[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
COMPREHENSIVE NATIONAL ENERGY POLICY
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
----------
MARCH 5, 12, and 13, 2003
----------
Serial No. 108-7
----------
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
86-052 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
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COMPREHENSIVE NATIONAL ENERGY POLICY
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
MARCH 5, 12, and 13, 2003
__________
Serial No. 108-7
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
------------------------------
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
Vice Chairman PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
RICHARD BURR, North Carolina (Ranking Member)
ED WHITFIELD, Kentucky ALBERT R. WYNN, Maryland
CHARLIE NORWOOD, Georgia THOMAS H. ALLEN, Maine
JOHN SHIMKUS, Illinois HENRY A. WAXMAN, California
Vice Chairman EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico RALPH M. HALL, Texas
JOHN SHADEGG, Arizona FRANK PALLONE, Jr., New Jersey
CHARLES W. ``CHIP'' PICKERING, SHERROD BROWN, Ohio
Mississippi BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York KAREN McCARTHY, Missouri
STEVE BUYER, Indiana TED STRICKLAND, Ohio
GEORGE RADANOVICH, California LOIS CAPPS, California
MARY BONO, California MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan
DARRELL ISSA, California (Ex Officio)
C.L. ``BUTCH'' OTTER, Idaho
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Hearings held:
March 5, 2003................................................ 1
March 12, 2003............................................... 231
March 13, 2003............................................... 295
Testimony of:
Aurilio, Anna, Legislative Director, U.S. Public Interest
Research Group............................................. 124
Benjamin, Jeffrey A., Vice President, Licensing and
Regulatory Affairs, Exelon Nuclear......................... 131
Brownell, Hon. Nora Mead, Commissioner, Federal Energy
Regulatory Commission...................................... 55
Buccino, Sharon, Senior Attorney, Natural Resources Defense
Council.................................................... 419
Douglass, Bill, CEO, Douglass Distributing Company, on Behalf
of the National Association of Convenience Stores and the
Society of Independent Gasoline Marketers of America....... 444
Early, A. Blakeman, Environmental Consultant, American Lung
Association, on Behalf of Northeast States for Coordinated
Air Use Management......................................... 449
English, Glenn, CEO, National Rural Electric Cooperative
Association................................................ 329
Ervin, Sam J., Commissioner, North Carolina Public Utility
Commission................................................. 349
Fertel, Marvin S., Senior Vice President of Business
Operations, Nuclear Energy Institute....................... 117
Gent, Michehl R., President and Chief Executive Officer,
North American Electric Reliability Council................ 389
Kanner, Marty, Coordinator, Consumers for Fair Competition... 410
Keil, Julie, Director of Hydro Licensing and Water Rights,
Portland General Electric.................................. 248
Lyman, Edwin S., President, Nuclear Control Institute........ 136
Masonis, Rob, Director, Northwest Regional Office, American
Rivers..................................................... 255
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission...................................... 47
McSlarrow, Hon. Kyle, Deputy Secretary, U.S. Department of
Energy..................................................... 23
Meserve, Hon. Richard A., Chairman, U.S. Nuclear Regulatory
Commission................................................. 33
Meyer, Alden, Director of Government Relations, Union of
Concerned Scientists....................................... 159
Moore, W. Henson, President and CEO, American Forest & Paper
Association, on Behalf of Electricity Consumers Resource
Council and American Chemistry Council..................... 343
Murphy, Edward, General Manager, Downstream, American
Petroleum Institute........................................ 431
Nadel, Steven, Executive Director, American Council for an
Energy-Efficient Economy................................... 141
Norlander, Gerald A., Executive Director, Public Law Project
of New York, Chairman, National Association of State
Utility Consumer Advocates................................. 398
O'Hagan, Malcolm, President, National Electrical
Manufacturers Association.................................. 149
Olson, Erik D., Senior Attorney, Natural Resources Defense
Council.................................................... 455
Owens, David K., Executive Vice President, Business
Operations Group, Edison Electric Institute................ 308
Robinson, J. Mark, Director, Office of Energy Projects,
Federal Energy Regulatory Commission....................... 242
Schori, Jan, General Manager and CEO, Sacramento Utility
District, on Behalf of Large Public Power Council.......... 316
(iii)
Segal, Scott M., Counsel, Oxygenated Fuels Association....... 465
Slaughter, Bob, President, National Petrochemical & Refiners
Association................................................ 435
Szeptycki, Leon, Eastern Conservation Director and General
Counsel, Trout Unlimited................................... 263
Tezak, Christine L., Electricity Analyst, Washington Research
Group, Schwab Capital Markets, LP.......................... 402
Twitty, John, General Manager, City Utilities of Springfield,
Missouri, on Behalf of American Public Power Association... 319
Walter, Ron, Executive Vice President, Calpine Corporation,
on Behalf of Electric Power Supply Association............. 338
Wood, Hon. Patrick, Chairman, Federal Energy Regulatory
Commission................................................. 38
Additional material submitted for the record:
Dinneen, Bob, President and CEO, Renewable Fuels Association,
prepared statement of...................................... 486
Electricity Consumers Resource Council, supplemental comments 490
Lyondell Chemical Company, prepared statement of............. 491
McSlarrow, Hon. Kyle, Deputy Secretary, U.S. Department of
Energy, response for the record............................ 181
Rathbun, Dennis K., Office of Congressional Affairs, Nuclear
Regulatory Commission, letter dated April 8, 2003,
enclosing response for the record.......................... 193
Tezak, Christine L., Electricity Analyst, Washington Research
Group, Schwab Capital Markets, LP, supplemental testimony
of......................................................... 495
Walter, Ron, Executive Vice President, Calpine Corporation,
on Behalf of Electric Power Supply Association, letter
dated March 25, 2003, enclosing response for the record.... 493
Wood, Hon. Patrick, Chairman, Federal Energy Regulatory
Commission, letter dated March 31, 2003, enclosing response
for the record............................................. 221
(iv)
COMPREHENSIVE NATIONAL ENERGY POLICY
----------
WEDNESDAY, MARCH 5, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Cox, Burr,
Whitfield, Norwood, Shimkus, Wilson, Shadegg, Pickering,
Fossella, Buyer, Radanovich, Bono, Walden, Issa, Otter, Tauzin
(ex officio), Boucher, Wynn, Allen, Waxman, Markey, Hall,
Pallone, Brown, McCarthy, Strickland, Capps, Doyle, John, and
Dingell (ex officio).
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Dwight Cates, professional staff;
Andy Black, policy coordinator; Prter Kielty, legislative
clerk; and Sue Sheridan, minority counsel.
Mr. Barton. The hearing will come to order. We appreciate
everybody's attendance. We want to, before we start the opening
statements, ask for unanimous consent to adopt and enforce a
version of the new Committee Rule 4(e).
Under Committee Rule 4(e), the subcommittee chairman and
the ranking member have the right to, on the opening
statements, allow the chairman and the ranking full committee
member and the subcommittee chairman and the ranking
subcommittee member each get 5 minutes.
All other members get 3 minutes, unless they wish to defer
their 3 minutes, in which case they get an extra 3 minutes on
their question periods, the first question period.
Congressman Boucher and I have, are going to recommend
unanimous consent to adopt a version of that, in that the non-
ranking members can have perhaps a 1-minute opening statement
and they get 2 extra minutes.
Or a 2-minute opening statement and get one extra minute.
So that you can have some opening statement, but the time you
don't use in your opening statement you can have that added to
your time for questions.
Is there an objection to that unanimous consent request?
Hearing none, so ordered. We want to begin today a series of
hearings, which the series is going to be two. So I should say
two hearings, on the energy policy of this country.
I have here, you can't see them all. These are copies of
the 34 hearings we've done on this while I have been
subcommittee chairman of this subcommittee.
So we have done extensive hearings on the general policy.
We have a draft bill out. And today we are going to hear from a
series of individuals representing various groups and also
various agencies of the U.S. Government about this policy.
We're going to hold another hearing next week on Thursday.
I want to thank Chairman Tauzin for his leadership on this
issue. He and I have work with Mr. Boucher and Mr. Dingell for
the last, really you could say the last 4 years, to try to get
such a policy in place.
I also want to thank my good friend, Congressman Rick
Boucher. He has worked tirelessly making sure that the views,
not only of himself, but of his party and his region are fully
aired during these hearings.
And also full committee ranking member Congressman Dingell.
If we look at what is happening in the markets, we see several
things.
Yesterday the spot price for oil in the New York market was
$36 a barrel. Last week natural gas got as high as $12 in Mcf
on the spot market.
We also, and this is just here in the Virginia, Washington,
DC region, saw prices of a $1.65 for regular unleaded self-
service gasoline. And I am told that up in New England last
week a gallon of residential heating oil got as high as a $1.79
a gallon.
These are prices that show that our production in this
country is lagging, so the price signal is going up. The signal
that while we don't have shortages, some of these materials are
getting scarcer and scarcer.
I think this Congress this year needs to enact a
comprehensive energy policy, focusing across the board on all
our energy needs.
Today, we're going to have before us, witnesses from the
administration and key energy regulators to discuss what they
think should be done.
It has been said that Congress does not legislate until
there is a crisis. I don't think we're in a crisis, but I do
believe we need to act in this critical time for both the short
term and the long term.
Some other numbers that indicate why we should begin to
act. Last month the Baker Hughes rig count for oil and gas rigs
in the United States was 854. That is down from last year in
spite of the price signals that I have just talked about.
I have been told that somewhere in the neighborhood of
50,000 megawatts of electricity generation has been canceled
during the last year because of the crisis of confidence in the
investor community in our utility industry.
Now zero is the number of nuclear power plants that have
been ordered in the last 10 years. I believe that nuclear power
could take some of the pressure off of coal and natural gas for
the generation of electricity.
I could go on and on, but I think the message is clear.
This subcommittee is going to soon consider legislating. I have
circulated in the last week, with the support of the full
committee chairman, Mr. Tauzin, a draft to start discussions.
I want to emphasize to my subcommittee and this is a draft,
it is not written in stone. I fully expect to make changes
based on what members on both sides of the aisle suggest after
they have reviewed the draft.
I have also asked that the witnesses before us comment on
elements of the draft. Some of these elements are very
familiar. We have been over this ground many, many times.
Others are new.
We have tried to come up with some innovative ways to solve
some of the controversial parts of past energy bills. I look
forward to working with members of all the subcommittees,
Republicans and Democrats.
There are some elements in the draft that we have not had a
markup on. The electricity title, the assumption that we did
not mark up in my subcommittee last year.
I think the electricity title needs to be bi-partisan and I
hope that it will be. Both my door and Chairman Tauzin's door
are open to all members on both sides of the subcommittee to
try to see if we can improve this title of the bill.
I am going to submit the rest of my statement for unanimous
consent for the record. My good friend, Congressman Boucher,
said that I should enforce the rule. So I have stopped my
statement with 4 seconds over. And I would recognize my good
friend, Mr. Boucher, for his opening statement.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
also look forward to working with you, with Chairman Tauzin of
the full committee, with our ranking Democratic member, Mr.
Dingell, and all members of the subcommittee during the course
of the 108th Congress as we seek to develop legislation that
enjoys a broad consensus, that addresses our Nation's energy
needs.
The hearing that we are having today and the one that has
been scheduled for next week, will provide a valuable
opportunity for subcommittee members to hear from a range of
witnesses on the various topics addressed in energy policy
legislation.
It also provides a useful forum to consider the provisions
that Chairman Barton has now put before the subcommittee and
the draft energy legislation that he circulated last week.
The chairman's draft addresses a number of important energy
policy topics from authorization of a new clean coal power
initiative, to new energy efficiency standards for appliances,
to hydroelectric facilities re-licensing reforms to
encouragement of the construction of the long awaited natural
gas pipeline from Alaska to renewal of the Price-Anderson Act.
The draft legislation makes broad and valuable improvements
to the Nation's energy laws and policies. Many of the
provisions in the chairman's draft were agreed to by the
conferees between the House and Senate last year.
And I am glad to see these provisions re-emerge in the
draft that the chairman has now put before the subcommittee. I
would particularly draw the attention of members to the
provisions which would foster a new generation of advanced
clean coal technology.
Coal is the Nation's most abundant fuel with reserves
sufficient for the next 250 years. It generates electricity at
less than one-half the cost of the fuel alternatives. It is
clearly in the energy security interest of the Nation to use to
a greater extent this abundant domestic resource.
And I would note that consumers get the best prices when
they purchase electricity generated through the combustion of
coal. The inclusion of the clean coal power initiative
acknowledges the value to the Nation of coal use and takes
appropriate steps to assure the protection of air quality in
those regions where coal is burned.
I strongly commend these provisions. While not a part of
the Energy and Commerce Committee's jurisdiction, I would also
take a moment to call attention to the incentives for the use
of clean coal technologies that were included in both the House
and Senate versions of energy policy legislation last year.
In the near future, I will be joining with our colleagues,
Mr. Whitfield and Mr. Shimkus and others, in reintroducing our
legislation to promote the use of coal in both new and
retrofitted power plants that agree to use advanced clean coal
technologies.
We have all urged that this comprehensive coal advancement
measure be included in any comprehensive legislation considered
by the house.
I will also offer a few comments this morning concerning
the electricity title which is included in Chairman Barton's
draft legislation.
The House Energy and Commerce Committee has devoted 4 years
to a so far elusive quest for consensus of electricity reform
measures.
We found no broad agreement on proposals to amend PUHCA or
PURPA, to alter the merger review authority of the FERC, to
establish incentive pricing for new transmission line
construction, to vest the FERC with transmission line sighting
authority, or to alter legislatively the rules pertaining to
the management of an access to the transmission grid for
wholesale market transactions.
While I appreciate the chairman's inclusion of provisions
relating to net metering, time of use pricing and transmission
reliability, I still have a number of concerns related to the
electricity provisions.
These are complex matters. And notwithstanding several
years of review, we have not been able to reach consensus on
these contentious and difficult issues.
We have, however, under the Chairmanship of Pat Wood, an
increasingly active and shall I say imaginative FERC. The
commission has taken positive steps in order to make the
wholesale market more reliable and has provoked a spirited
debate over its proposal for a standard market design for the
Nation's transmission grid. I have a number of questions
concerning that proposal which we may be able to address this
morning.
Dependency of the SMD rulemaking obviously complicates even
further the process of seeking consensus on legislation
relating to the electricity market. Perhaps before adopting
fundamental electricity law changes, we should carefully
consider--10 more seconds. We should----
Mr. Barton. Enforce the rule, somebody said.
Mr. Boucher. I know I did say enforce the rule and I am
proud to be the first violator. My view is that we should
carefully consider how electricity markets should be best
served.
Does the statutory law truly stand in need of change or the
alternative. Can we look with confidence to the FERC to direct
the future development of the wholesale market using existing
statutory authority.
Thank you very much, Mr. Chairman. I appreciate your
indulgence and I look forward to the testimony of these
witnesses.
Mr. Barton. Well, you just gave Markey and additional 42
seconds. That is what that is going to amount to. And I would
say that imaginative and creative is good to my FERC.
There are other things that have been said about what you
all have been doing, so that is a good start. I would now
recognize the full committee chairman, the distinguished
gentleman from Louisiana, Mr. Tauzin, for a 5-minute opening
statement.
Chairman Tauzin. Thank you, Mr. Barton. Let me first thank
the subcommittee. This year, unlike 2 years ago, this
subcommittee's task is make somewhat simpler.
We now have the experience of the last 2 years when this
subcommittee produced the basic frame of the energy bill that
worked its way through the House and into a conference with the
Senate.
And, as I understand, the draft the chairman has circulated
in built on that frame. On the knowledge we gained in the
process of working H.R. 4 through the House and a similar bill
or comparable bill through the Senate.
It is somewhat more difficult because the chairman has
engaged the issue of electricity in this title this year when
it was not engaged in the House on the energy bill last year.
And so this committee has some especially difficult
decisions to make regarding that particular title of the bill.
But I wanted to update you on the progress we made. We came
within an eyelash of concluding the conference last year.
We got caught in the last minute politics of the closing
session and did not finish it. But I want you to know that the
Senate conferees and the House conferees, all of you who worked
in the process, deserve a lot of credit for bringing this to
the point where we almost completed this work in the last
session.
And so a lot of the hard work has been done. And I
particularly want to commend, again, Mr. Boucher who has been
thanked, I know, by your chairman and Mr. Dingell for the
extraordinary cooperative spirit in which we worked in the last
Congress and encourage that same spirit this year.
It is my intent, I know it is the chairman's intent to work
with you to make sure that to the extent we can, this is as
much a bi-partisan effort as we can possibly engage in.
We will have differences. We will have different
approaches. And members on either side of our committee who
have some very different views about how best to draft an
energy policy for our country and what to stress and what not
to stress.
And those differences will be aired in this and other
hearings and in our final debates. But we're on a fast track.
And no one should be upset about that. A lot of work went
through last year.
We came this close to finishing it. We'll buildupon that
experience and move as quickly as we can to get an energy
policy before the House so that Senator Pete Domenici, on the
Senate side, can begin his process and meet us in a conference
that he will chair, under our agreements, as quickly as we can
accomplish that.
That is in the nature, rather, that is an ingredient of
America at this particular moment in our history. Now I will
say early off in this process we will have some great debates
and great differences of approach.
Mr. Markey and Mr. Waxman I know will have different ideas
and emphasis in the bill than perhaps I will or perhaps Mr.
Barton and others on this committee will have. That is good. We
ought to have those good debates.
But we are all joined in this debate for a common purpose
that is especially true today. I want to hold up a fact sheet
that was prepared in the last Congress. Details of imports from
Iraq in the first quarter of the year 2002.
What this fact sheet indicates is that indirect sales of
Iraqi oil to America then was requiring Americans to spend,
indirectly, money which we sent to Saddam Hussein in Iraq to
the tune of about $12.7 million per day on Iraqi oil.
But things have changed since then. What has changed is
that an awful situation has occurred in Venezuela. Imports of
Iraqi oil have, indirectly again, grown dramatically. And the
price has changed from $20, yesterday's spot crude price of
Texas sweet was $36.88, from $20 then to $30 plus today.
Which means that everyday we are sending to Saddam Hussein,
every time we fill up our gas tank, every time we fill up a jet
engine, every time, with jet fuel, every time we buy fuel oil,
every time we buy any oil derivative product in this country,
we are helping to send Saddam Hussein better than $20 million
per day.
Because of a necessary, unavoidable dependence upon that
resource. Now whatever path we choose to end that dependence,
whether it is for conservative or alternative fuels, more
production in the United States, whatever path we choose, we
had better make some decisions quickly.
It is absolutely insane for us to depend today, as our
troops, our young men and women are preparing perhaps to do
battle in Iraq, to depend upon that country for such a large
amount of our oil import.
And to send Mr. Saddam Hussein $20 million a day to arm his
troops to kill our young men and women. There is something
insane about that. And I give back the balance of my time.
Mr. Barton. Thank you, full committee chairman. We now want
to recognize Mr. Waxman. Does he wish an opening statement, and
if so, you have 1 minute, 2 minutes or 3 minutes?
Mr. Waxman. I have what?
Mr. Barton. You can have 1, 2 or 3, and whatever time you
don't use now you get on your question period.
Mr. Waxman. Thank you very much, Mr. Chairman. Today, the
committee----
Chairman Tauzin. Mr. Chairman----
Mr. Barton. Which do you want----
Chairman Tauzin. Mr. Chairman, if I can correct the
chairman. Our rule does not allow that. Our rule says you have
to choose to either give an opening statement----
Mr. Barton. We understand that, but we got unanimous----
Chairman Tauzin. [continuing] and if you don't give it, you
get 3 extra minutes on questions.
Mr. Barton. But we, by unanimous consent, agreed to let him
have part of it. Honest.
Chairman Tauzin. I wish I had been around to object to it.
Mr. Barton. You were around.
Chairman Tauzin. I missed it.
Mr. Barton. You just didn't object.
Chairman Tauzin. I wasn't paying attention. I'm going to
pay better attention.
Mr. Barton. You need to tell us how much of the opening----
Mr. Waxman. May I inquire of the chair, if I take 8 minutes
and forego questions----
Mr. Barton. No, no, no.
Mr. Waxman. I think my opening statement will take 3
minutes.
Mr. Barton. Three minutes.
Mr. Waxman. If I succeed in doing it in 1 minute, I'd like
to reserve the two.
Mr. Barton. All right, the gentleman is recognized for 3
minutes.
Mr. Waxman. Today the committee begins consideration of an
energy bill for this 108th Congress. And based on legislation
circulated on Friday, the committee starting point appears to
be where we left off in the last Congress.
The legislation that was circulated last Friday, not only
fails to reflect the energy needs of the 21st Century, it fails
to reflect even the most dramatic events in the energy sector
that have occurred since the House finished consideration of an
energy bill in August 2001.
I would like briefly to mention some of these important
issues. The collapse of Enron was one of the more dramatic
illustrations of the dangers of inadequate government oversight
of the energy industry.
But the examples of abuses in the gas and the electricity
sectors are rampant. Back in early 2001, many of us in
California believed that energy markets were being manipulated
to price gouge western families.
It has now been revealed that our worst suspicions were
true. Unfortunately, the committee has never held a hearing on
these abuses.
For example, El Paso was recently found to have withheld
pipeline capacity in order to increase gas prices in
California. Energy traders from Dynagy, El Paso Corporation,
American Electric Power and Williams Company have all been
involved with providing false information on gas trades which
could have had major price impacts on consumers.
Reliant Energy revealed their coordinated strategy to shut
down power plants in order to drive up electricity prices.
Cynically Reliant decided to wage a campaign to blame the Clean
Air Act.
We must address the corruption in this industry in order to
protect consumers and shareholders. We must also look seriously
at this industry's practices in order to protect the
environment.
No longer can the administration turn a blind eye to the
serious threat of global warming. They are out of step with the
rest of the world, the American people and even many in the
industry.
Although the Senate has done considerable bi-partisan work
on climate change, this committee has never held a hearing on
the Senate's extensive legislative work.
And finally I would like to mention several issues that
came up in the energy conference last year that have never been
considered by this committee.
The Senate proposed a provision placing a moratorium on EPA
regulation of the practice of hydraulic fracturing. This
committee certainly should examine this before legislation on
this issue.
The majority has also proposed, in the conference,
protecting MTBE producers from liability for polluting ground
water and drinking water.
This issue is highly contentious. It has never been
examined by the committee. Mr. Chairman, I hope the committee
can work together in a collegial, bi-partisan fashion on the
legislation.
To that end I hope the committee can examine these critical
energy issues through additional hearings and investigations.
We have an obligation to responsibly address the energy
problems facing the nation.
Mr. Cox [presiding]. Thank you, gentleman. The gentlelady
from New Mexico.
Mrs. Wilson. Thank you, Mr. Chairman. I will reserve my
time for questions.
Mr. Cox. The gentleman from Michigan, Mr. Dingell.
Mr. Dingell. Mr. Chairman, I thank you. Last Congress
Chairman Tauzin asked me to work on a bi-partisan issued bill.
We did that. Members of both sides worked together to determine
which topics should be addressed in the committee of energy and
commerce's bill, and how.
As a result, the bill was supported by a wide, bi-partisan
margin. And with few exceptions, was left intact when merged
with legislation from other committees to be taken up on the
House floor as H.R. 4.
Well, veritably we find ourselves in markedly different
circumstances today. The bill circulated on Friday is not a bi-
partisan bill and the very tight committee schedule with only
two errors will make it particularly difficult for new members
of the committee to have an opportunity to fully participate in
this bill's consideration, or indeed to understand it.
Indeed, witnesses in today's hearings had little time to
review the language circulated last Friday, that concerns
significant areas of energy policy, conservation, and nuclear
matters, and the controversial topics of electricity and
hydropower.
While I appreciate the chairman's cooperation with the
minority in inviting witnesses, and I thank him for that, I am
concerned that this scheduled is so compressed as to preclude
meaningful testimony on the draft bill.
I note that there seems to be a pattern moving in this
direction, as we face a similar situation with regard to
medical malpractice, and I suspect other bills coming before
us.
Unlike the bill we recorded in this last Congress. This
bill would repeal the Public Utilities Holding Company Act,
PUHCA, and major portions of the Public Utility Regulatory
Policies Act of 1978, or PURPA.
It also contains a controversial proposal to allow States
to override Federal agency's rulings concerning potential
sighting of new transmission lines on Federal lands.
This is an extraordinary and altogether new proposal, not
contained in either the Senate or House bill last year, and is
likely to prove very troublesome since it can compromise the
authority of several Federal agencies and disregard a number of
settled pieces of environmental and other law and regulations.
I am perplexed at the decision to further deregulate the
Nation's electricity markets at a time when turmoil in the
industry, if anything, shows that consumers need more
protection from naked market forces.
It seems to me if we must act now, that a better approach
would be for us to reach agreement on a narrow range of reforms
that address specific problems in wholesale markets and leave
controversial restructuring issues, such as PUHCA repeal, PURPA
repeal, and diminishing FERC's merger authority, to another
day.
The committee held its last electricity oversight hearing
in December, 2001. Much has occurred since then.
We have learned enough about market manipulation by Enron
and other high flying marketers with no sense of responsibility
for the interest of consumers or investors, to know that there
are probably other shoes yet to drop.
FERC's own internal investigation into the turmoil in west
coast markets during the 2001 year is still underway. Criminal
investigations into Enron and others' behavior is still
pending.
In light of what we have learned since our last hearing,
what we are likely to learn when FERC releases its internal
investigation, it seems to me to be irresponsible for this
committee to act to further deregulate the electric utility
industry.
It may well be we will want different deregulation, no
deregulation or a return to more regulation. It is far more
important to learn what happened and to take time to formulate
a thoughtful response, than to move legislation on some kind of
a preordained schedule.
Furthermore, as the Chair knows, I have a special interest
in hydropower reform. I was disheartened to learn that the
carefully crafted bi-partisan House compromise in favor of
objectionable language developed by the Senate.
This does not bode well for building support for the
overall bill. Finally, I would be remiss in not mentioning one
consumer concern that constantly arises among my constituents.
That is the continuing volatility of gasoline prices. In
many areas we have seen prices with more than $2 per gallon.
While it is important to keep Congress' watchful eye on the big
picture of energy, I think our constituents all would
appreciate our attention to this which is a far less than
theoretical problem. Thank you for your kindness, Mr. Chairman.
Mr. Cox. Members are obviously aware that there is a vote
on the floor. There is a vote on the journal. And after
discussing this with Mr. Boucher, it is our proposal that we
continue with opening statements and members can come and go
during the open statements to ensure that they make the vote on
the floor.
And if there is no objection, I would go next to a
gentleman from Oregon, Mr. Walden.
Mr. Walden. Thank you very much, Mr. Chairman. I have
prepared statement I will submit for the record and reserve the
balance of my time for question and answer.
Mr. Cox. Next, I would like to welcome to the committee the
gentleman from Maine, Mr. Allen.
Mr. Allen. Thank you, Mr. Chairman. I would like to take 2
minutes and I will do my best to stay within that. I want to
thank you for hold this hearing on comprehensive national
energy policy.
And I look forward to hearing from the panelists who are
here today. Electric deregulation in Maine has been accompanied
by rising electricity costs. The cold winter has reminded us
how much it costs to heat 19th Century homes, and gasoline
prices last week reached an all time high.
