy power flat 7 days a
week, 52 weeks a year, they ought to be able to buy that
product. But they also ought to be able to engage in a way that
would make this grid and its power supply much more efficient.
Because we do not experience costs that way at wholesale, flat,
7 days a week, 52 weeks a year, figuring out how to get out of
this hybrid, the deregulated wholesale and the regulated,
rolled-in retail, is a huge issue. If we stay in the middle, we
will surely experience more of the kind of difficulty that we
have got ourselves into since 1992. Eight years into
restructuring, it is still not clear how we are going to get on
through to retail. We either have to go back the way we came in
or we have to get out on the other side. We cannot stay in the
middle.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hickok follows:]
Prepared Statement of Steven G. Hickok, Chief Operating Officer,
Bonneville Power Administration, Portland, OR
Mr. Chairman, distinguished members of the Subcommittee, my name is
Steve Hickok. I am the Chief Operating Officer for the Bonneville Power
Administration (Bonneville). We appreciate this opportunity to appear
today and we thank the Subcommittee for its attention to the unique
circumstances of the Northwest within the context of the national
energy policy debate.
Mr. Chairman, arguably Bonneville has just come through the
roughest year in its history. Wholesale market power prices in the
Northwest hit levels ten times higher than anything anyone had ever
seen in the western grid. The unheard of happened in California with
rolling blackouts under relatively light loads. Far from being able to
help the Northwest during this winter's drought, California came
looking for additional power from us to help it cope with its frequent
power emergencies.
There were some scary days this past winter when the Northwest
teetered on the brink of power shortages. In one 4-day period last
January, we spent $50 million on power purchases. These costs gave us a
pretty strong signal that supply was drying up fast. Bonneville was
forced to declare power system emergencies on three occasions this
winter and extended emergency operations through the summer. High
market power prices and significant increases in loads led Bonneville
to project a potential wholesale rate increase for this fall of 250
percent or more.
Today, thanks to great regional cooperation, when our new rates go
into effect in October, our customers will see an average rate increase
of about 46 percent. Impacts at the retail level should be half of that
or less. The region avoided economic disaster. We helped preserve
system reliability, and Bonneville stayed financially solvent this
year.
My purpose today is to address the basics of where we have been,
what we have accomplished, and what the Pacific Northwest needs to do
in the future to make sure that an energy crisis like we have
experienced does not happen again. I also want to highlight for members
of the Subcommittee that Bonneville has a unique historic role in the
Northwest. As the Senate considers energy legislation this session, we
would ask that Bonneville's role be carefully considered, particularly
as it affects the future of the Northwest economy and the Columbia
River.
BONNEVILLE'S PUBLIC MISSION
Bonneville is a not-for-profit Federal electric utility, under the
U.S. Department of Energy, that markets wholesale electrical power and
transmission services in the Pacific Northwest. The power comes from 31
federal hydroelectric projects located in the Columbia River Basin that
are owned and operated by the U.S. Army Corps of Engineers and the U.S.
Bureau of Reclamation. Bonneville also markets power from the Columbia
Generating Station, a nuclear plant owned and operated by Energy
Northwest. Close to half of the Northwest's electricity comes from
Bonneville. Bonneville's transmission system accounts for about 75
percent of the region's high-voltage capacity. Bonneville also owns and
operates portions of the large interties that ship and receive power
from California, the Southwest, eastern Montana, and Canada.
Bonneville's customers include publicly owned and investor-owned
utilities, as well as some large industries. Bonneville also sells or
exchanges power with utilities in Canada and the western United States.
Bonneville is a self-funding agency, which pays for its costs
through power and transmission sales. Both power and transmission are
sold at cost, including the cost of mitigating environmental impacts of
the Federal hydro system. Bonneville repays any borrowing from the U.S.
Treasury with interest at market rates.
Revenues Bonneville earns help it fulfill public responsibilities
that include low-cost reliable power and investments in energy
conservation and renewable resources. Bonneville also funds the
region's efforts to protect and rebuild fish and wildlife populations
in the Columbia River Basin.
BONNEVILLE'S NEW POWER SALES CONTRACTS
Bonneville's low-cost power is immensely attractive in today's
market and demand for it exceeds our resources. By law, we have an
obligation to serve every retailing utility in the Northwest, public
and private, to the full extent of their net requirements, which is
their retail load net of their own generating resources. Public utility
districts, municipalities, cooperatives, and the residential and small
farm loads of the investor-owned utilities have a preference status and
qualify for our lowest firm power rate. We also have had a long
tradition of serving directly some electricity-intensive industries,
primarily aluminum smelters, although they are not preference
customers.
With our current 20-year contracts with these customers expire this
year, we negotiated new contracts in a 3-year regionwide process we
called subscription. When this process culminated in October 2000, we
had about 11,000 megawatts of load to begin serving on October 1, 2001,
with only about 8,000 megawatts of resources in our system or under
contract to us. As late as May 2000, that did not look like too bad a
challenge. We could augment these resources by going to the market and
melding that slightly higher priced power with our low-cost federal
power. It appeared we could do that and hold the new rates quite close
to the old rates.
But soon after, as we were about 1,000 megawatts into the
augmentation effort, the wholesale electricity market took off for the
moon.
THE WEST COAST ENERGY CRISIS
A number of events conspired to set this off, the most notable
being California's flawed approach to restructuring the State's power
system. But the fundamental problem was the basic issue of supply and
demand. Demand for electricity on the West Coast had increased over the
last ten years with population growth and strong economic expansion.
Throughout this period, there had been no significant building of new
resources. And, for the last six years, this growing problem had been
masked by good to extremely good water supplies in the Northwest
hydropower system. This year's drought ripped that mask off.
By last December, wholesale electricity prices were sky high in the
West. And what a winter we faced the California disaster on top of the
second worst water year in the 77 years we have been keeping record.
The Northwest teetered on the brink of blackouts.
BONNEVILLE'S SHORT-TERM MEASURES TO DEAL WITH THE CRISIS
Overall, during the first nine months of fiscal year 2001,
Bonneville spent over $1.5 billion on purchased power, but even that
was not nearly enough. It was only through such extraordinary measures
as paying industrial plants to shutdown, buying power and water back
from farmers, foregoing spill and flow augmentation for fish, and doing
two-for-one power exchanges with California that netted water and
energy for the Northwest, that we were able to meet reliability
standards and preserve financial solvency.
I particularly want to note our appreciation to the U.S. Army Corps
of Engineers, the Bureau of Reclamation, the National Marine Fisheries
Service, and the Environmental Protection Agency, all of whom worked
diligently to help to manage the hydro system through this challenging
period. And Energy Northwest, which manages the region's nuclear plant,
took extraordinary actions to keep power flowing this past winter and
spring.
BONNEVILLE'S LOAD REDUCTION EFFORT
We made it through the winter. But, while we had purchased
considerable power to meet our loads in the upcoming contract period,
we still needed to close a 2,000-megawatt gap. When we calculated the
cost of continuing to arrange those purchases in this overheated
market, it soon became apparent that it would cause a rate increase of
250 percent or more.
We knew this would be disastrous for the Northwest economy. We
anticipated that, as new supplies were developed, market prices would
eventually settle out. The big challenge was getting through the first
18 months to 2 years.
That is when we decided to turn to the demand side of the equation.
We asked our aluminum customers to delay the restart of their smelters
for another one to two years. We offered to cover their costs of
staying down, plus pay and benefits to their workers during the
downtime. At the same time, we also called on our utility customers,
both public and investor-owned, to reduce their demand for Bonneville
power by ten percent.
I do not know that anyone would have bet on us for a good outcome
at the time we started down that path. But, thanks to a tremendously
positive response from our customers and the support of the Governors
and the congressional delegation, we got the rate increase down to 46
percent. We invested $250 million to reduce demand and saved ratepayers
$4 billion. We estimate that 25,000 jobs were saved in the Northwest
economy. Aluminum smelters are down for some time, but they are not out
of business permanently and their workers will be paid.
Our load reductions also improved Northwest reliability, since the
bulk of the reduction came about through conservation or curtailment.
The Northwest Power Planning Council estimates that the load reduction
exercise cut the probability of further regional shortfalls this coming
winter from approximately 25 percent to 12 percent. And market prices
started to come down, partly and significantly because Bonneville
stayed out of the market.
Preserving our financial solvency, of course, is critically
important to our ability to preserve funding for the region's fish and
wildlife program, including efforts to save endangered fish. Bonneville
revenues are the principal source of funds for this effort.
MUCH REMAINS TO BE DONE
But if I leave you with any message today, it is that we cannot be
lulled into a false sense of security by the current lower market
prices, or we will be doomed to repeat our recent history.
Bonneville's entire effort to bring the rate increase to a
manageable level and to keep the lights on during this drought year was
simply short-term crisis management. We cannot forget that we got
through this period only by draconian efforts and some considerable
hurt. We are still curtailing loads. Aluminum smelters and other
manufacturing operations are still shut down. We spilled little water
at the dams for fish migration because of concerns over electricity
reliability and financial solvency. We have incurred environmental
costs because of the operation of emergency diesel generation.
What we need now is to forge the same kind of regional cooperation
we just saw on the demand side and focus it on building an energy
infrastructure for the Northwest that will ensure reliable electricity
supply, without environmental compromise, without industries shut down,
without sacrificing fish and wildlife protection, and without
sacrificing our low-cost energy base.
Let me outline the areas I believe the Pacific Northwest needs to
focus on as its maps out its energy future.
First, obviously the region needs to ensure there is adequate new
generation to meet the needs of a growing population and a growing
economy. The Pacific Northwest needs low-cost kilowatts added to its
system from a variety of sources, including gas-fired generation,
renewable power and investments in the existing hydropower system.
Bonneville is working with private sector entities to help integrate
new generation resources into the transmission system while also
continuing to assure transmission and power reliability in the Pacific
Northwest. And Bonneville now has 33 megawatts of wind power operating,
another 340 megawatts under development, and is reviewing proposals for
another 830 megawatts.
Second, we should not turn to generation alone. We must refocus on
using energy efficiently. We need to create sustainable energy
efficiency and conservation programs that are maintained through high
and low market periods. True energy efficiency means maintaining the
same amenity levels but using less energy to do so.
Third, the Northwest's high-voltage transmission system is
stretched to the limit. Other than one interregional transmission line,
there has been no major new transmission built in the Northwest since
1987. Yet, with dozens of companies now lining up to develop power for
the future, we must be able to deliver that power where it is needed.
The critical path for developing new generation will be transmission
construction because it is more difficult to site and build
transmission than generation.
Fourth, while hydropower will remain the basis of our region's
electricity system, it is not likely to be a major source of new
supplies. While additional wind power and other renewables should make
a significant contribution, much of the next increment of electricity
generation likely will come from combustion turbines fueled by natural
gas. They have advantages in that they can be sited and built
relatively quickly, and they have relatively low air emissions. But we
must ensure that we have the gas pipeline and storage capacity to
provide the fuel for these resources.
CONTINUING TO PROVIDE PUBLIC BENEFITS TO THE NORTHWEST
There are three other critical policy issues that we have to
resolve if we are to have a sound energy system. First among these
issues is the future of our fish and wildlife. With the issuance of the
National Marine Fisheries Service 2000 Biological Opinion, it is time
to move forward aggressively to implement this recovery effort, in
coordination with the Northwest Power Planning Council's fish and
wildlife program.
Another critical policy issue is how future service to electricity
consumers will be assured in a world of market forces. The role
Bonneville plays in this region, its future and its management, will be
an integral part of this discussion.
The 1980 vision for Bonneville was that Bonneville would be a
wholesale resource provider serving the needs of the region's retail
utilities and direct-service industries. Then, in 1996, the region
conducted a comprehensive review of the Northwest energy system. The
long-term vision for Bonneville that came out of that review was for
Bonneville to be a niche marketer and not an acquirer of resources to
meet load growth. It was envisioned that as a result of deregulation,
merchant suppliers would provide the resources of the future. However,
the utilities that left Bonneville and ventured into the market, when
it appeared market prices would stay low, came storming back to
Bonneville during our subscription contract offerings, demanding
service when it appeared market prices would go high. What a difference
a few short years can make.
Today, new resources are being developed independently in this
region, but customers are still counting on Bonneville to serve their
load for the next five years and beyond. However, because of the risks
in today's erratic market, it would not be prudent and we are not
willing to buy resources for periods that are any longer than our
supply obligations to these customers.
And finally, a key policy issue will be the ultimate shape and
scope of the regional transmission system. The Administration and the
Federal Energy Regulatory Commission are strongly supporting the
formation of independent regional transmission organizations, known as
RTOs, throughout the nation. Bonneville and the other filing utility
partners are supportive of the effort and have been working on ``RTO
West'' that could comprise most of six states and two Canadian
provinces. RTOs, if properly formed, will facilitate deregulated
wholesale energy markets and improve overall system reliability by
having a single, independent entity manage the region's transmission
transactions, as opposed to a fragmented approach.
CONCLUSION
Mr. Chairman, members of the Subcommittee, as I stated at the
outset, this has been an incredibly challenging year for Bonneville. We
have avoided falling on the stumbling blocks this dangerous market has
presented us. But our future and the future of our role in the
Northwest still hangs in the balance. There is a tremendous challenge
ahead of us to keep this system in shape so we do not have to go
through this kind of crisis again. I think we know what the challenges
are, and we know what we need to do.
It is imperative that we deal with all of these issues if we are to
preserve the benefits that Bonneville and the Columbia River provide to
the economy and the environment of the Northwest.
Thank you for your attention. I am available now to answer any
questions you have about Bonneville and its role in the Northwest
energy issues.
Senator Dorgan. Mr. Hickok, thank you very much. We will
ask questions after we have heard all three witnesses.
Mr. Harvard Spigal is someone who has had a wealth of
experience, I understand, with Bonneville and other experience
as well and is going to give us his perspective of the history
of this, and Mr. Spigal is a partner with Preston Gates and
Ellis.
Mr. Spigal, we appreciate you being here. Why don't you
proceed?
STATEMENT OF HARVARD P. SPIGAL, PARTNER, PRESTON GATES AND
ELLIS, PORTLAND, OR
Mr. Spigal. I am not here on behalf of any client. The firm
represents many participants in the utility industry, but I am
appearing here presenting only my own views and not advocating
any positions.
I have been asked to testify about the history of the
Pacific Northwest power system based on my 26 years of
experience at Bonneville, 14 years as general counsel, 2 years
as senior vice-president of Bonneville's transmission business
line. Like Steve, I am probably one of the few who is still
around, who remembers, active in the industry, who remembers
working on the Northwest Power Act, and I know there are new
perspectives about how the region should meet its power supply
requirements, and there are new perspectives about Bonneville's
possible role in the region, but I am here to talk about that
historical role, and that historical role included a public
service responsibility. The public service responsibility was
to attempt to serve all load, but there was a preface
requirement that Bonneville attempted to serve all load of
utilities and industries including commercial, industrial, and
agricultural load.
The Bonneville Project Act established a mandate for the
sale of Federal power generated at Federal hydroelectric
projects, and the mandate was to sell power and give first
priority to publicly owned utilities, PUDs, municipalities,
cooperatively-owned utilities, and then to sell power to
investor-owned utilities and direct service industrial
customers, principally aluminum companies. That economic
development role was key in Bonneville's history. Bonneville
was an engine for regional economic growth, and I tried to
think about how to illustrate that, and rather than talk, I
found a poster which Bonneville, if you want to look at that, I
will offer it, which Bonneville did in 1943, and that reflected
Bonneville thinking of itself at that time, and economic
development was a key part of that role. That worked until the
early 1970's when basically the additional developments of the
Federal, at Federal hydroelectric projects were insufficient to
meet increasing load growth, could not keep pace with demand,
and Bonneville cut off the last and best drawing utility
service in 1973.