National policies of the past have perpetuated an energy
system dependent on fossil fuels, which has caused serious
human health problems in our Nation's downwind States, of which
Maine is one.
In Maine we have the highest levels in the country of
methyl mercury within, in our fish. Our adults endure the
highest rate of asthma in the country, and ozone levels made
Maine's air dangerous 17 days this past summer.
I hope that as we go forward we can craft an energy bill
that will encourage economic growth around this country, that
will protect the health of our citizens, and will confront the
looming global environmental challenges that we face.
I am not convinced that the bill in front of us will do
that, but I hope in the process of debate and discussion within
this subcommittee we will make progress to a better product.
Thank you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Allen. Mr. Whitfield.
Mr. Whitfield. Mr. Chairman, there are so many important
issues that I am going to defer to the length of my question
period.
Mr. Barton. Mr. Whitfield defers. Ms. McCarthy. Whoops, we
have Ms. Capps. Was Ms. Capps before Ms. McCarthy?
Ms. Capps. Thank you, Mr. Chairman, for holding this
hearing. Shall I begin my opening statement?
Mr. Barton. If you tell us how much you are going to use.
Ms. Capps. The full amount.
Mr. Barton. All right, 3 minutes. The gentlelady from
California.
Ms. Capps. We need a national energy strategy. We need to
ensure that we have stable and predictable sources of energy.
There are new technologies to let us use energy more
efficiently. We need to identify and encourage the development
of new sources of energy, but I worry that the bill before us
would not foster these developments.
It would leave consumers at the mercy of unregulated energy
companies operating with little oversight. I want to highlight
a couple of concerns I have about this bill.
First, it contains many provisions to increase energy
efficiency and promote conservation, but it leaves out probably
the single most important step we can take, increasing the fuel
efficiency of our cars and trucks.
We all know about the National Academy of Sciences report
that concludes a significant improvement in the miles per
gallon performance of cars and trucks over the next 10 years is
possible.
One of our witnesses, Steve Nadel, will testify that
attaining an average fuel economy of one, 41 miles per gallon
is possible by 2012.
Such an improvement would result in real fuel savings that
would benefit consumers and our economy. Perhaps more
importantly, in light of what Chairman Tauzin noted, it would
reduce our dependence on foreign oil and increase our national
security.
For those who say these improvements are just not possible,
consider the President's plan to build a hydrogen car. It has
some rather bold assumptions.
Reducing the cost of fuel sales by a factor of ten.
Dramatically lowering the cost of hydrogen by 75 percent.
Solving expensive infrastructure challenges. Surely if we can
get a government program to achieve these goals, our private
companies could meet the challenges of increasing fuel
efficiency.
It is likely that hydrogen cars wouldn't have any
appreciable impact on the market for 20 or 30 years. Increasing
the efficiency of our cars and trucks can begin very quickly.
It is the right thing to do. Mr. Nadel notes that there may
not be the political will to require the kind of increases in
fuel economy, but perhaps, and I hope and pray that when we go
to mark up, it will miraculously occur.
Another major flaw in the legislation is the call for
national electricity deregulation without any real assurance
that a repeat of the price gouging that took place in
California does not happen again.
With all due respect to our witnesses here today, the FERC
response has gone from being completely nonexistent a couple of
years ago, to being inadequate today.
Energy marketers ripped off Californians, my constituents,
to the tune of billions of dollars. We said back then the power
was being withheld from the market and inappropriately, if not
illegally, driving wholesale prices, power prices through the
roof.
FERC did essentially nothing. This committee's reaction was
halting and grudging. When FERC finally stepped in, the damage
had been done to California and the western States.
Over the last couple of years we have seen some documents
from the energy companies involved in the California heist.
Enron has outlined some of their schemes, complete with
catchy names like ``Get Shorty'' and ``Death Star''. Recent
documents from Reliant Energy catch the traders' illuminating
discussion about how to jack up wholesale rates by removing
power from the grid.
If asked about it, the traders said they would just blame
the lack of power on the Clean Air Act. I know that FERC still
has some of these issues under investigation, but I have been
deeply disappointed in the outcome so far.
This bill does not address the shortcomings in FERC's
authority, or its inability or refusal to be the tough cop on
the beat.
If national electricity deregulation is enacted, we could
see the same kind of market gaming strategies that hurt
California so badly.
So I look forward to hearing from our witnesses today. And
I yield back my time.
Mr. Barton. I thank you. The gentleman from Indiana is
recognized for 1 minute.
Mr. Buyer. Thank you, Mr. Chairman. I did not get the
opportunity to sit through those 34 hearings last year. I am,
but what I did was I held an energy forum in Indiana, Mr.
Chairman, and invited producers and consumers.
We had 4 hours. I want you to know that there was a degree
of comfort out there between both, with regard to the product
that you produced last year.
The inquisitiveness would be on the electricity side, and I
think there is a pretty good agreement coming out of Indiana
that they concur with your product last year.
That we need a broad based and diversified portfolio with
regard to our energy sources, and that was the goal that you
had in that bill.
So complements from Indiana for the product that you had
put together. I did not know what to expect from all theses
individuals that came.
And I look forward to these two hearings and let us have at
it.
Mr. Barton. Thank you, gentleman from Indiana. The
gentlelady from Missouri.
Ms. McCarthy. I will just need 1 minute, Mr. Chairman.
Mr. Barton. One minute.
Ms. McCarthy. It is imperative, as we consider energy
policy, that we address the environmental ramifications of
proposals such as carbon emissions, which significantly
contribute to global climate change.
And that we establish greenhouse gas emissions reductions
in our own country by providing for an industry-wide sale of
carbon allowances by all entities that bring carbon into the
stream of commerce.
Our committee should forge policy that will provide for
reductions and a reasonable compliance time and have a safety
valve that will ensure no economic injury to our economy, and
yet move this country toward reducing carbon emissions.
Mr. Chairman, about two dozen U.S. companies including
Ford, Dupont and International Paper, and a number of large
electric utilities are already voluntarily doing this in the
Chicago area.
The Chicago Climate Exchange, if it succeeds, could be a
model for us to use with the rest of the Nation. They are
struggling in a voluntary program, and I believe what I heard
in the reports in the news that they think we should move to
broaden it and to make it something that all companies
participate in, in our country.
I yield back what little time I can and I thank you, Mr.
Chairman, for this recognition.
Mr. Barton. The gentlelady yields back the time. The
gentleman from Ohio, Mr. Brown.
Mr. Brown. Three minutes, Mr. Chairman.
Mr. Barton. He wants his full 3 minutes.
Mr. Brown. I will take the full 3. Thank you, Mr. Chairman.
We should do something on energy policy and legislation, but we
should employ a process which helps us do more than just
something, we should do the right thing.
Mr. Chairman, I have significant concerns about the
electricity title of the new energy bill. Instead of responding
to Enron and market power abuses, by strengthening PUHCA, the
bill would repeal it.
I am concerned about the transmission siting provision
which seems to make FERC look more like a Court of Appeals for
energy companies dissatisfied with State decisions, than a true
backstop.
For States like Ohio, which have worked hard to modernize
their siting laws, the potential for FERC review for every
siting decision seems a step backward.
Let me turn to my principal concern for today's hearing,
price volatility in the retail gasoline market and NRC safety
oversight.
Many observers, including AAA, raised concerns about the
role of oil industry business decisions in recent price
increases. These concerns are well founded in light of findings
by the FTC and a Senate committee concerning the oil industry's
business decision and their effect on price volatility in the
retail market.
I would make two requests on these important, this
important issue. First, Mr. McSlarrow, I would ask that you and
Secretary Abraham schedule meetings this month with oil company
representatives to do two things.
Impress upon them the importance of ensuring adequate
reserves of gas this spring and summer especially serving areas
like the midwest and demonstrate its susceptibility to price
spikes.
Second, ensure that the spring refinery maintenance cycles
are completed well in advance of the summer driving season. The
Energy Department needs to act now to prevent price spikes and
minimize those that are unavoidable.
My second request, Mr. Chairman, is that you schedule
investigative hearings on the issue of retail gas price
volatility.
The Senate held hearings last year and this year, but this
subcommittee has remained silent. Turning briefly to NRC
oversight, my district is 50 miles from the Davis-Besse Nuclear
Power Plant.
My colleagues know a football size crater was discovered in
the reactor head last year at Davis-Besse. The most alarming
part of this alarming story was the NRC Inspector General's
report.
The IG concluded that the regulators considered the
financial consequences in making their decision not to order a
shut down for inspection that would have revealed the reactor
had erosion months earlier.
Some observers have pointed the finger of blame at Davis-
Besse operators, others have blamed the senior NRC regulator
who made the decision.
The more compelling question for Congress is the
protectiveness of a regulatory philosophy that defines as
unnecessarily burdensome any action above and beyond the bare
minimum necessary for reasonable assurance of safety.
It has been years since the subcommittee has held an NRC
oversight hearing. I ask, Mr. Chairman, you schedule oversight
hearings in this subcommittee concerning the NRC's approach to
safety and a security regulation.
Thank you, Mr. Chairman. I look forward to beginning the
debate on the future of America's energy policy.
Mr. Barton. We thank you, Mr. Brown. Seeing no other
members who have not given an opening statement, the Chair is
going to recess briefly while I go vote.
When we come back, we will resume opening statements. The
members right to reserve who had to go vote. I am going to take
a point of personal privilege before I leave and recognize one
of my good friends from West Junior High School and Waco High
School, Mr. Tim Mitchell.
He was an all-district guard at Waco High while I was kind
of a has-been, also-ran. He's also been a precinct chairman in
my congressional district. He is up here with his brother
attending a conference.
Tim, why don't you stand up and let everybody recognize
you. We are going to recess very briefly. As soon as members
get back, we will resume our opening statements.
[Whereupon, at 10:44 a.m., the subcommittee recessed, to
reconvene at 10:59 a.m., the same day.]
Mr. Barton. The subcommittee will come to order. When we,
the reason we recessed is we ran out of members to give
statements. But I promised that we would let everybody give an
opening statement.
Congressman Brown of Ohio was the last member to give an
opening statement, so we would recognize Mr. Norwood.
Mr. Norwood. Mr. Chairman, I will reserve my time for
questions.
Mr. Barton. Mr. Norwood reserves his time. We go to Mr.
Markey.
Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, I would
like to take up 2 minutes.
Mr. Barton. Two minutes. Mr. Markey is recognized for 2
minutes.
Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, today is
Ash Wednesday, which I really think is quite an appropriate day
to hold a hearing on the Bush Administration's energy plan.
Ash Wednesday is recognition of the day in which you, as
Catholic, have to give something up as a sacrifice in our
religion. Well, today the Republicans have announced that they
have a plan which essentially gives up energy consumers for
Lent, and declares every day to be Fat Tuesday.
Mardi Gras for the energy producing companies across this
Nation. If the Republican energy plan is enacted into law, the
big oil companies, the natural gas companies, the coal
industry, the nuclear industry, the utility industries will all
be saying let the good times roll as long as they can chow down
on the huge legislative king cake that is being delivered up to
them by the Bush Administration and their allies in the
Republican energy crew.
And unlike more Mardi Gras king cakes, this bill has a
little plastic baby prize in every single slice. They will be
drilling in the arctic refuge and other pristine public lands
for the oil and gas industries.
Price-Anderson liability insurance subsidies for the
nuclear industry. Clean coal subsidies for the coal industry.
Hydroelectric licensing reform for the dam owners. Higher
incentive transmission rates.
Participant funding. PUHCA and PURPA repeal for the utility
industry, and no meaningful improvement in automobile fuel
efficiency for the car industry.
The SUV industry can breathe a sigh of relief. Consumers,
on the other hand, will be left nursing a legislative and
regulatory hang over of higher electricity costs, dirtier air,
disfoiled public lands and ugly--can I take the whole 3? It is
just such good stuff.
Mr. Barton. All right. Well, you have the Boucher 42 second
override anyway.
Mr. Markey. Thank you, I will just use up the whole three,
if I could. Disfoiled public lands and ugly transmission wires,
who's sighting they are preempted from blocking.
Yes, consumers may have been thrown a few legislative beads
as the Republican energy crew went by. A net metering program,
an FTC privacy rulemaking there, with a few new appliance
efficiency standards over there.
They are nice, but they are mere baubles compared to the
pinata of hefty benefits being afforded to the energy-producing
companies.
We need a balanced, comprehensive, national energy policy
that is fair to both producers and consumers. This plan is not
fair. Mr. Chairman, I look forward to today's hearing.
Mr. Barton. We knew it was too good to be true. Congressman
Boucher said, look, it is working, he is only going to take 2
minutes.
And I said, he hasn't finished yet. But it is a start. You
wanted to only do two.
Mr. Markey. No Irishman has ever given up talking for Lent,
okay. There is no known instance of that.
Mr. Barton. All right. The Chair recognizes the gentleman
from California, Mr. Cox, I believe for 1 minute, is that
correct.
Mr. Cox. I think I can get this done in 1 minute.
Mr. Barton. All right.
Mr. Cox. Mr. Chairman, I want to begin by commending you
for assembling this legislation which I hope will deal with our
country's troubling energy situation. The policy we have had up
until now, at least in California, is best described as lights
out.
And I think we need to do a lot of work to change that. I
want to just point out to my colleague, Mr. Markey, how happy I
am that the Price-Anderson reauthorization language in this
bill includes the Cox-Markey Amendment.
Beginning in the Clinton Administration, the State
Department had been giving serious consideration to making U.S.
taxpayers liable for nuclear actions in North Korean nuclear
facilities.
As was first uncovered by the Los Angeles Times, Clinton
Administration lawyers were trying to contort the Price-
Anderson Act in recovering the costs from Kim Jong-il failed
nuclear power plants, which was never intended by this
legislation.
The Cox-Markey Amendment which has been overwhelmingly
adopted in this committee and on the floor on multiple
occasions, makes it clear that U.S. taxpayers cannot be held
liable for nuclear actions in North Korea or any other
government, government of any other country that sponsors
terrorism or engages in the proliferation of weapons of mass
destruction.
And I yield back the abundant balance of my time.
Mr. Barton. All right. We now go to Mr. Wynn of Maryland.
Mr. Wynn. Thank you, Mr. Chairman, I will defer at this
time.
Mr. Barton. Mr. Wynn defers. Mrs. Bono from California.
Ms. Bono. Thank you, Mr. Chairman, I will submit for the
record.
Mr. Barton. She defers. Mr. Pallone of New Jersey.
Mr. Pallone. Thank you, Mr. Chairman. I am going to ask to
use my time, the 3 minutes.
Mr. Barton. The gentleman is recognized for 3 minutes.
Mr. Pallone. Mr. Chairman, I believe that this country
would benefit from a comprehensive energy plan, but last Friday
we received a copy of the majority's energy bill and sadly we
did not receive a comprehensive plan.
While the bill is extensive, it contains harmful provisions
that weaken existing consumer protections that could elicit
potentially dangerous business practices, including going out
of its way to repeal PUHCA, at the same time the FERC's merger
authority is also repealed. The bill also threatens to trample
on environmental laws by providing overriding authority to
States and Federal land management agency decisions and FERC
authority to override a State's decision for transmission
sighting.
It also includes no renewable portfolio standard and
provides only modest provisions for energy efficiency and
conservation efforts, and I am also concerned about the
potential inclusion of a renewable fuel provision that would
mandate the use of ethanol.
This effort is premature in that there has been no
independent analysis of the impact of the mandate on consumer's
gasoline supplies or fuel prices and numerous questions
regarding the environmental impact of ethanol use remain
unanswered.
During the next month, I hope the subcommittee will make a
concerted effort to address some of these concerns. First, I
believe it is critically important for us to reach an agreement
on a renewal portfolio standard. I understand that during last
year's energy conference, disagreement between the House and
Senate conferees on the inclusion of an RPS was a significant
factor in the failure of the energy bill.
Furthermore, I understand there is a continued disagreement
between the scope and definition of renewable energy sources as
well as the percentages and timeframes that were proposed
during discussions last year.
I believe that an RPS must be included in any energy bill
that leaves the subcommittee, especially given the fact that
language in this bill provides relief for mandatory purchase
obligations under PURPA without including strong enough
language to promote further development of small, renewable
energy facilities and distributed energy sources.
Finally, I would like to note that I am encouraged by the
FERC's activities with regard to standard market design. But I
would add that while the PJM structure works well for my State
and region, I understand that a complete replica of the system
may not work for every area of the country.
I believe that FERC's efforts to create standardized
markets, while allowing for regional differences can help to
provide the best certainty for customers. And we need to
proceed cautiously on SMD, but we should not undermine the
process with unnecessary and premature prescriptive measures
while FERC's rulemaking is still being developed.
There are a lot of issues that need to be addressed. I have
not mentioned my concern about lack of strong nuclear security
language, or the failure to include tax incentives for
purchasers of hybrid vehicles.
But I hope that through this hearing and subsequent
hearings we can move ahead and address these concerns that are
absent from this energy proposal and develop sensible
legislation that will effectively address current problems of
the energy industry today, as well as establish a long, forward
thinking energy plan which I think is so crucial that we try to
accomplish this year. Thank you, Mr. Chairman.
Mr. Barton. And thank the gentleman from New Jersey. We
recognize Mr. Radanovich from California.
Mr. Radanovich. Thank you, Mr. Chairman. Just to say one
quick thing that I hope to hear some comment on the hydro
relicensing section of this bill and I applaud you for your
efforts on this bill.
Mr. Barton. So you are going to defer? Okay, Mr. Strickland
of Ohio.
Mr. Strickland. I will save my time for questioning, Mr.
Chairman.
Mr. Barton. All right. Mr. Shimkus of Illinois.
Mr. Shimkus. Mr. Chairman, I will defer also, thank you.
Mr. Barton. Mr. Hall of Texas.
Mr. Hall. Mr. Chairman, I will be very brief. I just want
to put an addendum on to what the gentleman of Massachusetts,
his fine State, that I enjoyed so much, that I have heard so
many times.
And I do enjoy him. I want to remind him of the gentleman
we had come before this committee who was the Railroad
Commission chairman of Texas. The Railroad Commission governs
oil and gas in Texas. His name was Jim Nugent.
And he had made a speech over in Birmingham to the effect
of let the Yankees freeze and starve in the dark. When asked
about that here, and I think Mr. Markey had a copy of his
speech in front of him, he denied making that speech.
But he told me earlier he was going to deny it and for me
to ask him exactly what he said. He denied saying let the
Yankees freeze and starve in the dark.
And when I asked him to tell Mr. Markey exactly what he
said, he said let the thieving Yankees freeze and starve in the
dark.
But I don't consider them thieving Yankees. We have to have
an energy policy and we need to work toward it. I yield back my
time and congratulate Mr. Markey.
Mr. Barton. I think you cleaned up what he really said. I
don't think it was thieving Yankees.
Mr. Markey. What Mr. Hall always forgets is that Red Sox
fans are constantly saying let the thieving Yankees starve and
freeze in the dark. We hate them as much as you do.
Mr. Hall. Maybe he paraphrased.
Mr. Barton. That's better than your opening statement, Mr.
Markey. That was good. Mr. Burr of North Carolina.
Mr. Burr. Though tempted to get into this debate, I will
defer my opening statement.
Mr. Barton. Mr. John of Louisiana.
Mr. John. Unlike Mr. Burr, I can't resist. I thank you, Mr.
Chairman, for convening this hearing. And I think you for the
remarks from the gentleman from Massachusetts in sharing with
us his vast knowledge of the customs of Mardi Gras.
Although, I seem to have lost it in his frame when he
talked about pinatas, and so I'm a little confused about
pinatas and Mardi Gras. But you did well.
But thanks a lot, I will just be very brief. But there are
some important things about which I would like to speak. First
is the fact that as we face a possible war with Iraq and the
unsettling situation in Venezuela and around the Middle East, I
think it has never been more appropriate for Congress to enact
a comprehensive energy policy that will increase our domestic
energy security.
If there was an equivalent to the Department of Homeland
Security's threat level indicator for energy security, it would
surely be code orange, which is a high alert situation, and
certainly duct tape and plastic sheeting would not fix this
problem.
The spikes in gasoline and natural gas reflect our need to
increase domestic production and really modernize our national
distribution system.
Unfortunately, there is bi-partisan blame to go around for
locking up the known quantities of oil and gas around the
country. No more glaring to me than the administration's
decision to deny developing natural gas, the abundance of it,
in the large areas of the eastern Gulf of Mexico, and at the
same time promote a bill in Congress that promotes drilling in
Alaska.
I just want to say if it is good for Alaska, why isn't it
good for Florida, Mr. Chairman? And I look forward to hearing
from the Deputy Secretary of Energy today to talk about our
natural gas supply.
Second, I would like to comment briefly on the recent
actions by the FERC on SMD, the Standard Market Design, that
has my Public Service Commission in Louisiana and certainly the
Governor in Louisiana, to name only a few, concerned about the
increased costs that may lie with Louisiana consumers and
residents.
Unlike my good friends and colleagues from Texas, who will
think this debate may be only academic, for those of us who
face the real prospect of increased rates in our States to
benefit customers in higher cost States, the current SMD
proposal, in my eyes, is a non-starter.
I look forward to hearing from Chairman Wood on how he
intends to address the concerns raised by the southern and
western States, and what positive impacts and results to low
cost States, like Louisiana, you can guarantee in the SMD rule.
So, Mr. Chairman, thank you for calling this hearing. I
look forward to continue my focus and debate on a national
energy policy as I did in the last Congress, because I think
today, more than last year, that it is important that we have a
comprehensive policy for the energy security of our country.
Thank you, Mr. Chairman.
Mr. Barton. Thank you, gentleman from Louisiana. I
recognize the gentleman from Pennsylvania, Mr. Doyle.
Mr. Doyle. Thank you, Mr. Chairman, and I will take the
whole enchilada.
Mr. Barton. You got it.
Mr. Doyle. Mr. Chairman, I thank you for the time in
convening this hearing today. I anticipate an interesting and
useful discussion on a number of issues involving our national
energy policy and our efforts to improve and strengthen that
policy.
Let there be no mistake that this is one member who thinks
it is vitally important that we have a national energy policy.
Improving our energy infrastructure and national policy has
been a focus of mine since I came to Congress. Two years ago
when I first joined this committee, and one of the reasons I
sought that assignment, was that I wanted to continue this
focus and expand my ability to influence the direction that we
take.
I share the frustration that some of us have that for the
work we did on this issue during the last Congress that did not
result in the final conference report to become law.
But of course these are difficult issues and not everything
happens the first time, so we begin again this year on this
effort.
From my perspective, I'll continue to hold true to many of
the same principles that I brought to this debate in the last
Congress.
I continue to believe that it is integral that a national
energy policy be comprehensive and inclusive. I believe that
the best way to solidify our long term energy health, that that
is the best way to solidify our long term energy health.
I want to see our national portfolio involve and support
traditional fossil fuels, such as coal, oil gas, as well as
hydro power and nuclear.
But it must be in conjunction with a sincere commitment to
renewable energy sources, such as fuel cells, solar, wind power
and combined heat and power systems, as well as developing new
technologies, like the research that is ongoing to extract gas
from methane hydrates.
It is only by encouraging a diverse portfolio like this,
that we can guarantee our future energy independence and ensure
that we have access to energy that we will need in the years to
come.
Now I know it is not an easy task to marry all of these
forces and competing interests, as you can well imagine, there
is a lot to cover.
I hope we can use this hearing to begin to glean a little
more understanding of the heavy lifting ahead. But there is one
item that does concern me.
Considering the variety of issues we need to examine, I am
concerned that, as I understand it, we only have one additional
hearing scheduled on these subjects, before I assume we will
move to a mark up.
I would add my voice to those suggesting that at least one
additional hearing would be helpful. From my perspective,
representing my district in Pittsburgh, Pennsylvania, I can
attest to the fact that there is great potential in, when we
talk about an electricity title this session, that there is
great interest in Pennsylvania, as we have made significant
strides since we passed our electricity restructuring law
several years ago.
According to some recent independent studies, conducted by
the Pennsylvania public interest organization, consumers in
Pennsylvania have seen more than $2.82 billion in savings and
rate cuts of up to 39 percent since Pennsylvania law took
effect in January 1997.
It is my understanding that some of the areas I represent
in Pittsburgh, have seen some of the biggest savings. So, Mr.
Chairman, I look forward to engaging this debate.
Being able to include a discussion of the proposed
electricity title as part of that mix. I am sure we are going
to have some disagreements along the way, but I am hopeful in
the end we will be able to achieve some positive results that
will benefit the country and my constituents in Pittsburgh.
Thank you, Mr. Chair.
Mr. Barton. We thank the gentleman from Pittsburgh. All
members not present who have not made an opening statement will
have the opportunity to put their opening statement in the
record.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Vito Fossella, a Representative in Congress
from the State of New York
Mr. Chairman, thank you for holding this hearing today. Few topics
are as important as defining and passing into law a comprehensive
national energy policy. The lack of such a policy to date has caused
uncertainty in energy markets and highlighted America's severe reliance
on foreign energy sources. A Venezuelan oil strike, a chilling winter,
and the potential for war with Iraq among other things have sent oil
and gas prices soaring to near record highs. These concerns hit home
for me recently, when an explosion at a storage facility in my hometown
of Staten Island, New York, sent crude futures skyrocketing. The
current price of oil puts many Americans in a tough spot when making
decisions about paying for everything from gas and heating oil to their
groceries. Given such circumstances, we must take fast, bold steps to
shed our unnatural dependence on foreign oil.
Oil prices aren't the only cause for concern in America. The recent
crisis in California generated great uncertainty in our nation's
electricity markets and brought to the forefront serious deficiencies
in America's system of electricity transmission, generation and
distribution. With energy consumption projected to grow significantly
by 2025, we must ensure Americans have faith in transparent energy
markets and receive access to reliable electricity. The Federal Energy
Regulatory Commission is here today to discuss, among other things,
it's Standard Market Design. FERC hopes its proposal will, ``provide
certainty to all market participants, encourage new infrastructure
investment, promote fair competition and prevent a repeat of the
mistakes made previously in California.'' I'm am extremely interested
in learning more about the Commission's plan and how it responds to
American's concerns.
While oil independence and strong electricity markets are critical
goals, they are just two factors among many that need to be addressed
in sculpting a national energy policy. As we forge ahead with this
initiative, it is imperative we examine a diverse range of options to
ensure our country receives reliable energy in a clean environment.
Enhancing energy efficiency and conservation, the production of
renewable sources, and modernizing our energy infrastructure are all
crucial aspects of securing our country's power needs. It is also
important to look into the future; to plans such as the President's
proposal to expand the role of clean burning fuel cells in our
country's energy portfolio. Achieving these goals is essential to
addressing America's energy needs and allowing our great economy to
expand and flourish in the 21st century.
______
Prepared Statement of Hon. George Radanovich, a Representative in
Congress from the State of California
Thank you, Mr. Chairman for holding this hearing, and I applaud
your efforts to enact energy legislation that will spawn economic
development around our country.
The energy issues that continue to impact California and the
Pacific Northwest have only underscored the importance of the hydro
electric relicensing legislation included in the energy bill draft,
which mirrors the Radanovich/Towns Hydroelectric Licensing Improvement
Act of 2003. This legislation will help repair our broken licensing
process and will strengthen hydropower's ability to improve quality for
future generations.
The emergency surrounding hydroelectric relicensing has not changed
with the passage of time. In fact, every day that passes, we dig
ourselves into a deeper hole. As we look at the next 15 years, enough
non-federal hydroelectric capacity to serve approximately 30 million
homes must undergo the FERC relicensing process. The relicensing
process must be modified before our nation's hydropower resources lose
the ability to provide clean, emissions-free energy to America's energy
consumers.
In order for California to have a vibrant energy market, we have to
address the issue of supply in California. Industry analysts now
predict the financial situation facing the industry could result in
electricity shortages beginning in 2004, potentially hampering economic
recovery. In addition to these problems, insufficient licensing reform
threatens available hydropower supplies this year. Dependable and
affordable hydroelectric energy requires a licensing process that is
efficient and fair in order to accomplish these goals.
I congratulate FERC on their leadership in developing a policy that
will resolve many important problems with the licensing process.
However, legislation is still needed to address the fundamental
problems that have plagued the licensing process for so long. The fact
that federal resource agencies mandate restrictive conditions on the
operations of hydropower projects without either comprehensive analysis
of their impacts or an independent review of the conditions is
unacceptable. The FERC rulemaking is not meant to, nor can it, address
this problem with the licensing process. I believe that greater
interaction between the resource agencies and the licensees in the
development of environmental measures, which this legislation would
encourage, will improve the process.
In the end, I hope we can work together to forge bipartisan
legislation that will build on our Committee's progress in the 107th
Congress and result in continued improvements in the nation's energy
markets in a time of war.
Thank you, Mr. Chairman, for holding this hearing today. I look
forward to the witnesses' testimony.
______
Prepared Statement of Hon. Mary Bono, a Representative in Congress from
the State of California
Mr. Chairman: Thank you for holding this important hearing.
Prior to commenting on the bill as it relates to the witnesses here
today, I would like to urge FERC to continue looking into refunds as
they relate to the California energy crisis. I've always believed that
it should be up to FERC to uncover the extent of abuse and then
recommend corrective action. There are several ongoing cases before the
commission, so I urge you to continue to evaluate them in a thorough
and timely manner. The actions you take on this matter could very well
serve to either prevent or encourage future abuses of the system.
One aspect of the proposed energy bill I support is the
reauthorization of the Renewable Energy Production Incentive. While I
continue to work on refining the exact language of this section of the
bill, I am quite pleased it was included and urge the Department of
Energy to advocate for full funding of REPI once it is reauthorized.
Obviously, in these challenging economic times, we have to make
difficult funding choices. However, providing such an incentive
benefits both the production and development of alternative fuels which
is something our country needs to invest in.
Finally, I would also like to commend the Chairman for including
the President's Freedom Car provision in the bill. I've had the honor
and privilege of working on hydrogen fuel cell technology with the
Sunline Transit Agency, a true leader in this field. I look forward to
hearing from Deputy Secretary McSlarrow on how we can also use this
program to assist the development of hydrogen fuel cell technology with
regards to public transportation. This bill could provide a valuable
platform to encourage the development of this promising technology in
both the public and private sectors.
Thank you Mr. Chairman. I look forward to hearing from the
witnesses.
______
Prepared Statement of Hon. Greg Walden, a Representative in Congress
from the State of Oregon
Mr. Chairman, I'm from a hydro rich area of the United States where
70% of our energy comes from our abundant hydro resources. It is the
most inexpensive energy there is, and it is renewable. However, we in
the Northwest region are having a drought, and that coupled with the
current energy markets in the West is having a devastating effect on
Oregon's economy and the rest of the Northwest. The situation is
becoming so severe that large industrial customers that were once
considered the driving force behind the Northwest economy and provided
good high-paying jobs are beginning to look elsewhere to see if they
can't produce their products more efficiently.
In a year like this when hydrologists are predicting that we will
have only 73% of our normal water levels, and because 70% of our
electricity comes from hydro (as compared to 7% nationwide), the
remaining 30% from coal, nuclear and natural gas fired generation, this
puts us in a tricky predicament for the upcoming summer.
I am happy to say that we are looking at a number of new projects
in Oregon that will be gas fired. Most of these plants are being sited
in my district because a large natural gas pipeline goes right down the
center. They are an important part of meeting our region's growing
generation needs. The Northwest is no longer a region with cheap
surplus power in abundance like it was just after Bonneville, Grand
Coulee and the other dams along the Columbia were completed. It is a
region that must continue to develop alternative sources of generation
instead of relying on the traditional supply of hydropower to meet its
ever-increasing energy needs.
Coming from a district that possesses the windsurfing capital of
the World, I don't think I need to tell you what potential we have for
the further development of wind generation. Just last year I toured a
wind farm in one of my counties, which has generated enough revenue to
double the property tax base of this county. Let me put it in
perspective in explaining the economic development potential for my
district, 15 of the 20 counties have unemployment rates above the state
average of 7.0% and the state average rate is more than a point above
the national rate. The continued development of this renewable energy
source could really turn around some of the failing local economies in
my district.
If the administration could continue to support incentives to
increase the development and production of these alternatives, whether
it is geothermal, solar or wind, it would help the region plan for its
future load growth, and like I just said significantly benefit many of
the communities in my district.
And finally, Mr. Chairman, I must get my two cents in regarding the
future of RTO's and the much talked about and equally maligned Standard
Market Design (SMD). I think it's gross understatement to say that many
people in my district and in the Northwest are ``concerned'' with the
prospect of an SMD regime being uniformly applied to the Northwest.
And, I know my colleagues from other regions of the country are equally
concerned about the ramifications of its implementation. This proposed
rulemaking makes no sense whatsoever, particularly when you take into
consideration the progress that was being made last summer concerning
BPA becoming integral part, albeit with a list of concerns still to be
addressed, of an RTO West. In light of SMD, and its potential to
supercede all the progress that was made during last year's RTO
discussions, I see no reason why BPA would want to become part of RTO
West. As BPA owns approximately 70%-80% of the transmission lines in
the region, I think all of you would agree it would be difficult to
have an RTO West without its participation.
I appreciate your being here today, and I look forward to you
addressing these issues of importance for the Northwest.
With that Mr. Chairman, I'm anxious to hear what the panels have to
say and yield back the remainder of my time.
______
Prepared Statement of Hon. Mike Rogers, a Representative in Congress
from the State of Michigan
Mr. Chairman, thank you for holding this important hearing as we
begin to move forward on how best to provide for our nation's energy
needs.
One issue of concern to me is the Department of Energy's Office of
Energy Efficiency and Renewable Energy is seeking to change the
prescriptive criteria for the Energy Star Windows program, and the
Department has offered two proposals for public comment. I am concerned
with any proposal that lessens the choices currently available to
consumers, damages the marketplace for existing manufacturers, and
ultimately results in lost jobs for workers in the industry. I look
forward to learning from the Department of Energy the criteria that
will be used as the Department makes its selection between the two
proposals.
Finally, coming from a state that for nearly one hundred years has
been the world's leader of automotive technology, Michigan is poised to
develop the next generation of automobiles. Clearly, hydrogen fuel
cells will be at the forefront of the vehicles of tomorrow. I am
excited to see the strong commitment of Chairman Barton on this
critical issue to Michigan and our nation's economy and environment. I
look forward to learning how the Department envisions the FreedomCAR
proposal being integrated with current technologies being developed by
domestic automakers and then with the men and women working on the line
tasked with making the best cars in the world.
Mr. Chairman, thank you again for your continued leadership on
these key issues. I look forward to working with you as we proceed.
Mr. Barton. The Chair would now recognize and welcome our
first panel. We have a very distinguished panel. We have the
Deputy Secretary of Energy, the Honorable Kyle McSlarrow.
We have the Chairman of the Nuclear Regulatory Commission,
the Honorable Richard Meserve. We have three of our
Commissioners from the FERC, including the distinguished
Chairman from Texas, Mr. Pat Wood.
We are going to start with our Deputy Secretary from Energy
and then we will just go with Chairman Meserve and then
Chairman Wood, and Ms. Brownell and Commissioner Massey.
The Chair would recognize Deputy Secretary McSlarrow. Do
you have any idea about how long your statement should take?
Under 5 minutes, okay, then we will recognize you for 6
minutes, and let us see if we can do it in under 6 minutes.
You need to really turn the microphone on and speak into
it.
STATEMENTS OF HON. KYLE McSLARROW, DEPUTY SECRETARY, U.S.
DEPARTMENT OF ENERGY; HON. RICHARD A. MESERVE, CHAIRMAN, U.S.
NUCLEAR REGULATORY COMMISSION; HON. PATRICK WOOD, CHAIRMAN,
FEDERAL REGULATORY COMMISSION; HON. WILLIAM L. MASSEY,
COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; AND HON.
NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY REGULATORY
COMMISSION
Mr. McSlarrow. Thank you, Mr. Chairman. I will be brief. I
am pleased to present the administration's views on the need
for comprehensive energy legislation.
First, I would like to compliment you, Mr. Chairman, and
the entire committee on your leadership in tackling these
important issues, once again.
What was true in the beginning of 2001, is still true. We
had a series of long term energy challenges that require action
now. These challenges are present along the entire energy
continuum and affect the environment and economy, the
generation and transmission of electricity and commodities
ranging from crude oil and its associated products to natural
gas.
The issues that relate to electricity pose their own set of
challenges and possible policy responses, which I will address
later. But the other challenges can be summarized by one
phrase, energy security.
To be more specific, the United States is increasingly
dependent on foreign oil and may not be far from the point in
which we can no longer assume a domestic or even a North
American supply of natural gas that fully meets our demand.
These trends are a concern, Mr. Chairman. Quite simply, we
are at the mercy of events and decisions over which we have
often limited, sometimes no control. When winters and summers
are mild, when no refineries or pipelines break down, when
supply from abroad is abundant and reliable, we do not feel
this dependency.
But when almost anything goes wrong, the markets react
instantly and we confront the higher prices and volatility that
have become by now an almost reliable, cyclical phenomenon.
Almost 2 years ago President Bush presented his solution to
the national energy policy to the American people. I would like
to take 1 minute to highlight one of his initiatives, and that
is the hydrogen initiative.
Hydrogen can be produced from diverse domestic sources,
freeing us from reliance on foreign imports for the energy we
use at home.
Hydrogen emits no greenhouse gas emissions. When hydrogen
is used to power fuel cell vehicles, it will do so with more
than twice the efficiency of today's engines.
If we are successful with the President's hydrogen
initiative, by 2040, we can reduce oil use in light duty
vehicles by over 11 million barrels per day. The amount of oil
that approximates that which American imports today.
Mr. Chairman, I would like to briefly comment on the draft
legislation, because we have only had the last few days to
review the draft, we are not in a position, obviously, to
provide an administration position on every provision and we
look forward to working with you and the members of this
committee on it.
First, the administration strongly supports completing the
transition to effective competition in wholesale power markets,
and believes that much of the electricity title in the draft
legislation is a strong step in the right direction.
Well functioning markets will, we believe, lead to lower
costs for consumers and businesses. But there is more than
simply the benefit of lower prices.
A well functioning market brings its own rewards. As
confidence is gained that the system is reliable and capable of
coping with high demand for electricity, much needed investment
is likely to be attracted.
Investment in new technologies and an improved generation
in transmission facilities, to produce additional energy and
environmental benefits.
When the opposite is true, when uncertainty reigns, when
reliability is questioned, when prices seem detached from
market forces, investment vanishes.
Because the administration supports efforts to ensure open
access for all generators to grid, we support the open access
language in section 7021.
We also support establishing mandatory enforceable
reliability rules, as found in section 7031. The administration
agrees that the Public Utility Holding Company Act should be
repealed and we support reform of PURPA in an innovative and
competition-friendly manner as contemplated in Subtitle E.
We also believe that facilitating an effective national
electric transmission grid for the benefit of consumers, last
resort Federal sighting authority for high priority
transmission lines is needed.
The administration has strongly supported efforts to
increase energy efficiency and I am pleased to note the
chairman's inclusion in this draft of agreements reached toward
this end by the energy conferees in the last Congress.
The administration strongly supports a renewable fuel
standard that will increase the use of clean, domestically
produced renewal fuels, especially ethanol, which will improve
the Nation's energy security, farm economy and environment.
However, the administration firmly believes, and I know
this is a jurisdictional point, but a balanced comprehensive
energy plan with increased domestic production in order to
reduce our rising dependence on imported oil and gas.
And the key to achieving this balance is the President's
proposal to open a small portion of ANWR to environmentally
responsible oil and gas exploration and development.
The administration strongly supports the construction of a
commercially viable Alaskan natural gas pipeline as a critical
part of our energy security portfolio.
And finally, the administration strongly believes that
comprehensive energy legislation should include long term
reauthorization of the Price-Anderson Act. And therefore we
applaud the draft bill's extension of Price-Anderson to 2017.
And at this point, I will close my statement, Mr. Chairman,
thank you.
[The prepared statement of Hon. Kyle McSlarrow follows:]
Prepared Statement of Hon. Kyle McSlarrow, Deputy Secretary of Energy
Thank you, Mr. Chairman. I am pleased to be able to present the
Administration's views on the need for comprehensive and balanced
energy legislation, and where appropriate, our views on specific
proposals before this committee.
I. INTRODUCTION
First, I would like to compliment you, Mr. Chairman, and the entire
committee on your leadership in tackling these important issues once
again.
To almost no one's surprise, the turbulent times on the energy
front continue. From our first week in office, we knew that the United
States faced an energy crisis long in the making. In addition to the
California electricity crisis, you will recall that consumers faced
unparalleled rises in natural gas and gasoline prices, and OPEC was in
the midst of a series of production cuts that aimed at higher prices
for crude oil.
That is why President Bush so quickly directed the completion of a
comprehensive and balanced national energy policy.
II. THE LONG-TERM CHALLENGE
What was true in the beginning of 2001 is still true: we have a
series of long-term energy challenges that require action now. These
challenges are present along the entire energy continuum, and affect
the environment and economy, the generation and transmission of
electricity, and commodities ranging from crude oil and its associated
products to natural gas.
The issues that relate to electricity pose their own set of
challenges and possible policy responses, which I will address later.
But the other challenges can be summarized by one phrase: energy
security. To be more specific, the United States is increasingly
dependent on foreign oil and may not be far from the point at which we
no longer can assume a domestic-or even a North American-supply of
natural gas that fully meets demand.
Thus, before I address some of the policy issues before this
committee and Congress, it is worth analyzing the premise of growing
dependence on foreign energy. I will use the analysis presented by the
Department of Energy's independent analytical arm, the Energy
Information Administration, in its Annual Energy Outlook 2003 (AEO
2003), and will confine this brief review to petroleum specifically and
total energy supply and demand.
A. Petroleum Trends
The historical record shows substantial variability in world oil
prices, and there is similar uncertainty about future prices. Three
AEO2003 cases with different price paths allow an assessment of
alternative views on the course of future oil prices. The three price
cases are based on alternative assumptions about OPEC oil production
levels, primarily from the Persian Gulf: lower output in the high price
case and higher output in the low price case. However, with its vast
store of readily accessible oil reserves, OPEC is expected to be the
principal source of marginal supply to meet demand increases in all
scenarios.
By 2025, OPEC production is projected to be 61 million barrels per
day (more than twice its 2001 level) for the ``Reference'' case. Based
on growth in world oil demand of about 2.0 percent annually, projected
prices in real 2001 dollars reach about $27 per barrel in 2025. In
nominal dollars, the reference case price is expected to exceed $48 per
barrel in 2025.
In the high world oil price case, OPEC production is assumed to
only increase to 46 million barrels per day by 2025 (about 25 percent
less than the reference case) and prices rise by about 3 percent per
year from 2001 to 2015. Prices remain at about $33 per barrel (in real
2001 dollars) after 2015 as market penetration of alternative energy
supplies become economically viable at the higher price and cap oil
prices.
In the ``low world oil price'' case, with assumed greater expansion
of OPEC production to 71 million barrels per day by 2025 (about 15
percent greater than the reference case), prices are projected to
decline from their high in 2003, reaching $19 a barrel by 2010 (in real
2001 dollars), and remain at that level to 2025.
U.S. petroleum consumption varies, not only with oil prices, but
the level of economic growth. While projected U.S. petroleum
consumption varies with the projected price of crude oil, from 28.2
million barrels per day in the high world oil price case to 30.2
million barrels per day in the low world oil price case in 2025, the
largest variation is with different assumptions about the rate of
economic growth. Total petroleum consumption in 2025 ranges from 26.9
million to 31.8 million barrels per day in the low and high economic
growth cases, respectively.
In the reference case, gross domestic product is expected to
increase by 3.0 percent per year between 2001 and 2025. In the high
economic growth case, GDP grows at a faster 3.5 percent per year and in
the low economic growth case at a slower 2.5 percent per year. However,
while petroleum consumption varies with each scenario, it increases in
all cases from today's level.
In 2001, net imports of petroleum accounted for 55 percent of
domestic petroleum consumption. Dependence on petroleum imports is
projected to grow in the reference case, reaching 68 percent in 2025.
The corresponding import shares of total consumption in 2025 are
expected to be 65 percent in the high world oil price case and 70
percent in the low world oil price case.
The growth in the share of petroleum accounted for by imports has
received little notice in recent years. Expenditures on petroleum as a
share of GDP have fallen from a peak of 9 percent in 1980 to only 3
percent today. The OPEC share of U.S. petroleum imports has fallen from
a peak of 70 percent in 1977 to 47 percent in 2001. More importantly,
the share of U.S. petroleum imports originating from the Persian Gulf
is about 23 percent today versus a peak of 28 percent in the late
1970s.
However, as the marginal source of supply, OPEC and, ultimately,
the Persian Gulf are expected to be become increasingly important for
future supplies to the United States and the world. By 2025, 53 percent
of U.S. petroleum supply is expected to come from OPEC, including 26
percent from the Persian Gulf.
Although crude oil is expected to continue as the major component
of petroleum imports, refined products are projected to represent a
growing share. Growth in domestic U.S. refinery capacity is expected to
remain constrained by regulations and economics. While total capacity
is projected to grow by 3 million barrels per day between 2001 and
2025, all of the growth is at existing refineries. No new grassroots
facilities are expected to be built over the forecast period.
Growth in total U.S. petroleum demand in the reference case, from
20 million barrels per day in 2001 to over 29 million barrels per day
by 2025, is projected to outstrip U.S. refinery capacity. As a result,
refined petroleum products are projected to account for a growing
portion of total net petroleum imports, reaching 34 percent of total
net imports by 2025 (6.7 million barrels per day) in the reference
case, up from a 15 percent share of total imports in 2001 (1.6 million
barrels per day).
This means that the U.S. will increasingly rely on foreign refinery
investors to provide not just the volume of petroleum product needed by
U.S. markets but products that meet the required characteristics (e.g.,
sulfur content, octane levels, etc.) of the U.S. supply slate. This
decreases the flexibility and direct control that U.S. policymakers
have in dealing with petroleum supply issues.
B. Total Energy Trends
Another way to analyze our energy picture is to look at our total
energy consumption and balance it against our total energy production.
Total U.S. primary energy consumption is projected to increase from
97 quadrillion Btu in 2001 to 139 quadrillion Btu by 2025 in the
reference case, 1.5 percent per year. It is important to note that the
reference case already assumes continued improvement in energy-
consuming and producing technologies, consistent with historic trends.
Without these improvements, total primary energy consumption would
otherwise grow to about 200 quadrillion Btu by 2025.
The difference between reference case consumption and domestic
energy production is the level of net imports (all energy types)
required to meet projected U.S. energy consumption levels. Because of
slow growth in domestic energy production, total net imports are
projected to grow from about 26 quadrillion Btu in 2001 to almost 50
quadrillion Btu in 2025.
As I mentioned earlier, this already assumes that future gains in
energy efficiency take place at the same impressive rate as in recent
years. Nonetheless, the EIA also analyzed what it termed a ``high
technology'' case, with an even more aggressive decline in energy
intensity.
With more rapid decline in energy intensity, total energy
consumption could be reduced to levels below that shown in the
reference case. In the high technology case, it is assumed that
increased spending on research and development will result in earlier
introduction, lower costs, and higher efficiencies for end-use and
electric generation technologies than assumed in the reference case.
Due to a faster decline in energy intensity in the high technology
case, total primary energy consumption is projected to be 6 percent
lower in the high technology case by 2025, at 130 quadrillion Btu.
With lower levels of total consumption, net imports are also
reduced. However, the reduction in imports is partially offset by lower
levels of domestic energy production resulting from a decline in the
energy prices that producers see with lower consumption levels. Net
energy imports decline to 45 quadrillion Btu by 2025 in the high
technology case from nearly 50 quadrillion Btu by 2025 in the reference
case. The result is that even in a case with an accelerated decline in
energy intensity, the U.S. will still be highly dependent on energy
imports to meet future consumption needs.
III. RISING TO THE CHALLENGE: PRESIDENT BUSH'S NATIONAL ENERGY POLICY.
These trends are a concern. We long ago ceased to fully provide for
our petroleum needs domestically, and though most of our natural gas
can be supplied currently by North American production, the trend here
is also toward a greater share for imported gas.
Quite simply, we are at the mercy of events and decisions over
which we have often limited-sometimes no -control. When winters and
summers are mild; when no refineries or pipelines break down; when
supply from abroad is abundant and reliable, we do not feel this
dependency. But when almost anything goes wrong, the markets react
instantly, and we confront the higher prices and volatility that have
become by now an almost reliable cyclical phenomenon.
President Bush recognized that to prevent those problems from
becoming a permanent, recurring feature of American life, we needed a
long-term plan for energy security that would promote reliable,
affordable and environmentally sound energy for the future.
Almost two years ago, President Bush presented his solution, a
national energy policy, to the American people.
The key to the comprehensive plan's approach was the recognition
that over the next 20 years our country would demand large and timely
increases in energy in order to keep our economy growing, keep
Americans working, and keep the nation secure.
The National Energy Policy helped define six general objectives to
ensure America's continued growth and prosperity:
-- First, we would aggressively reduce demand by employing energy
efficient technologies and encourage sound conservation
measures as essential components of our energy policy.
-- Second, realizing that even the most aggressive energy efficiency
and conservation programs would not be enough by themselves to
bring supply and demand into balance, we resolved to increase
energy supply, with an emphasis on domestic supply.
-- Third, to ensure energy security, we would maintain a diversity of
fuels from a multiplicity of sources.
-- Fourth, we would dramatically upgrade our national energy
infrastructure so as to more efficiently and reliably deliver
energy from the source to the consumer.
-- Fifth, we would accomplish our energy production, consumption and
conservation goals while building on our successful record of
environmental protection.
-- Sixth, realizing that our energy challenges would extend beyond the
next two decades, we would provide a vision of the future in
which solutions to these challenges would transform our energy
future.
IV. NATIONAL ENERGY POLICY ACHIEVEMENTS
Above all else, the underlying goal of the National Energy Policy
was to strengthen America's energy security; and pursuant to this goal,
the Administration has made significant progress in the past two years.
This Administration has made great strides toward increasing
domestic energy supplies and diversifying foreign energy sources. The
President's decision to move forward on Yucca Mountain, and Congress'
subsequent approval, will ensure the continued viability of the
nation's nuclear industry. And the President's Coal Research Initiative
continues to demonstrate great promise for the development of new
technologies for cleaning--and potentially eliminating--coal emissions
and thereby protecting the viability of this nation's most abundant
energy resource.
As part of our efforts to modernize and expand the infrastructure
we have established an interagency Task Force on Permit Streamlining
that has been instrumental in coordinating the permit process for many
infrastructure projects, joined with Congress to enact Pipeline Safety
legislation, and begun construction on the Path 15 transmission line to
ease electricity congestion in California.
The Administration's commitment to encouraging conservation,
boosting energy efficiency, and expanding the potential for the use of
clean renewable energy is demonstrated in the President's request for
increased weatherization funding, and the largest request for funding
for the Department of Energy's Office of Energy Efficiency and
Renewable Energy in 20 years.
Our promise to protect the environment for future generations is
the foundation of proposals such as Clear Skies, which will
substantially reduce the amount of pollutants resulting from the
production of electricity and through the Administration's Brownfields
initiative which seeks to return abandoned industrial properties to
beneficial use allowing location of combined heat and power facilities
on remediated lands.
V. TRANSFORMING OUR ENERGY FUTURE.
Of particular significance, however, are two Presidential
initiatives that I would like to take a moment to highlight. The
National Energy Policy recommended that the President direct the
Secretary of Energy to develop next generation technologies, and it
specifically focused on hydrogen and fusion.
A. Hydrogen.
The President soon carried out this recommendation by announcing
the FreedomCAR initiative, a program designed to greatly accelerate the
pace of development of hydrogen vehicles.
The potential benefits of hydrogen-fueled vehicles are incredible.
Hydrogen can be produced from diverse domestic sources,
freeing us from reliance on foreign imports for the energy we
use at home.
When hydrogen is used to power fuel cell vehicles, it will do
so with more than twice the efficiency of today's engines.
And hydrogen-powered vehicles would have a tremendous positive
impact on the environment, as they would produce none of the
harmful emissions that we see with today's gasoline-powered
fleet. In fact, the only byproduct of the fuel cell is pure
water.
These factors also led to the development of the President's
Hydrogen Fuel Initiative, which he announced just over one month ago
during the State of the Union Address.
Today's gasoline-powered vehicles are fueled by an infrastructure
that is the result of nearly 100 years and 1 trillion dollars of
investment. It is remarkably efficient, and it is everywhere.
Initially, we won't need a hydrogen station on every corner, and our
hydrogen production will not need to match gasoline production
overnight. But we needed a plan for making the necessary research and
development breakthroughs to enable industry to develop a fueling
infrastructure that would allow hydrogen vehicles to operate alongside
their gasoline counterparts, that would be ready when the vehicles are
entering the marketplace, and that will grow with the use of this new
technology.
The President's Hydrogen Fuel Initiative provides this plan for the
future hydrogen economy, and it has already generated tremendous
enthusiasm among the energy and auto industries--partners that will be
integral to transforming our nation's energy future from one dependent
on foreign petroleum, to one that utilizes the most abundant element in
the universe.
As the President has said, his goal is to see to it that the first
car driven by a child born today could be powered by hydrogen and
pollution free. Pursuant to the FreedomCAR partnership and Hydrogen
Fuel Initiative, we propose to focus $1.7 billion over the next five
years on several significant barriers to hydrogen, fuel cell, and
advanced automotive technologies:
First, we will work to lower the cost of fuel cells by another
factor of ten. If we were to mass-produce the fuel cell designs
we have today, they would cost approximately $300 per kilowatt.
The comparable cost of a modern internal combustion engine is
$30 per kilowatt, so we have our work cut out for us to make
this technology competitive.
Second, we will endeavor to lower the cost of hydrogen, which
is approximately four times more expensive than its gasoline
equivalent today. Our 2010 goal is to bring down the cost of
the hydrogen equivalent of an untaxed gallon of gas to $1.50.
The way to do that is by developing cost effective, efficient
means of production and distribution.
Third, we will undertake research aimed at devising new
methods to store sufficient amounts of hydrogen fuel aboard a
vehicle, to provide consumers with a driving range of at least
300 miles between refuelings.
Fourth, and most critically, we will work to solve the
overarching infrastructure challenges, to develop a hydrogen-
based delivery and refueling infrastructure like the petroleum-
based one we now have.