By the late 1970's, Bonneville had issued a notice of
intent to allocate power among its preference customer. DSI,
Direct Service Industrial customers were basically told that
they would not get new contracts when their existing contracts
terminated. That kicked off an intense period of regional
discussion about how to meet that problem and how to avoid an
allocation, and the result was the Northwest Power Act, and the
Northwest Power Act had as its essential purpose to avoid a
dispute over the allocation of Bonneville's limited power
supply, and it had as another purpose a desire to maintain a
strong regional economy using the economic benefits of the
Federal Columbia River power system, and the way that the
regional power act attempted to achieve that objective was to
give Bonneville the authority to expand its power supply, to
acquire new general resources, both generating resources,
conservation, and renewable resources. To the extent that an
individual utility whether publicly owned or investor-owned
utility looked to Bonneville to meets its power supply
obligation, Bonneville had the authority to expand the Federal
power supply to meet that obligation.
During debate on the regional act, there was never in my
recollection, and there is never any indication in the
legislative history of any serious consideration during that
period of dropping load to put the region in load resource
balance. The objective was to expand the power supply even
though at the time new generating resources were about 10 times
the price of BPA's power supply. Now, of course, new generating
resources are probably closer to two, maybe three times the
cost of BPA's power supply.
The second way the regional act was supposed to end the
dispute over the allocation of Federal power was by spreading
the benefits of Federal power to investor-owned utility,
residential consumers, but we find ourselves, as Steve
indicated, at a point in time where the power supply did not
expand, and we are not able to meet all loads, and I think that
it is an important issue about whether or not the choice to
serve the regional economy as well as meet Bonneville's other
statutory mandates is going to be satisfied by expanding the
power supply or dropping loads or being forced into an
allocation among a class of BPA customers or a subclass. Thank
you.
[The prepared statement of Mr. Spigal follows:]
Prepared Statement of Harvard P. Spigal, Partner, Preston Gates and
Ellis, Portland, OR
INTRODUCTION
My name is Harvard P. Spigal. I am a partner with Preston Gates &
Ellis LLP. Although I and other members of my firm represent
participants in the electric utility industry, I am not appearing on
behalf of any client, or advocating any position on behalf of a client.
The views I express are my own.
I have been asked to testify about the history of the Pacific
Northwest power system based on my twenty-six years of experience as an
employee of the Bonneville Power Administration (``BPA''), of which,
fourteen years were spent as General Counsel and two years as Senior
Vice President of BPA's Transmission Business Line. Like many others, I
participated in negotiations that led to the Pacific Northwest Electric
Power Planning and Conservation Act (the ``Northwest Power Act'') and
worked on implementation of that act.
HISTORICAL ROLE
Before enactment of the Northwest Power Act, BPA's role was to
market power produced at Corps of Engineers and Bureau of Reclamation
dams on the Columbia River and its tributaries. As new dams were
constructed into the 1950's, additional amounts of power were made
available to meet the region's increasing demand for energy as the
economy and population expanded. One focus of BPA's marketing efforts
was to bring new industry to the region. Power surplus to the needs of
preference customers (publicly owned utilities), was sold to investor
owned utilities and to BPA's direct service industry customers
(``DSIs''). In the early 1970's, BPA participated in a program to
purchase the energy generating capability of nuclear power plants in
order to enable the agency to continually meet the load growth of its
preference customers. As loads grew, however, BPA stopped selling power
to investor owned utilities. By the late 1970's, BPA had announced the
need to allocate its limited power supply among preference customers.
PURPOSE OF THE NORTHWEST POWER ACT
The Pacific Northwest is unlike other regions in three ways. First,
the region relies on hydroelectric power to meet its needs. Even today,
low cost hydroelectric power serves almost half of the load in the
region. Second, the region has a large number of publicly owned
utilities that are a powerful force in the Pacific Northwest. Public
power serves about a third of the region's load, and is given
preference and priority to BPA power. Third, BPA is the dominant
wholesale power supplier and transmission provider. Bonneville markets
approximately 40 percent of the power consumed in the region, and owns
and operates approximately 75 percent of the transmission system. These
three elements--low cost hydroelectric power, the importance of public
power, and Bonneville's role in the market and as a transmission
provider--were even greater factors twenty-five years ago when Pacific
Northwest utilities, BPA's direct service industrial customers, and BPA
started to work with the Pacific Northwest's Congressional delegation
to produce the Northwest Power Act.
Senator Jackson succinctly stated the reason why the Northwest
Power Act was needed. ``Reduced to one sentence the heart of the
regional power bill is the authority for BPA to acquire from non-
Federal entities additional electric power resources, including
conservation, to meet the needs of Northwest consumers.'' \1\ Senator
Jackson asked why this authority was needed ``instead of relying solely
on existing systems, public and private, to meet growth needs.'' \2\
Senator Jackson answered his own question by stating that the
alternative was ``a battle over the allocation over the large but
limited pool of Federal power.'' \3\ The only solution, Senator Jackson
explained, was to expand the resource pool and legislatively allocate
BPA's power. ``First and foremost, the region is extraordinarily
dependent on electric energy. In the absence of legislation resolving
the allocation issue, the whole fabric of the utility industry and the
Northwest economy will be in turmoil for a decade.'' \4\
---------------------------------------------------------------------------
\1\ 26 Cong. Rec., S 14690 (daily ed. Nov. 19, 1980) (statement of
Sen. Jackson).
\2\ Id.
\3\ Id.
\4\ Id. at S 14691.
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Congressman Dicks, during the House debate on the bill, also
explained its purpose.
I cannot emphasize enough how vitally important this
legislation is to the economy and welfare of the residents of
the Pacific Northwest region. . . . . With this legislation,
the potentially explosive reallocation problems can be
resolved. This bill embodies a regionally negotiated and
supported ``peace treaty'' by all of the affected parties. In
ensures a smooth reallocation of power by establishing a
regional planning process permitting the BPA to expand its
resource base, and thereby sign the new utility and industry
contracts necessary for the coordinated planning and efficient
use of regional energy resources.
126 Cong. Rec., H 9859(daily ed. Sept. 29,1980) (statement of
Rep. Dicks).
The Northwest Power Act begins with a ``Congressional declaration''
\5\ of purposes, including to ``assure the Pacific Northwest with an
adequate, efficient, economical and reliable power supply.'' \6\ BPA
was required to meet the firm power loads of each publicly owned and
investor owned utility exceeding each utility's own resources,\7\ and
to offer DSIs new power sales contacts.\8\ BPA was given the authority
to acquire sufficient resources to meet these loads, however, a utility
could choose not to put its load on BPA and develop its own resources
to meet its load, or to purchase power from others.
---------------------------------------------------------------------------
\5\ Pacific Northwest Electric Power Planning and Conservation Act,
Sec. 1, 16 U.S.C. Sec. 839.
\6\ 16 U.S.C. Sec. 839(2).
\7\ 16 U.S.C. Sec. 839c(b)(1).
\8\ 16 U.S.C. Sec. 839c(d)(1)(D).
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REGIONAL POWER PLANNING
In 1980, all utilities shared their twenty-year forecasts of loads
and resources. Utilities, BPA, and state officials were able to
determine if the region was taking steps to assure an adequate power
supply. Of great significance was the expectation of each utility to at
least be in load-resource balance. It was unacceptable for a utility to
be in load resource deficit. Today, however, individual utility load
and resource information is not available, and one cannot know whether
individual utilities have made arrangements to meet their firm loads,
or are relying on the spot or short-term market, which might or might
not have adequate power available to meet demands.
In 1980, the Pacific Northwest was believed to have an inadequate
power supply. Nevertheless, it was expected that all loads would be
served because Pacific Northwest utilities, like utilities elsewhere,
would meet their power supply obligations. The first obligation of a
utility was to plan resources sufficient to serve its entire load. Even
high costs for new resources did not justify dropping load to keep
rates low for other consumers. The BPA power rate for preference
customers was $8 MWh, and the rate for power from thermal power plants
was estimated to be ten times as much.\9\ Today, power from new power
plants probably costs two to three times the cost of BPA power.
---------------------------------------------------------------------------
\9\ H.R. Rep. No. 96-976(I)(1980).
---------------------------------------------------------------------------
Congress and the Pacific Northwest could have let DSI contracts
terminate in the mid-1980's to allow the power used by DSI's to serve
other loads. That alternative was rejected, in part because many DSIs
could take service from publicly owned utilities that purchased power
from BPA. The Northwest Power Act directed BPA to offer DSIs new,
twenty-year power sales contracts, which BPA was able to sign in the
face of a forecasted power shortage because the Northwest Power Act
``deemed'' BPA to have sufficient power to enter into new contracts
with the DSIs.
NEW RESOURCES
When the Northwest Power Act was enacted, publicly owned utilities
were expected to rely on BPA to acquire power to meet their load
growth. It was believed that high costs and risks of new generation
could be absorbed only by spreading the costs and risks to all BPA
ratepayers. BPA was empowered to meet these loads by acquiring
resources. Resources were the electric power capability or output from
generation or ``the actual or planned load reduction'' from direct
application of renewable resources by a consumer and conservation.\10\
Because conservation was defined as a reduction in consumption as a
result of increases in the efficiency of energy use, production or
distribution, load reductions achieved by high prices or dropping loads
was not conservation.
---------------------------------------------------------------------------
\10\ 16 U.S.C. Sec. 839d.
---------------------------------------------------------------------------
BPA was required to secure the approval of the Regional Power
Council before acquiring major resources.\11\ Major resources were
defined as a purchase of more than 50 average megawatts for more than
five years.\12\ BPA resource purchases were required to be consistent
with the Northwest Power Planning Council''s power plan, which meant
they had to be cost effective, meaning a cost ``no greater than that of
the least-cost similarly reliable and available alternative measure.''
\13\ The intended consequence was that resources compete to determine
to most cost effective resource.
---------------------------------------------------------------------------
\11\ 16 U.S.C. Sec. 839d(c).
\12\ 16 U.S.C. 839a(19).
\13\ 16 U.S.C. 839a(4).
---------------------------------------------------------------------------
BPA TRANSMISSION
BPA's transmission role has been unchanged for decades. In 1980,
BPA owned approximately 80 percent of the region's high voltage
transmission system. BPA's responsibility on key paths, such as the
Cross-Cascades path used to deliver electricity from hydroelectric and
thermal plants on the Columbia River, is particularly critical. Total
Cross-Cascades transfer capability is about 10,500 megawatts. Puget
Sound Energy owns 450 megawatts, and the rest is owned by BPA. In 1974,
legislation was enacted to allow BPA to borrow funds from the U.S.
Treasury Department to construct transmission facilities.\14\ This
authority freed BPA from annual appropriations for costly transmission
facilities, making it possible for utilities developing power plants to
be confident that BPA transmission facilities would be ready when their
plants were completed.
---------------------------------------------------------------------------
\14\ 16 U.S.C. Sec. 838k(a).
---------------------------------------------------------------------------
BPA is required to set rates for transmission service that
equitably allocate its transmission costs between federal and non-
federal users. Although BPA is not subject to most provisions of the
Federal Power Act, under the Energy Policy Act of 1992, BPA is a
transmitting utility \15\ and can be ordered the Federal Energy
Regulatory Commission (``FERC'') to provide an interconnection and
transmission service. The Energy Policy Act also required that BPA
transmission rates ``not be unjust, unreasonable, or unduly
discriminatory or preferential, as determined by the Commission.'' \16\
The provisions also provide for a complaint process and a FERC hearing
and determination.
---------------------------------------------------------------------------
\15\ 16 U.S.C. Sec. 796(23).
\16\ 16 U.S.C. Sec. 824k(i)(b)(B)(ii).
---------------------------------------------------------------------------
CONCLUSION
The Northwest Power Act provides a statutory structure ``to assure
the Northwest of an adequate, efficient, economical and reliable power
supply.'' The objective was to spread the benefits of the low cost
Federal Columbia River Power System to all consumers and to avoid an
unwanted allocation fight over the limited amount low cost Federal
hydroelectric power. The result was to be a stronger Pacific Northwest
economy.
Senator Dorgan. Mr. Spigal, thank you very much.
Next we will hear from Miss Sharon Nelson, a member of the
board of trustees, North American Electric Reliability Council.
It says here Princeton, New Jersey. You are from this region,
right?
Ms. Nelson. That is correct.
STATEMENT OF SHARON L. NELSON, MEMBER, BOARD OF TRUSTEES, NORTH
AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ
Ms. Nelson. Thank you, Mr. Chairman. I am here, Mr.
Chairman, and Senator Cantwell, thank you for the invitation. I
am here representing the North American Electric Reliability
Council. It is based in Princeton. I am an independent member
of the board of that non-profit organization. My day job is as
director of the University of Washington Law School Center for
Law, Commerce and Technology, and previously I was two terms as
head of the Washington State Utilities Transportation
Commission, and in those 12 years it was my privilege to serve
with Bruce Haggen from your State, Mr. Chairman, and to work
with you actually, on a very complex phantom tax issue many,
many years ago. You might remember.
My point following these distinguished gentlemen, whom I
have known for quite a long time in other roles, is much
simpler, a much simpler point than theirs. My point today is
that if Congress does nothing else this year, Congress must
address the question of how to institutionalize responsibility
for reliability assurance for the electric power grid. This is
a simpler question, and I don't mean to say that it is
exceedingly simple, because nothing in this industry is
exceedingly simple, but it is a doable proposition as opposed
to many of the other thorny issues that face the Congress.
Comprehensive restructuring at the retail level as Mr.
Hickok suggested is something that needs to be addressed by the
Congress, but it has been many years in coming, and may be
again impossible, and while your bill will deal most likely
with the bulk power market, it may not get to the retail
market, but I think the California debacle demonstrates why
this is no ordinary commodity, and this is not garden variety
deregulation, and again why Congress must address the
reliability issue.
Electricity simply is the life blood of our economy. Our
very public safety and our economy depends on its availability
and reliability. As former Commissioner Ron Laird from the
Colorado commission once said, you know, when the phones go
out, you finally can get some work done, but when electric
power goes out, you have got to move out, and that is true
whether you are at home, whether you are at the hospital or
whether you are on the factory floor. There simply is no ready
substitute for electricity for most of its uses, and as my
current, as sitting Commissioner Dick Kemp said on the
Washington Commission said, saying that electricity is like any
other commodity is saying that oxygen is like any other gas.
Again, it is a fundamental and essential part of our economy.
My own history, it may be a dubious distinction, but I have
been a student of deregulation. I started on the congressional
committee in the U.S. Senate in 1976 when Senator Magnuson was
its chair and was privileged to be there when Congress
abolished the Civil Aeronautics Board. It abolished the
economic regulator of the airline industry, but it did not
abolish the Federal Aviation Administration, the safety
regulators of the airline industry. When it changed the rules
for trucking, it changed the rules for the Interstate Commerce
Commission economic regulation of the trucking industry, but it
left the safety and the workplace rules intact at the
Department of Transportation.
When the FCC deregulated administratively the
telecommunications industry, it found that it had to create a
reliability council to take care of some of the problems that
were unanticipated in its scheme for economic deregulation, and
recently the Congress, trying to be respectful of the
marketplace realities, and I am convinced of how markets can
function very effectively in formerly regulated industries,
much better than they ever did when they were regulated, still
Congress has been trying to establish self-regulating
organizations, and ICNN, the Internet Corporation for Signs,
Names and Numbers is a recent example which may not be a model
for my testimony today. I should also indicate that one of my
other night jobs is sitting on the National Academy of Sciences
board and reviewing Corporation for Signs, Names and Numbers
now to see just how well it is operating.
One of the chief criticisms for ICNN has been that it is
way too American-economy centric, not international enough,
which is again, which brings us back to this legislation that I
am advocating today.
The North American Electric Reliability Council had
proposed to transform itself starting in 1977 from a volunteer,
self-regulating organization, organized primarily in a
contractual manner. We have been in existence since 1968. We
were created in the wake of the 1965 New York City blackout.
The industry has shown great leadership in trying to
transform itself, but it needs Congress's help to give finally
the enforcement authority that it needs to make sure that
people do not lean on the electric power grid and try to seek
competitive advantages through misusing the grid.
Senator Cantwell has joined Senator Gordon Smith from
Oregon in promoting this reliability title to the legislation,
and I am here today to urge you to really take a serious look
at it, and despite whatever else happens in Congress to try to
make sure that this gets through on a stand-alone basis. This
legislation did make it through the Senate once before. It is a
doable proposition.
Recently, some of our consensus, the proponents of the
legislation has been almost God, apple pie and motherhood, have
retracted their support, but I know that various members of the
former coalition met last Thursday and are working to try to
make the legislation simpler so that it can be passed by
Congress this year.
Many of the people who have left the coalition are arguing
that the FERC should be given the reliability authority, and I
would just like to tell you from my own experience at the
Washington Utilities and Transportation Commission, that
combining economic regulation and safety regulation is not
always an easy fit.
Again, in the wake of the trucking deregulation experiment,
the UTC kept a lot of safety regulations for trucks, but
finally our legislature realized that in an era of scarce
resources, both personnel and budgetary, that it was much more
sensible to put safety regulation with the Washington State
Patrol where the personnel already exists to do that kind of
work, and the same was true of the natural gas deregulation
issue where the commission shared safety enforcement with the
Department of Transportation, and frankly, it is going to be a
tight budget year for Congress, and adding the adequate
personnel and budgetary resources to FERC budget may be more
difficult than to simply approve and to continue in existence
NERC, which wants to transform itself from something called
NERC to something called NAERO, the North American Electric
Reliability Organization, which will have the benefit of again
of being something that we can work with our neighbors to the
north in Canada and our neighbors to the south in Mexico
without running afoul of their notions of their own
sovereignty, and the other criticisms that have been lately
filed against NERC are that it is too slow, and it is too
captured by incumbent electricity providers.
Again, I think the industry has shown great leadership. The
nine independent trustees that I am one of have taken over the
organization now, and it is our mission to make the
organization truly independent, its processes truly fair to
everyone in the industry, and its processes truly transparent.
Thank you, Mr. Chairman, for your attention. I am hoping
that at least the electric reliability title is not an ``only
yesterday'' policy. I think it is clearly one for the future,
and the only one that Congress can address in a comprehensive
and rational way. Thank you.
[The prepared statement of Ms. Nelson follows:]
Prepared Statement of Sharon L. Nelson, Member, Board of Trustees,
North American Electric Reliability Council, Princeton, NJ
SUMMARY
Good Morning Mr. Chairman and members of the Subcommittee. My name
is Sharon L. Nelson, and I am a member of the Independent Board of
Trustees of the North American Electric Reliability Council (NERC). I
am also Director, Center for Law, Commerce and Technology, at the
University of Washington. I recently completed two terms as Chairman of
the Washington State Utilities and Transportation Commission. I was the
Past President of the National Association of Regulatory Utility
Commissioners and the Past President of the Western Conference of
Public Service Commissioners.
NERC strongly 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 United States. NERC firmly believes that
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.
WHAT IS 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.
NERC sets 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 in 1968 was the electric industry's response to
legislation that had been introduced in the Congress following the 1965
blackout in the Northeast. That legislation would have given the then
Federal Power Commission (FPC) a central role in the reliability of the
bulk electric system. Instead of adopting that legislation, Congress
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 is 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, which means 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.
A number of factors have contributed to our present circumstance.
Demand has been steadily increasing over the past decade and is
expected to increase. Just last week, peak demands were recorded in
many areas of this country and in Canada. Second, merchant generators
are now building or planning to build hundreds of new plants across the
country to meet that increased demand in response to the increased
prices that we have been seeing in the wholesale electricity markets.
The same is not true for transmission. Ten years ago North America
had a little less than 200,000 circuit-miles of high voltage
transmission lines. Today we have about 200,000 circuit-miles of lines.
Ten years from now we are projecting that we will have just a little
over 200,000 circuit-miles of high voltage transmission lines. All of
these new generators will need to access the transmission grid to get
their power to where it is needed. For the most part, however, the
transmission dollars that are being spent today are to connect new
generation to the grid; they are not going to result in major new power
lines that will strengthen the grid's ability to move large blocks of
electricity 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 with lower priced generation will not occur.
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 generating stations close to load centers, which were largely
cities. As the cities grew, the electric systems grew with them,
spreading outward from the center. The weakest part of the electric
grid is generally where one system abuts another. Initially, utilities
installed connections between adjacent 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 these systems were not 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,
vertically integrated utilities with monopoly franchise service
territories had complete responsibility for all aspects of their
electric systems. They planned and built their transmission systems,
ensured that sufficient generation was constructed, and operated and
maintained their transmission and distribution systems, all to serve
customers within designated service areas. 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. In some cases, those responsibilities may be falling
between the cracks. Regional Transmission Organizations (RTOs) 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. NERC is seeing more congestion on the grid, for
more hours of the day. NERC is also seeing increasing violations of its
reliability rules. If these trends continue, we risk the increased
likelihood of grid failure.
LEGISLATION IS NEEDED TO ENSURE 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 United States. 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 the Senate
Committee on Energy and Natural Resources, 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 similar letter
supporting the pending NERC legislative proposal to the Senate Energy
Committee, the House Committee, and the Administration.
GOALS OF RELIABILITY LEGISLATION
The following goals are embodied in the NERC legislative proposal:
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.
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, the development and
enforcement of reliability rules is not a job that can simply be given
to FERC. Furthermore, FERC does not even have clear authority over
reliability matters for the utilities that it does regulate.
Legislation that would have given FERC's predecessor, the FPC, 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 the responsibility for ensuring
the reliability of the interconnected bulk power system. NERC was
formed in 1968 to lead that industry effort.
FERC lacks jurisdiction over approximately one-third of the owners
and operators of 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.
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 possess and is never likely
to achieve anything approaching the level of technical sophistication
inherent in the NERC standard-setting process, which involves dozens of
committees and working groups and thousands of professionals
representing all segments of the electric industry. 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 lawyers.
These complex rules need to be worked out together in a collaborative
fashion by all segments of the industry.
A further and often overlooked impediment to FERC's ability to act
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 United States,
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 an industry self-regulatory organization,
rather than FERC, set and enforce compliance with grid reliability
standards.
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 reliability 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).
Finally, the NERC reliability legislation addresses the role of
state regulatory 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.
CURRENT INDUSTRY DISCUSSIONS OF LEGISLATION
Although a broad coalition of state, consumer, and industry
representatives are supporting passage of the NERC legislative
proposal, we recognize that 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 can broaden
the base of support even further. One of the major criticisms of the
legislative language is that the proposal is longer and more detailed
than may be appropriate for a legislative enactment. NERC is in the
process of working with all interested parties to develop a shorter,
less detailed bill that nonetheless retains the essential criteria
needed to create an independent industry self-regulatory organization
that will command at least the same level of support as exists for the
current version. Members of the coalition met on August 9, 2001, in
Washington, DC to review those efforts. We anticipate that this process
can be completed and revised language provided to the Committee
shortly.
FERC's recent RTO orders do not change the need for Congress to
enact reliability legislation because those orders do not address any
of the reasons why this legislation is needed. Those orders cannot
confer jurisdiction that FERC does not now have, either over
reliability matters or over non-jurisdictional entities. Nor do they
provide FERC with the resources or technical competence to undertake
the task of setting and enforcing reliability rules itself. Finally,
those orders do not address in any way the international nature of the
interconnected grid.
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 Subcommittee for attending to the critical issue
of ensuring 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 grid, and the security of
the customers whose electricity supplies depend on them, is 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.
Senator Dorgan. Miss Nelson, thank you very much.
Let me start with the issue of reliability. FERC has not
distinguished itself in my judgment in the recent years. I have
indicated that I thought that FERC has done a great imitation
of a potted plant for a couple of years as California has
suffered blackouts and the wholesale market went haywire. So I
do not, I do not know where we ought to put reliability. I mean
that is something that we are spending a fair amount of time
trying to think through, but it also seems to me that you must,
you must assign the reliability piece somewhere where there is
some responsiveness and where you are not going to have a
sweetheart connection to industry, either. I mean can you, how,
if we, if we did not use FERC here, how would we be sure that
we are not seeing a reliability piece that has a large grip by
the industry, itself?
Ms. Nelson. That is always the problem in an industry
capture, and it happens even to government agencies. George
Stigler first got a Nobel Prize for noticing that regulatees
could capture their regulators, and I think the reason for
FERC's potted plant attitude in the last several years has been
a capture in the other way, an ideological capture saying that
markets will cure anything, sort of a fundamental
misapprehension of the competitive realities underlying the
economy of electricity.
Our model for this legislation is really modeled on the
Securities and Exchange Commission and securities regulation
institutions of the country, and I think most people while they
may be impatient with the SEC, the Nasdaq and the New York
Stock Exchanges and the National Association of Securities
Dealers, think that that market functions fairly and most of
the time fairly efficiently and fairly nimbly, and it addresses
problems when they emerge. That is the model this legislation
seeks to impose for the electricity industry.
FERC would get delegated authority from Congress to enforce
reliability rules which in turn would be redelegated to the
NAERO which would then be formed, again like the National
Association of Securities Dealers and the exchanges, would then
become a self-regulating organization which through its
regional councils, working in numerous committees composed of
many professionals, utilizing checks and balances, would
formulate the standards that would apply to the industry.
This is not a new model for industry. It is, standard
setting is done this way in many different venues, but we think
this can work, and what the missing piece is is now the way the
industry since 1968 functioned is essentially sunshine and peer
pressure and public embarrassment, but as competition comes, we
need the authority to single out the bad actors and actually
give them meaningful sanctions, and that is what the
legislation would do.
Senator Dorgan. Thank you.
Mr. Hickok, what do you expect will happen between now and
the end of the year with respect to rates from Bonneville?
Mr. Hickok. We have a 46 percent rate increase that is set
to go into effect on October 1. When we first began assembling
that additional 3,000 megawatts to close the gap I mentioned
when our customers came back to us, we thought we could do that
with very little impact on our current rates, which averaged
about 2.3 cents a kilowatt hour or $23 a megawatt hour.
When we were about 1,000 megawatts into assembling that
power supply, which we were doing quite well at prices under
$30 a megawatt hour, we suddenly hit the competition with
California and its desire to lock up in long-term contracts
very large supplies, and prices went into outer space. So we
decided to move in, as I mentioned, on the demand side in order
to hold a rate increase down from what would have been about
250 percent, if we bought our way out of the situation, to 46
percent. But I have to confess to you, Mr. Chairman and Senator
Cantwell, we hate this curtailment business. We are doing it on
a willing-buyer/willing-seller basis, but we know that upstream
and downstream from the industries that we are dealing with,
including irrigated agriculture as well as aluminum, chemicals,
pulp and paper, steel and so forth, we know that upstream and
downstream we are doing damage in the Northwest economy. We are
resorting to these curtailment actions to avoid a wider
calamity which a 250-percent rate increase undoubtedly would
have caused. We estimated it would have put 25,000 people out
of work. As it is, we were able to cover the employment of the
industries we curtailed, but there are employment effects
upstream and downstream from these industries--not as severe as
25,000, but they are definitely there, and we want to get out
of curtailment just as rapidly as we can. So, as we look to the
long-term future, our desire is to put together the power
supplies that let these industries come back up just as rapidly
as we can assemble those supplies at reasonable prices.
Senator Dorgan. What do you mean by ``long-term'' when you
refer to it here?
Mr. Hickok. Well, we basically arranged with the industries
and our utility customers to keep a lot of users off-line for
the next 1 to 2 years, because we are getting fairly decent
price quotes in years 3, 4 and 5 of the next 5-year period
covered by our rates. It is the first 2 years in which it is
incredibly tight. And in order for those supplies to come on
line, we have got to build transmission, because we have got
equally as big a transmission problem, congestion in the
system, in addition to a power supply problem. In other words,
even if all the plants in the world, and there is 30,000
megawatts of development interest just in the Pacific
Northwest, even if it all suddenly arrived, the grid cannot
handle it.
Senator Dorgan. I did not mention transmission in my
opening statement. We need to talk a bit about transmission
here, because that is integral to solving all of these issues,
but let me ask the question that came to my mind when both you
and Mr. Spigal discussed the notion that we did not have the
power supply expand when it was expected to expand here in this
region, because you could go to other wholesale markets and buy
it at a price that would really render it worthless to go build
additional plants here, so if that power supply did not expand
because the market system sent signals that it should not
expand, does not that undercut the whole notion of the market
system sending appropriate signals with respect to future
needs?
Mr. Spigal. If I could answer, I think it does. I think
there is a major disconnect between a market approach and the
fact that supply meeting reliability responsibility lies with
individual utilities.
Twenty years ago or even 10 years ago here in the Northwest
all of the utilities submitted load forecasts and resource
forecasts demonstrating how they were going to meet their
obligation to carry their load for 20 years in the future, and
that information was publicly available, and there was a real
sense of duty, responsibility, utility responsibility, if you
will, to keep yourself in load resource balance and not have a
deficit. Now, none of that information is available. It is all
commercially sensitive, and so nobody knows which individual
utilities, publicly owned or investor-owned have taken the
steps to secure an adequate supply to meet their loads. A lot
of utilities, obviously as Steve indicated, relied upon spot
market to meet their load. No signal was sent to the market.
The only way a signal gets sent to the market is when there is
a shortage and prices spike or when individual utilities go out
and contract with developers. So I think there is a real, there
is an issue there how to assure you are going to have an open
market on the generation side, how to send the signals when the
supply reliability is basically at the local level.
Mr. Hickok. I have a bit of a different take or maybe it is
in addition to Harvey's take, and that is who is going to have
the load serving obligation at retail is unclear. The utilities
that traditionally have had it do not know exactly how much of
that load they are going to continue to be obligated to serve
in the future, and those who would enter the market and compete
to serve that load, presumably the aggregators or the
merchants, do not know what the rules are going to be either.
So one of the things that has been a problem for the last 8
years is the rules for retail are not clear. Basically, you
could not set up to do that business. A number of companies set
up and began going down that road, and then pulled out because
they could not understand what they were going to have access
to.
On the wholesale side, we were in surplus for a number of
years, so it was not worth going into the business to serve at
wholesale, and wholesale supplies were artificially high
because Northwest hydropower was plentiful for a good number of
years, probably masking what otherwise would have been a signal
sent to that market much sooner than it was sent suddenly two
summers ago.
Senator Dorgan. What impact can wind generation or the new
technology of wind turbines play in this region of the country
for the generation of additional power?