If we are successful in this endeavor, we estimate that industry
could make a commercialization decision on fuel cell vehicles, hydrogen
production, and refueling infrastructure by 2015. A positive decision
would lead to hydrogen fuel cell vehicles in the showroom by 2020, and
by 2040, this could reduce oil use in light duty vehicles by over 11
million barrels per day--an amount of oil that approximates that which
America imports today.
B. Fusion
A second element of the National Energy Policy technologies
recommendation received much attention domestically and internationally
when President Bush recently announced that the United States would
make a major commitment to the development of fusion energy.
Fusion is the process that powers the sun and the stars, and our
best scientists believe it may become the ultimate energy source for
earth as well. In the stars, hydrogen atoms combine under extremely
high temperature and pressure to produce helium and energy. The
envisioned fusion energy plants would harness this process here on
earth, relying on an abundant fuel that is readily available to all
nations: simple seawater. Fusion energy plants would produce no harmful
emissions, no long-term radioactive waste, and because no fissile
materials are required in the fusion process, it presents virtually no
proliferation threat. It promises to be the ultimate safe, clean,
abundant energy source, and it may be the energy source for the future.
The great promise of fusion, however, presents great scientific
challenges, challenges we believe we can meet if we engage the talents
of experts from around the world. That is why on January 30, 2003,
President Bush announced that the United States would join with the
international community to develop the International Thermonuclear
Experimental Reactor. When built, ITER is expected to achieve the first
sustained burning plasma, an essential next step in demonstrating the
feasibility of commercial fusion energy systems. In his announcement,
the President noted that ITER is ``an ambitious international research
project'' that will ``advance the effort to produce clean, safe,
renewable, and commercially-available fusion energy by the middle of
this century.''
Both our hydrogen initiative and our fusion energy research program
will, of course, depend on Congressional funding and approval, and we
look forward to working with Congress to ensure that these initiatives
are fully supported.
VI. PRINCIPLES GUIDING ENERGY LEGISLATION.
Hydrogen and fusion present a long-term promise, and are primarily
focused on research and development. But there are a number of
proposals that can be implemented now. Some require action by the
Administration-indeed, three-quarters of the National Energy Policy's
105 recommendations can and are being done by actions in the Executive
Branch. However, some of the most important actions require legislative
action.
Let me outline a few of the principles that the Administration
believes should guide the development of energy legislation, and the
goals we think we should achieve.
A. Modernization of Wholesale Electricity Laws
The Administration strongly believes a comprehensive energy bill
must include a sound electricity title that modernizes our Nation's
antiquated wholesale electricity laws.
Our overarching goal is to ensure that Americans have abundant,
affordable, clean and secure electricity supplies.
Developments in the electricity industry in recent years have
brought the industry to a crossroads. While the move to competitive
markets has fostered enormous benefits, some serious problems have
given rise to a significant policy debate, especially over the past two
years.
We have three basic policy choices.
First, go back to comprehensive rate regulation for wholesale
power sales. Have FERC set regulated rates for each
jurisdictional utility. Abandon reliance on market forces and
competition as the underpinning of Federal electricity policy.
Second, maintain the status quo. Defer making decisions on
major policy issues. Continue to straddle the fence.
And, third, complete the transition to effective competition
in wholesale power markets.
Going back to comprehensive rate regulation is not really an
option. Too much has happened, and too much has changed. The process of
change introduced into electricity markets by past Federal and State
policies is probably irreversible.
Preserving the status quo is not a real option, either. The status
quo has meant dramatic price spikes in wholesale power markets in
California and the West, attempts to manipulate power markets, a
dramatic expansion of generation by many independent power producers
and the subsequent challenges some have faced as a result, and stagnant
investment in an inadequate transmission grid that restricts entry into
regional power markets.
The Administration believes that there really is only one viable
policy choice: completing the transition to effective competition in
wholesale power markets designed to generate and deliver reliable,
abundant and affordable electricity.
The evidence of the price benefits derived from increased
efficiencies can already be seen. As imperfect as the market has been,
wholesale power prices declined by 23 % from 1985 to 2000. Even when
one takes into account the volatile price increases of 2001, the
decline from 1985 is still 12%.
Well-functioning markets will, we believe, lead to lower costs for
consumers and businesses. But there is more than simply the benefit of
lower prices. A well-functioning market brings its own rewards. As
confidence is gained that the system is reliable and capable of coping
with high-demand for electricity, there will increasingly be less need
for restrictive and prescriptive regulation. And that is the point when
much-needed investment is likely to be attracted--investment in new
technologies, and in improved generation and transmission facilities
that produce additional energy and environmental benefits.
When the opposite is true--when uncertainty reigns, when
reliability is questioned, when prices seem detached from market
forces--investment vanishes.
What is required to complete the transition is new and aggressive
reform, and that requires new legislation and new, streamlined
regulatory regimes.
The reforms that lead to greater competition are embodied in the
following principles:
Prevent market manipulation and market power abuse.
Promote reliability of electricity service.
Ensure open access to the interstate transmission grid.
Eliminate undue discrimination in wholesale power markets.
Ensure that customers have the ability to respond to price in
real-time.
Encourage investment in new generation and transmission
facilities.
Support transmission policy options, including participant
funding, that appropriately allocates costs; and
Lower barriers to entry to electricity markets.
The Federal Energy Regulatory Commission has already taken a number
of steps in these directions. For example, FERC already has begun a
rulemaking to establish incentive-based and performance-based rate
treatments to encourage construction of new transmission facilities,
and has acted to make regional transmission organizations a reality.
However, legislation still is needed, and the Administration
believes that much of the Electricity title in the draft House bill is
a strong step in the right direction. Because the Administration
supports efforts to ensure open access for all generators to the
wholesale electricity grid, the open access language in section 7021 of
the draft House bill is a desirable goal, and we support that goal. The
Administration also supports establishing mandatory and enforceable
reliability rules that will reduce the chances for power outages.
Therefore, we support section 7031 of the bill concerning electric
reliability.
The Administration agrees that the Public Utility Holding Company
Act (PUHCA), an outdated law that restricts utility investment, should
be repealed, and so we support Subtitle D of the Electricity title in
the House bill. We also have advocated reform of the Public Utility
Regulatory Policies Act (PURPA) in an innovative and competition-
friendly manner as contemplated in Subtitle E of the Electricity title.
The Administration supports FERC's ability to review mergers and
prohibit abuses of market power. As a result, we oppose section 7101 of
the bill, which would repeal FERC's authority to review mergers. The
Administration supports enacting legislation to further protect
consumers against unauthorized disclosure of personal information,
unauthorized switching of electricity service, and unethical
individuals and companies in this industry. As a result, we generally
support Subtitle H of the draft bill and look forward to working with
you on some of the details of this subtitle.
We also believe that to facilitate an effective national electric
transmission grid for the benefit of consumers, last-resort federal
siting authority for high-priority transmission lines is needed.
Therefore, we support the concepts of section 7012 concerning siting of
transmission facilities. However, we still are reviewing the details
and legal ramifications of this proposal. We believe the Tennessee
Valley Authority and the Power Marketing Administrations (PMA) should
be an integral part of the national grid and relevant authority should
be included in the bill. We also generally support Subtitle B of the
draft bill concerning transmission operation, though we do have some
concerns about the regional transmission organization section because,
among other things, it does not explicitly provide for Federal cost
recovery when a PMA joins an RTO, or for preserving prior contracts and
third-party financing obligations of the PMAs. We look forward to
working with you to address our concerns.
Finally, the Administration supports the ban on roundtrip trading,
the increases in criminal penalties, and the other modifications made
to the Federal Power Act in Subtitle G of the draft bill. We are still
studying the provisions of Subtitle F concerning Renewable Energy, but
it appears that the bill contains much we can support there as well.
B. Energy efficiency and conservation
A comprehensive energy policy must be balanced, and must include
initiatives that foster both supply and demand side improvements-and
importantly, those which increase energy efficiency and energy
conservation. The Administration has strongly supported efforts to
increase energy efficiency, and I am pleased to note the Chairman's
inclusion in his energy legislation of agreements reached to this end
by the energy conferees of the 107th Congress.
C. Tax Provisions
Comprehensive energy legislation must increase energy conservation
and efficiency. Nearly every dollar of the NEP's energy tax proposals
for FY 2002-2012 would be devoted to increasing efficiency,
conservation, and renewable energy. For example, the NEP includes a
consumer tax credit for the purchase of hybrid and fuel cell vehicles.
Other fiscal incentives include extending and modifying the tax credit
for producing electricity from environmentally friendly sources, such
as biomass and wind; providing tax credits for energy produced from
landfill gas, residential solar energy systems, and investment in
combined heat and power; and extending the ethanol tax exemption. It is
imperative that the tax provisions of comprehensive energy legislation
reflect the President's priorities of environmental protection and
energy conservation and maintain the fiscal discipline reflected in the
FY 2004 Budget.
D. Renewable Fuels Standard
The Administration strongly supports a renewable fuels standard
that will increase the use of clean, domestically produced renewable
fuels, especially ethanol, which will improve the Nation's energy
security, farm economy, and environment. The Administration also
supports the inclusion of a market-based, national credit trading
mechanism--such as that included in Section 5052 of the draft
legislation--that will increase efficiency and reduce costs.
E. Alaska Natural Gas Pipeline
The Administration strongly supports the construction of a
commercially viable Alaska natural gas pipeline as a critical part of
our energy security portfolio, and believes that market forces should
select the route of the pipeline. Although no such provision appears in
the House draft, the Administration reiterates its strong opposition to
a price-floor tax subsidy--and any similar provision--because it would
distort markets. It is also likely to undermine Canada's support for
construction of the pipeline, setting back broader bilateral energy
integration.
F. ANWR
As I've stated earlier, the Administration firmly believes that a
balanced, comprehensive energy plan is imperative to the long-term
strength of our economic and national security. This balance must
include a recognition that we must also increase domestic production in
order to reduce our rising dependence on imported oil and gas; and key
to achieving this balance is the President's proposal to open a small
portion of the Arctic National Wildlife Refuge (ANWR) to
environmentally responsible oil and gas exploration and development.
As you are aware, primary responsibility for managing the vast
public resources of this nation rests with the Department of the
Interior. Secretary Norton has set a goal of forging strong
partnerships with Federal and State agencies, Tribal governments, and
all of the stakeholders-including the Congress-to create greater
opportunities for the responsible development of energy resources on
Federal lands.
The Department of the Interior has taken several actions to advance
the goals of the National Energy Policy, including the approval of a 5-
year Oil and Gas Leasing program to ensure that the Outer Continental
Shelf remains a solid contributor to our nation's energy security;
completion of the EPCA inventory, which provides an estimate of
undiscovered technically recoverable resources and proved resources of
oil and gas; and recent collaboration with the Department of Energy on
a joint report that identifies and evaluates renewable energy resources
on public lands. The Bureau of Land Management will use this report's
findings to prioritize land-use planning activities, and to increase
the development and use of renewable energy resources.
G. Price-Anderson
The Administration strongly believes that comprehensive energy
legislation should include long-term reauthorization of the Price-
Anderson Act. Price-Anderson ensures prompt and equitable compensation
for the public in the unlikely event of a nuclear accident.
In the Bob Stump National Defense Authorization Act of 2003,
Congress extended Price-Anderson for DOE contractors until December 31,
2004. In the recent omnibus appropriations act, Congress extended
Price-Anderson for Nuclear Regulatory Commission licensees only until
December 31, 2003. We need a long-term extension of this important law,
and therefore we applaud the draft House bill's extension of Price-
Anderson to 2017.
We have only recently seen the provisions of the draft bill
concerning financial accountability, safety, security and other matters
relevant to the nuclear power industry, and look forward to working
with Congress to ensure that the bill achieves its intended effect
without detracting from the quality of potential contractors, or
compromising security, anti-terrorism or non-proliferation efforts.
H. Strategic Petroleum Reserve
As was demonstrated by the President's decision to fill the
Strategic Petroleum Reserve to its current statutory capacity, the
Administration recognizes the tremendous importance of this national
resource. We applaud the Chairman for including permanent SPRO
authorization in the legislation.
The Administration intends shortly to initiate a study to determine
the optimal size of the reserve. The results of this analysis are
necessary to determine the full range of impacts on markets and
national security of any decision to adjust capacity following its
expected fill in 2005. We believe such an analysis is an important
first step when considering an expansion of the Reserve above the
current goal of 700 million barrels.
At this point, I thank you for the opportunity to testify before
you today, and I welcome any questions the Committee might have.
Mr. Barton. Now recognizing the distinguished chairman of
the Nuclear Regulatory Commission. Tell him how much we have
enjoyed working with you in your chairmanship and we wish you
well in whatever future endeavors you incur once you leave the
commission. Do you know how long your statement is?
Mr. Meserve. Under 5 minutes.
Mr. Barton. Well, you all are just doing great. Okay, we
will recognize you for 6 minutes, also.
STATEMENT OF RICHARD A. MESERVE
Mr. Meserve. Thank you for your generous comments, Mr.
Chairman. Mr. Chairman and members of the committee, I am
pleased to be here today to present the Nuclear Regulatory
Commission's perspective on how nuclear energy fits into the
national energy policy.
As the subcommittee knows, the NRC's mission is to ensure
the adequate protection of public health and safety, the common
defense and security, and the environment in the application of
nuclear technology for civilian use.
The commission does not have a promotional role. Its role
is to ensure the safe application of nuclear technology if
society elects to pursue the nuclear energy option.
The commission, nonetheless, recognizes that the quality,
predictability and timeliness of its regulatory actions bear on
licensee decisions related to construction and operation of
nuclear power plants.
Currently there are 104 nuclear power plants licensed by
the commission to operate in the United States in 31 different
States.
As a group they are operating at high levels of safety and
reliability. Indeed the trends over the past decade are very
favorable, as indicated by the graphs and tables in my
submitted statement.
These plants have produced approximately 20 percent of our
Nation's electricity for the past several years. Because of the
improved economic performance of the plants, the commission has
seen a significant increase in the number of requests for
approval of license renewal that would allow the plants to
operate beyond their original 40 year term.
The focus of the commission's review of license renewal
applications is on maintaining plant safety, with a primary
concern directed at the effects of aging on important systems,
structures and components.
Applicants must demonstrate that they have identified and
can manage the effects of aging, so as to maintain an
acceptable level of safety during the period of extended
operation.
The commission has now renewed the licenses of plants at
five sites for an additional 20 years, comprising a total of
ten units. A thorough review of these applications were
completed on or ahead of schedule.
And applications for 20 units from 12 additional sites are
currently under review. Many more applications for renewal are
anticipated in the coming years.
In recent years, the commission has also approved license
amendments that permit its licensees to undertake power
uprates.
The commission takes this step only after determining that
safety margins can be maintained at the higher power.
Collectively, these approved uprates supplied the electricity
equivalent to that from three large power plants, approximately
3,000 megawatts electric.
Over the past 17 months, the commission has undertaken a
comprehensive review of safeguards and security programs, in
close consultation with the Department of Homeland Security,
the Department of Energy, and other Federal agencies, and with
significant involvement by State agencies.
Out of that review has come a series of interim
compensatory measures to strengthen nuclear security at power
reactors and other NRC licensed facilities, as well as in the
transportation of spent fuel.
Last August we put in place a five tier threat advisory
system compatible with the homeland security advisory system.
We have issued orders to strengthen programs that control
access at power reactors.
And have drafted proposed orders to strengthen guard
training and address guard fatigue. We provided revised design
based threats for comment to other Federal agencies, the States
and cleared stakeholders.
We have been conducting enhanced table-top security
exercises at our reactor facilities and are resuming the
conduct of enhanced force-on-force exercises.
While the improved performance of operating nuclear power
plants has resulted in significant increases in electrical
output, increased demands for electricity will need to be
addressed eventually by construction of new generating capacity
of some type.
As a result, industry interest in new construction of
nuclear power plants has recently emerged. As you know, the
commission has already certified three new reactor designs.
The NRC staff is currently reviewing the Westinghouse
AP1000 design and has six other designs in various stages of
preapplication review.
In addition, discussions are taking place in preparation
for three early site permit applications which are expected in
2003.
The commission has a stake in the national energy policy
and has identified areas where new legislation would be
helpful. These changes would maintain safety, while increasing
flexibility.
Additionally, the commission has long sought additional
authority in the nuclear security arena. With a strong
Congressional interest in examining energy policy, the
commission is optimistic that there will be a legislative
vehicle for making these changes.
There are many elements of the proposed legislation before
this committee that we support and a few that we believe are
unnecessary.
Mr. Chairman, we would be very pleased to work with you and
the committee in addressing matters of mutual concern. Thank
you for the opportunity to testify today, I would be very
pleased to take questions.
[The prepared statement of Hon. Richard A. Meserve
follows:]
Prepared Statement of Richard A. Meserve, Chairman, U.S. Nuclear
Regulatory Commission
INTRODUCTION
Mr. Chairman, members of the Subcommittee, I am pleased to submit
this testimony on behalf of the U.S. Nuclear Regulatory Commission
(NRC) regarding the NRC's perspective on how nuclear energy fits into
the U.S. National Energy Policy. As the Subcommittee knows, the
Commission's mission is to ensure the adequate protection of public
health and safety, the common defense and security, and the environment
in the application of nuclear technology for civilian use. The
Commission does not have a promotional role--the agency's role is to
ensure the safe application of nuclear technology if society elects to
pursue the nuclear energy option. The Commission recognizes, however,
that its regulatory system should not establish inappropriate
impediments to the application of nuclear technology. Many of the
Commission's initiatives over the past several years have sought to
maintain or enhance safety and security while simultaneously improving
the efficiency and effectiveness of our regulatory system.
The Commission's primary focus is on safety. The Commission
nonetheless recognizes that the quality, predictability, and timeliness
of its regulatory actions bear on licensee decisions related to
construction and operation of nuclear power plants.
BACKGROUND
Currently there are 104 nuclear power plants licensed by the
Commission to operate in the United States in 31 different states. As a
group, they are operating at high levels of safety and reliability.
Indeed, the trends over the past decade are very favorable.
These plants have produced approximately 20% of our nation's
electricity for the past several years and are operated by about 35
different companies. In 2001, these nuclear power plants produced about
750-thousand gigawatt-hours of electricity.
Improved Licensee Efficiencies (Increased Capacity Factors)
The nation's nuclear electricity generators have worked for over
ten years to improve nuclear power plant performance, reliability, and
efficiency. According to the Nuclear Energy Institute, the improved
performance of the U.S. nuclear power plants since 1990 is equivalent
to placing 23 new 1000-MWe power plants on line. The average capacity
factor for U.S. light water reactors was 90 percent in 2001, up from 71
percent just 10 years earlier. The Commission has focused on ensuring
that safety has not been compromised as a result of these industry
efforts.
U.S. Commercial Nuclear Power Reactor Average Capacity Factor and Net Generation
----------------------------------------------------------------------------------------------------------------
Average Net Generation of
Number of Annual Electricity
Year Operating Capacity ----------------------------
Reactors Factor Thousands of Percent of
(Percent) Gigawatthours Total U.S.
----------------------------------------------------------------------------------------------------------------
1990................................................... 111 68 577 19.1
1991................................................... 111 71 613 20.0
1992................................................... 110 71 619 20.1
1993................................................... 109 73 610 19.1
1994................................................... 109 75 640 19.7
1995................................................... 109 79 673 20.1
1996................................................... 110 77 675 19.6
1997................................................... 104 74 629 18.0
1998................................................... 104 78 674 18.6
1999................................................... 104 86 728 19.6
2000................................................... 104 88 754 19.8
2001................................................... 104 90 767 20.0
----------------------------------------------------------------------------------------------------------------
initiatives in the area of current reactor regulation
License Renewals
Because of the improved economic performance of the plants, the
Commission has seen a significant increase in the number of requests
for approval of license renewal that would allow plants to operate
beyond their original 40-year term. That term, which was established in
the Atomic Energy Act, did not reflect a limitation that was determined
by engineering or scientific considerations, but rather was based on
financial and antitrust concerns.
The focus of the Commission's review of license renewal
applications is on maintaining plant safety, with the primary concern
directed at the effects of aging on important systems, structures, and
components. Applicants must demonstrate that they have identified and
can manage the effects of aging so as to maintain an acceptable level
of safety during the period of extended operation.
The Commission has now renewed the licenses of plants at five sites
for an additional 20 years: Calvert Cliffs in Maryland, and Oconee in
South Carolina, Arkansas Nuclear One in Arkansas, Edwin I. Hatch in
Georgia, and Turkey Point in Florida, comprising a total of ten units.
The thorough reviews of these applications were completed on or ahead
of schedule, which is indicative of the care exercised by licensees in
the preparation of the applications and the planning and dedication of
the Commission staff. Applications for twenty units from twelve
additional sites are currently under review. As indicated by our
licensees, many more applications for renewal are anticipated in the
coming years.
Although the Commission has met the projected schedules for the
first reviews, we seek further improvements. The extent to which the
Commission is able to sustain or improve on our performance depends on
the rate at which applications are actually received, the quality of
the applications, and the ability to staff the review effort. The
Commission recognizes the importance of license renewal and is
committed to providing high-priority attention to this effort. As you
know, the Commission encourages early notification by licensees, in
advance of their intentions to seek renewals, in order to allow
adequate planning so as not to create unmanageable demands on staff
resources.
Reactor Plant Power Uprates
In recent years, the Commission has approved numerous license
amendments that permit its licensees to make power uprates. The
Commission takes this step only after determining that safety margins
can be maintained at the higher power. Collectively, these approved
uprates supplied the electricity equivalent to that from three large
power plants (approximately 3,000 MWe). In addition, some nuclear
generators have requested Commission safety review of increasing fuel
burnup, thereby extending the operating cycle between refueling outages
and thus increasing nuclear plant capacity factors. Again, such
approvals are granted only after a thorough evaluation by Commission
staff to ensure that safe operation and shutdown can be achieved at the
increased fuel burnup.
Risk-Informing the Commission's Regulatory Framework
The Commission also is in a period of dynamic change as the agency
continues to move from a prescriptive, deterministic approach towards a
more risk-informed and performance-based regulatory paradigm. Improved
probabilistic risk assessment techniques combined with over four
decades of accumulated experience with operating nuclear power reactors
have led the Commission to revise or eliminate certain requirements. On
the other hand, the Commission is prepared to strengthen our regulatory
system where risk considerations reveal the need.
Perhaps the most visible aspect of the Commission's efforts to
risk-inform its regulatory framework is the new reactor oversight
process. The process was initiated on a pilot basis in 1999 and fully
implemented in April 2000. The new process was developed to focus
inspection effort on those areas involving greater risk to the plant
and thus to workers and the public, while simultaneously providing a
more objective and transparent process.
Nuclear Security Enhancements
Over the past 17 months, the Commission has undertaken a
comprehensive review of safeguards and security programs, in close
consultation with the Department of Homeland Security and other Federal
agencies, and with significant involvement by State agencies. Out of
that review has come a series of interim compensatory measures to
strengthen nuclear security at power reactors, Category I fuel cycle
facilities, decommissioning reactors, research and test reactors,
independent spent fuel storage facilities, the two gaseous diffusion
plants, and the conversion facility, as well as in the transportation
of spent fuel. Last August we put in place a five-tier threat advisory
system compatible with the Homeland Security Advisory System, and we
have used that system twice to improve security measures at our
licensed facilities. We have issued Orders to strengthen programs to
control access at power reactors. We have drafted proposed Orders to
strengthen guard training and address guard fatigue. We have provided
revised design basis threats for comment to other Federal agencies, the
States and cleared industry personnel. We have been conducting enhanced
table-top security exercises at our reactor facilities and have just
resumed the conduct of enhanced force-on-force exercises at these
facilities. We plan to conduct force-on-force exercises on a thee-year
cycle and have requested the resources to do this in our fiscal year
2004 budget. We have defined the actions that we need to take to ensure
better control of high risk radioactive sources containing radioactive
isotopes of the most concern for potential use in a radiological
dispersal device.
FUTURE ACTIVITIES
Scheduling and Organizational Assumptions Associated with New Reactor
Designs
While improved performance of operating nuclear power plants has
resulted in significant increases in electrical output, significant
increased demands for electricity will need to be addressed by
construction of new generating capacity of some type. As a result,
industry interest in new construction of nuclear power plants in the
U.S. has recently emerged. As you know, the Commission has already
certified three new reactor designs, pursuant to 10 CFR Part 52, making
them readily available for new plant orders. These designs include
General Electric's advanced boiling water reactor, Westinghouse's AP-
600 and Combustion Engineering's System 80+.
In addition to the three already certified advanced reactor
designs, there are new nuclear power plant technologies which some
believe can provide enhanced safety, improved efficiency, lower costs,
as well as other benefits. The NRC staff is currently reviewing the
Westinghouse AP1000 design certification application and has six other
designs in various stages of pre-application review. In addition, pre-
application discussions are taking place in preparation for three early
site permit applications expected in 2003.
The staff is also making infrastructure improvements to ensure that
tools, information, and regulatory processes are in place for the
efficient, effective, and realistic review of new site and reactor
applications. For example, the NRC staff has developed proposed changes
to 10 CFR Part 52 ``Early Site Permits, Standard Design Certifications,
and Combined Licenses for Nuclear Power Plants'' based on lessons
learned during the previous design certification reviews and
discussions with industry representatives on the licensing processes.
Additionally, the NRC staff has initiated early site permit pre-
application public meetings in the vicinity of expected sites to inform
the public about the early site permit process and their opportunities
for participation. It should also be noted that the NRC staff is
developing options for the efficient review of security aspects of new
reactor designs and early site permits.
In order to confirm the safety of new reactor designs and
technology, the NRC believes that a strong nuclear research program
should be maintained. The NRC staff is performing a research
infrastructure assessment for advanced reactors. The assessment
identifies technology gaps and the means to fill the gaps in the form
of methods, tools, data and expertise. The Advisory Committee on
Reactor Safeguards has been briefed and has provided comments and
recommendations regarding the assessment findings. With the benefit of
these insights, the Commission expects to undertake measures to
strengthen our research program for new reactor designs over the coming
months.
NATIONAL ENERGY POLICY IMPLICATIONS
The Commission has a stake in the national energy policy and has
identified areas where new legislation would be helpful to eliminate
artificial restrictions and to reduce the uncertainty in the licensing
process. These changes would maintain safety while increasing
flexibility in decision-making. Although those changes would have
little or no immediate impact on electrical supply, they would help
establish the context for consideration of nuclear power by the private
sector without any compromise of public health and safety or protection
of the environment. Additionally, the Commission has long sought
additional authority in the nuclear security arena to enhance security
for these facilities, the need for which has been magnified by the
events of September 11, 2001.
Legislation will be needed to extend the Price-Anderson Act. The
Act, which recently received a one-year extension until December 31,
2003, establishes a framework that provides assurance that adequate
funds will be available to compensate the public in the event of a
nuclear accident and sets out a process for considering nuclear
liability claims. While our mission is not a promotional one, it is our
understanding that without the framework provided by the Act, new
private-sector participation in nuclear power would be discouraged.
Moreover, the Commission believes it is important to assure that if an
improbable accident should occur, the means are provided to care for
the affected members of the public.