Mr. Hickok. In this region probably more than any other
region in the country, Mr. Chairman, and that is because
intermittent resources such as wind, which does not blow all
the time and the sun, which doesn't shine all the time, depend
on hydro storage for their efficacy for serving firm retail
load.
The Northwest system with its large storage batteries in
the form of the reservoirs behind the large dams in the
Columbia and Snake River systems gives us the ability to
integrate these resources--wind, solar and other intermittent
resources--better than any other system I know. So, they will
probably play a much larger role in this region than they will
play anywhere else in the country. In fact, Bonneville is
currently developing about 350 megawatts of wind power that
will be coming on-line in the next several years. We are in
negotiation with a number of companies to add up to 800
megawatts more which will make us by far the largest acquirer
of wind resources in the country.
Senator Dorgan. One of you said that, you talked about
retail disengagement, I think you were talking about
California, perhaps, was that----
Mr. Spigal. Yes.
Senator Dorgan. Whoever, the issue of retail disengagement,
and I got the feeling that retail disengagement meant that the
market system really never had a full opportunity to work. My
sense is that retail disengagement, for example, in the
California broken or failed experiment was the only method by
which they could possibly pass legislation as goofy as that,
suggesting that somehow you could just, that just the market
system will send whatever signals it sends all the way through
to the retail customer, and whatever happens happens, and that
the market system will be the arbiter or the allocator of the
goods and services here in a manner that is fair and
responsible at all times, but as you indicated, Mr. Spigal, in
your testimony, and you just stated as well that individually
utility loads and resource information is no longer available
in these circumstances. It seems to me that we have a cross-
word puzzle here with pieces that do not fit.
Mr. Spigal. Exactly.
Senator Dorgan. That is why I come to this issue of retail
disengagement. My guess is there is not a sober legislator
within 8,000 miles who could possibly put together a system
that says, oh, and by the way the market system will work here,
and we will have no stop limit for retail customers in terms of
what happens to their rates. Yes?
Ms. Nelson. May I, Mr. Chairman?
Senator Dorgan. It was therapeutic to say that. I am not
sure what the----
Ms. Nelson. It is absolutely a puzzle where the pieces do
not fit, and it is again why students of deregulation, and
especially in our area urged caution a few years ago to our
public policy makers. In this State, for example, only one-
third of the retail sales are by private investor-owned
utilities.
Senator Dorgan. What percent?
Ms. Nelson. About a third. The rest are by municipal
utilities, and what we call public utility districts that buy
power from Bonneville, so they are not even, in your classic
sense, private market actors. They have a different set of
availability of capital. They have different tax
responsibilities, and so right away you get a disconnect and
short of trying to shape the market with their involvement in
it.
We have a Federal agency that is our big transmission owner
in this region. That is really different than the rest of the
country, and in California's case, they tried to do it all.
They thought there was only upside market potential. They
forgot about the downside of the market, and so they thought
all the rates were going to be down, and in fact, the
legislature said we are going to have a 10 percent right across
the board retail rate drop, but they could not continue to
honor that with their rate payers, and when the wholesale
market went whacko, then the market signal, as Steve indicated,
did not get passed through to customers, instead the governor
stepped in hoping to become the buyer of last resort of power
and tried to discipline the market.
Senator Dorgan. Explain the phrase, ``the market signal did
not get passed through to the customers--''
Ms. Nelson. That means the rates have to go up.
Senator Dorgan. I understand that. You are putting it in an
antiseptic way. The point is they protected the customer from
being crushed by an overburdening rate increase that they could
not possibly deal with. So they created this structure of, the
wholesale price structure bearing the increase, with, you know,
a stop limit for retail customers.
Ms. Nelson. And I have to say we are hoping that the
Pennsylvania and Texas experiments in retail will be better,
but they are just beginning.
Senator Dorgan. I think their pieces do not fit in their
puzzle either, but we'll see.
Mr. Hickok.
Mr. Hickok. Retail has not actually been engaged. I think
California taught us how not to try to go with retail. The
Federal Government's jurisdiction was wholesale, and the
Federal Government acted in 1992 and the FERC just came along
and underscored it with its rules, 888, 889 and 2000. But the
States' jurisdiction is at retail, and they will determine how
retail does engage, and right now they are totally
disconnected. If retail basically had been engaged from the
beginning, that is to say if the transformation had begun, you
would not see something as wildly out of whack as we have got
right now. California was bullying its way through by basically
attempting to throw all of its retail customers into a short-
term market. California basically prohibited the kind of
engagement that a retail aggregator would have taken on by
assembling a portfolio of supplies, and most States are
thinking about portfolio approaches as they think about how
they ought to develop retail. They said basically in California
everybody is going to be in the short-term market, and that
guaranteed they were going to swing with a very volatile kind
of market. Wholesale is always going to be volatile, and retail
for the most part should not be, and I would argue it need not
be, and that people who supply at retail will need to
understand that they have a set of customers that need
something different from the wild swings that can happen at
wholesale. Nevertheless, somebody has got to assemble the
wholesale supply, and, as you know, they do not experience
costs that reflect flat kinds of rates which is now what we
have at retail.
Mr. Spigal. Mr. Chairman?
Senator Dorgan. Yes?
Mr. Spigal. If I could disagree with Mr. Hickok a bit, I
think there were problems at retail with failure to pass price
signals with the consequences on the retail customers, but I
think the problem, the missing piece was at the wholesale
level.
In the Pacific Northwest, Mr. Hickok says that the
shortages, the failure to acquire generation, build generation
was masked by good water years, but that never happened in the
past, and the reason it never happened in the past is people
made decisions about how much power they needed to buy,
utilities did, based upon critical water, worst water year of
average, and saying that, taking the position that the utility
taking the position that it did not have to arrange resources,
because it hoped it would be lucky and that it would rain a lot
and there would be surplus power available to buy at very low
prices, that was incurring a risk. That was willing to take a
bet, and so that created a consequence, ultimately now for
Bonneville in terms of the load that is placed on Bonneville.
I think the fundamental issue is the load-serving entities
whether they are investor-owned utilities or public-owned
utilities have a responsibility either in terms of the actions
they take or the type of notice they give Bonneville in this
region, so that the generation can be built. Absent that, the
only signals that are going to occur are going to be short-term
price spikes. That is the way that the developers will learn.
Senator Dorgan. And the short term is really antithetical
to reliability?
Mr. Spigal. Absolutely. It is antithetical to supply
reliability.
Senator Dorgan. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
This reliability question is so interesting, I think we
should continue on it for a second, and Miss Nelson, if you
could just walk us through, say the legislation that Senator
Smith has introduced and has passed the Senate before was
actually in place prior to say, you know, last summer, how
exactly would they have operated in avoiding the situation as
it relates to California?
Ms. Nelson. Well, I do not want to fall into the trap of
saying if the legislation had been in place that this would
have eased problems in California. In fact, the rolling
blackouts were conducted well according to NERC rules. There
was not----
Senator Cantwell. By that you mean?
Ms. Nelson. That the whole system did not go down. The NERC
rules were followed, so the curtailments happened in an orderly
way. It may not have been orderly from the customers' point of
view, but at least the whole system did not collapse, and I
want to make sure that you understand that what the NERC
legislation is proposing again as the wholesale-retail dividing
line is a not a bright line, but it is the line that we in
electricity rely upon to try to get the jurisdictional piece
between the Federal and the State dividing lines for
jurisdiction established, and it is essentially the States are
responsible for retail and intrastate safety and transmission,
but again, each State is so different that in California they
had already formed what Mr. Hickok referred to as a regional
transmission organization, a California independent system
operator, and its rules were primarily followed last month, in
the last few months.
Just a week ago they weren't followed, and the ISO issued
some very stern admonitions to a couple of these retail
marketeers, but what we are proposing is that the FERC would
create a delegation of authority that really what would change
would be that people who did what happened in California last
week would be fined, so that it would hurt for them to violate
NERC rules, and they would be a deterrent effect, so they would
not do----
Senator Cantwell. When would somebody receive the fine
under that situation?
Ms. Nelson. Hopefully not months after the fact.
Senator Cantwell. Which is what, NERC was very late at
citing an actual problem?
Ms. Nelson. Exactly. There would be a real deterrent
effect, and people would know that it would really hurt them in
their pocket book, so they would not do knowingly what they are
alleged to have done last week in California, and what was
alleged to have been done in Ohio a couple of years ago, but
again, the jurisdiction of the NERC FERC would be different
than what the California ISOs or the RTOs would have
jurisdiction over enforcing, as the, as you step down in terms
of where you are in the grid. This is really bulk power we are
talking about here. The State responsibilities for the local
utilities would remain unaffected, and so the rules that are
there would remain as they are, and it is again, it is not,
this is not the most comforting answer I can give you, but it
certainly would have helped.
Mr. Hickok. Senator, could I add a note to that? Stability
and reliability are a real time operations issues, and are
distinguished from the adequacy of the physical amounts of
generation and transmission that exist in the system. It is a
different issue.
Basically, the narrow issue of stability and reliability is
how do you run given the physical assets you have got, how do
you run reliably and safely, and what limits do you put on
lines for loadings and what limits on operating plants so that
the grid does not collapse. So, if you are in an adequacy
problem, there just literally is not enough physical supply as
we saw in California, it governs the way demand will be
involuntarily shed through rotating blackouts. That is really
NERC's responsibility to be sure that all of these real time
operations happen within certain parameters, so that the grid
maintains its integrity, but it is a completely separate issue
in terms of, what we do to ensure the adequacy of the physical
assets, the amount of generation that is available to us to
work with, and the amount of transmission to work with in this
system.
Senator Cantwell. I want to follow up on that, because I
think what is at heart here in the complexity is really the
consumer, and one of my energy advisors who is here this
morning had suggested to me that really this is the equivalent
of what we do with banks and FDIC insurance. The banks have to,
once entering into a relationship with consumers, make sure
that they have a reliable supply of money, and when there are
runs on banks, they have to have a back-up plan, or so it seems
to me at the national level we are faced with giving FERC more
responsibility, an entity may not have reacted as quickly or
have all the tools, still may not be the right model, as Sharon
was saying, to mix economics and regulatory.
There is one aspect of the NERC that I do think is
valuable, Mr. Chairman, and that is the ability to have
international input and conversation which FERC cannot do,
because if we have that, then we are not constantly dealing
with well, if we put these regulations on at the U.S. level, is
not that just going to invite people to do things on an
international basis.
So my question is, we have these choices. We have, you
know, more empowerment to FERC to have oversight here, which
people say this is a puzzle that there will only be a piece of,
we have the ability to make more responsibility in
organizations like FERC, or we have the ability to make more
consumer-friendly requirements of entities to make sure that
they either have the load or the back-up plan that will not
leave consumers in the lurch when we have a hydro shortage or a
spot market that is out of control, and that is really what I
think we have to answer to consumers. So I do not know which of
those, if you could just each answer. I kind of know where
Sharon is, because she has already supported the legislation,
but where are you, Mr. Spigal and Mr. Hickok, on which of those
entities which we invest in, or should we do all of those in
the sense of putting further reliability in the hands of
entities that will protect consumers?
Mr. Hickok. From a reliablity and stability standpoint, we
are completely in support of the NAERO legislation, and I would
support Sharon Nelson's testimony entirely in terms what they
need to make sure that the grid operates in a stable and
reliable fashion, given the assets that are engaged real time.
Those are big issues, no question about it. The grid right now
is precarious, and it is operated now in ways that were not
anticipated because we basically imposed a market environment.
Generation patterns are from an operational standpoint,
frankly, pretty wild, they do threaten the integrity of the
grid, and they demand a different approach. So we are with that
a hundred percent.
Senator Cantwell. And nothing, no further involvement of
FERC, no further responsibilities or oversight from FERC?
Mr. Hickok. From a reliability and stability standpoint,
the Congress is basically putting in the underpinnings that are
necessary at FERC, to be then delegated to the NAERO board.
This is an independent board, by the way, NAERO. Hopefully, it
will not be captured by the industry. That is why it was
designed to be the way it is, but it does depend for technical
support on industry committees that provide the technical
information on which it acts. We think that is definitely the
way to go, but that is only half the picture, as you are
pointing out. The other half is how do you secure an adequate
supply of both transmission infrastructure and generation, and
even the conservation on the demand side, that assures that
people who bought firm service get firm service. As the Silicon
Valley Manufacturers Association will remind us all, what they
contracted for, they haven't been getting lately, and it is a
lot like doing business in a third-world country last summer
down there. What we want to assure is that we do not have that
situation operating in the Pacific Northwest.
Senator Cantwell. Mr. Spigal, you made the points that we
do not really know the loads that the utilities have now, so if
the information is not available how can we tell whether we are
going to meet demands for the future?
Mr. Spigal. If I could back up for just a second, I agree
completely with Mr. Hickok and Miss Nelson. I think the
transmission reliability and transmission planning and
transmission operations jurisdiction proposed for FERC, that is
encompassed within the NAERO proposal is long overdue, and I
think it is a terrific idea. That does not address fixing the
supply responsibility. I thought your analogy to FDIC was
fabulous, and that is exactly the problem. Historically that
has been handled at the State and local level, and it is
particularly an issue here in the State of Washington where 70
percent of the load is the responsibility of publicly-owned
utilities which are not subject to review, subject to the
jurisdiction of the Washington Utilities and Transportation
Commission, and I think the question that I thought I heard was
should that be a FERC responsibility? Should that be a national
responsibility?
That would be, I think, historically, an enormous shift in
responsibility to the Federal level, and yet there is a problem
which if it is not fixed in terms of making sure that local
distribution utilities have responsibility of doing exactly
what Mr. Hickok says, making sure the firm power is available
when people flick the switch or when they turn on their
computer and when the server farm is operating, and that is a
critical responsibility, and that responsibility no longer
works if that responsibility is fulfilled through the cultural
mandate of what it means to be a utility. Utilities are
businesses, and they look at cost benefits of buying fairly
high cost power versus hoping that it rains or hoping that
something good happens, that is really tough and unless that
piece is fixed either through some Federal legislation or
through some local State-by-State initiative, the California
experience will repeat itself. It will repeat itself, and that
experience was nobody was buying in the forward market. FERC
has identified that, and FERC's studies are very clear on that.
I hope that answers your question.
Senator Cantwell. So should you be saying that we should be
looking on the State-wide basis instead, because I think
somewhere the consumer has to be protected, and I think your
last point is the more important one, and that is we have
visited this problem before, and so how do we protect ourselves
in the future, and again we are going to hear from the next
panel about renewables and I am sure about diversifying our
energy source, and obviously we are in this national debate,
but how do we make sure that we protect consumers from this
situation again?
Mr. Spigal. I am cringing saying Federal legislation is
necessary, because----
Senator Cantwell. You could say that the missing link here
is as partial deregulation has taken place, there is nobody
responsible making sure that that load supply is there, and I
think one of the FERC commissioners has suggested that is what
you put, must-build requirements in legislation, and I am sure
that will be discussed at the national level.
Ms. Nelson. Senator Cantwell, can I just take a stab with
this? We have all been infatuated with the market for the last
two decades, this jurisdiction, for example, when I started in
1985 at the commission, we had utilities file their budgets
with us every year. They told us what they were going to do
next year, 5 years out, 10 years out. Well, over time we said,
hey, that is kind of an infringement on their free market
prerogative. Why should they be disclosing to a public body
what they are going to do? So we abolished all that budget
thing, and we do not allow the telephone companies to build
anymore, so the whole digital divide that the Congress is
worried about is another fact in our State that we, as public
officials, they, as public officials, can no longer get their
hands around even at the State level. So it might be wise for
Congress to look at from some sort of notion, again, from sort
of from the ground up, what does the obligation to serve mean
anymore?
Mr. Hickok. And I would say that is largely a State issue.
The Federal Government can move to preempt the States, but
right now it is squarely with the States to decide who has the
obligation to serve at retail, and most of the States are
considering how that obligation will change, whether the
existing distribution utility will be the primary supplier, a
backstop supplier, or will competition be allowed at retail?
Bonneville, for its part, is the backstop wholesale
supplier to every retail utility in the Northwest. One of the
things that we noticed was that, as they all ran from us 5
years ago and then came running back just last year, that puts
us in a fairly precarious situation for ensuring stability of
rates, because we suddenly had to assemble a power supply, and
we were actually told 5 years ago not to worry about that.
So there is a contractual issue in terms of who has the
obligation, and then as they turn to supplies, they can develop
those supplies themselves, or buy from Bonneville, give us
little advance notice, or buy from a merchant developer. But we
need to know what the rules are going to be at retail.
Ms. Nelson. Senators, Senator Dorgan's admonition about not
yesterday's policy I think is also really well taken in this
industry. It seems in this industry in my professional lifetime
we always learn the wrong lesson from the last war.
When I left the commission in 1997, our governors convened
something called the Regional Review to look at how the States,
the four Northwest States should respond to the 1992
electricity revolution, and Montana and Oregon went the
California route, the retail route, and just for an instance,
we have had Interrun enter Oregon's market and exit in the 4
years since I left. They thought there was a really good deal
there. They bought Portland General Electric. They thought they
could go into retail in Oregon, and then did they sell it yet?
Mr. Spigal. No.
Ms. Nelson. They are trying to sell it, but it has not
worked up here in the Northwest, and so I think the State
legislative bodies and the Governors are trying to deal with
that reality at this point, and I do not envy Congress' job,
but the FDIC is sort of, the consumer disclosure issue might be
another way to go, but these fundamental issues of who is going
to be providing generation supply, who is going to be siting
new transmission? These are huge, huge issues, and they are
different from the NERC, NAERO reliability piece.
Mr. Spigal. Maybe the type of solution is one where it is a
Federal mandate, but it is supplied at the State and local
level. There are many Federal programs where local governments
make the implementing decision, but the standards are federal,
and I know that would be an anathema to many utilities. I think
probably most States have that established, but as long as the
responsibility lies with local distribution utilities invested
or publicly owned, and as long as the information is basically
proprietory under this type of market situation, nobody knows,
except in the case of Bonneville. Bonneville publishes resource
balance information.
Senator Cantwell. I think that perhaps we just enter these
perfect storm conditions, that we had the second worse drought
on record, that the spot market was made worse by California,
and that all these things happened, and even if you had 15 or
20 percent reserves it would not have helped, but I think the
economic consequences to the region have been so drastic, 50
percent rate increases, people basically conserving as much as
20 or 30 percent of their businesses and still seeing huge rate
increases, the loss of jobs, the potential economic impact to
some of the large industrial users, it is just too significant
for us to say that they were perfect storm conditions, and
there is no way to plan for them, so I think we will have to
look hard at that question.
Mr. Chairman, I know we have a second panel, but if I
could----
Mr. Hickok. Senator, if I could add one note, so it is not
lost, the adequacy of the bulk transmission is equally as
difficult an issue as the adequacy of the generation to serve
this need. This is not well understood, so it kind of gets
short shift. People understand that power supply and demand are
out of balance, but honestly how the grid will be expanded and
how it will be operated are equally difficult issues. For that
we are looking at an NTO, a regional independent grid operator
who will do the planning and make the decisions and operate the
grid, so that it is a fair, open, non-discriminatory common
carrier, and it is not benefitting a generation affiliate
against the competition, and it is making the kinds of
investments in the system that make sense from a regional
standpoint.
Right now there are no easy solutions to all of the bulk
transmission expansion and operation issues without a creature
like that or something to serve equally in that place.
Senator Cantwell. I know we have a second panel, but there
are two other important issues that I just feel that I would
love to hear from the panelists on. I feel somewhat like I am
hearing the previous statements of Senator Jackson and Senator
Magnuson about Northwest power and the direction of our State,
and clearly, Mr. Spigal, in your testimony about the Northwest
Power Act ensuring that the Northwest have an adequate and
efficient, economical power supply, it seems there is some
difference here among the panelists on how we should or how we
have proceeded, let us say, in the last couple of years, and
how we should proceed going further on this, and so my question
is first and foremost, should we create a Northwest title in
the legislation and be specific about the direction? Should it
be a time again in which our delegations said this is the focus
of power for the Northwest, and secondly, what do we need to do
to get the administration to be supportive of BPA borrowing
authority given that part of our challenge is expanding
transmission within our State?
Mr. Spigal. So from what I understand the debate is
inevitable about Bonneville given the fact that there is a
substantial load on Bonneville. There are demands on
Bonneville's limited power supply. There is a debate about
whether or not Bonneville should acquire resources. It has been
a little over 20 years since the regional act was passed. I
suspect the debate will be on, and there will be expectations,
and there will be opposing visions about Bonneville's future
role, and even if it is an affirmation in some manner or
tweaking of the statutory responsibility for Bonneville, that
is probably not avoidable.
I also believe that it is necessary for the Northwest, a
Northwest section to create clear authority for Bonneville to
be part of an RTO. I think the existing fragmented system,
transmission system in the Northwest should be replaced by a
single operator, and I believe that legislation is required for
that and has been proposed in previous congresses, and I think
that is something, even before then, Senator, I think that
inability of Bonneville to have sufficient funds to build
transmission to provide service for many of these power plants
which are coming on or supposed to come on line in the next few
years is going to have a chilling effect. If Bonneville does
not get the funding, the light at the end of the tunnel, the
rainbow we all seek is not going to materialize if plant
builders see Bonneville cannot supply transmission.
Some of those plants, even the ones which look like they
are well organized and well funded, they just probably are not
going to have a choice. They are going to have to stop spending
money. I think that is a very credible issue. Is that
responsive?
Senator Cantwell. I would be interested in what you meant
by tweaking. That would be the delegation saying specifically,
here is the broad focus of who should be served by BPA?
Mr. Spigal. Yes.
Senator Cantwell. You think we should decide that and be
specific?
Mr. Spigal. I think it is clear that at this point, for
example, the direct service industry is on their way out, that
Bonneville has contracts to serve the direct service industries
through 2006, and most of those industries are shut down
through 2003, and I understand informally, there has been no
formal position that Bonneville says it will not serve the
industries after 2006, that they have to find other supply
sources. So I think that debate is going to go on, and there is
going to be a resolution, either no legislation which means
they will be off the system, or there is going to be
legislation.
It is an issue about what it means to be a load serving
entity, which Bonneville is, directly or indirectly, and I
think there are people who would want to revisit the issue
about whether Bonneville should be buying resources, buying,
whether it is conservation, renewable or generating plants. I
just think that debate is inevitable, and having the debate
without having closure, some restated mandate for Bonneville
would not be productive. It will just leave us where we are
today, a lot of dispute about Bonneville's role.
Ms. Nelson. I agree.
Mr. Hickok. Senator, Bonneville has not said it cannot and
it will not supply the direct service industries after 2006,
but we do need to know to what extent that we will, and we need
to know that a long time before we get to 2006. So, we have
been encouraging the industries as we have negotiated contracts
with them for supplies in the 2002 to 2006 period to let us
know whether they are going to want service from us after 2006
or not, to square that up, so we do not get to that point where
suddenly we have a big regional discussion, and it is decided
Bonneville should supply them, and we haven't had time to
arrange for the adequacy of the supply.
Bonneville as a backstop supplier in the region can work in
the new environment. The transmission issue, how Bonneville's
transmission system is operated in an RTO kind of environment,
how a Federal entity turns over effective control of a Federal
system to a non-Federal entity, that is a little bit trickier
issue. We believe that discussion needs to take place because
Bonneville is 80 percent of the transmission in this part of
the country, and it does not make sense to have an RTO without
us. We have been working with the other transmission owners and
with FERC to understand how we can bring that together. It may
take legislation. There are some legal opinions as to whether
it will or it will not. We are proceeding under the assumption
that it will not, but we would not shy away from encouraging
you to clarify some of the issues that are around the edge of
that situation.
Senator Cantwell. I know I am joined by several of my
Northwest colleagues on the Energy Committee in being very
concerned about the BPA bonding authority, and Senator Murray
has been a leader in making sure that that concept becomes a
reality, but how can we better explain the BPA case to the
administration that the current bonding authority that is left
over is not sufficient for what we need to do to move forward?
Mr. Hickok. I think that the case has been made pretty
well. Bonneville is self-financed. We do not get annual
appropriations to operate. We are entirely financed with
ratepayer revenues, but our access to capital is the sale of
bonds. In 1974, when that authority was provided, we were going
to go straight to the capital markets. But, at the last second
before that legislation was passed, the U.S. Treasury stepped
in and said no, we do not want a competing Federal security out
there. We will buy your bonds, package you up with the rest of
the government which we are financing and refinancing every
day, and that will be efficient. That has indeed been
efficient.
Later, when the budget act which formed the budget
committees and the current scoring system was enacted, a
situation was created where Treasury buys Bonneville's bonds,
it looks like an outlay, just like any Federal appropriation,
as if it never comes back to the treasury. In fact, we repay
all of those loans from Treasury in full at market interest
rates, Treasury's cost of money plus a markup. So it is not a
subsidy situation, and unfortunately it really confounds the
situation when the Appropriations Committee and OMB face the
issue of how does Bonneville square in the budget. From a long-
term perspective, we are a net zero, if you look out long
enough, because we are repaying everything we get as Treasury
loans, which we only get when Treasury buys our bonds.
Right now the situation is that we will reach our bonded
indebtedness limit in 2003. So technically, do we need more
borrowing authority in 2002 for the 2002 program? Literally,
no, but almost all of the projects that we are describing that
respond to the infrastructure needs are multi-year projects.
These require 2, 3, 4 years to complete, and with the existing
borrowing authority, we do not have the bonded indebtedness to
cover completion of projects we would start in 2002, and
therein lies the rub. The picture is pretty clear in terms of
when we run out. We run out at the end of 2003. The question
is, if we do not get additional borrowing authority, would we
start projects that we cannot finance to completion? No
business would do that.
Senator Cantwell. Thank you for that answer, and, Mr.
Chairman, I think it is something that I think the committee
will be dealing with, and your seatmate as well plays an
important role from the budget perspective, and how we get a
resolution to this issue. So thank you very much.
Senator Dorgan. Let me ask one additional question of Mr.
Hickok, and then we will be finished with the panel.
You indicated in your testimony that you had some scary
days, and you had power system emergencies, but you had not had
blackouts here. Can the residents of the Northwest expect that
will continue, not the scary days, but that you have matters in
hand, and they will not experience blackouts in the future?
Mr. Hickok. It takes a coincidence of several events, each
of which has a very low probability of occurrence to get us
close to the edge the way we were last winter. Last winter we
literally had that with lowest water or second lowest in
recorded history, starting the winter 3,000 megawatts short of
what we should have had on the system from an historic
reliability standpoint, and being unable to import power from
California in winter. We normally can import large amounts of
power from California in the winter. California is a summer-
peaking system, and last winter with 55,000 megawatts of in-
State generation and about 35,000 megawatts of in-State load in
California, they were blacking out. That was astonishing. We
had never seen anything like it. So those were the three
strikes and you are out, literally. The lights in the Northwest
should have gone out in February, and the only reason they did
not is that we and some of the investor-owned utilities and
some of the big public systems bought out load. I mean we shut
down, as I said, a total of about 3,000 megawatts of industrial
traffic in the region.
Senator Dorgan. I am asking about the future. My question
is can the people of the Northwest expect that will remain the
case, that they will not see rolling blackouts here?
Mr. Hickok. Absent another water year like the present, we
will not be that close to the edge again, but we definitely
have to climb out of the hole. We are 3,000 megawatts in the
hole.
Ms. Nelson. Mr. Chairman, I am glad Mr. Hickok is chief
operation officer if Bonneville is optimistic about that. I am
also glad I am not in the chair of the utilities commission.
Senator Dorgan. This has been a very interesting panel. We
thank you for being with us and presenting testimony today.
We will next call on Miss Rachel Shimshak and Mr. Steve
Hauser. Miss Shimshak is a director of the Renewable Northwest
Project in Portland, Oregon, and Mr. Hauser is senior account
manager, Pacific Northwest National Laboratory in Richland,
Washington. We welcome both of you, and we will include both of
your statements as a part of the permanent record, and we would
ask you to summarize, if you would, and why do not I call on
Mr. Hauser first? Mr. Hauser, you are with Pacific?
Mr. Hauser. Yes, sir.
STATEMENT OF STEVEN HAUSER, SENIOR ENERGY PROGRAMS MANAGER,
ENERGY DIVISION, PACIFIC NORTHWEST NATIONAL LABORATORY,
PORTLAND, OR
Mr. Hauser. Thank you very much.
Good morning, Chairman Dorgan and Senator Cantwell. I am
pleased to be here this morning to participate in this timely
and critically important hearing.
My name, as you mentioned, is Steven Hauser. I am a senior
manager with the Energy Division of Pacific Northwest
Laboratory, which is operated for the Department of Energy.
My colleagues and I at the laboratory appreciate the
leadership that both of you are providing in creating new
national policies related to energy. I am also pleased to share
with you some of the innovative ideas and technologies that we
are developing at the laboratory. We believe that these ideas
can have significant impacts on the future of our energy system
in the Northwest and across the Nation.
As Senator Cantwell knows, the Pacific Northwest National
Laboratory provides the region and the Nation with over 3500
dedicated staff members that explore the fundamentals of
science and technology leading to break-through solutions for
many of our toughest problems. In addition to our main facility
in the Tricities, PNNL operates a marine sciences laboratory in
Sequim in this State, and also has offices in Seattle, Portland
and Tacoma.
We have many staff that focus on energy programs that range
from developing new fuel cells to analyzing the reliability of
the electrical grid, to changing the use of energy in
buildings.
We have a strong historical relationship with Bonneville
and significant partnerships with other regional organizations
supporting them with research, development and analysis for
more than two decades now.
The Northwest has always been a leader on energy issues--
with PNNL and Bonneville providing much of that leadership.
This leadership has been key in developing and deploying new
energy technologies and innovative energy systems throughout
the Northwest. Much of this work has been recognized nationally
and even internationally as pioneering efficient and reliable
energy technologies. We are now faced with new opportunities to
show this leadership.
The region has an infrastructure that is not meeting our
current and projected needs given a continuing strong economy
and the lack of investment during the last decade. Incremental
improvements may keep an efficient system afloat, at best, and
at worse, may lead us to another even larger crisis in the
future. The challenge is to ensure that new investments in
central plants, gas and electric transmission and distribution
and use efficiency distributed generation and other distributed
resources are the right investments, the investments that
create a cleaner, cheaper and more reliable system, one that
integrates production, delivery and consumption to sustain our
increasingly dynamic and technology-driven economy. For this,
we need a new look at the situation, one that embraces the
growing complexity of our energy system, where simple solutions
are no longer possible. I believe we are on the verge of a
major transformation in the energy system that meets this
challenge, a transformation that recognizes, that recognizes
and embraces the complexity while it preserves the health of
the entire system and meets the diverse and individual needs of
each consumer, a transformation that creates a web of energy
sources and synchs, buyers and users, all interacting in near
real time to balance supply and demand, investments and costs.