Over the years, the NRC has provided and continues to pursue
legislative proposals to Congress detailing specific initiatives that
would further enhance security of NRC-licensed activities. These
proposals address a wide spectrum of activities. One provision would
authorize guards at NRC-regulated facilities to use deadly force to
protect property significant to the common defense and security. This
would give guards protection from State criminal prosecution for
actions taken during the performance of their official duties. Another
provision would allow the Commission, in consultation with the Attorney
General, to confer upon guards at NRC-designated facilities the
authority to possess or use weapons that are comparable to those used
by the Department of Energy's guard forces. Some State laws currently
preclude private guard forces at NRC-regulated facilities from
utilizing a wide range of weapons. Another provision would make it a
Federal crime to bring unauthorized weapons and explosives into NRC-
licensed facilities. The NRC would also make Federal prohibitions on
sabotage applicable to the operation and construction of certain
nuclear facilities. The NRC hopes that these and other more recently
developed legislative initiatives, such as in the area of access
authorization, will be enacted early in the 108th Congress.
With the strong Congressional interest in examining energy policy,
the Commission is optimistic that there will be a legislative vehicle
for making these changes and thereby for updating the Atomic Energy
Act. As you know, the Commission has expressed significant concerns
about several provisions that were contained in H.R. 4 and H.R. 2938
from the last Congress. We would be pleased to work with the Committee
in addressing those concerns.
SUMMARY
The Commission has long been, and will continue to be, active in
ensuring the adequate protection of public health and safety, the
common defense and security, and the environment in the application of
nuclear technology for civilian use. The Commission is mindful of the
need to: (1) reduce unnecessary burdens, so as not to inappropriately
inhibit any renewed interest in nuclear power; (2) maintain open
communications with all its stakeholders; and (3) continue to encourage
its highly qualified staff to strive for increased efficiency and
effectiveness.
I look forward to working with the Committee, and I welcome your
comments and questions.
Mr. Barton. Thank you, Mr. Chairman.
We now recognize the distinguished Chairman of the Federal
Energy Regulatory Commission, Mr. Wood. Do you know how long
your statement--5 minutes. Okay, we will give you 6 minutes
also.
STATEMENT OF HON. PATRICK WOOD
Mr. Wood. Thank you, Mr. Chairman and members. Dependable,
reliable, affordable, competitive wholesale energy markets
require three key elements. Adequate infrastructure, balanced
market rules and vigilant market oversight.
Since I became chairman 18 months ago at the FERC, the
commission has been aggressively moving forward on each of
these three elements.
For example, recently the commission has acted to safeguard
information about our critical energy infrastructure. We have
held public conferences across the country to assess
infrastructure adequacy in the different regions of the
country.
We propose to limit the sharing of cash assets between
regulated and unregulated affiliates in ways that can harm
utility customers, and, importantly, we formed a new office
that is focused solely on market oversight and enforcement.
For wholesale electric energy markets, the commission is
proposing to adopt a platform of market elements that are
shared by the best functioning markets in the world.
We are looking at financial incentives for building new
transmission or operating transmission independently of
generation ownership and we are looking at a streamlined
process to interconnect new generation to the transmission grid
for that day in the future when supply and demand come closer
into balance.
The commission also intends to act soon on the proceedings
involving the energy crisis of 2000-2001, before Commissioner
Brownell and I arrived at the commission, which plagued
California and the west, including the refund proceedings, the
staff's investigation of evidence of market manipulation in the
energy markets in the west, efforts to revisit or reform long
term power contracts, and the alleged withholding of natural
gas transportation capacity on a major pipeline serving the
California markets.
For gas markets itself, the commission has significantly
expedited its processing of natural gas pipeline construction
applications, cutting by one-third the environmental and
sighting and regulatory reviews that existed when I was at FERC
last in 1992.
We stand ready to process any applications to bring a
pipeline of Alaska natural gas into the lower continental
market. And in addition, the commission has taken steps
recently to encourage greater development and streamline the
regulatory approach for liquified natural gas, imported natural
gas on barges to the United States from other countries or from
other parts of our country.
That is a critical part of our long term gas solution. The
commission has also proposed ways to streamline the processing
of hydroelectric projects, which are an important part of the
commission's responsibility under the law.
Our intent in this process is to craft a more efficient and
timely process, while balancing the required stakeholder
interest and improving the quality of decisionmaking.
In my view, in that light of what the commission is up to,
to try to accomplish its statutory responsibilities, I would
envision that there are three critical steps that Congress
could take.
The first of which is to clarify FERC's authority to obtain
the market information necessary for price discovery and
effective monitoring of gas and electric markets; a lot of
which is in the bill, a few others are recommended in my
testimony.
Second, to increase the civil and criminal penalties for
violations of both the Federal Power Act and the Natural Gas
Act. Again, the Power Act issues are dealt with in the
electricity title.
And third, to take the steps required to make the Alaska
Natural Gas Pipeline project a reality in this decade.
This enormous Alaska Gas project is of national
significance, and in order to maintain the long term health of
all the energy markets, it must be built.
Chairman Barton, your proposed legislation would take a
number of steps in these various areas, as well as a number of
others that are really outside the FERC's issues, and I think
that they will collectively provide strong support for a
continued evolution of well overseen competitive wholesale
energy markets to meet the Nation's future electric needs and
natural gas needs as well.
[The prepared statement of Hon. Patrick Wood follows:]
Prepared Statement of Hon. Pat Wood III, Chairman, Federal Energy
Regulatory Commission
I. BACKGROUND
I appreciate the opportunity to testify on the current status of
energy markets under the jurisdiction of the Federal Energy Regulatory
Commission (FERC or the Commission). Today, I would like to focus
particularly on natural gas data reporting, the Alaskan Natural Gas
Transportation System, wholesale electricity markets and hydroelectric
licensing.
Dependable, affordable, competitive wholesale energy markets
require three key elements--adequate infrastructure, balanced market
rules and vigilant oversight. Weakness in any one element can harm
markets, American energy customers, and ultimately the entire U.S.
economy. The Commission is pursuing a number of initiatives to
establish the framework needed to spur investment in much-needed
infrastructure, to support the most efficient and competitive wholesale
marketplace, and to adequately monitor the marketplace so customers
continue to derive benefits from energy markets. Achieving these goals
restores confidence to investors and customers by promoting greater
transparency and regulatory certainty.
This FERC's commitment to prevent future market abuses, and to
remedy past ones, is now a firmly established part of our agency's
mission, and we will continue to strengthen our present coordination
with other federal agencies to ensure that we effectively regulate
energy industries so that customers and investors are fully protected.
Additionally, the Commission is moving aggressively to take steps
within its authority to remedy problems in the California and Western
energy markets. The Commission has learned many lessons from the
Western energy crisis in 2000-01, which caused unacceptable harm to
ratepayers and demonstrated the consequences of poorly designed
wholesale markets. We also have learned lessons from successful
wholesale market reforms in the East. The Commission remains convinced
that customers are best served by moving forward to complete the
transition of the wholesale power business to competition. We are
drawing from markets that work well to develop a national platform for
competitive wholesale energy markets.
While the Commission is taking steps within its authority to
encourage needed electric and natural gas infrastructure and to bring
stability and regulatory certainty to energy markets, there are several
actions that the Congress could take to help us do our job more
effectively and to ensure adequate protection of energy customers. In
my view, the three most important steps that Congress can take are
these: first, clarify FERC's authority to obtain market information
necessary for price discovery and effective monitoring of natural gas
and electric markets; second, increase civil and criminal penalties for
violations of the Federal Power Act (FPA) and Natural Gas Act (NGA) or
our rules and regulations thereunder; and, third, take the steps
required to make the Alaska Natural Gas Pipeline project a reality in
this decade. With respect to the Alaska Natural Gas Pipeline project,
in particular, I would observe that this enormous project is of such
national significance that Congress may want to consider focused
financial support in any legislation. Chairman Barton's proposed
legislation would take a number of steps in these areas as well as
provide support for the continued evolution of strong competitive
wholesale energy markets to meet our future energy needs.
II. INITIATIVES IN ENERGY MARKETS GENERALLY
While the natural gas and electricity industries differ in some
ways, they share many issues. For example, both raise the issue of how
we can safeguard our energy infrastructure against terrorists. Both
also raise issues on the need for dependable, transparent accounting
and the separation of utility operations financed by captive customers
from unregulated ventures. On these issues and others, the Commission
has taken a cross-industry approach to protect the interests of our
Nation's energy customers.
Critical Energy Infrastructure Information (CEII)--On February 21,
2003, the Commission issued a final rule to protect the American public
by safeguarding certain information about the Nation's energy
infrastructure. Within a month of the terrorist attacks of September
11, 2001, the Commission began a public proceeding to examine its CEII
policies. The final rule defines CEII and establishes a timely
procedure for the public to request and obtain such information, which
encompasses only a small portion of the information available from the
Commission.
Regional Infrastructure Conferences--In the past 20 months, the
Commission held conferences to address infrastructure concerns across
the country--California, the Northeast, Southeast, Midwest and West.
The aim of these conferences was to conduct in-depth studies of the
broad conditions of the area's energy infrastructure, and to understand
the issues in each region. These conferences featured informative
presentations on the state of each region's energy infrastructure
(electric power plants, fuel sources, hydroelectric facilities, gas
pipelines, electric transmission system, and other relevant
information), demographic and energy load forecasts, and were attended
by state energy regulators as well as industry members and concerned
citizens.
Proposed Rules on Regulation of Cash Management Practices--In
August 2002, the Commission proposed requirements for participation by
public utilities and natural gas pipelines in cash management programs
in order to prevent the abuse of such programs. Such abuse could occur
where cash from Commission-regulated utility subsidiaries is
transferred to the parent holding company and then used to finance
unregulated activities by non-utility subsidiaries. The Commission has
received comments on this proposal and I expect that we will act on
this matter very soon.
Proposed Rulemaking on Affiliate Standards of Conduct--In September
2001, the Commission proposed to revise its restrictions on the
relationship between regulated transmission providers and their energy
affiliates. The Commission proposed, for example, to broaden the
definition of an affiliate to include newer types of affiliates,
including those operating trading platforms. The proposed standards of
conduct would rely on three principles to prevent transmission market
power from being exercised in commodity markets: (1) separating
employees engaged in transmission services from those engaged in
commodity marketing services; (2) ensuring that all transmission
customers, affiliated and non-affiliated, are treated on a non-
discriminatory basis; and (3) prohibiting a transmission provider from
granting its energy affiliate an undue preference over non-affiliates
by sharing confidential or transmission information. The Commission
also proposed to eliminate the differences between the Commission's
rules for natural gas companies and electric utilities. The Commission
intends to adopt final rules soon.
Final Rule on Accounting--In October 2002, the Commission issued a
final rule on accounting and reporting of financial instruments,
comprehensive income, derivatives and hedging activities. The final
rule directs public utilities, licensees, natural gas companies and oil
pipelines to report changes in the fair value of certain investment
securities, derivatives and hedging activities. The new rules will
enhance the transparency of financial information and facilitate a
better understanding of the nature and extent to which derivatives and
hedging activities are used by regulated companies and the impact these
transactions may have on the companies' financial condition.
Industry Financial Condition Conferences--In January and February
the Commission hosted two conferences on financial conditions in the
energy markets. At these conferences, a number of factors were cited as
causing the current financial problems. FERC is continuing to explore
solutions to the financial conditions in the energy sector.
Office of Market Oversight and Investigations (OMOI)--In order to
better understand natural gas, oil and power markets and to swiftly
remedy market rule violations and abuse of market power, the Commission
created the new Office of Market Oversight and Investigations (OMOI).
In August 2002, OMOI became a formal, functioning office within the
Commission, reporting directly to the Commissioners. OMOI serves as an
early warning system to alert the Commission when market problems
develop, and allows the Commission to analyze and address any problems
more quickly. OMOI has begun an aggressive program of outreach to a
wide variety of entities including: other federal, state and provincial
regulatory agencies, state consumer advocates, industry participants,
academic institutions and think tanks, financial institutions (such as
ratings agencies), and Market Monitoring Units (MMUs) at Regional
Transmission Organizations (RTOs) and Independent System Operators.
III. INITIATIVES IN THE ELECTRIC ENERGY MARKET
The Commission has begun or continued work on numerous efforts to
improve the performance, transparency and oversight of the wholesale
electricity markets. These efforts, aimed at ensuring that electric
energy customers receive adequate supplies at reasonable prices,
include the following.
Proposed Rulemaking on Standard Market Design--On July 31, 2002,
the Commission issued proposed rules on a standard market design for
wholesale electric energy markets, including a comprehensive plan for
mitigating market power and market manipulation. The proposed rules are
intended to provide certainty to all market participants, encourage new
infrastructure investment, promote fair competition and prevent a
repeat of the mistakes made previously in California. The proposed
rules would remedy remaining undue discrimination in the use of the
Nation's interstate transmission grid and also provide a solid platform
to ensure that wholesale markets produce just and reasonable rates for
customers.
Experience in the United States and abroad has shown that
successful power markets have certain core features in common. These
include an independent grid operator; a single transmission tariff; a
long-term bilateral contract market; an available short-term spot
market with transparent prices; regional transmission planning;
locational price signals; transmission rights; and, appropriate
mitigation rules to protect against the exercise of market power.
This platform of market features works in hydro-based systems like
Scandinavia, South America and New Zealand. It works in areas where
generation may be distant from population centers as well as areas with
highly networked transmission grids. It works with thermal- and
stability-limited systems. It respects treaties, contracts, and various
forms of state regulation. It is essentially what has already been
developed in both the more mature power markets in the Northeast, mid-
Atlantic, Midwest and Texas, as well as in those markets developing in
the West and South.
Importantly, this platform leaves plenty of room for regional
variation. In our RTO dockets, we concluded that certain functions are
needed to make wholesale power markets work, but they need not be done
the same in every part of the country. These functions include, for
example, transmission planning, resource adequacy, mitigation
techniques, and RTO governance.
A platform based on these core features includes a strong customer
protection plan. It checks generation market power through mitigated
prices when necessary. It solves transmission market power through
structural separation between transmission owners and generators. It
fully protects existing wholesale contracts and native load service. On
the infrastructure side, it encourages and eases entry of new
generation into the market, facilitates new transmission construction,
and promotes demand-side bidding as a check on supplier market power.
The Commission has engaged in extensive public outreach both prior
to the issuance of the proposal and since that time. We continue to
listen to all constituencies in developing final rules. The Commission
anticipates issuing, and obtaining public comment on, a white paper
reflecting our reaction to the over 1,000 filed comments and 300+
meetings we have held since last August. Due to their necessary
breadth, the proposed rules have received much attention. Getting these
rules right, and thus increasing the benefits to customers from
competitive bulk power markets, is a priority for the Commission.
Proposed Policy Statement on Rate Incentives for Transmission
Independence and Expansion--On January 15, 2003, the Commission issued
a proposed policy statement to allow a higher return on equity when a
utility participates in an RTO, sells its RTO-operated transmission
asset to an independent company, or pursues additional measures that
promote efficient operation and expansion of the transmission grid.
Under the proposal, a utility's return on equity could be increased by
50 basis points for joining a Commission-approved RTO, 150 basis points
for selling RTO-operated transmission assets to an independent company
and 100 basis points for investing in new transmission facilities found
appropriate pursuant to an RTO planning process. This proposed policy
would further the Commission's goal of achieving a robust
infrastructure for the future and bringing lower prices and cost
savings to all customers. The proposed policy would help encourage
needed investment in transmission infrastructure and improve grid
performance. Comments are due early this month. This policy supports,
and is consistent with, the transmission tax incentives and other
language in the proposed legislation.
Information Filing Requirements--Improving market transparency
requires detailed reporting on transactions. On April 25, 2002, the
Commission issued a final rule (Order No. 2001) to enhance public
access to information on public utility services and sales by requiring
public utilities to electronically file quarterly reports. This final
rule is intended to equalize reporting requirements for traditional
utilities and power marketers, making information more easily available
to the public and helping to streamline compliance with the filing
requirements of FPA section 205. The data contained in the new Electric
Quarterly Report will provide greater price transparency, promote
competition, enhance confidence in the fairness of the markets and
provide a better means to detect and discourage discriminatory
practices.
Proposed Rulemakings on Standardized Generator Interconnections--
The Commission recently has undertaken two rulemakings to standardize
agreements and procedures for generators seeking to interconnect and
participate in the wholesale market. The first applies to large
generators (i.e., those producing over 20 megawatts) and was the
subject of proposed rules issued April 24, 2002. The second applies to
small generators (i.e., those producing no more than 20 megawatts), and
was the subject of an advanced notice of proposed rulemaking issued
August 16, 2002. Each rulemaking will produce a set of standard
generator interconnection procedures, which describe the procedural
steps for studying and securing a requested interconnection, and a
standard generator interconnection agreement for use by interconnection
providers and customers. The Commission expects that these rulemakings
will help ensure that reliability needs will be met, provide greater
certainty to generators wishing to participate in the wholesale market,
and, importantly, shorten the time needed to get a project brought on
line.
Policy on Conditioning Public Utilities' Issuances of Securities--
To prevent public utilities from borrowing substantial amounts of money
and diverting the proceeds to finance non-utility businesses, the
Commission issued an order on February 21, 2003, announcing a policy
placing conditions on all new issuances of secured and unsecured debt
authorized by the Commission under FPA section 204. These conditions
state, for example, that a public utility seeking authorization to
issue debt secured by utility assets must use the proceeds of the debt
for only utility purposes. Similarly, if the assets securing such debt
are divested or ``spun off,'' the debt must ``follow'' the asset and be
divested or ``spun off'' as well.
At its core, the policy ensures that any encumbrance of utility
assets is used for utility purposes. This policy should ensure that
future issuances of debt are compatible with the public interest and
will not impair a public utility's ability to perform its duties and
provide appropriate ratepayer protection. These concerns also lead me
to believe that FERC should have authority under the Natural Gas Act
similar to FPA section 204.
IV. PENDING CALIFORNIA-RELATED PROCEEDINGS
In addition to the initiatives described above, there are several
proceedings related to the Western energy crisis in 2000-01 currently
pending before the Commission. These proceedings are discussed below.
On February 13, 2002, in Docket No. PA02-2-000, the Commission
formally announced a fact-finding investigation into whether any entity
had manipulated electric energy or natural gas prices in the West since
January 1, 2000. In conducting this investigation, Commission staff has
coordinated closely with staff from the Department of Justice, the
Securities and Exchange Commission, the Commodity Futures Trading
Commission, and the Department of Labor. On August 13, 2002, Commission
staff released an initial report of its investigation. Based on the
staff report, the Commission initiated formal enforcement proceedings
under FPA Section 206 regarding possible misconduct by a number of
utilities. These proceedings are pending before administrative law
judges.
A public written report dealing with all aspects of this staff
investigation is on schedule to be released later this month. The
Commission will consider all relevant evidence from this investigation
once we receive the final report. The Commission also has set up a
process which has allowed the parties in the California proceedings to
conduct discovery on market manipulation in the same time period.
Parties submitted additional evidence and proposed new and/or modified
findings of fact on March 3, 2003. Reply submissions are due on March
20, 2003.
With respect to the California refund proceeding for calculating
the amount of overcharges from October 2000 through June 2001, the
Administrative Law Judge (ALJ) issued his proposed findings in December
2002. The Commission is currently reviewing the ALJ's proposed
findings.
The Commission is also currently reviewing the recommendations and
proposed findings issued by an ALJ regarding whether rates charged for
spot market bilateral sales in the Pacific Northwest for the period
December 2000 through June 2001 were unjust and unreasonable. Also, in
recent weeks, the Commission has received several decisions by ALJs on
complaints seeking to modify long-term contracts for the sale of
wholesale power in California or the West. Finally, the Commission is
reviewing an ALJ's decision on whether El Paso Natural Gas Company and
its affiliates exercised market power in order to drive up natural gas
prices at the California border in 2000-01.
The Commission will act on all of these matters soon. Then,
customers can receive all appropriate refunds, utilities can have
regulatory certainty and all of us can focus on the important goal of
preventing this from ever happening again.
V. INITIATIVES IN THE NATURAL GAS MARKET
As with the electric energy markets, the Commission has launched
numerous initiatives designed to improve the performance, transparency
and oversight of the natural gas markets. These initiatives include the
following.
Liquified Natural Gas (LNG) Facilities--To help meet the Nation's
increasing demand for natural gas, the Commission in December 2002
charted a new course for the treatment of LNG facilities. The
Commission allowed the Hackberry LNG facility in Lake Charles,
Louisiana, to provide terminalling services without a FERC tariff and
rate schedules, similar to the approach used for natural gas production
facilities. The Commission retains authority over all siting and
environmental aspects of onshore LNG facilities. We anticipate that the
new policy will stimulate the development of new LNG terminals by
accommodating various business models and will ultimately result in
increased gas supplies in the United States. Since issuing the
Hackberry decision, the Commission has been in various stages of
discussions and application processing with about ten companies
pursuing some 20 different LNG import terminal locations with a total
potential daily send-out of about 12 Bcf. This amount is at least twice
the projected capacity of an Alaskan gas pipeline.
Emergency Reconstruction of Pipelines--The Commission has proposed
rules on emergency reconstruction of interstate natural gas facilities
when immediate action is required to restore natural gas service due to
a sudden, unanticipated natural event or a deliberate effort to disrupt
natural gas service. The Commission is currently reviewing comments
received in February 2003.
Reporting on Natural Gas Data--As part of its fact-finding
investigation on electric energy and natural gas prices in the West
since January 1, 2000, Commission staff gathered information that
raised doubts about the accuracy of information reported in many
wholesale natural gas price indices. Current industry practice is for
the trade press to gather price information by polling traders. The
markets cannot function efficiently without accurate wholesale price
information. Although the industry and the trade press are now taking
steps to improve the dependability of the natural gas price indices, it
is unclear whether these steps are sufficient to restore customer,
investor and counterparty confidence.
Quicker Processing of Proposals to Build or Expand Pipelines--The
Commission has improved the efficiency of its pipeline certificate
process, and we have a number of initiatives underway to achieve even
greater streamlining. During the period beginning in January 2001, the
Commission authorized just under 16 Billion cubic feet per day (Bcfd)
of new pipeline capacity, raising total daily deliverability to 131
Bcfd. Of these additions, over 50 percent is earmarked for electric
generation, with the greatest growth in that sector occurring in the
Southeast and West. On average, these certificate applications took
about 200 days to process, a marked improvement over the average turn-
around time of nearly 300 days some years ago.
While our current inventory of pending projects is relatively low
compared to the recent past, we anticipate increasing activity in the
future. In preparation, we are pursuing several streamlining
initiatives that combine early identification and resolution of issues,
concurrent consideration by other agencies and increased opportunities
for stakeholder involvement. One such initiative is the National
Environmental Policy Act (NEPA) Pre-Filing Process, which entails a
more interactive NEPA process well in advance of the application being
filed, with earlier, more direct involvement by FERC staff, other
agencies and landowners, resulting in an overall time savings to obtain
a certificate.
Also, in accordance with the President's National Energy Policy,
which among other things calls for actions to expedite energy-related
projects, the Commission and nine other federal agencies (the
Departments of the Army, Agriculture, Commerce, Energy, the Interior,
Transportation, the Environmental Protection Agency, the Advisory
Council on Historic Preservation, and the Council on Environmental
Quality) in August 2002 signed an interagency agreement, providing that
the Commission will be the lead agency for environmental review of
interstate natural gas pipelines under the Natural Gas Act, that there
will be early interagency communication to determine schedules,
identify issues, and share information, that alternative routes and
mitigation measures will be developed jointly, and that necessary
permits will be issued jointly. The agencies completed an
implementation plan for the agreement in November 2002, and have
established a working group, chaired by the Commission, to oversee
implementation.
VI. INITIATIVES REGARDING HYDROELECTRIC LICENSING
The licensing of non-federal hydroelectric projects under Part I of
the FPA is the Commission's original mission, and still a vital aspect
of the Commission's efforts to ensure workable, competitive energy
markets. My fellow Commissioners and I are well aware of the need to
ensure that our licensing processes are in tune with the need of
today's markets for regulatory certainty and more efficient
decisionmaking on this important part of the Nation's energy mix. In
keeping with these considerations, the Commission on February 20, 2003,
issued a notice of proposed rulemaking presenting a comprehensive plan
that will result in more efficient and timely processing of
hydroelectric licenses while also balancing stakeholder interests and
improving the quality of decisionmaking.
The proposal, referred to as the ``integrated'' process, would
become the Commission's primary licensing process, with the existing
alternative licensing process (ALP) and the traditional process
remaining as options for applicants in certain situations.
The highlights of the proposed rule are:
increased assistance by Commission staff to potential
applicants and stakeholders during the development of license
applications;
greater coordination among the Commission and federal and
state agencies with mandatory conditioning authority;
carrying out the Commission's environmental scoping process in
conjunction with the applicant's pre-filing consultation;
increased public participation in the pre-filing consultation
process;
establishing schedules and deadlines for all participants,
including Commission staff;
development of a Commission-approved study plan by the
applicant, with informal resolution to study disagreements,
followed by mandatory, binding study dispute resolution, if
necessary;
elimination of the need for post-application study requests;
and
creation of a new Commission Tribal Liaison, to be the point
of contact for Native Americans' concerns regardless of the
proceeding or issue.
In addition, the traditional licensing process would be modified by
increasing public participation, and by establishing mandatory, binding
dispute resolution for necessary studies.
Before issuing the proposed rule, Commission staff held regional
forums around the country, as well as drafting sessions in Washington,
D.C., to discuss the licensing process with stakeholders and to
collaboratively draft regulatory language. We plan to obtain further
public input through regional workshops to be held around the country
in March and April 2003 to discuss stakeholder reaction to the proposed
rule. A four-day drafting session is scheduled in April in Washington
to draft language for the final rule.
VII. COMMENTS ON THE DRAFT LEGISLATION
The draft legislation addresses a wide range of energy issues
confronting our Nation. I will focus on the issues affecting FERC's
responsibilities. On these issues, the draft legislation takes a good
approach. I would suggest a few modifications and some additional
provisions, as described below. If the Committee wishes, I would be
happy to provide, in writing after the hearing, a detailed technical
analysis of the legislative language.
Section 7081, Market Transparency Rules--This section would require
FERC to issue rules establishing an electronic information system,
accessible by the public, specifying the availability and price of
wholesale power and transmission services. I support this section
because more transparency is needed in energy markets and customers
should have access to the broadest range of useful market information.
I note that this section refers to ``markets subject to the
Commission's jurisdiction,'' but does not explicitly mention natural
gas markets. I suggest modifying this section to clarify the
Commission's authority to obtain information on natural gas prices
(since these are an important factor in wholesale power prices), or
that a separate section be added to the legislation clarifying FERC's
authority under the NGA to obtain such information for purposes of
price discovery.
Section 7084, Enforcement--This section would significantly
increase the penalties available under the FPA. I have long supported
increasing these penalties, and believe the increases proposed here are
appropriate. I recommend including similar penalties under the NGA.
Section 7091, Refund Effective Date--This section would eliminate
the 60-day wait at the beginning of the refund period under the FPA, so
that refunds would be allowed from the date a complaint is filed,
instead of only 60 days later. I support this change, and also
recommend including a similar provision in the NGA.