As we begin this 21st century, the information age demands
a new model, one that leverages information to optimize our use
of energy. This new model promises to carefully manage our use
of precious resources and expensive assets while protecting the
environment and enhancing the economy. Let us just imagine for
a moment what if every business, home and appliance connected
to the system could provide information to the system on its
need for energy now, today, this week, and in the future. What
if they each could also let the system know what energy they
are willing not to use today, this week and in the future? What
if every electrical generator from Grand Coulee Dam to a small
fuel cell in a microturbine in this building could provide
information to the system on what energy it could provide and
at what cost, and what if the system could take this
information and create a network and a market for optimizing
the best use of energy, meeting every need and do all of this
in real time?
This vision of the future is not just a dream, but a
potential reality. Right now we have technology and techniques
that are already transforming other business sectors and are
now ready to transform the energy sector. Advances in
information technology continue at an astounding rate.
Companies here in the Northwest are instrumental in creating
some of these technology break-throughs and bringing them to
market. Faster processors, new operating systems, optical,
wireless and infrared telecommunications, intelligent software
agents and more are transforming supply chain management and
other business sectors today, and they will, these same
technologies will transform the energy sector tomorrow.
These new technologies will allow for distributing,
computing, and communications to be imbedded in equipment at
all levels of the energy system, providing a pipeline for data
and financial transactions. These innovations provide the
potential to create virtual resources where geography and
ownership are less important than contract terms, real time
measurement, control and valuation.
The challenge is to define the protocols and the
appropriate infrastructure requirements to enable security,
privacy, accountability, robustness, flexibility and
adaptability of these new energy networks.
We believe that this level of interactive communication
across the entire network of supply and demand will better
capture the inherent variability of such factors as time of
use, emissions, power quality, production costs, value of end-
use services, reliability and reserve capacity. Although we
have not quantified all of these benefits, we are convinced
that higher asset utilization and increased efficiency will
result.
This is not just a national laboratory vision. IBM, Alstom,
and other companies share this vision and are creating new
products and services to begin this transformation.
Opportunities will explode over the next few years as current
prototypes become real solutions.
Now, in my testimony, I have given several examples of
these technologies. In the interest of time, I want to just
highlight a couple of those. The laboratory has already begun
working with Bonneville, for instance, on a concept called the
EnergyWeb. This is an Internet-based system of monitoring
controls that will enable distributed generation and demand
resources to be dispatched remotely. It will include technology
such as wind, solar, biomass, standby generators, storage and
load controls. This new tool for aggregating resources is
useful to determine the real impacts these technologies could
have on the power system and the dynamic optimization
strategies.
We are also developing a new system of what we call grid-
friendly appliances, buildings and loads, computer chips
embedded in grid-connected devices will be able to sense the
condition of the grid, and also sense real-time price signals
and adjust their performance accordingly. For example,
refrigerators could potentially precool or avoid defrost
operations during periods of peak demand, momentarily
interrupting operations to stabilize the grid during
emergencies.
Other appliances like water heaters as an example will
support end-use gray-outs that reduce system demand, but still
keep the power on for priority loads like traffic lights that
would otherwise be blacked out.
Distributed generation offers opportunities to
incrementally add capacity where it is needed most, reducing
the risk of building large powerplants, displacing the need for
new substations and lines, and offering huge opportunities to
use waste heat for useful purposes in buildings and industry.
By networking these devices we can optimally dispatch them to
cooperatively meet both local loads, and system needs.
Distributed generation also establishes precedents for
interconnect protocols, policy and financial mechanisms that
will facilitate the entry of other technologies such as
storage, demand-side resources, fuel cells and even renewables.
Let me end by saying that PNNL is committed to work with
Bonneville and other Northwest utilities and organizations to
explore these new concepts and test them in facilities,
neighborhood and communities around the region. We believe the
Northwest can provide a unique testbed for advanced prototype
and pilot scale projects.
The committee's current legislation supports many of these
new ideas that I have discussed. We look forward to working
with the appropriate committees including your own and other
parties to see the potential of these ideas bear fruit.
Thank you very much for your time and attention, and I will
be happy to answer any questions.
[The prepared statement of Mr. Hauser follows:]
Prepared Statement of Steven Hauser, Senior Energy Programs Manager,
Energy Division, Pacific Northwest National Laboratory, Portland, OR
Chairman Dorgan and Senator Cantwell--I am pleased to be here this
morning to participate in this timely and critically important hearing.
My name is Steve Hauser and I am a Senior Energy Programs Manager in
the Energy Science and Technology Division at the Pacific Northwest
National Laboratory, operated for the Department of Energy by Battelle
Memorial Institute. My colleagues and I at the Pacific Northwest
National Laboratory appreciate the leadership that both of you are
providing in creating new national policies related to energy. I am
also pleased to share with you some innovative ideas and technologies
we are developing at the Laboratory. We believe that these ideas can
have significant impacts on the future of our energy system in the
Northwest and across the nation.
As Sen. Cantwell knows, the Pacific Northwest National Laboratory
(PNNL) provides the region and the nation with 3500 staff members
dedicated to exploring the fundamentals of science and technology
leading to breakthrough solutions for many of our toughest problems. In
addition to the main complex in Richland, PNNL operates a Marine
Sciences Laboratory in Sequim and offices in Seattle, Portland and
Tacoma. We have many staff focused on the energy sector with programs
that range from developing new fuel cells to analyzing the reliability
of the electrical grid to changing the use of energy in buildings. We
have a strong historical relationship with Bonneville and significant
partnerships with other regional organizations, supporting them with
research, development and analysis for over two decades.
The Northwest has always been a leader on energy issues--with PNNL
and Bonneville providing much of that leadership. This leadership has
been key in developing and deploying new energy technologies and
innovative energy systems throughout the Northwest. Much of this work
has been recognized nationally, and even internationally, as pioneering
efficient and reliable energy technologies.
We are now faced with new opportunities to show our leadership. The
region has an infrastructure that is not meeting our current and
projected needs given a continuing strong economy and the lack of
investment during the last decade. Incremental improvements and panic-
driven searches for ``silver bullet solutions'' may keep an inefficient
system afloat, at best, and at worst may lead us to another, even
larger crisis. The drought condition currently in the Northwest
complicates the situation and adds uncertainty. The challenge is to
ensure that new investments in central plants, gas and electric
transmission and distribution, end-use efficiency, distributed
generation and other distributed resources, are the right investments--
the investments that create a cleaner, cheaper, and more reliable
system; one that integrates production, delivery, and consumption to
sustain our increasingly dynamic and technology driven economy. For
this, we need a new look at the situation, one that embraces the
growing complexity of our energy system where simple solutions are no
longer possible
I believe we are on the verge of a major transformation in the
energy system that meets this challenge. A transformation that
recognizes and embraces the complexity while preserving the health of
the entire system and meeting the diverse, individual needs of each
consumer. A transformation that creates a web of energy sources and
sinks, suppliers and users, all interacting in near real time to
balance supply and demand, investment and cost.
Our energy system has its roots in the 19th century industrial
revolution with demand driving supply, and large investments in
infrastructure driving the economy. This system has served us well. As
we begin the 21st century, the ``Information Age'' demands a new model,
one that leverages information to optimize our use of energy. This new
model promises to carefully manage our use of precious resources and
expensive assets while protecting the environment and enhancing the
economy.
What if every business, home and appliance connected to the
``system'' could provide information to the system on its need for
energy now, today, this week, and in the future? What if they each
could also let the system know what energy they are willing to not use
now, today, this week and in the future? What if every electricity
generator from Grand Coulee Dam to a small fuel cell or micro-turbine
in this building could provide information to the system on what energy
it can provide and at what cost? And what if the system could take this
information and create a network and a ``market'' for optimizing the
best use of energy, meeting every need? Plus do it in ``real time''?
This vision of the future is not just a dream but a potential
reality. Right now, we have technologies and techniques that are
already transforming other business sectors ready to transform the
energy sector. Advances in information technology continue at an
astounding rate. Companies here in the Northwest are instrumental in
creating technology breakthroughs and bringing them to market. Faster
processors, new operating systems, optical, wireless and infrared
telecommunications, intelligent software agents, and more are
transforming supply-chain management and other business sectors today.
They will transform the energy sector tomorrow.
These new technologies will allow for distributed computing and
communications to be embedded in equipment at all levels of our energy
system providing a pipeline for data and financial transactions. All
parties, without regard to their position within the physical
hierarchy, will be allowed to participate in open, free markets for
energy commodities. These innovations provide the potential to create
``virtual'' resources where geography and ownership are less important
than contract terms, real-time measurement and control, and valuation.
By valuation I mean how much it's worth and when and where it is used
or not used. The challenge is to define the protocols and appropriate
infrastructure requirements to enable security, privacy,
accountability, robustness, flexibility, and adaptability of these new
energy networks.
We believe that this level of interactive communication across the
entire network of supply and demand will better capture the inherent
variability of such factors as time-of-use, emissions, power quality,
production cost, value of end use services, reliability, and reserve
capacity. Although we have not quantified all of the benefits of such a
vision, we are convinced that higher asset utilization and increased
efficiency will result.
This is not just a Pacific Northwest National Laboratory vision.
IBM, Alstom, and other companies share this vision and are creating new
products and services to begin the transition. Opportunities will
explode over the next few years, as the current prototypes become real
solutions.
Let me give a few examples to make these concepts more tangible.
PNNL and Bonneville have jointly developed the Wide Area Monitoring
(WAM) technology suite that now provides real-time monitoring of the
performance of the Western grid. This system of data collection and
analysis provides valuable insights to anticipate grid stress and to do
``post mortem'' analyses of complex outages such as the 1996 blackouts
in the West. These systems are being installed this summer in CA at the
Independent System Operator's facilities. The WAM system was also
recognized this year as one of DOE's top 100 technology developments in
the 20th century.
Similarly, we also believe that tools can be developed to better
match output of the Columbia River Basin hydro system with the power
demands of the region. Dry conditions in the Northwest this year have
increased our awareness of the tradeoffs between power, irrigation,
recreation and fish. An integrated science and technology development
program including power market behavior, water resource management,
fisheries biology, regional climate based forecasting, and information
technology can advance the regions ability to balance power needs with
fisheries resource management and other regional needs. Bonneville,
PNNL and other regional organizations are already exploring these
possibilities.
PNNL is also beginning to work with Bonneville on a concept called
the EnergyWeb. This is an internet-based system of monitoring and
controls that will enable distributed generation and demand resources
to be dispatched remotely. It will include technologies such as wind,
solar, biomass, standby generators, storage, and load control. This new
tool for aggregating resources is useful to determine the real impacts
these technologies will have on the power system and the dynamic
optimization strategies. The rapid growth of wind energy farms in the
region, in particular, will present new challenges to system
operations.
We are also developing a new system of ``grid-friendly''
appliances, buildings, and loads. Computer chips embedded in grid
connected devices will be able to sense the ``condition'' of the grid
in real time and adjust performance accordingly. For example,
refrigerators can pre-cool and avoid defrost operations during periods
of peak demand, momentarily interrupting operation to stabilize the
grid in emergencies. Other appliances like water heaters will support
end-use ``greyouts'' that reduce system demand but still keep the power
on for priority loads (like traffic lights) that would otherwise be
blacked out.
Distributed generation offers opportunities to incrementally add
capacity where it is needed most, reducing the risks of building large
power plants, displacing the need for new substations and lines, and
offering huge opportunities to use waste heat for useful purposes in
buildings and industry. By networking these devices we can optimally
dispatch them to cooperatively meet both local loads and system needs.
Distributed generation also establishes precedent for interconnect
protocols, policy and financial mechanisms that will facilitate the
entry of storage, dispatchable demand-side resources, fuel cells, and
renewables. PNNL is leading a national program to develop new fuel cell
systems whose clean, quiet, and efficient operation make them suitable
for even our own backyards. We are also developing advanced diagnostics
and control strategies for these devices.
PNNL has recently launched a new effort to construct a new
simulation of the energy system using the latest computer modeling
techniques. This simulation will analyze technologies and markets to
understand and quantify benefits. It will provide insights needed to
determine appropriate system control and operational strategies, to
guide technology development, study the impacts of open, evolving
energy markets, and develop public policy and regulation in ways that
equitably enhance the benefits of the transformation. A key part of
this simulation is that it combines the engineering aspects of the
system with dynamic, evolving markets, strategies and financial
instruments.
PNNL is committed to work with Bonneville and other Northwest
utilities and organizations to explore these new concepts and test them
in facilities, neighborhoods, and communities around the region. We
believe the Northwest can provide a unique testbed for advanced
prototype and pilot scale projects.
The Committee's current energy legislation supports many of the new
ideas that I've discussed. We look forward to working with the
appropriate committees and other parties to see the potential of these
ideas bear fruit.
Thank you very much for your time and attention.
Senator Dorgan. Mr. Hauser, thank you very much. Next we
will hear from Rachel Shimshak with the Renewable Northwest
Project.
STATEMENT OF J. RACHEL SHIMSHAK, DIRECTOR, RENEWABLE NORTHWEST
PROJECT, PORTLAND, OR
Ms. Shimshak. Thank you, Senator Dorgan, and thank you for
the opportunity to come and speak to you today, and hello,
Senator Cantwell.
I'm Rachel Shimshak. I am the director of the Renewable
Northwest Project. We are a regional advocacy organization
working in Oregon, Washington, Idaho and Montana to promote
renewable resources such as solar, wind and geothermal.
We are a little different from some organizations in that
we have consumer and environmental group numbers and also
energy companies as members. It is the one place that you can
get together and try to work towards a common goal, and I am
delighted to be here today among my distinguished colleagues to
talk to you about the unique role that Bonneville has in
pursuing both conservation and renewables to help us deal with
our energy crisis and to help manage us into the future.
If the goal of our energy system is to provide reliable,
environmentally responsible, stably-priced energy resources, I
think we can do four things as we move forward. One is continue
to create a diverse portfolio of both demand and supply-side
resources, implement transmission and shaping policies which
acknowledge the benefits of clean resources, support Bonneville
in its clean energy leadership, and enact Federal initiatives
that will provide stable funding for conservation and
renewables.
I think the way that we manage ourselves out of this
current crisis really does matter, and a wise governor once
said that ``the most important step in developing an energy
policy is to understand that energy is a problem that we must
manage over the long haul, not a crisis to be solved and
forgotten.'' Although I think a lot of people internalize that
concept intellectually, I can tell you that the recent change
in energy prices which have fallen in the past couple of months
have made some energy managers revert back to their short-term,
cost-only outlook on life as opposed to looking at the long-
term least cost, and I was interested in coming down here today
to look at the front page of the Oregonian, which has an
article about California, and it is titled, ``California Now
Faces Expensive Electricity Glut,'' and the subtitle is, ``The
State May End Up Urging Customers to Use More Power to Avoid
Selling the Surplus at a Loss.'' So I think the long-term is
very important to keep in perspective here.
Let me just briefly describe the portfolio of resources
that we consume in the Northwest. We certainly produce a lot of
hydroelectricity. We consume about 54 percent hydro, but a full
40 percent of the electricity that we consume in the Northwest
is fossil fuel, and if we want to keep the system stable in the
future, I think we need to add a diversity of resources.