Section 7101, Mergers and Other Dispositions--This section would
repeal FPA section 203, which requires Commission approval of most
mergers and other dispositions involving public utilities. In light of
the proposed PUHCA repeal, repealing section 203 without including the
public interest review standard in another agency's specific duties may
not be good policy. The Commission deals with the electric industry on
a daily basis and much more closely than do the federal antitrust
agencies. Thus, the Commission is better able to identify and remedy
any harmful effects of mergers and other dispositions and to ensure
that customers' rates are not adversely affected. Our efforts do not
duplicate those actually being performed today by other merger
reviewing agencies. The Commission has used its section 203 authority
as intended by Congress, and appropriately, to ensure that mergers and
other dispositions are consistent with the public interest.
Sections 2001-14, Alaska Natural Gas Pipeline--Over the last
several years, there has been much renewed interest, in both the
private and public sectors, in the development of the transportation
infrastructure needed to bring Alaskan natural gas, including supplies
from Alaska's North Slope, to markets in the Lower 48 states. The
importance of Alaskan natural gas supplies is obvious; indeed, it is
impossible to envision the 30-35 Tcf annual domestic market that the
Department of Energy has estimated may exist by 2020 without Alaskan
natural gas. Although there are currently no applications before the
Commission regarding an Alaska natural gas transportation project, the
need for Alaskan natural gas in the Lower 48 market is only going to
increase.
We will make every effort to process and act upon any applications
for Alaska gas transportation projects as efficiently as possible,
working with the applicants, other federal and state agencies, Native
Americans, shippers, end users, and other interested parties, to ensure
timely, reasonable decisions. Over the past two years, the Commission
staff has participated in the Interagency Alaska Natural Gas Task
Force, along with representatives of the Departments of Energy, State,
Interior, and Transportation, in order to prepare, to the extent
possible, for streamlined government action on an application for an
Alaska gas pipeline.
I strongly support the goals of this legislation, which provides a
statutory framework for the expedited approval, construction, and
initial operation of an Alaska natural gas transportation project. The
bill helpfully resolves some significant questions with respect to
potential projects. There are some matters that may benefit from
additional clarification, such as the extent to which the Commission
would need to interact with the proposed Federal Coordinator as it
reviews and acts on any certificate application. I would be happy to
provide the Committee with more detailed comments on this and other
provisions of this Subtitle.
I can assure you that any application ultimately filed with the
Commission, will be reviewed thoroughly, promptly, and fairly, with the
public interest firmly in mind, and with a clear understanding of how
important Alaska natural gas is to our Nation's long-term energy
security. With respect to the Alaska Natural Gas Pipeline project, in
particular, I would observe that this enormous project is of such
national significance that Congress may want to consider focused
financial support in any legislation.
VIII. CONCLUSION
Events of the past three years have demonstrated the critical role
that energy plays in our Nation's economic well-being. I appreciate the
opportunity to contribute to your debate on the best ways to ensure
that this crucial industry continues to support the many demands placed
on it by our citizens, and I will be happy to answer any questions you
may have.
Mr. Barton. Thank the chairman. We have inadvertently
seated Commissioner Brownell and Commissioner Massey out of
order. Mr. Massey is actually senior to Mrs. Brownell.
So we are going to give Mr. Massey an opportunity to speak
first, if he wishes to. Would you like to speak before
Commissioner Brownell?
Mr. Massey. However you would like to handle it, Mr.
Chairman.
Mr. Barton. Well, you are senior, and this was not
intentional, we just screwed up, to be honest about it and we
want--since you are the senior member, we are going to
recognize you for 5 minutes and then we will go to Mrs.
Brownell to be the clean up hitter.
STATEMENT OF HON. WILLIAM L. MASSEY
Mr. Massey. Thank you, Mr. Chairman and members of the
subcommittee for this opportunity to testify about the
important energy policy questions that face both this
subcommittee and the Federal Energy Regulatory Commission.
There are high prices in energy markets as the much colder
than normal winter of 2003, lingers, and demand for natural gas
remains high.
Natural gas prices in both the production and market areas
are sharply higher than normal, and unusually volatile. The
commission must take a hard look at the cause of these dramatic
price spikes.
Higher natural gas prices have caused a sharp spike in
electricity prices as well in a number of markets. These events
are rippling through the U.S. economy, impacting industrial
users, businesses and residential consumers.
In addition, the western energy crisis, coupled with the
collapse of Enron, have left their wake within the energy
industry.
Investor and lender confidence has been shaken by these
events by a declining national economy, by indictments of
energy traders, by accounting irregularities, downgrades by
rating agencies and continuing investigations by the FERC, the
CFTC, SEC and the Justice Department.
These investigations are important and necessary and must
leave no stone unturned. Refunds must be made for customers
that paid unjust and unreasonable prices.
And those found to have manipulated the market, should be
punished. Nevertheless, all of these events have severely
eroded capital availability for critical infrastructure
projects, and I am concerned about that.
In these times it is particularly important for the
commission to promote clear market rules and structure,
reasonable and stable regulation of energy transmission and
comprehensive market monitoring.
The commission must conduct thorough and forceful
investigations and oversight to ferret out abuses and our
remedies must be tough-minded and appropriate.
In his testimony, Chairman Wood provides a thorough outline
of the initiatives underway at the commission that are aimed at
reforming electricity and natural gas markets to ensure just
and reasonable prices and customer benefits.
I share his vision of well-functioning markets with
regulators playing an important role in determining market
structure, prohibiting discrimination, enforcing transparent
market rules and engaging in vigilant oversight and monitoring.
In the electricity title of the draft I agree with the call
to form regional transmission organizations. The proposal to
provide the commission with back up authority for transmission
sighting is an excellent idea.
I support the authorization to develop an electronic
information system regarding price and availability of services
in the market, and the prohibition of round trip trading.
I urge you to extend these provisions to natural gas
markets as well. Increasing the level of civil penalties the
commission may impose is a welcome addition to the tools we
have to police markets.
I recommend that the commission be given direct authority
to mitigate market power in jurisdictional markets. Removing
the 60 day delay and the refund effective date for complaints
provides additional customer protection and I support it.
I cannot support repealing the commission's merger review
authority under the Federal Power Act. Recent gas price
volatility is of great concern to me.
I am deeply concerned about the impact of these high prices
on customers. The commission would be better able to evaluate
natural gas price spikes if there were more reliable price
transparency.
I would amend section 7081 to extend its information
availability provisions to natural gas markets. Likewise, I
would amend the proposed section 7084, to provide the
commission with authority to impose civil penalties for
violations of the Natural Gas Act, an authority the commission
now lacks.
I fully support measures to facilitate natural gas supply
projects, such as our light-handed regulation of LNG and
efforts to streamline processing of natural gas infrastructure
projects.
Thank you, Mr. Chairman, I look forward to answering any
questions.
[The prepared statement of Hon. William L. Massey follows:]
Prepared Statement of Hon. William L. Massey, Commissioner, Federal
Energy Regulatory Commission
Mr. Chairman and members of the Subcommittee on Energy and Air
Quality, thank you for the opportunity to provide testimony about the
important energy policy issues facing both this subcommittee and the
Federal Energy Regulatory Commission.
There are high prices in energy markets as the much colder than
normal winter of 2003 lingers and demand for natural gas remains high.
Natural gas prices both in the production and market areas are sharply
higher than normal and unusually volatile. Members of Congress have
asked the Commission to investigate the cause of these dramatic price
spikes. Higher natural gas prices have caused a sharp spike in
electricity prices as well in a number of markets. These events are
rippling through the U.S. economy, impacting industrial users,
businesses and residential consumers.
In addition, the western energy crisis, coupled with the collapse
of Enron, have left their wake within the energy industry. Investor and
lender confidence has been shaken by these events, by a declining
national economy, indictments of energy traders, accounting
irregularities, downgrades by rating agencies, and continuing
investigations by the FERC, CFTC, SEC and Justice Department. These
investigations are important and necessary, and must leave no stone
unturned. Nevertheless, all of these events have an impact on investor
and lender confidence and have severely eroded capital availability for
the energy industry.
In these times, it is particularly important for the Commission to
promote clear market rules and structure, reasonable and stable
regulation of energy transmission, and comprehensive market monitoring.
The Commission must conduct thorough and forceful investigations and
oversight to ferret out abuses.
In his testimony, Chairman Wood provides a thorough outline of the
initiatives underway at the Commission that are aimed at reforming
electricity and natural gas markets to ensure just and reasonable
prices and customer benefits. I would like to applaud Chairman Wood's
leadership. I share his vision of well functioning markets with
regulators playing an important role in determining market structure,
prohibiting discrimination, enforcing transparent market rules, and
engaging in vigilant oversight and monitoring. In the interest of
brevity, I would like to associate myself with his excellent testimony.
I will comment on particular issues raised by Chairman Barton's
draft legislation and by the subcommittee in its letter of invitation
to testify.
I. ELECTRICITY ISSUES
The development of competitive efficient wholesale electricity
markets is a highly desirable goal. This is primarily a federal
responsibility, and achieving this goal will benefit our nation's
consumers and economy. There are, however, a number of barriers to the
creation of robust markets, including grid operation influenced by
merchant interests and a patchwork of markets and rules governing the
grid. Almost a third of the grid is not subject directly to the FERC's
open access and nondiscrimination requirements. Necessary grid
expansion in not keeping pace with the requirements of robust wholesale
markets. This means that cheaper power cannot always reach the
customers who want it. The lack of uniformity in generation
interconnection standards among regions and utilities poses unnecessary
barriers to entry by generators that could provide cheaper power for
consumers. Demand responsiveness could act as a brake on price run ups,
yet is generally absent from electricity markets. Vibrant markets
require a reliable trading platform, yet there are no legally
enforceable reliability standards.
Ensuring just and reasonable prices must be addressed far
differently as we move to competitive markets than under the monopoly
structure. It is more complex now. The basic nature of our regulatory
tasks is changing. We are moving away from reviewing cost-based prices
charged by individual sellers and toward ensuring good performance by
markets.
Transmission infrastructure improvement rulemaking
Section 7011 of the discussion draft submitted by Chairman Barton
requires the Commission to adopt rules providing for incentive-based
and performance-based transmission rates. I support such a policy
direction. The Commission has already taken a step in this direction
with our proposed policy on incentive transmission rates that provides
enhanced returns on equity for transmission assets that are operated
independently from market participants and for new infrastructure
investment. Transmission will remain a monopoly service in restructured
markets and will need to be regulated, but a performance-based rate
approach, while presenting its own significant challenges, shows
promise as a way to reward efficient behavior while protecting
customers.
Section 7011 also requires the Commission to adopt rules allowing
participant funding for new transmission investment if it is requested
by an RTO or other Commission-approved transmission organization. I
support this policy direction. I have strongly supported the
participant funding provision in the Commission's Standard Market
Design proposal. It allows participant funding where there is a
locational pricing regime in place and the grid is managed by an entity
that is independent of market participants.
Transmission Siting
Although the Commission is responsible for well functioning
electricity markets, it has no authority to site the electric
transmission facilities that are necessary for such markets to thrive
and produce consumer benefits. Existing law leaves siting entirely to
state and local authorities. This contrasts sharply with section 7 of
the Natural Gas Act, which authorizes the Commission to site and grant
eminent domain for the construction of interstate gas pipeline
facilities. Exercising that authority, the Commission balances local
concerns with the need for new pipeline capacity to support evolving
markets.
The transmission grid is the critical superhighway for electricity
commerce, but it is becoming congested because of the new uses for
which it was not designed. Transmission expansion has not kept pace
with changes in the interstate electricity marketplace. Adequate grid
facilities are essential to robust wholesale power markets. I am
confident that transmission will be built in sufficient quantities if
siting authority is rationalized, appropriate price signals and
independent regional grid operation are put in place, and adequate cost
recovery mechanisms and risk-based rates of return are allowed.
Proposed section 7012 provides the Commission with backstop siting
authority to ensure that the necessary transmission facilities are
built in areas designated as an ``interstate congestion area'' by the
Secretary of Energy, and grants authority for states to form interstate
compacts for regional siting coordination. This provision appears to
provide appropriate respect for the siting prerogatives of the states
and recognizes the regional nature of today's electricity markets. The
provision has my support.
One Set of Transmission Rules
All interstate transmission should be provided under one set of
open access rules. That means subjecting the transmission facilities of
municipal electric agencies, rural cooperatives, the Tennessee Valley
Authority, and the Power Marketing Administrations to the Commission's
open access rules. These entities control a substantial share of the
nation's electricity transmission grid. Their current non-
jurisdictional status has resulted in a patchwork of rules that may
hinder seamless electricity markets. Markets require an open non-
discriminatory transmission network in order to flourish.
Section 7021 of the discussion draft would allow the Commission to
require open access service under a comparability standard by entities
that are currently not covered under our open access rules. I support
the thrust of this provision.
Regional Transmission Organizations
The Commission has made substantial progress in forming the
Regional Transmission Organizations that are critical to the
competitive market place. I firmly believe that large RTOs consistent
with FERC's vision in Order No. 2000 are absolutely essential for the
smooth functioning of electricity markets. RTOs will eliminate the
conflicting incentives vertically integrated firms still have in
providing access. RTOs will streamline interconnection standards and
help get new generation into the market. RTOs will improve transmission
pricing, regional planning, congestion management, and produce
consistent market rules. We know for a fact that resources will trade
into the market that is most favorable to them. Trade should be based
on true economics, not the idiosyncracies of differing market rules
across the region.
I interpret section 7022 of the discussion draft as a clear
declaration by the Congress that these institutions are in the public
interest and should be formed. It is my hope that such a clear message
from Congress will speed the formation of these critical institutions
in all regions of the nation. But I believe even stronger action may be
appropriate. I recommend that the Congress clarify existing law to
authorize the Commission to require the formation of RTOs and to shape
their configuration. Well structured Regional Transmission
Organizations are necessary platforms on which to build efficient
electricity markets. The full benefits of RTOs to the marketplace will
not be realized, however, if they do not form in a timely manner, if
they are not truly independent of merchant interests, or if they are
not shaped to capture market efficiencies and reliability benefits.
Reliability
Section 7031 of the discussion draft would provide for an Electric
Reliability Organization that is independent of market participants, to
develop and enforce mandatory reliability standards subject to
Commission oversight. I support this provision. We need mandatory
reliability standards. Vibrant markets must be based upon a reliable
trading platform. Yet, under existing law there are no legally
enforceable reliability standards. The North American Electric
Reliability Council (NERC) does an excellent job preserving
reliability, but compliance with its rules is voluntary. A voluntary
system is likely to break down in a competitive electricity industry.
Mandatory reliability rules are critical to evolving competitive
markets.
Demand Responsiveness
Markets need demand responsiveness to price. This is a standard
means of ensuring good resource allocation decisions and moderating
prices in well-functioning markets, but it is generally absent from
electricity markets. When prices for other commodities get high,
consumers can usually respond by buying less, thereby acting as a brake
on price run-ups. Without the ability of end use consumers to respond
to price, there is virtually no limit on the price suppliers can fetch
in shortage conditions. Consumers see the exorbitant bill only after
the fact. This does not make for a well functioning market.
Instilling demand responsiveness into electricity markets requires
two conditions: first, significant numbers of customers must be able to
see prices before they consume, and second, they must have reasonable
means to adjust consumption in response to those prices. Accomplishing
both of these on a widespread scale will require technical innovation.
A modest demand response, however, can make a significant difference in
moderating price where the supply curve is steep.
Section 7061 of the discussion draft sets out requirements for
real-time pricing and time of use metering and communications. I
support these provisions as necessary first steps toward increasing
demand responsiveness in electricity markets. I regard these provisions
as a message from the Congress that instilling a significant measure of
demand responsiveness into electricity markets is in the public
interest. I recommend that legislation strongly encourage FERC and
state commissions to cooperate in designing markets that include demand
responsiveness. This would help to ensure just and reasonable wholesale
prices and would be an effective market power mitigation measure.
PURPA purchase obligation
Section 7062 of the discussion draft would remove the purchase
obligation on the part of utilities for power from a QF facility if the
QF has access to independently administered day ahead and real time
markets, if the utility is a member of an RTO, or if the Commission
otherwise finds the QF has access to a competitive market for
electricity. I support the policy direction of this section.
Market transparency rules
Section 7081 of the discussion draft requires an electronic
information system, under the Commission's oversight, that provides
information regarding the availability and price of wholesale energy
and transmission services. I support this measure as providing
additional transparency to energy markets. Transparency is absolutely
necessary for good market decisions and to protect against manipulation
and other abuses. I recommend that Congress broaden the coverage of
this section to include natural gas markets as well. Natural gas
markets would certainly benefit from transparency, and natural gas is
an increasingly important input to electricity production.
Section 7081 also prohibits what has come to be known as round trip
trading. I strongly support this prohibition, and recommend that
Congress also extend this prohibition to natural gas trading.
Civil Penalties and Enforcement
Section 7084 of the discussion draft significantly increases the
penalties available to the Commission. I support this provision. If the
Commission is to be the ``cop on the beat'' of competitive markets, we
must have the tools needed to ensure good behavior. Refunds alone are
not a sufficient deterrent against bad behavior. The consequences of
engaging in prohibited behavior must be severe enough to act as a
deterrent.
I believe additional tools are needed for the Commission to ensure
that markets are structured so that the benefits of competition will
inure to consumers. The FERC, with its broad interstate view, must have
adequate authority to ensure that market power does not squelch the
very competition we are attempting to facilitate. However, the
Commission now has only indirect conditioning authority to remedy
market power. This is clearly inadequate. Therefore, I recommend
legislation that would give the Commission the direct authority to
remedy market power in wholesale markets, and also in retail markets if
asked by a state commission that lacks adequate authority. For example,
such authority would allow the Commission to order structural remedies
directly, such as divestiture, needed to mitigate market power.
Refunds
Section 7091 of the discussion draft would expand the refund
protection under section 206 of the Federal Power Act by eliminating
the 60-day delay in the refund effective date. I support this provision
but would recommend additional protections. As we have seen from past
experience, when market structure and market rules are flawed, or when
suppliers act in an anticompetitive manner, electricity prices can
quickly rise to exorbitant levels. During the time that it takes to
detect the market flaws or misbehavior and to file a complaint, unjust
and unreasonable rates are charged. The Federal Power Act states that
such rates are absolutely unlawful. Yet, the weight of court precedent
strongly suggest that retroactive refunds are impermissible. I
recommend clear statutory language that would allow the Commission to
order refunds for past periods if the rates charged are determined to
be unjust and unreasonable. Limitations may be appropriate on how far
back in time the Commission can order refunds.
Review of Mergers
Section 7101 of the discussion draft repeals the Commission's
authority to review mergers. I do not support this provision. As we
strive to move toward competitive markets and light-handed regulation,
the Commission's ability to remedy market power is increasingly
important. Market power is likely to exist in the electric industry for
a while. It is unreasonable to expect an industry that has operated
under a heavily regulated monopoly structure for 100 years suddenly to
shed all pockets of market power. An agency such as the FERC with a
broad interstate view must have adequate authority to ensure that
market power does not squelch the very competition the Commission is
attempting to facilitate.
The Commission's authority over mergers is important. While mergers
can produce efficiencies, they can also increase both horizontal and
vertical market power. The Commission is particularly well suited to
evaluate proposed mergers involving electric utilities. The
Commission's detailed experience with electricity markets and its
unique technical expertise can provide critical insights into a
merger's competitive effects. In addition, the Commission's duty to
protect the public interest is broader than the focus of the antitrust
agencies and thus allows us to better protect consumers from other
possible effects of a merger, such as unreasonable costs. As the
architect of Order No. 888 and Order No. 2000 (the RTO rule), the
Commission must retain the authority to condition a merger to ensure
consistency with broader policy goals. And unlike the antitrust
agencies, the Commission's merger procedures allow public intervention
and participation in proceedings critical to the restructuring of this
vital national industry.
For these reasons, I would not support any weakening of the
Commission's merger authority. Indeed, to ensure that mergers do not
undercut our competitive goals, I recommend that the Commission's
authority over electricity mergers be strengthened in a number of ways.
The Commission should be given direct authority to review mergers that
involve generation facilities. The Commission has been upheld in its
interpretation of the Federal Power Act as excluding generation
facilities per se from our direct authority. It is important that all
significant consolidations in electricity markets be subject to
Commission review. For the same reason, the Commission should be given
direct authority to review consolidations involving holding companies.
I am also concerned that significant vertical mergers can be
outside of our merger review authority. Under section 203 of the FPA,
our merger jurisdiction is triggered if there is a change in control of
jurisdictional assets, such as transmission facilities. Consequently,
consolidations can lie outside of the Commission's jurisdiction
depending on the way they are structured. For example, a merger of a
large fuel supplier and a public utility would not be subject to
Commission review if the utility acquires the fuel supplier, because
there would be no change in control of the jurisdictional assets of the
utility. If the merger transaction were structured the other way, i.e.,
the fuel supplier acquiring the utility, it would be subject to
Commission review. Such vertical consolidations can have significant
anticompetitive effects on electricity markets. Those potential adverse
effects do not depend on how merger transactions are structured, and
thus our jurisdiction should not depend on how transactions are
structured. Therefore, I recommend that the Commission be given
authority to review all consolidations involving electricity market
participants, however structured.
II. NATURAL GAS ISSUES
Gas Price Volatility
We have been following with great interest and concern the sharply
higher and volatile natural gas prices over the last couple of weeks.
The sustained cold weather brought prices at the Henry Hub up to the $4
to $5 range early in the winter, and prices have risen steadily as the
winter weather has persisted without much letup. In recent days, there
have been large price increases that we have not seen in some time.
Since February 21, prices at the Henry Hub have ranged from a low of
$6.73 to a high of $18.60 on February 25. It is vitally important that
the Commission investigate this phenomenon to get a clear understanding
as to what is driving this volatility and to determine whether these
price spikes are a dramatic response to normal seasonal cycles, or
other forces are at work.
This winter has been one of the coldest in years in the Northeast,
Mid-Atlantic and Midwest states. By some reports, it has been 29
percent colder in these regions than last year, and demand has
increased accordingly. Late winter storage is being drawn down more
rapidly than was expected, and cold weather has led to short-term
freeze-offs of some sources of supply. As a result of these factors, a
couple of major interstate pipelines last week instituted operational
flow orders, which reduce shippers' contractual rights to draw gas from
storage. Adding to the anxiety is the fact that the weather experts
believe that the winter heating season will continue at least for
several more weeks.
High natural gas prices have sharply increased the price of
electricity in wholesale markets. Thus, consumers of both natural gas
and electricity likely will feel the impact of this price volatility.
The Commission must investigate the causes of the price run-up. I am
deeply concerned about the impact of these prices on residential
consumers, businesses and industrial users.
Adequacy of Natural Gas Supply
Natural gas exploration and production activity, as reflected in
the number of gas drilling rigs, has increased over time, and will no
doubt increase more in response to these powerful price signals. Yet,
it takes time to develop a gas well--up to 18 months from new drilling
until gas finally flows to market. This puts more pressure on the
existing pipeline infrastructure, including storage, to meet winter
demands.
The Commission recently announced a new policy of light-handed
regulation for LNG import facilities. The Commission was persuaded that
its traditional open access requirement for LNG terminals would stifle
investment in these critical energy supply projects. Hence, the
Commission's new policy will allow such projects to be developed on a
proprietary basis. This regulatory approach represents the prevailing
view that these terminals are more akin to production facilities than
to interstate pipeline facilities and thus warrant less regulatory
scrutiny.
Adequacy of Natural Gas Infrastructure
The Commission has also taken steps to streamline its approval
process for new pipeline infrastructure. It is axiomatic that where
pipeline infrastructure is constrained, prices will rise as capacity
markets tighten. Basin differential price data lead to the conclusion
that perhaps several regions of the country are now short of natural
gas transmission capacity: the Rockies, the New York metropolitan area
and other parts of the Northeast, the Mid-Atlantic Coast, the Southeast
and Florida.
Traditionally, the pipeline industry has responded to price signals
and contracted with shippers to support capacity expansions, but the
deteriorating health of the industry and sharply reduced capital
availability is a cause for concern. I note with concern that there are
only a few significant pipeline construction applications now pending
at the Commission. Our Office of Energy Projects tells me that there
are 11 major pipeline certificate applications pending Commission
approval, totaling 4.0 Bcf/day in new capacity and covering about 783
miles of new pipeline. By way of comparison, early in the year 2001,
the Commission had under consideration project proposals for 7.3 Bcf/
day of new capacity and over 2,200 miles of additional pipeline.
Clearly, constrained areas are more prone to price spikes and to
market manipulation than are non-constrained areas. This puts a premium
on the Commission's ability to process expeditiously applications for
approval of new infrastructure additions, while balancing the need for
full participation by affected parties in the NEPA process. Our track
record is solid and getting better. From 2001 to the present, the
Commission has certificated 4,814 miles of new pipeline infrastructure,
with a total capacity of 15.8 Bcf/day. The Commission remains committed
to responding promptly to facilitate the approval of necessary
infrastructure projects. A vibrant market demands a solid
infrastructure foundation.
The draft legislation contains a major initiative that would
encourage the development of natural gas supplies in Alaska for
delivery both in that state and the lower forty-eight states. The
recent natural gas price spikes underscore the need to attach new
sources of production. Alaskan gas supplies would bolster our domestic
resource base and will be an essential part of the nation's energy
future. Our agency is prepared to process an Alaskan pipeline project
application expeditiously. I stand ready to consider any proposal or
proposals that are filed.
Shaken Confidence in Price Discovery Methods
It is clear that market participants must have timely access to
accurate information about prevailing prices. Price discovery, the
ability to access this price information, helps customers determine the
price they should pay for the service or commodity, helps sellers
determine and recover their investment, and allocates resources to the
customers who value them most. Over the last twenty years, the trade
press has created natural gas price indices through the polling of
market participants. The quality of the indices depends on the
integrity of the information collected and the number of active traders
who report. Accurate and credible price indices for natural gas are the
foundation for natural gas and electric transactions nationwide.
Unfortunately, the false reporting of price and volume information has
shaken confidence in these indices. The potential fallout includes the
nullification of existing contracts pegged to indices, and the
reluctance of parties to enter into new index-based contracts.
Accurate price indices are also required by pipeline tariffs. At a
January 15 Commission meeting, Commission staff pointed to three areas
of pipeline tariffs that refer to market price data: cash-out
provisions, penalties and basis differentials. Most major pipelines
have cash-out mechanisms that allow them to resolve system imbalances.
Accurate price information is essential if cash-out mechanisms are to
account for and minimize pipeline imbalances. The Commission has
approved some pipeline penalty provisions based on market indices to
deter shipper misconduct that can threaten system reliability. Finally,
many negotiated rate transactions peg the transportation rate to the
basis differentials between two or more price index trading points.
Given the prevalence of price index information in pipeline tariffs
and contracts, it is imperative that there be trustworthy indices. As a
first step, the Commission will probably adopt minimum standards for
the natural gas price indices used in pipeline tariffs or new
contracts. We will sponsor a technical conference this spring to
explore price index issues and various proposed remedies.
The Commission is also analyzing natural gas price index issues in
its massive ongoing Western market manipulation investigation. This
investigation has already found significant manipulation of published
price indices that were used by traders, pipelines, and power
generators. These indices also had been used by the Commission in
establishing a formula for determining refunds of overcharges arising
from the dysfunctional electric western power markets. FERC staff has
recommended that the Commission modify the refund formula to eliminate
any reliance on manipulated indices. Hundreds of millions of dollars,
perhaps billions of dollars, are at stake in that huge refund
proceeding. This only underscores that reliable price discovery methods
are an imperative in well-functioning natural gas and electric markets.
In addition to developing minimum standards for natural gas price
indices, some have suggested that the Commission take even more
aggressive actions. Some have suggested that the Commission gather and
report price data. I have an open mind about how to achieve price
transparency and facilitate price discovery. However, it is critical
that the Commission be prepared to take whatever action is necessary to
restore confidence in the natural gas price indices that undergird
natural gas pipeline tariffs and negotiated rate contracts.
Section 7081 of the discussion draft amends the Federal Power Act
to promote price transparency. FERC is directed to establish an
electronic information system. As I said earlier, I fully support this
provision and recommend that it be modified to apply explicitly to
natural gas markets as well.
Penalties and Refund Effective Date
Section 7084 of the discussion draft should be modified to provide
penalties for prohibited behavior under the Natural Gas Act.
I also recommend that the Natural Gas Act be amended to include the
refund effective date provisions of Section 7091 (with the further
modification I recommended earlier).
III. HYDROELECTRIC LICENSING ISSUES
The Commission has recently proposed a rulemaking to streamline the
hydroelectric licensing process to provide more efficient decision
making. A new process, an integrated process, is proposed to facilitate
increased assistance by Commission staff early in the process and to
promote greater coordination among federal and state agencies.
The proposed amendments of section 3001 of the discussion draft
outline a process to ensure that viable alternative conditions are
given adequate consideration in the licensing process. These amendments
are worthy of serious consideration by the subcommittee.
This concludes my testimony. I stand ready to answer questions and
to assist the Subcommittee in any way. Thank you for this opportunity
to testify.
Mr. Barton. Thank you. Before I recognize Commissioner
Brownell, Congresswoman Capps has 12 students visiting her from
Santa Barbara from the Congregation of B'nai B'rith. We want to
welcome you.
And if you would like to sit at the lower dais, down here,
you will improve the intelligence of both sides of the aisle.
And it will be a little bit easier on your knees.
Let us welcome the students from Congresswoman Capps'
Congregation. You may not ask questions, though. As soon as
they get seated we will recognize Commissioner Brownell. And it
is okay to sit on the Republican side. You are not going to be
excommunicated.
And if you have cameras, feel free to have somebody take
pictures of you doing this. We now would like to welcome
Commissioner Brownell. And are you a 5-minute statement or a 6-
minute statement?
Ms. Brownell. Mr. Chairman, with all due respect, and
consistent with the inclusionary policy of outreach that the
FERC has undertaken in the last year, we would actually love to
hear from the students, because we think that they could add
value to the discussion.
Mr. Barton. Well, I wish Commissioner, the phantom
Commissioner, Mr. Kelliher, were here. He's in confirmation
purgatory over in the Senate. We wish there were four of you
here instead of just three.
Ms. Brownell. And we certainly await his arrival as well.
Mr. Barton. All right, you are recognize for 5 minutes.
STATEMENT OF HON. NORA MEAD BROWNELL
Ms. Brownell. Thank you. I am pleased to be here today, Mr.
Chairman, Mr. Vice Chairman, committee members, to discuss the
future of our energy sector in this country.
I certainly join in my colleagues' statements, but I would
just like to make a few additions. A couple of weeks ago a
major analyst from Merrill Lynch had this headline in his
morning commentary: ``Energy sector better than bad.'' And that
was supposed to be the good news. Indeed, we have seen over
$200 billion in market cap loss.
We see congestion and associated prices increasing. We see
no real innovation or investment in technology. We see an
increase in power quality disturbances. Power quality
disturbances that are having an effect on products and on
company's ability to compete.
We see market dysfunction and customers paying huge prices
that they should not have paid.
We see increased concerns about fuel supply and
distribution. The picture is quite stark. There may be no
visible crisis, but there is a slow and silent erosion of the
strength of this energy sector in our country.
And there is a cost, sadly, it is largely hidden. And Mr.
Boucher, the nicest thing that has been said about us recently
is that we are imaginative.
But we need to be more than imaginative. We need to be
innovative. We need to be committed. And we need to be focused
and courageous to deal with the crisis that we face today.
The principles that drew us to initiate the restructuring
10 years ago still hold true. But sadly, we have learned some
hard lessons.
Markets just don't happen, they need guidance, transparency
and structural change. Markets are vulnerable in transition, we
need to complete the task.
Markets must have oversight with swift and certain justice,
and above all, customers must be confident that their needs
will be met.
We have begun to transform ourselves at the FERC, as you
see in all of our testimony, to address those issues. But I am
pleased that this bill and the work that will go forward,
indeed, address critical issues to make markets work.
It addresses accountability for us, for market
participants, for the reliability organizations on which we
rely.
It addresses economic signals. Economic signals to build
infrastructure, which we so critically need. Economic signals
to incent new technologies, including renewable technologies.
It sends the right economic signals to discipline the
marketplace. It creates structures that will allow us to manage
the marketplace more effectively and with greater
accountability.
So I look forward to working with you because I think the
economic and moral imperative is essential. I hope that we can
address these issues quickly with deliberation, but with
closure and certainty.
We need to move forward. Thank you.
[The prepared statement of Hon. Nora Mead Brownell
follows:]
Prepared Statement of Hon. Nora Mead Brownell, Commissioner, Federal
Energy Regulatory Commission
I. INTRODUCTION
Thank you for the opportunity to share my thoughts. Chairman Wood's
testimony summarizes the full range of initiatives we are undertaking
at the Federal Energy Regulatory Commission (FERC), and I fully support
his comments on those efforts. I would like to offer observations about
the state of the energy sector in general and about some of the
initiatives outlined in Chairman Wood's testimony. My comments on these
initiatives will address how I believe they support the transformation
of wholesale energy markets for long-term customer benefit and how the
FERC is making internal reforms to adjust to changes in the market
place. Finally, with your indulgence, I would like to provide comment
on particular portions of the discussion draft provided on February 28,
2003. Of course, I am happy to answer any questions the Subcommittee
might have.
II. STATE OF THE ENERGY SECTOR
The state of the energy sector in this country is, at best,
precarious:
Power quality disturbances grow--disrupting production lines
and calling into question the ability of the energy sector to
serve a growing digital economy, adding to customers' costs for
goods and services and driving jobs and business from our
cities and towns;
Customers have a profound lack of confidence in corporate
America, public policy makers, and regulators;
Lack of meaningful and transparent prices has led to
inefficient generator siting decisions, creating access and
transmission problems;
Increasingly illiquid markets affect forward prices; and
Questionable trading and reporting practices continue to
surface.
Moreover, we are experiencing a capital crisis in the energy
sector. Over $200 billion of market capitalization has been lost.
Uncertainty in the energy sector generated by the lack of clear,
understandable, enforceable rules, the California energy crisis, the
collapse of Enron, allegations of false reporting, criminal
indictments, the closing of trading operations, and federal
investigations have all undermined investor confidence. Credit ratings
have been downgraded, access to capital at reasonable rates has been
limited or cut-off. The result has been a lack of capital available for
greatly needed investment in infrastructure to reliably deliver energy
that this country so desperately needs. The near-term impact of this
lack of investment is cost to customers in terms of congestion,
security, and missed opportunity. Longer-term, the lack of investment
threatens the very future of our economy.
While the electric and natural gas sectors are intertwined, the
natural gas sector has fared better. For example, stock prices for
electric utilities declined over 40 percent in 2002 compared to 25
percent in natural gas pipelines; electric generators' prices declined
80 percent compared to a 5 percent increase for oil and gas producers.
I attribute this to a more mature natural gas market with clear,
standardized rules. The natural gas marketplace has shown itself to be
remarkably robust and I believe that the issues facing the natural gas
market are manageable over time.
I applaud the efforts of this Committee to address these very
important and difficult issues and bring together a coherent and
consistent energy policy for this nation's future. We at FERC are doing
what we can to address the problems facing us in the energy sector. I
would like to focus now on three particular initiatives: 1)
restructuring wholesale electricity markets; 2) improving efficiency in
processing applications for pipeline and hydroelectric projects; and 3)
increasing market monitoring.
III. RESTRUCTURING WHOLESALE ELECTRICITY MARKETS
The FERC has been working actively to restructure the wholesale
electricity sector into the vibrant, competitive marketplace that
customers deserve. As we do so, I have been guided by five core
principles:
First, customers must benefit. Restructuring markets toward a
competitive outcome should be a value-added proposition. We are not
abandoning what works, we are making it better. That has been the
competitive advantage of the U.S. economy.
Second, the FERC must ensure independent operation of the nation's
transmission highway. Such independence is essential to meeting
Congress' directive in the Federal Power Act of nondiscriminatory
access to the interstate grid.
Third, the FERC must promote the development of a robust and
reliable infrastructure that supports the dispatch of generation on a
least-cost basis. Until all wholesale generators can compete fairly on
an economic basis, customers will continue to be deprived of potential
savings.
Fourth, the FERC must ensure transparency in the electricity
markets. A market cannot run efficiently unless the rules are clear and
there is adequate opportunity for price discovery. We can't assume this
without an independent system operator and full access to information
Fifth, the FERC must ensure adequate customer protection against
unjust and unreasonable rates. This begins with a well-functioning
wholesale electricity market and also requires vigilant market
monitoring at all times and mitigation whenever appropriate.
My decisions to support consideration of modifications to our
affiliate rule, creation of the new Office of Market Oversight and
Investigations, issuance of Order No. 2001 requiring detailed reporting
on transactions, development of standardized procedures for generator
interconnections, and aggressive investigation of the causes of the
Western energy crisis were all in furtherance of these five principles.
However, I continue to believe that creation of Regional Transmission
Organizations (RTOs) is the single most effective way of achieving
these five goals simultaneously.
RTOs that are fully independent of market participants can ensure
non-discriminatory operation of the transmission facilities under their
control. RTOs have FERC-approved market monitors, implement FERC-
approved market mitigation plans, and conduct long-range planning all
for the protection of customers. RTOs can perform economic dispatch
over large geographic areas that will ensure the selection of least-
cost generators. Finally, RTOs can offer organized markets and one-stop
shopping that reduce transaction costs, provide transparent market
rules and allow the opportunity for price discovery.
I am pleased to announce that the majority of public utilities now
seem to recognize the value of RTOs--almost every transmission-owning
public utility has announced its intention to join a specific RTO. The
FERC recently granted RTO status to the Midwest ISO and PJM
Interconnection, and has several other RTO filings pending.
The standard market design rulemaking has been an invaluable source
of information as the FERC works through the RTO filings. The wealth of
comments we have received on the proposed standard market design rule
has given us a much greater understanding of how to create a commercial
platform within RTOs that will ensure the maximum benefits for
customers. Regional differences should and are being accommodated in
RTOs. Nevertheless, market platforms must be consistent in order to
ensure equity, eliminate barriers to entry, reduce transaction costs,
and create an environment where gaming is limited, if not eliminated.
The platform must also ensure that the most appropriate solution,
whether transmission, generation or demand-side, is implemented. As I
continue my work at the FERC on wholesale electricity matters, I commit
to you that I will retain a focus on the five principles I have
articulated here.
IV. IMPROVING EFFICIENCY IN PROCESSING ENERGY PROJECT APPLICATIONS
The FERC has responsibility for authorizing the construction and
operation of interstate natural gas pipelines and hydroelectric
projects. We have been improving our processes for handling project
applications so that our processes do not impede market development,
and may in fact advance infrastructure.
Revisions to the pipeline certification processes have resulted in
reduced processing time from an average of 273 days in 1995 to 195 days
today. In 2001, the FERC certificated 16 Bcf per day of new capacity.
More recently, the FERC, after hearing complaints for years about
the inefficiency of the licensing process for hydroelectric projects,
has proposed changes to the hydroelectric licensing regulations.
Hydroelectric projects are a critical component of this nation's energy
infrastructure, and inefficiencies in FERC's relicensing process add
unnecessary costs and uncertainties to the detriment of consumers. The
proposed rule would create a new process in which the current
duplicative, sequential environmental analyses conducted separately by
the license applicant, the FERC, and the other agencies is replaced
with a single ``integrated'' environmental analysis.
This proposal was the result of work not only by FERC staff but by
all stakeholders: individual licensees, small and large from all over
the country; non-governmental organizations (NGOs), including the
National Hydropower Association, the Hydropower Reform Coalition, and
individual environmental and recreation groups; the U.S. Departments of
the Interior, Agriculture, and Commerce; State agencies; and Indian
tribes. In fact, the proposed rule draws heavily from proposals
developed by two very different groups--the National Review Group, a
coalition of licensees and NGOs, and the Interagency Hydropower
Committee, a federal interagency working group--and reflects a
remarkable degree of consensus. We estimate that the proposed rule
would reduce the average time it takes to complete the licensing
process by 30 months--cutting down 47 months of preparation and
processing time to 17 months. Further, we estimate that the proposed
process would reduce the cost of licensing for a project under 5
megawatts by $150,000 and for a project greater than 5 megawatts by
$690,000.
V. MARKET MONITORING
The FERC's other relatively recent initiative has been on market
monitoring and investigations. Much has been said over the historic
failure of market monitoring and without revisiting history, I believe
we now recognize that market monitoring must:
Be the responsibility of everyone;
Be a continuous proactive process anticipating trends,
understanding market dynamics and inter-dependencies;
Have dedicated resources;
Develop effective ongoing communications with regional market
monitors and state commissioners;
Clearly understand financial markets and customer needs;
Co-ordinate effectively with sister agencies; and
Analyze, inquire and investigate.
I am pleased to report that we have made substantive changes in
FERC's market monitoring with the reformation of the Office of Market
Oversight and Investigation (OMOI). OMOI is charged with the above
objectives and with nearly a full staff complement is well on its way
toward meeting them. Are we where we would like to be? No, but for
large portions of the country we are confident we are close.
Significantly and importantly, these areas include where we have had
independent system operators, transparency, organized markets, and
regional monitors. In other areas of the country that lack independent
grid operators, developed market rules, and independent market monitors
with access to information, I am less confident of our ability to
monitor markets for the exercise of transmission or generation market
power, discriminatory practices or manipulation.
OMOI is not only gaining experience with monitoring, but also in
responding to market conditions in a responsible manner. We have
recently analyzed gas price indices and continue to monitor the
situation. We will work with industry as they respond to problems with
gas indices. Not every inquiry calls for an investigation; I believe
that OMOI should have a panoply of tools in its tool-box to deal with
different stages and degrees of development.
VI. COMMENTS ON DISCUSSION DRAFT
I appreciate the opportunity to offer the following thoughts on
specific provisions on the discussion draft.
Section 7101--Repeal of Section 203
Section 7101 would repeal Section 203 of the Federal Power Act and,
thus, leave review of mergers and other dispositions of public utility
facilities to the Department of Justice and the Federal Trade
Commission. While I support coordination of federal agency review of
proposed utility mergers to ensure that such reviews are not
duplicative or overly time-consuming, I do not believe it is
appropriate to eliminate FERC review. The FERC has knowledge of the
electric utility industry that the federal antitrust agencies do not,
and FERC review is necessary to ensure that mergers and other
dispositions are consistent with the public interest. The FERC has
years of expertise with Section 203 matters and such matters may affect
the ability of the FERC to ensure just and reasonable rates and terms
and conditions of service as required under the Federal Power Act. I
believe merger reviews must be disciplined and focused. They are not
shopping opportunities to extract concessions on issues that add cost
not value.
Title II--Alaska Natural Gas Pipeline
This title streamlines the FERC's issuance of a certificate of
public convenience and necessity authorizing the construction of an
Alaska natural gas transportation by recognizing the need for such a
project, setting aggressive time lines for the completion of
environmental reviews, and designating the FERC as lead agency for
compliance with the National Environmental Policy Act and for
coordination with and among federal agencies. Ensuring adequate
pipeline infrastructure to deliver natural gas supplies is critical to
the security, health and prosperity of this nation. For several years
now there has been interest in the development of the transportation
infrastructure needed to bring Alaskan natural gas to markets in the
lower 48 states, and yet, for many reasons, there have been no requests
for certification filed with the FERC. I fully support inter-agency
cooperation and the streamlining of processes where possible and can
assure you that any applications ultimately filed with the FERC for an
Alaska natural gas transportation project will be reviewed thoroughly,
promptly, and fairly with recognition of the importance of Alaska
natural gas to our nation's long-term energy security.
Title III--Hydroelectric Relicensing
The discussion draft would provide applicants for hydroelectric
licenses the opportunity to propose alternatives to the mandatory
conditions and fishway prescriptions developed by federal resource
management agencies. The Secretary of such an agency would then be
required to adopt the alternative if he concluded, based on substantial
evidence and giving equal consideration to a wide range of factors,
that the alternative provided adequate protection of natural resources
and was either less costly or would result in improved electricity
generation. I believe this provision is one reasonable approach to
recognizing the expertise of the resource management agencies while
still ensuring that such agencies perform an appropriate balancing of
interests when developing mandatory conditions and fishway
prescriptions, just as the FERC is required to do when developing its
license conditions.
Section 7011--Transmission Infrastructure Improvement Rulemaking
This section would require the FERC to develop regulations on
incentive- and performance-based rates to encourage transmission
investment. An improved transmission infrastructure is critical to the
success of this nation's electricity markets. I support incentive- and
performance-based rates for transmission investment and note that the
FERC has recently issued a proposal on incentive pricing for
transmission expansion. This section would also require that the
regulations provide for participant funding of transmission upgrades
upon the request of an RTO or other FERC-approved transmission
organization. I support the concept of participant funding of
transmission upgrades provided that an independent transmission
organization, which can ensure nondiscriminatory access and rate
treatment, is operating and planning expansions of the grid, and this
provision appears to meet that standard.
Section 7012--Siting of Interstate Electrical Transmission Facilities
I support granting the FERC backstop authority to site interstate
transmission lines. As I have stated previously to this Subcommittee,
state-by-state siting of such transmission superhighways is an
anachronism that impedes transmission investment and slows transmission
construction. This section, which grants the FERC such authority to
site transmission in Department of Energy-designated ``interstate
congestion areas'' where states have been unable or unwilling to do so,
is one potential approach to this problem. I also believe new models
may respond to siting issues in a way that recognizes state concerns
while accepting the reality that electricity planning and operations
are regional in nature.
Section 7021--Open Access Transmission by Certain Utilities
This section would grant the FERC the authority to require all
transmitting utilities (not just those that constitute ``public
utilities'' under the Federal Power Act) to offer open access
transmission service, unless they sell no more than 4 million megawatts
of electricity per year. I support the intent of this provision to
ensure a properly functioning and transparent transmission grid, and
understand the concerns of parties not now subject to open access. We
must work to ensure that their rights are protected.
Section 7041--Public Utility Holding Company Act (PUHCA)
I support the repeal of PUHCA. PUHCA was necessary to address
abuses that existed a half-century ago. However, that statute has not
only outlived its usefulness, it is actually thwarting needed
development of our electricity resources by subjecting registered
utility holding companies to heavy-handed regulation of ordinary
business activities and to outdated requirements that they operate
``integrated'' and contiguous systems. One of PUHCA's perverse effects
is that it causes foreign companies to buy here and U.S. companies to
invest overseas. Nevertheless, I appreciate the concerns of those, like
the rural electric cooperatives, who have opposed elimination of
certain safeguards that PUHCA provides against market power. The FERC
is aware of the concerns of the cooperatives and of the problems with
market power in general, and we are engaged in an overhaul of our
efforts at market monitoring and market power protection. I believe
that the discussion draft strikes an appropriate balance by replacing
PUHCA with increased access by the FERC and state regulators to certain
books and records.
Section 7062--Public Utility Regulatory Policies Act (PURPA)
I support the draft's prospective elimination of the forced sale
provision of PURPA. In my view, the discussion draft appropriately
recognizes the vital role of organized markets in facilitating sales
while providing appropriate transitions rules to recognize the rights
and obligations of parties. PURPA was enacted out of concern over
dependence on oil for electric generation. Now, a quarter of a century
later, when a gas-fired generator can be on-line in less than two
years, and many advances are being made in distributed generation,
PURPA's subsidies for certain types of generation are no longer
appropriate.
Section 7084--Enforcement
The FERC must have an expanded role in monitoring for, and
mitigating, market power abuse. The enabling statutes of the Securities
and Exchange Commission and the Federal Communications Commission
provide for a range of enforcement measures, such as civil penalties. I
believe that providing FERC with similar authority would send a
powerful message to electricity market participants that we take
violations of the Federal Power Act just as seriously. Therefore, I
support the draft's increase in the level of penalties available under
the Federal Power Act.
Section 7091--Refund Effective Date
I support allowing refunds from the date a complaint is filed, as
opposed to 60 days after the filing. This proposed change will better
protect customers.
VII. CONCLUSION
I appreciate the enormous commitment of time, energy, and
leadership that the Chairman and the other members of this Subcommittee
have made to address the issues facing our energy markets. I thank you
for the opportunity to share my thoughts with you, and look forward to
continuing to work with you on these matters.
Mr. Barton. Thank you. The Chair is now going to begin the
questioning period. The Chair wants to announce that the order
of the questions is in order to seniority as of, when the gavel
was tapped and in order of appearance after the gavel was
tapped.
Now that is kind of confusing, but we checked with both
staffs and we think we have it properly. If you deferred, you
get an additional 3 minutes. Some of you only used one or 2
minutes, so we are going to have a very, separately timed
question period, which is good.
So the Chair would recognize himself for 5 minutes, since I
did take a 5-minute opening statement. Chairman Wood, I am told
that in the last several weeks, the Commonwealth of Virginia
passed a State law that prevented a private utility from
joining an RTO until a date certain.
Could you comment on that and would you also give us your
comments on how you think that affects the ability to create
the RTOs that most people think need to be created?
Mr. Wood. A little background on that, Chairman Barton.
There are two large regional transmission organization, one
that is serving where we are today and then on over to really
the entire midwest of the country up to Saskatchewan, Manitoba
down to Oklahoma, Texas panhandle, all the way back over to
Indiana.
That is the Midwest Independent System Operator, MISO and
PJM. The AEP Company, out of Ohio, a 7-State company, of which
part of it is in Virginia, is really at the cross wires between
those two RTOs.
Those RTOs came forward last summer with a plan to
integrate their markets into one large energy market where a
customer or a supplier could really have a one-stop shop, kind
of transparent, uniform approach toward business rules,
software, a lot of the stuff that we are looking at in the
standard marketing design, they are moving ahead and doing it
voluntarily.
The utilities, the stakeholders, the State commissioners in
that region are a real model for kind of, you know, working
together across State boundaries to make this market work and
deliver significant benefits. The cost benefit study from that
integrated energy market was quite pronounced. I think
something, I remember it being north of, let's see, $7 billion
over the next 10 years.
That was a cost benefit study done in July of this past
year. So that was really moving forward to have that integrated
energy market on the ground and operating by October 2004.
A lot of time lines to meet, very important. In the past 2
months this, my new home State legislature passed a bill which
I do not believe the Governor has yet signed, that would, in
fact, not allow AEP to join this RTO as it had planned to do
and as the FERC had already approved it doing back 5 years ago
when it had a merger condition in its merger with Central
Southwest from our home State.
That they made a commitment to joining an RTO, one, exists,
they joined it. They are moving forward on that. And then the
State legislature in Virginia passed a bill that basically said
you can't join that until after July 2004.
Which is going to really, in fact, make the October 2004,
day not happen. So that is unfortunate. The other States in the
area have, you know, been concerned about that, including some
from some of the different members here have expressed a
concern to us at the commissioner's meeting last week.
We are in discussions now trying to determine what is the
best way to move forward, but it does show how important it is
that when you do have an interstate grid that is in multiple
States, and when you have utilities that are spread over
multiple States, as we have throughout the country, it is very
important to kind of have a uniform regional approach that, in
this case, 26 States or 25 States and a couple of provinces are
moving forward and one who said no and it, in fact, does stop
it for all 26. So that is a little background on that.
Mr. Barton. Okay. Chairman Meserve, correct me if I am
wrong, but nuclear power plants that are already in the grid,
when we have a price spike like we have had in natural gas the
last several months, because of the cold winter, do the prices
that are generated by nuclear power plants for electricity, do
they go up also?
Mr. Meserve. Mr. Chairman, we don't regulate the power
plants in terms of their economic conditions, only their safety
conditions.
I believe it varies by the plant as to their economic
relationship to the grid. Some plants have long term contracts
and their power goes out at agreed upon rates.
And others have an opportunity to sell into the market. But
let me emphasize, this is not an area that is subject----
Mr. Barton. I know that the commission does not regulate
it, but what I was hoping you would say is that if we had more
nuclear power plants, when we have fuel shortages in other
areas, the nuclear power plants generally maintain their price
structure because they are regulated at the State level and
their prices are not allowed to go up. That is what I would
hope you would say.
Mr. Meserve. Well, let me say that the regulation does vary
state-by-state. But let me emphasize that nuclear power plants
are base load and at the moment the average cost of production
from nuclear power plants is less than that from coal or from
natural gas, which are the principal competitors.
Mr. Barton. That is a better answer. All right. My time is
expired and I would recognize the gentleman from Virginia for 5
minutes.
Mr. Boucher. Thank you, Mr. Chairman, and thanks to each of
the witnesses for the very informative testimony here today.
Mr. McSlarrow, let me begin with you. I have a number of
concerns about the electricity provisions that are contained in
the draft legislation that has now been circulated, and you
addressed a number of the matters.
I was very pleased to read in your prepared testimony that
the administration does not favor a repeal of the FERC's merger
review authority.
I share your opposition to that provision. I am concerned
that particularly when teamed with a repeal of the Public
Utility Holding Company Act, which in and of itself will
generate a large amount of industry consolidation, that this is
really not a very good time to be taking away this key consumer
protection by repealing the merger review authority of the
FERC.
My view is it is probably going to be more needed in the
future that it is even today, particularly if this
comprehensive electricity provision passes and PUHCA is
repealed.
I wonder if you would like to take the opportunity to
comment on the administration's rationale for not supporting
the repeal of the FERC's merger review authority?
Mr. McSlarrow. Well, I can hardly put it better than you
just did. There are really two goals. One, is as you put it,
consumer protection, and we would like to ensure that someone,
and FERC has the authority now and has been doing the job, will
judge mergers on their public interest standard.
And No. 2, we want to ensure that we can increase
investment into an industry that is, to put it mildly, ailing.
And so therefore, we think we ought to repeal PUHCA.
But as you pointed out, if you are going to repeal PUHCA,
it is even more important that someone have that kind of
regulatory oversight.
Mr. Boucher. Thank you. The second question I have for you
is on an entirely different topic, but one that you also raised
during the course of your testimony.
I share the administration's enthusiasm for the advent of
commercially available hydrogen-fueled vehicles. And I want to
applaud the administration for making that one of its
priorities.
The big challenge that I think we face in realizing
commercial availability of fuel cells is the source of
hydrogen. And I wonder if you could comment to the subcommittee
this morning on where you see the sources of hydrogen being and
what specific steps we in the Congress need to take in order to
make sure there are reliable hydrogen sources so that we can
achieve this commercial availability?
Mr. McSlarrow. I would be glad to. The good news is that
almost everything you can imagine as an energy source is also
something that can be made to work to produce hydrogen.