Conservation is the cheapest, quickest, cleanest resource
available, and we ought to accelerate its implementation
immediately.
A whole bunch of the region's utilities and Bonneville
joined together to offer energy efficiency programs and
products to their customers during this crisis, and a lot of
them, as you heard Steve Hickok say, have asked their customers
to curtail their loads. The impact that their actions and the
calls from Western Governors to reduce energy consumption have
actually helped our situation quite a bit, but rather than the
boom-and-bust nature of these efforts, we ought to have broad
public policies at the State and Federal level that provide
consistent investment in energy efficiency, Federal incentives
for efficient buildings and equipment, and reserving a portion
of utility revenues for conservation investment are just two of
the initiatives that we should pursue. Those will help keep the
infrastructure in place and keep the investment constant so
that we will have the energy efficiency there when we need it.
The next one step, the one closest to the heart, is to move
forward aggressively with renewable resources, and I cannot
emphasize enough how pivotal the Bonneville Power
Administration's role is in this endeavor. As you know,
Bonneville serves almost half the people, half the load in the
Northwest, and also controls up to 80 percent of the
transmission. They also have the statutory responsibility to
encourage the development of renewables.
Now, when Bonneville was faced with this 3,000 megawatt
shortage, they had more demand than they had supply, they took
a rational step, and they initiated a thousand megawatt RFP for
wind. Now, happily the Northwest is blessed with a tremendous
potential for wind similar to North Dakota. There is quite a
bit of resource here, also solar and geothermal, but wind is
really the most competitively priced of the renewable
resources, and it can be permitted, after it is permitted, it
can be built within 6 months, and that is a pretty good thing
when you are experiencing energy shortages.
I just want to tell you, this RFP has drawn a variety of
different developers from all over the country and all over the
world to our region to develop these resources, and the more
competition, the better the quality of the projects, the lower
the prices are, and the prices have been terrifically low for
these projects. In other words, Bonneville is playing a key
role in helping develop the market in the Northwest.
I want to just touch on the diversity of different kinds of
projects. We have a hundred and ten megawatts of operating wind
projects here. The largest wind project, which Senator Cantwell
had an opportunity to visit recently, is the Stateline Project
which is located on the Oregon-Washington border in the eastern
part of the State. It is a 261 megawatt project, and its
economy of scale allowed a single buyer to purchase the entire
output of that project, which really was, it acts as the anchor
tenant in the region to signal everybody that it is okay to be
building and purchasing wind.
We have the first project being developed on Indian land in
Montana by the Blackfeet Indian Reservation built by SeaWest, a
developer from California. We have Energy Northwest, usually
known for their nuclear plants also entering into a wind
project also to serve their customers, and the owner of two
aluminum plants is also building wind projects with some of the
finances that they received from Bonneville for curtailing his
load. So there is this incredible interesting diversity of
projects.
There are 360 megawatts under construction right now, and
1200 megawatts in the permitting stage. So we stand to benefit
if we can follow through to the end of this, and that is the
key.
There are lots of benefits to wind energy as in other, as
other renewables. There are environmental benefits, but there
are also economic development benefits, and for the farmers on
whose land these resources are being developed, they get money
for every turbine that exists on their land, and that provides
kind of a second crop for them and helps them stay in the
farming business. We also have quite a vital metals industry
here in the Northwest, and the metals industry has been called
upon to produce the towers for these wind turbines, and I just
learned the other day that a major manufacturer of wind
turbines is looking to locate a manufacturing facility here in
the Northwest given the activity that is taking place in the
market. Again, none of this would be possible without the
critical role that Bonneville played.
Bonneville is doing other stuff. They have a conservation
and renewable energy discount for their customers which
encourages them to purchase these resources, and they offer
every one of their customers the opportunity to buy as much
green power as they would like, but Bonneville has two
incredibly critical roles to play that have not yet been well-
defined, especially for wind. One as you heard Steve Hickok say
before, that the reason that the Northwest is a great place to
develop wind is that the hydro system can act as the battery.
Because wind is an intermittent resource, it needs to blend
with other resources in order to deliver firm kilowatt hours,
and it is a beautiful situation, but the cost of those shaping
services has to be reasonable or else the resource will be
priced right out of the market. Those decisions have not been
finalized yet, and they need to be finalized soon, so there can
be some certainty, and they need to be fair. The other thing is
transmission policies. Again, wind being an intermittent
resource does not act like a resource where you can predict
that you are going to put fuel in the plant, and it is going to
produce X-amount of the time. There are better ways these days
to predict when wind will happen, but you still need a
transmission set of policies that would accommodate
intermittent resources at a reasonable price. Again, Bonneville
is key to making sure that these policies work for wind.
The developers of wind and the manufacturers of wind have
driven the price of just producing the kilowatt hours down 80
percent over the last 20 years, and if we can just figure out
how to put those other two pieces together, we can have a very
cost-competitive resource that is clean, that helps develop the
economic opportunity in the Northwest and delivers power, clean
power to its customers.
Bonneville has done a great job stimulating and building
the market in the region, but they could chill the market in an
instant if they lose their resolve. So I urge you to support
them as they move forward on this very important initiative,
and the way I characterize this is they have the ruby slippers
on. They just need to click their heels together.
Congress can play a further role in helping the development
of renewable resources by extending the wind production tax
credits, which I know are before you in the Congress, and
indeed provide those kind of tax credits to all renewable
resources. That will ensure that we have a diverse energy
portfolio, not only in the Northwest but at other places around
the country.
There is also a proposal for a Federal portfolio standard,
and I think that would be developed the same.
We can have a secure, clean future if we prioritize
conservation and renewable resources and move forward with
their implementation. Bonneville is critical to achieving a
clean energy future in the Northwest and to preserving our
quality of life. They deserve your support in their clean
energy endeavors.
Thank you very much.
[The prepared statement of Ms. Shimshak follows:]
Prepared Statement of J. Rachel Shimshak, Director, Renewable Northwest
Project, Portland, OR
Good morning Mr. Chairman and Senator Cantwell. My name is Rachel
Shimshak, and I am the director of the Renewable Northwest Project
(RNP). RNP is a regional advocacy organization promoting the
implementation of solar, wind and geothermal resources in Washington,
Oregon, Idaho, and Montana. Our members include environmental and
consumer groups as well as energy companies. We work together with
policymakers, elected officials and customer groups to ensure a clean
energy future for the region.
I am delighted to be here today among my distinguished colleagues
to address the electricity challenges facing the Northwest, and the
special role of the Bonneville Power Administration in promoting energy
conservation and renewable energy to help address those challenges. By
now you have heard a lot about the ugly prices many utilities and their
customers experienced over the last year, our low water situation, and
about the uncertainty that has plagued the market over the past five
years resulting in a lack of demand and supply-side investments.
We have a chance to move forward and solve these problems if the
region works together to address the situation. I want to talk to you
this morning about solutions to the problem. If the goal of our energy
system is to provide adequate, reliable, environmentally responsible,
and affordable energy, I believe there are at least four important
strategies we ought to pursue:
Create a diverse portfolio of demand and supply-side
resources;
Implement transmission and shaping policies that acknowledge
the benefits of clean energy technologies;
Support the Bonneville Power Administration in its clean
energy leadership; and
Enact federal initiatives that will provide stable funding
for conservation and renewable technologies.
These four strategies will help us maintain a strong system to
serve our needs, and help us maintain a high quality of life.
I believe that the way we manage our way out of this energy crisis
matters. A wise governor once said that, ``The most important step in
developing energy policy is to understand that energy is a problem that
we must manage over the long haul, not a crisis to be solved and
forgotten.'' Although many people accept this concept intellectually,
the truth is that, given the recent drop in energy prices, many
managers already have amnesia about the prices and the problems we have
all faced over the past year. Many are reverting back to their old, bad
habits of looking only at short-term low prices, and not long-term
least costs.
The key to addressing our crisis is to move forward with a
diversity of demand and supply side resources. Let me begin by
describing the current portfolio of resources we consume in the
Northwest. Over half comes from hydro, but a full forty- percent of the
electric energy we consume comes from fossil fuels. To keep the system
stable in the future, we need to add a diversity of resources,
beginning with conservation.
Conservation is the quickest, cheapest, cleanest resource we have
available, and we should accelerate its implementation immediately.
Many of the region's utilities and Bonneville have joined together in a
rush to offer energy efficiency programs and products to their
customers, and many have pursued load curtailments with their
customers. The impact of their actions, coupled with the calls for
conservation from the Western Governors have had a very positive impact
on our situation.
Rather than the boom and bust nature of these efforts, we should
have broad public policies at the state and federal level that will
provide consistent investment in energy efficiency. Federal incentives
for efficient buildings and equipment, and reserving a portion of
utility revenues for conservation investment are just two of the many
initiatives that will help maintain the energy efficiency
infrastructure and make sure that the resource is available when we
need it.
The next step is to move forward aggressively with new renewable
resources. Bonneville's role in the region with respect to renewables
is pivotal. As you know, BPA serves over 40% of the load in the region
and controls over 70% of the high voltage transmission. They also have
a statutory responsibility to encourage the development of renewable
resources.
Bonneville responded rationally to their need for additional power
with a 1000-megawatt wind Request for Proposals (RFP). Happily, the
Northwest is blessed with a tremendous potential for wind, solar, and
geothermal power. Wind is the most cost competitive of the resources,
and once it is permitted, it can be built within six months. That RFP
has drawn a huge diversity of developers to the region. The greater
competition created with the RFP will help deliver high quality
projects that are competitively priced. In other words, Bonneville is
playing a key role in developing a market for wind in the Northwest.
We now have 110 MW of operating wind projects in the Northwest with
over 360 MW of wind and geothermal projects under construction. The 261
MW Stateline wind project will be on line by the end of this year.
Another 1200 MW of wind is undergoing siting reviews and could be
operating by 2003. This is all good news, but it is happening amidst a
backdrop of 16,000 MW of proposed gas plants.
Wind power is clean energy, with no air or water pollution, and no
fuel price volatility. In fact, wind has no fuel! Wind development also
brings with it some important economic development benefits for our
region. Some of the best wind resources are found on rural wheat farms
and cattle ranches. For every turbine installed on a farmer's property,
the landowner receives a royalty payment from the wind developer. This
helps create a ``second crop'' for these farmers which helps them stay
in the farming business. In addition, wind turbines sit atop tall
towers made of steel. Many in the regional metals industry have been
called upon to produce these towers, and one turbine company is
currently contemplating locating its manufacturing facility in the
Northwest.
Bonneville is providing other green power opportunities for its
customers as well. Their recent rate case includes a conservation and
renewable incentive program that will reduce the rates for customers
who invest in clean resources. And all wholesale customers can purchase
Bonneville's Environmentally Preferred Product, or a straight chunk of
new renewable power.
Bonneville has two other critical roles in relation to wind
resources. One is to provide reasonably priced shaping services for
wind. Because wind is an intermittent resource, and doesn't operate
100% of the time, you need to blend it with other resources to create a
firm power product. The hydro system is the perfect battery for this
purpose.
The final element for making wind a reality in the Northwest is to
establish fair transmission policies for renewable resources. The
current system was designed for large projects with control of their
generating resources. Those existing policies disadvantage intermittent
resources such as wind. A wind resource often has to sign up for
transmission services to cover the entire output of the plant even
though it may only produce energy 40% of the time. Stiff penalties are
assessed for projects that don't use their transmission rights.
The establishment of a new Regional Transmission Organization (RTO)
can address these problems if the transmission owners move forward with
the recommendations of the regional representatives group. Having a
deep and liquid market for transmission rights across constrained paths
is critical for intermittent renewables. FERC and the region need to
insure that the rules of the new RTO incent the development of
renewable resources.
Bonneville has done a great job stimulating and building the market
for wind in the region. But they could chill that market in an instant
if they lose their resolve. I urge you to support Bonneville as they
move forward on this very important initiative and urge them to find
timely and fair solutions to the shaping and transmission issues. They
definitely have the ruby slippers on. They just have to click their
heals together.
Congress can play a further role in helping the development of
renewable resources by extending the wind energy production tax credit
and providing the credit to all renewable resources. To ensure that we
have a diverse energy portfolio, Congress should also enact the federal
renewable portfolio standard contained in Senator Jeffords' bill.
We can have a secure, clean energy future if we prioritize
conservation and renewable resources, and move forward with their
implementation. Bonneville is critical to achieving a clean energy
future in the Northwest and to preserving our quality of life. They
deserve your support in their clean energy endeavors.
Thank you.
Senator Dorgan. Miss Shimshak, thank you very much.
How important is the production tax credit? I assume I know
your answer, but we are, in fact, looking at that at the
moment, and would wind energy be developed in substantial
quantity here without the production tax credit?
Ms. Shimshak. I do not believe so. I attached to
everybody's testimony a copy of the map of all of the different
projects that are ongoing in the Northwest. About a year ago,
there were only four dots on this, and the combination of
Bonneville expressing a need for power, the ability of wind to
be generated in the Northwest, and the production tax credit
are the critical elements that need to be combined in order to
make these things a reality. There is always a terrific amount
of development just before the credits are expected to expire,
and it would be a lot more sensible to signal that there is an
interest in extending those tax credits so that the price of
development will be reasonable over a period of time, but they
are critical to wind.
Senator Dorgan. It is interesting, the Department of Energy
ranks North Dakota as the Saudi Arabia of wind potential.
Ms. Shimshak. It is because they know you are there.
Senator Dorgan. That is right, especially when I am there,
but our wind energy development is retarded by transmission
issues. So these go hand-in-hand, and I am a big fan of wind
energy and a big supporter.
We had a wind energy conference last January in Bismarck,
250 people preregistered, and 550 people showed up. There is a
lot of interest in it, and we have to solve the transmission
issues in our part of the country.
Mr. Hauser, you know, I keep hearing about fuel cells. I
indicated that I drove a fuel cell car last week, but when are
we going to see fuel cells really move into the marketplace?
When will residential fuel cells be available and competitive
in your judgment?
Mr. Hauser. Well, those are two different questions
actually in my opinion, whether they move into the residential
markets or whether they move into other niche markets. You can
buy a fuel cell today. It is a matter of how much you want to
pay for it. I believe there are niche markets where there is a
rational reason for paying the extra amount for having that
kind of power, and those markets, I believe, will continue and
will grow.
It is still going to be a few years before we see them down
to the cost point which they become more pervasive in the
market. I do not know whether that is 3 years or 5 years, and
we can ask a number of different fuel cell companies around the
country, and you will probably get just about as many different
answers.
Senator Dorgan. Can you just give a brief description, what
applications that you are now working on will we see move to
the marketplace in a short-term period?
Mr. Hauser. Well, we have a number of things that we hope
will go into the market. As you know, going into the market is
not an easy thing to do. It requires financing. It requires a
lot of hard work. So I will give you an example of one that we
think will probably move as quick as any, and that is we have
developed a rooftop control unit that would go on an air-
conditioning system in a commercial building like this that is
wireless. It has smart diagnostics on board so, it will
actually monitor the health of the HVAC system in a building
like this, and essentially phone home when there is a problem,
and we are, our experience in being out in the field is that
there are not very many air-conditioning systems, particularly
commercial systems, that are working at their optimal
performance, and there is room for maybe 20 to 30 percent
improvement on any system including probably the one in this
building, and so these intelligent diagnostic systems that
could actually go out in the field and tell you how well the
system is working, I think, will probably go into the market
fairly quickly.
Senator Dorgan. Senator Cantwell.
Senator Cantwell. Thank you. If I could follow up, Mr.
Hauser, on your discussion about how these new efficiencies in
the system will improve, and I want to thank the chairman for
his support of the amendment that we got on through on the R&D
title that we basically did, and I think it was something that
you were involved in----
Mr. Hauser. Right.
Senator Cantwell [continuing]. In helping to write the
language for, but in looking at how to move forward on an
energy policy for research and development, and looking at the
power system efficiencies, it was critical, and so that
language was added to the title, and I am very appreciative of
that support, and you talk about a variety of things in
relationship to the improvement, the how to distribute
computing and distributing generation, virtual resources, and
to a certain degree, when you say virtual resources, I am sure
that makes a variety of people throughout our State anxious
because what does that mean, virtual resources? These are
resources that the generation is here, and we would like to get
the benefit of those resources.
My first question is: have you put into some context the
savings or the efficiencies that we might reap from the system
using new information technologies, and I know that is hard,
but just an idea, are we talking about one to five percent
savings? Are we talking about efficiencies in the system that
will lower prices by a certain amount? How would you
characterize that the best that you can today?
Mr. Hauser. It is tough to characterize, because actually,
the benefits are in the complication, and it is such a complex
system that we actually operate, and the more we add
distributive resources, the more we add renewable resources,
the more complicated the system gets, and so the more difficult
it is to really understand what the efficiencies are.
I just mentioned in the previous question that we are
finding in air conditioning systems in commercial buildings
that there could be as much as 25 to 30 percent efficiency
gains possible just by operating them better without really any
new technologies.
I think my best guess is that it is 10 to 25 percent that
could be sort of squeezed out of the system if we really
understood how to operate it better and more efficiently. If we
did not run, you know, dishwashers in the middle of the day or
try to manage loads better. I think there is a pretty
substantial sufficient efficiency gains that could be made.
Senator Cantwell. Those are actually large numbers if you
think about the consequences of what we have been dealing with
lately.
You mentioned the need for protocols, and I am assuming
what you are saying PNNL is advancing some of these
technologies and efficiencies, somewhere along the line, we
have to implement a communication and interaction throughout
the grid? How would we go about doing that? What role do we
need to play in making sure that that happens?
Mr. Hauser. Well, we are already convening a group of
industry companies. In fact, our first workshop is in late
September in Colorado. These are companies like IBM and Cisco
and Sun and a number of names that we recognize as well as a
number of small companies that are playing in this market. So
we will begin to get the industry together to start talking
about what the issues are, what the protocols might have to be,
what is working, what is not working, what is the Federal role,
what kind of research needs to be done from a Federal
perspective. So I will have better answers to those questions
in a few months, and we will continue to engage industry over
the period of the next few years to ensure that we are looking
at the right issues including protocols.
Senator Cantwell. And I am assuming the metering is just
one small aspect of that?
Mr. Hauser. One small aspect.
Senator Cantwell. And you are talking about efficiencies
throughout the whole grid and system?
Mr. Hauser. That is correct.
Senator Cantwell. That you would have to get some sort of,
I do not know what would you call it, an efficiency, an
efficiency standard or efficiency protocol, something of that
nature----
Mr. Hauser. Right.
Senator Cantwell [continuing]. That goes beyond just how do
you get distributive power hook-ups to the grid. You are
talking about a communication system within the grid?
Mr. Hauser. It is, and you might even--in some circles we
talk about it as plug and play. If you were to buy a fuel cell
and put it in your home or put it in this building in the next
few years, what we would like to be able to do essentially is
plug it in. The system would recognize it right away, and say,
``A-ha, we like that you are there, and here is what we would
like you to do in order to optimize the health of the system.''
Right now we do not understand the system in sufficient detail
to really understand how to do those sorts of things, and even
issues around renewables, we know the resources are important.
We know that they are available, but how best to optimize them?
You know, how many wind turbines do you really want in Walla
Walla, and how many do you want in Ellensburg in order for the
system to really perform at its optimum? Those are the kinds of
issues that we would like to get at.
Senator Cantwell. Well, I definitely made sure that the
people at Stateline knew that there was a town in Washington,
Ellensburg, that people are constantly complaining about the
wind, and they ought to venture up there.
Ms. Shimshak. You will be happy to know there is a project
proposed for Ellensburg.
Senator Cantwell. Miss Shimshak, have we, has your
organization set a goal for diversifying our system within the
Northwest? I mean, is there a number that you attached to what
our renewable focus ought to be or just diversification of our
existing hydro reliance?
Ms. Shimshak. We do have a goal, the activities of last
year have kind of had an impact on that goal, and we probably
will revisit it shortly, but we figure if by the year 2005, we
could have one to 2,000 megawatts of renewables in the system
that the market would be robust and able to help sustain
itself. That is not to say that is the end goal that we want to
see for the system, but that is what we think is necessary in
order to create a market that can work here.
Senator Cantwell. You mentioned several times during your
testimony how Bonneville plays a vital role in the market
development or if their activities were not supportive of
renewables which we have made direction towards in the past,
are you saying that we need to do something further as far as a
directive and a national policy?
Ms. Shimshak. Bonneville does have a statutory requirement
to encourage the development of new renewables, and just like
any other set of power managers, they are affected by things
that happen in the market, and when the market is very high,
everybody runs to find new resources. When the market starts to
dip lower, they get a little squishier about going to acquire
those new resources, and I think they are doing something that
is, they are going above and beyond the call of duty in what
they are doing in helping the wind market develop in the
Northwest, and it will be a sustainable market if they follow
through with their expectations, and anything that Congress and
the congressional delegation for the Northwest can do to
encourage them forward would be most appreciated and to
encourage them to resolve some of these outstanding issues that
are really the key elements that had need to be solved for us
to make sure that we can do these resources in a cost-effective
manner.
Senator Cantwell. You mentioned the Grassley bill, but I
assume you are very supportive of the REPI legislation and
continuing that as an incentive for public power to seek
renewable resource solutions?
Ms. Shimshak. And there were quite a few public power
entities that are pursuing renewable. Seattle City Light right
here put out a hundred average megawatt RFP to serve its load
and to meet its no-new CO2 standard that the city
council adopted, and they are taking a very positive leadership
role in moving forward for this utility. Other public utilities
around the region are doing good work, also.
If I might, I wanted to go back to a question that Senator
Dorgan asked, and that was the importance of the production tax
credit. I know you have probably heard this before, but
renewables and conservation have these classic market barriers.
They have very high up-front costs, but very low long-term
costs, because there is no fuel, and that is a market barrier
for an energy manager, because you are looking at gas plants
that tend to be pretty cheap to build. Only a third of the cost
of the gas plant is in putting it in the ground, and two-thirds
is the cost of the fuel, and you take the risk on the fuel
price.
Renewables, if you can get past the first decision, you
have a stable-priced resource to add to your portfolio of
resources which really helps customers in the end because when
fuel prices are going up like this, you are not affected, which
is why the Northwest has enjoyed so much low cost power,
because of its emphasis on hydro systems over time, but the
production tax credit is the thing that has really helped
resolve that market barrier question. It has brought wind in
line with other resources, and the 1.7 cents a kilowatt hour
for 10 years has really done that, so we addressed that market
barrier problem straight on and it really helps to make things
happen.
Senator Dorgan. Thank you very much. Your endorsement of
the efforts by Bonneville in this area is very impressive. I
can think of many instances around the country where people
have tried to develop renewable projects, they have found
resistance with the incumbent providers in a range of areas,
and I think there really needs to be an enthusiastic
endorsement and a set of goals and a willingness to want to
make this happen, and I do appreciate the fact that you say
that Bonneville is very interested and has been working very
productively in that area.
Let me thank the panel for your contribution. This has been
an interesting bit of information this morning that I have
received, and I know that Senator Cantwell knows this issue
certainly better than I and our colleagues on the Energy
Committee, because as I indicated as we started, we understand
that the Northwest is unique and different. You have a
different energy mix, and you have a different set of
circumstances here, and I think that her, Senator Cantwell's
role is going to be central on the Energy Committee to make
sure that when we do what we do in September to put this bill
together, that that bill recognizes and addresses the unique
needs of the Northwest.
So this hearing is very helpful to me and I am hoping to my
colleagues.
We would like to hold the hearing record open for 2 weeks,
and if there are those who did not testify today who would wish
to submit a statement for the hearing record, we would be happy
to receive that statement, and you would just send it to the
U.S. Senate, the Energy Committee, and Deborah Estes, the
counsel with the committee as a witness today. You are welcome
to give your name if you choose to do so.
I thank you, Deborah, for being here, and I thank you
Jonathan Black for being here, and I thank my colleague,
Senator Cantwell, for being here, and this hearing is now
adjourned.
[Whereupon, at 12:00 p.m., the hearing was adjourned.]
APPENDIX
Additional Material Submitted for the Record
----------
Lakeview Light & Power,
Lakewood, WA, August 13, 2001.
Dear Senator Cantwell: On behalf of Lakeview Light & Power and the
Washington State Cooperatives, I offer the following comments:
1. The President's Energy Plan, and the House Energy Proposal--
These two documents do less for renewable energy than the federal
government currently does. We believe the Senate should make sure that
there is adequate investment in renewables, as well as the clean coal
investments and other energy budget items.
2. BPA transmission--We support BPA's transmission investments over
the next 5 years (app. $1.3 billion of new borrowing requested).
However, we (BPA customers) need assurances that the investment will
benefit our ratepayers and the value not shifted to other companies if
a Western RTO becomes a reality. Concerning the $700 million in
borrowing authority BPA is requesting for conservation and hydro
upgrades, we strongly support the hydro upgrades and Lakeview Light &
Power and other Washington State Coops continue to support local
control of conservation spending.
3. BPA's future--We strongly support preference and urge our
Senators to defend the right of public power to continue to provide at
cost power to citizens. We oppose market-based rates, additional
spreading of benefits to ``for-profit'' companies, and we believe that
BPA service to DSIs must be phased out over time, as preference
utilities need the electricity to meet their load growth.
4. Deregulation--We are not convinced that experiments in other
states have provided the evidence we need to support deregulation at
the federal level. In fact, the opposite is true. Until a number of
states can demonstrate over a number of years that competition works in
this inherently monopolistic industry, we would not want federal laws
or state laws which force consumers in our state to take on such risk.
5. Real Time Meters--We question the need to further complicate the
lives of busy Americans by forcing them into a situation where they
have to monitor their electricity meters for fear of using too much
electricity when rates spike. We continue to believe that providing
reliable, affordable electricity is our responsibility. The local
utility has the ability to provide the high quality of service
consumers deserve and the ability to provide cost-based rates that are
competitive and predictable.
6. FERC Jurisdiction--We oppose any expansion of FERC jurisdiction
over cooperatives and the PMAs.
Robin A. Rego,
General Manager.
______
Federal Way Chamber of Commerce,
Federal Way, WA, August 13, 2001.
Senator Byron Dorgan,
Chairman, Senate Energy Subcommittee on Water and Power.
Senator Maria Cantwell,
Member, Subcommittee on Water and Power.
Subject: Electricity in the Northwest: A Unique Region Preparing for
the Future
On behalf of our membership and community, the Federal Way Chamber
of Commerce respectfully submits the following comments to the Senate
Energy Subcommittee on Water and Power at its meeting in Seattle,
Washington on August 13, 2001. First let us state that we sincerely
appreciate Senator Dorgan and Senator Cantwell for conducting this
meeting in King County and for inviting the public to submit comments
for the record on this most important issue.
Federal Way is a community of over 105,000 residents and
businesses. Our city is located in south King County and we receive
natural gas and electric service from Puget Sound Energy, an investor-
owned utility. We have been fortunate, so far Puget Sound Energy has
been able to manage through this energy crisis without having to raise
its rates more than 1.5 percent. As you know, our neighboring
communities have suffered double-digit rate increases as a result of
the volatile energy markets. It is our hope that Puget Sound Energy is
able to continue its course, however we understand that recent
decisions by the Federal Energy Regulatory Commission are certain to
harm PSE's customers. This is the reason we are submitting these
comments. For ease of explanation, we have divided our concerns into
two categories. Those applying to potential refunds for electricity
sales and those applying to the price control mechanism FERC has
implemented.
REFUNDS
Citizens and utilities located in the Northwest have already
suffered greatly from effects of the California energy deregulation
experiment and the flawed markets that this experiment created. The
current claim to refunds made by California entities from Northwest
load-serving utilities will only exacerbate the situation.
Like other Northwest utilities, PSE in its planning to meet its
customers' needs last winter was often forced to buy power at high
prices driven by California markets. On the occasions when our
utilities' customer requirements were less than projected and they had
surplus energy to sell to California, the prices on the California spot
markets were likewise high. Those prices, however, reflected the
desperate need for power in California due to their inadequate
generation. In fact, according to newspaper stories, the federal
government was forcing utilities in the Pacific Northwest to sell to
California during this time. Our utilities used these sales to help
offset the high prices they had already paid for power when we needed
it here. Federal Way citizens shod, not pay twice for the California
problem--we too paid high prices for power last winter, and now
California wants a ``refund'' for the power we sold to California.
Our Northwest utilities (and their customers) should not be
penalized for purchasing power needed to ensure our community's
electric reliability and for selling their excess resources into the
marketplace at prices set by that market at that time. To treat
utilities serving customers as if they were market speculators is
unfair to utility customers. We object to any federal policy that would
force Northwest citizens to provide refunds to California when many of
our citizens have suffered so much from California's energy policies.
As a final point on this issue, we feel strongly that California
should be required to pay its outstanding debt to Northwest utilities
for power they purchased and consumed. California's unpaid bills should
not find themselves into our future electric rates and Northwest
utilities should not be expected to absorb those bad debts as yet
another subsidy to California.
PRICE CONTROLS
On the issue of price caps, we must again make every attempt to be
sure that the Northwest is not made to suffer even more consequences
from the California deregulation experiment. In that regard, we do not
believe that the prices for energy in the markets in the Northwest
should be set by the California ISO. The California ISO will only act
in the best interest of California and again, our Northwest communities
will fall victim to their actions.
As the Subcommittee is well aware, California and the Pacific
Northwest experience peak electrical loads at opposite times of the
year--California in the summer, the Northwest in the winter. This
situation, with the prices set by the Cal ISO, poses the peril of the
Northwest having a peak need for power at a time when the California
loads are light and markets are calm. In the worst case, the Cal ISO
could be congratulating itself for maintaining low power prices while
Northwest citizens shiver in the cold and dark of an arctic blast.
As a result, we urge FERC's ``correction'' to the California
deregulation experiment take into consideration the situation in all
states in the West, not just California. The ``correction'' should not
``compensate'' California by further increasing the expense to
Northwest customers and utilities. And, most of all, any such
``correction'' should not result in the Northwest being unable to meet
its load and experiencing its own blackouts. We understand the opinion
of many that the electric market may need to be managed so we avoid the
price spikes of recent months, however the notion that we are better
off now that FERC has implemented a price cap is simply incorrect. If
we are to have price caps then it must take into consideration the
situation of all utility customers in the West--including those in the
Northwest.
Finally, any price mitigation efforts must not impair current and
future energy supplies. The established price cap must both protect
utility customers from unnecessary and outrageous electric prices and
encourage future development of new energy resources. Like other
communities, Federal Way is continuously adding new residents and
businesses--we want to be sure that there is enough affordable
electricity to meet this growth.
Thank you for your consideration of our concerns on this critical
issue for the citizens of Federal Way.
Sincerely,
Delores Shull,
President/CEO.