Whether you are talking about renewables, fossil fuels,
natural gas, coal, nuclear energy. Across the board, we already
know how you do it and how to produce hydrogen. The trick and
what the research and development is focused on right now, is
how to bring the cost down.
Because, candidly, it is not where it should be in order to
competitively produce hydrogen. Last week or maybe the week
before, the President announced a new initiative on a coal
gasification plant, which we are calling FutureGen.
And it is a very exciting project that we are hoping to
have international collaboration on. About a billion dollars
and it will be constructed over the next 10 years.
But the idea is to produce or to construct a coal
gasification facility that will simultaneously produce
electricity and produce hydrogen.
And do so in a way where, because of the mechanics of the
plant, any greenhouses gases, and in particular carbon dioxide,
come out in a discrete stream that makes it even easier to
sequester that carbon.
And so there are huge environmental benefits too, and it
will allow us, we hope, to really tap into what is our greatest
natural abundance, energy source, coal.
Mr. Boucher. Well, thank you very much for that answer. And
I enthusiastically endorse that proposal and I would love to
have that plant in my congressional district. We will have some
discussions, maybe, about that.
I have a number of questions I want to propound to the
commissioners from the FERC. And Mr. Chairman, I hope we will
have a second round during which we can do that.
Let me, while I have the floor, ask Mr. Meserve a question
that intrigues me. Last year, when we have representatives of
the nuclear industry here, there was discussion about the
possibility of a new generation of nuclear reactors called
pebble bed reactors.
I think that there were even plans to build a prototype in
South Africa. I have not heard much about that lately. Do you
happen to know whether those plans are still active and whether
anyone intends to go forward with this new generation of
facilities that might lead to the first new construction of a
nuclear plant in the U.S.?
Mr. Meserve. Sir, I did mention very briefly in my
testimony that we do have a process for certifying designs,
advanced designs. And we have one design for which the review
is underway which is an outgrowth of the existing fleet of
plants, and six more that are in the discussion phase.
Some of those are quite radically different designs than
our current fleet. The pebble bed reactor was one that an
American company was interested in, but decided not to pursue
because that company concluded that its mission was different
and that the pebble bed reactor was not an appropriate business
line.
The South Africans are still pursuing the pebble bed idea,
and have not yet made any final decisions, but there is great
interest in that reactor.
Mr. Boucher. And there are designs other than pebble bed
that are new and different than what we have today?
Mr. Meserve. Definitely. There are passively safe designs
that people are pursuing.
Mr. Boucher. Thank you very much. Thank you, Mr. Chairman.
Mr. Barton. The gentleman's time has expired. The next on
the list is Congresswoman Wilson of New Mexico. She is in a
meeting. Then the next would be Mr. Buyer of Indiana for 7
minutes.
All right, then on to the next would be, on our side, Mr.,
he is not here? No. Mr. Norwood for 8 minutes. Oh, wait, wait,
Mr. Whitfield is here.
Mr. Whitfield, did you reserve at the beginning? So, Mr.
Whitfield for 8 minutes.
Mr. Whitfield. Thank you. Mr. Norwood was getting ready to
take advantage of me. Mr. McSlarrow, I think all of us are very
much aware that new refineries have not been built in the U.S.
in some time, and I would like to ask you what do you consider
the main reasons that new refineries have not been built?
Mr. McSlarrow. As you point out, the last major refinery
that was built in this country was built in 1976, in Garyville,
Louisiana.
The last major expansion took place in 1983, and that was
actually the peak of our refinery capacity, about 18.5 million
barrels a day, and we are under 17 today.
There are a lot of factors. There is no question that this
is an industry where a huge capital investment up front is
required.
The refining margins are not very great, typically. The
regulatory regimes that govern refinery operations are
critically important.
When the administration did a review about refinery
capacity, as part of a national energy policy, we discovered
that most of what we were getting, now this is anecdotal, but
most of what we were getting from investors and talking through
how we expand capacity, made very clear that no one was willing
to step forward for the huge capital costs up front with
environmental rules that really could, in some ways, cripple
the ability to expand capacity.
And so what you have seen over the last, really, 10, 15
years, is rather than build new plants, there have been
incremental additions to capacity of existing ones.
But there is no question that in the future demand is going
to outstrip our refinery capacity and more and more we are
going to import, not just crude oil from foreign sources, we
are going to import increasingly refined products from abroad,
which is going to be, I think, probably a real challenge.
Because it is hard enough for our own refineries to figure
out the boutique fuels problems and all those associated
challenges.
And one wonders how the foreign suppliers are going to meet
that.
Mr. Whitfield. In your testimony you talked about the fact
that no grass root facilities are expected to be built. Now,
were you referring to refineries when you said that?
Mr. McSlarrow. Yes, sir.
Mr. Whitfield. Okay. Does the Department of Energy have any
strategic plan or suggestions on ways to provide incentives to
try to build more refineries?
Mr. McSlarrow. The, it is not directed at refineries, per
se. But there is no question that we believe that a more
sensible regulatory environment, whether it is at the State or
Federal level, to ensure that we are meeting environmental
protection goals, principally, is one that at least, as I said
before, the investors tell us is what they need to see before
they have the certainty they require before they make the
investment.
Now that is an across the board problem. And it affects
more than just refineries. But that principally is the best way
for us to move forward. And in fact EPA has made proposals
along those lines.
Mr. Whitfield. Okay. I might just make one comment also.
Kentucky is a relatively large coal State and I think it is
imperative that when we consider a national energy policy that
coal play a vital role in that.
And I know we are going to be taking up maybe clean air
reauthorization this year, and I think we need to keep that in
mind.
I would also say that as a part of the energy bill that
passed the House and went to conference with the Senate, there
were provisions in there, through the Department of Energy,
with grants regarding clean coal technology, which I think we
need to continue to do.
And I might add that Congressman Boucher and Shimkus and
others of us are introducing a bill within the week that would
provide additional R&D funds for developing newer clean coal
technology and tax credits for the use of clean coal technology
in producing electricity.
I think that it is imperative that we remember that we do
have over a 200 year supply of coal, and I hope that the
Department of Energy will certainly keep that in mind as we
move forward.
I would also express my concerns, I guess this would be
relating more to Mr. Wood, about the proposed rule for standard
market design.
And in the discussions that I have had with retail
customers as well as the public utility people in Kentucky--
Kentucky is one of those fortunate States that does have very
low rates.
In this proposed SMD rule you are taking away the
jurisdiction of State regulators and placing it all in
Washington. And I would like for you to just elaborate briefly
on why you think that that is the best way to go at this time?
Mr. Wood. Thank you, Mr. Whitfield. The commission actually
has done something much lesser than that. And it has, as the
Federal Power Act allows, the jurisdiction over both
transmission and interstate commerce and over wholesale sales
of power.
And so those two things together really define the energy
markets. We are not asserting to regulate the retail rates or
the retail service of customers in any state.
Quite frankly, our jurisdiction is not even close to that.
But we do think it is important that all the transmission be
looked at together so that it can be most efficiently utilized.
Mr. Whitfield. I was familiar that you were not doing the
retail, and the transmission is specifically what we are
concerned about.
Mr. Wood. Yes, sir. Yes, sir.
Mr. Whitfield. Can you tell me what is wrong with the
regulatory approach that Kentucky has right now about
transmission?
Mr. Wood. I think what we have got, what we envision is
that each State will continue to regulate as they have done for
many years.
That the interstate uses of transmission, which are, the
electrons don't stop at the border of Virginia or Kentucky or
any other state. They move in interstate commerce.
And so what some of the concerns that have happened, as we
have seen competition try to take root in our country over the
past 10 years since Congress passed the 1992 Policy Act, is
that there is a, kind of a second tier class of service.
You have got the transmission that is used for local
service being treated one way. And the transmission that is
being used for service between utilities, neighboring
utilities, both within a State and across the State boundaries,
at a growing inferior grade of service.
And so we are really trying to bring up the second grade,
not bring down the first grade, but bring up the second grade
so that transmission service for all can really tie together
the region.
I think Kentucky, as you mentioned, and I think as we have
seen with gas prices over the recent weeks, as Mr. McSlarrow
testified, coal is going to be an important resource for this
country for many years to come.
Mr. Whitfield. But you know we have always maintained that
the native load electric customers should have the preferential
use of these transmission systems.
Your proposed regulation is moving the opposite direction
of that, and it is a dramatic change.
Mr. Wood. Well, to be clearer about that from our
perspective, what we want to do is ensure that that preference
is maintained through the allocation of the rights to use the
system on day one.
Clearly that is something that the State commissions,
including Mr. Huelsmann, who is chairman of the Kentucky
commission, and made a clear point to us that they want to make
sure that the use of that system today is the same as it is
tomorrow.
And we don't have an issue with that. I think it is just a
question of then what happens the day after tomorrow? Will
there be investment in the grid? Will there be sufficient
signals being sent to generators to build in the right spot?
This is an issue we have got more to the south of Kentucky,
but generators right now are not building in the right spots,
if they are building at all.
And really investing in the overall grid, that is the kind
of platform that we are setting. It is not really to rejumble
what we have got today, but to take what we have got today and
set clear rules for going forward so that there are clear
signals about where investment is needed, where it is not
needed. Where people need to build.
Mr. Barton. Okay, the gentleman's time has expired.
Commissioner Wood has Senate potential. You give great long
answers. They are good but long. We want to thank our students
for coming by and hope they gained from it.
Unlike the rest of us, they get to leave early. As soon as
the clear the room, we will recognize Mr. Allen. Congresswoman
Capps, do you want to say anything to your students before they
exit the premises? Okay. The Chair would recognize the
gentleman from Maine for 6 minutes.
Mr. Allen. Thank you, Mr. Chairman. This question is really
for Mr. McSlarrow and also Mr. Wood. I understand that ISO New
England has successfully launched a standard market design on
March 1.
And in New England we have really been moving toward a
market-driven utility system for some years, but it has
included significant and varied oversight by regulators.
But what has not seemed to happen is, has not seemed to
lead to a reduction in the price of electricity. I sat with a
company yesterday who said the affect of deregulation for them
in Maine was a 30 percent increase in the price of electricity.
Can you, first question, can you explain what you think has
happened, to what extent has the price not gone down and what
kinds of factors do you think are responsible?
And then a second question, I will give it to you now,
unrelated to that. It has to do with the draft bill. And as I
read the transmission provisions, it seems to say that States
that say no to a transmission project that the Secretary of
Energy considers vital to solve interstate congestion areas,
will lose their right to say no in the future.
That is it looks as if that section, and I am not sure
which of you could speak to this, it looks as though that
section essentially strips States of their right to determine
where to place transmission lines.
Two unrelated questions. Either one, however you want to
begin.
Mr. McSlarrow. First, on the New England ISO. I don't know
the specifics about the data, and I would have to get back to
you on that.
I will say this. What is generally true in the analyses
that we have conducted is that competition, wholesale
competition has led to lower prices, and that is true in every
region in the country.
What is also the case, is that in most of the country it
has been a partial move toward wholesale competition. And so I
think that the answer is that the successes that we have
already seen lead us to believe that regional markets, properly
constructed, ought to lead to lower prices.
But I don't think that is something that we can make a
judgment about today. On the siting authority, I believe that
you are correct.
The administration has supported the idea of granting FERC
a last resort back stop authority, as we call it, in those
cases where the Department of Energy has identified what we
call national interest bottlenecks.
And I would imagine there would only be a handful really
that would rise to that level in the country. And then it would
establish a process that would look first, and hopefully in
almost every circumstance, to States and multi-state entities
working together to figure out the transmission.
But that if you had a situation at the end of the day,
after an extended period of time, where a transmission line
that was a national interest transmission line, that was
critical to reliability nationally, that FERC would ultimately
have that authority to site that line.
As I read the draft it looked very much like that and we
are very supportive of that principle.
Mr. Allen. Was that provision inserted to deal with any
past experience, any problem that you have had?
Mr. McSlarrow. There are a number of, I can't cite them to
you today. We did an analysis called the Transmission Grid
Study, which identified some, and I would be happy to send that
to your staff.
Mr. Allen. I would appreciate it. Chairman Wood?
Mr. Wood. As to the first issue, Mr. Allen, the, I was with
the Maine commissioners 2 weeks ago, two of them, they are from
all three parties, so it is a nice balanced commission.
My general impression is they are pretty pleased with how
the more competitive market has worked to benefit customers up
there.
I think the changes in electric prices may be tied back to
the fuel that is used. There is certainly some oil-burning
plants that are mostly now moving over to gas. A tremendous
amount of new investment in gas-fired plants, which due to the
fortunate discovery of gas off of Nova Scotia, has made Maine a
lot like some of the States around the Gulf of Mexico, pretty
fortunate to be close to.
But what has resulted is a lot of generation is built
there. It is trapped behind transmission, so it can't really
get out. So there are some issues there.
But that has generally resulted in a pretty glutted market.
And so your supply is well in excess of your demand there. So I
think it is driven by the fundamental, the cost of the
underlying fuel.
And with oil, of course, at $37 a barrel and gas up high
due to the cold winter, I do think that I would be surprised if
a customer saw a bill lower this year than last.
But I think it would have been true under a regulated
environment as well. I am not that expert on the, I don't
really have much more to add on the transmission issue, that
Kyle didn't already cover.
So in light of my admonition, I will just be quiet.
Mr. Allen. Thank you very much. I yield back, Mr. Chairman.
Mr. Barton. Thank you. The gentleman from Georgia. Mr.
Norwood is recognized for 8 minutes.
Mr. Norwood. Thank you very much, Mr. Chairman. I want to
thank you for this hearing. It is critical in my mind that this
country have a national energy policy and I thank you for your
discussion draft, first round of the first bill.
I have to say that I am more than a little peeved that as
many important things as there are that we need to deal with,
with a National Energy Bill, I end up coming back every time
talking about the same thing.
One of the most contentious parts of the bill, which is the
electricity title. And it is time to legislatively put that to
bed, and quit waiting on the Federal Government and the
executive branch to write rules and regulations.
Either we do it or they do it. And if we omit anything from
our bill, they are happy to do it through rule and regulation.
Let me go to where I always go. Pat, same old subject.
Incidentally, I noticed your comments on native load that came
back to Mr. Whitfield.
You implied, at least, from what you said, you thought that
was a good thing, and it certainly is State law in many cases
where a local utility really has to take care of their local
customers first.
Be good enough to write me a letter as to why your
commission keeps referring to that as discrimination. You know,
that just sort of sets folks up when they first start.
It appears to me, and I know that you have said to me that
you have a desire to correct the inefficiencies in order to
ensure reliability and maximum efficiency across the
electrician transmission grid.
You have said that directly to me in our office. And what I
have concluded over the last year or so, not so much about what
you have said, but sort of the actions, your actions and the
committee's actions.
If I catch on to this at all, it appears to me you want to
Federalize the transmission grid and control costs because, in
your view, that is the only way that you are going to ensure
reliability and maximize efficiency.
Now I didn't come to that conclusion overnight. This has
been going on, as you know, for a good while. But that is where
I think you are, regardless of what is being said.
That seems to me is to what your commission wants to do. We
will take over. We can do it best. How can we possibly be
efficient unless we do it from Washington, and by the way, we
will control the prices in the process for that.
Now, those of us from the southeast, that causes us
problems. And I want to back this up with just a little history
and see if you can remember some of our previous encounters.
When we met here in the committee in December 2001, you and
I had a discussion about, new language to me, supply margin
assessment, known as SMA. Which basically the purpose of which
is to force a few companies and mandate a few companies into
RTOs. Do you remember that carrying on we had in December?
Mr. Wood. I do.
Mr. Norwood. You know we weren't on the same page, as you
may recall. In fact, we disagreed a lot that day. And it seems
to me that the SMA, this supply margin assessment, has sort of
disappeared.
At least it seems to have been pulled back or at least it
certainly hasn't been implemented. But those of use who are on
constant alert for what might come from you guys next, know
that it is still out there.
I asked you what affect an SMA might have on the electric
rate of my constituents. And I do have interest in that. I know
it may surprise you, but I do.
And you told me that no study had ever been performed to
determine what affect an SMA would have on our constituents.
And, I am sure you recall, I took great issue with you on that
subject.
Now, stay with me just a minute because I am trying to make
a point of where we have been. Let us fast forward just a
little bit to last fall.
My staff comes to me and says that now the commission has
decided since they aren't going to use SMAs, that there is a
notice of proposed rulemaking about an SMD. That reminds me
that maybe you didn't give up on the SMAs, you just want to
force everybody into a mandatory RTO.
Now just so you don't take this personally, because I don't
want you to, I despise, at every level, heavy handed tactics of
a Federal agency, which show little or no regard for the
respect of the legitimate, repeated, over and over, Mr.
Chairman, repeated concerns of an entire region of the country.
It doesn't matter to me whether you call this darn thing an
SMA or a QRP or an SMD, I have got a big problem with you
trying to affect proposals that affect my electric rates in
Georgia, my constituents that I don't think are going to be
very positive at all.
I think that you can, if you are not very careful, that you
are going to compromise the reliability of transmission that we
do have.
Now I am sorry everybody doesn't have reliable
transmission. I am sorry everybody doesn't have rates that you
think they ought to have. But do you know what? We are not
unhappy about ours.
And we are going to be real unhappy with anybody who messes
with the reliability of the rates in the southeast and the
prices in the southeast.
Do you agree that southeasterners, from the Carolinas to
Louisiana, enjoy the delivery of low cost, reliable
electricity?
Mr. Wood. Yes, sir, I think it could be lower.
Mr. Norwood. Say again?
Mr. Wood. I think it could be lower. There was a study done
by----
Mr. Norwood. But do you agree that we already enjoy pretty
good rates and great reliability?
Mr. Wood. I think the rates are good and the reliability is
good, yes, sir.
Mr. Norwood. Me too. Do you know how many States, State
commissions and Governors that have opposed your standard
market design?
Mr. Wood. Yes, sir, and I have visited with the head of
that group in Kentucky right after that resolution came out.
Mr. Norwood. Well, so that means something to you that all
of them seem to be against that. Mr. Chairman, with unanimous
consent, I would like to submit this letter of February 21, a
letter to Chairman Wood from the Southeastern Association of
Regulatory Utility Commissioners about standard market design.
Mr. Barton. We would have to show it to the minority, but I
am sure that they will clear it and we will put it in the
record.
Mr. Norwood. I hope they will. I suspect some of them
would, anyway.
Mr. Barton. All right.
[The letter follows:]
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Mr. Norwood. The point here is you are aggravating a pretty
large section of the country. What specific--what do we got, 27
second. Pat, we will continue this in round two, if we could.
Mr. Barton. If the gentleman will yield, Mr. Boucher says
he has seen the letter and thinks it is a good letter. So
without objection, it is going to be put in the record.
Mr. Norwood. Thank you, Mr. Boucher.
Mr. Boucher. Well, I didn't say it was a good letter. I
said it was okay to put it in the record. Let me modify that
comment slightly.
Mr. Barton. All right.
Mr. Norwood. That is a long letter, have you read it all?
Well, it appears to be over. Just try not to forget any of that
so we can pick right back up.
Mr. Barton. All right. The Chair recognizes Mr. Waxman for
5 minutes.
Mr. Waxman. Thank you, Mr. Chairman. I listened carefully
Mr. Norwood's comments and I wanted to indicate that in our
part of the country we also have some concerns about the SMD,
and perhaps we can talk this through and work together, because
I think we share that issue.
Mr. Norwood. I hope they will highlight this, Henry, we
have agreed on something.
Mr. Waxman. Mr. McSlarrow, I would like to ask you about
Subtitle B of Title V of the majority's draft legislation. This
provision is entitled Freedom Car and Hydrogen Fuel Program.
Is it accurate that this is the hydrogen program the
President spoke of in the State of the Union Address?
Mr. McSlarrow. Yes, sir.
Mr. Waxman. And the Energy Information Administration's
annual energy outlook only makes predictions about oil demand
as far out as 2020. EIA predicts that by 2020, the Nation's oil
consumption will grow by as much as 9 million barrels per day.
Is there anything in the President's hydrogen proposal that
will decrease oil consumption by the U.S. before 2020, and if
so, by how much?
Mr. McSlarrow. Yes, there is. Even though, of course, the
really exciting focus of the hydrogen initiative is on the
hydrogen fuel cell vehicles themselves.
The truth is the funding proposal that we have sent
Congress, that will be $1.7 billion over the next 5 years,
envisions a need to work on near term technologies.
Particularly alternative fuel vehicles, hybrid vehicles,
electric----
Mr. Waxman. Excuse me, I really want to get very, very
specific, because I have so little time and a lot of questions.
Is there anything that you can point to that will decrease
oil consumption by the U.S. before 2020?
Mr. McSlarrow. The greater use of hybrid and alternative
vehicles, which I am saying that we are pushing, would do it.
We are proposing a tax credit in the President's budget for
greater use of hybrid and fuel cell vehicles. That will do it.
Mr. Waxman. The President has said, under his hydrogen
plan, we can reduce our demand for oil by over 11 million
barrels per day by the year 2040. You testified to this affect
as well.
To put the President's statement in context, how much oil
does this prediction assume we will consume in 2040?
Mr. McSlarrow. I will have to get back to you on that.
Mr. Waxman. Okay, I would like the record held open for
that. And what CAFE standard does the administration assume is
in place between now and 2040 in making this projection?
Mr. McSlarrow. The analysis the EIA has done doesn't assume
a CAFE standard, but as you know, the NHTSA has actually
recently proposed an increase in fuel economy for light duty
trucks.
Mr. Waxman. So is there an assumption that that would be
the standard in projecting the----
Mr. McSlarrow. If it is finalized it will be, but I don't
think the assumptions that go into it assume a fuel economy
standard, so hopefully the savings will be even greater.
Mr. Waxman. So the assumptions assume a CAFE standard at
the present level?
Mr. McSlarrow. I believe so.
Mr. Waxman. The draft legislation states that the program's
goal is to enable a decision by auto makers no later than the
year 2015, to offer safe, affordable and technically viable
hydrogen fuel cell vehicles into commerce.
I am concerned that under the President's proposal, the
U.S. would provide hundreds of millions of dollars to the auto
industry year after year and they could simply decide in 2015,
that they don't want to make these vehicles.
Is that accurate? Under the President's proposal could the
auto makers simply decide that they don't want to produce these
vehicles. Could oil companies decide they simply don't want to
install the infrastructure necessary to supply hydrogen?
Mr. McSlarrow. The truth of the matter is that today these
companies are spending billions of dollars in investment. Now
they can always walk away from it, that is true.
There is no guarantees in any initiative like this. But the
money that we are spending is on R&D that will have its own
rewards, with or without the oil or energy or automobile
companies.
Mr. Waxman. The taxpayers are going to be putting in
hundreds of millions of dollars. I would hope there would be
some guarantee of a return on their investment.
If Congress had applied this approach to CAFE, the Clean
Air Act, the Clean Water Act, or other important policies, in
all likelihood we would never have made the progress we have
already seen.
Chairman Wood, I would like to ask you about the Reliant
transcripts that FERC recently released. These transcripts
revealed that as early as June 2000, Reliant managers, traders
and plant operators all worked together to shut down power
plants in a deliberate effort to increase market prices, and in
fact, they did increase market prices.
The transcripts are clearly outrageous. I am concerned that
FERC has only released 2 days of transcripts when market
manipulations could have gone on for months or even longer.
I am also disturbed that Reliant wants to blame the Clean
Air Act for shutting down their power plants. Will you seek and
release the rest of Reliant transcripts for 2000 and 2001?
Mr. Wood. We have, yes, when the filings from the
California parties came in Monday we began processes to
declassify all the documents that we have in our investigation,
and that were provided by the parties.
Under our rules, that takes a couple of weeks, but yes,
sir, we will have that out.
Mr. Waxman. Thank you very much. Mr. Chairman, my time has
expired.
Mr. Barton. The gentleman's time has expired. We would
recognize Mr. Burr for 8 minutes.
Mr. Burr. Thank you, chairman. Let me take this opportunity
to welcome all of our panelists. I was in the ante room
listening to the questions as they came through.
And when Mr. Norwood asked you, Mr. Wood, about the SMD as
it related to south, I think you started to respond to him that
there was a study that was done.
And in that study there was a scenario that basically said
that if everything were perfect, including participatory
funding, that there might be as much as a 1-percent savings to
those areas in the south.
And I guess my question to you was, in that answer to him,
were you also going to say that there were eight scenarios in
addition to the one that showed no savings or a cost to the
south, on that same study?
Mr. Wood. I was actually not going to say that. I think the
study, the eight scenarios are in fact ones that I think are
very unlikely to be the scenarios that go forward.
So the one they modeled, in fact that's a good reason why
you model, is to find out what market characteristics should we
have in the south so that customers can get the greatest
benefit from efficiently dispatched markets.
Mr. Burr. Well, I am sure everybody should go out and read
that study, because they may come to a different conclusion as
to which one of the nine scenarios is in fact closer to the
reality of what the market place might look like.
Let me ask you also, I think this was clear and I am not
sure in your testimony, but certainly in responses to questions
that I have asked you before.
Can you ever envision that there is a point in time where
FERC would ask for expanded jurisdiction on international sites
that companies, that through mergers, where you would have
jurisdiction to regulate those international points?
Mr. Wood. I don't think we would ask for that, sir. I
think, as you heard, our plate is full. But, you know, there
may be a move somewhere from the SEC or from the investor
community to have a regulatory view of that.
Mr. Burr. But you don't see FERC's expansion overseas to be
an effort that you are supporting or encouraging and
suggesting?
Mr. Wood. I think our expansion of recent months has got me
in enough hot water, so I think I will leave it at that.
Mr. Burr. Let me ask Mr. McSlarrow, as DOE. Do you ever see
a point where the Department of Energy would actually suggest
that FERC have this jurisdiction outside of the country?
Mr. McSlarrow. No, I don't.
Mr. Burr. Would DOE's position on the current merger
authority of FERC be that it is sufficient and they would not
expect or ask for further merger authority than the current
provisions that are provided?
Mr. McSlarrow. I believe it is sufficient. And, as I
testified earlier, we would encourage keeping it.
Mr. Burr. Let me, once again, thank the witnesses for their
willingness to be here today. It seems like this is always an
important annual thing for us to get into and I hope that I
will encourage all members to go back and remember the answers
and the questions that we have gone through today.
But I would also encourage those who sit at the witness
table, to go back and read the questions and the answers and
let us all remember it for the next 12 months.
I thank you, once again, and Mr. Chairman, I yield back.
Mr. Barton. Does the gentleman yield back?
Mr. Burr. Yes.
Mr. Barton. Oh, my. Mrs. Capps is recognized for 6 minutes.
Ms. Capps. Thank you, Mr. Chairman. Mr. Wood, Chairman
Wood, I would like to follow up on my colleague, Mr. Waxman's
query of you regarding the disclosure of information.
You said that FERC would declassify documents from the
California parties. And I want to ask are these all the
documents that FERC has that might show market manipulation?
And if I could read you just a statement from a local
newspaper, the Ventura County Star, one of my papers, a
columnist this morning has a piece under the title, ``A Snake
Under Every Rock, U.S. Keeps Evidence of Price Gouging
Secret.''
Mr. Tim Hurt says. ``Every Californian who pays a utility
bill has been ripped off. An agency of the Federal Government
has in its hands evidence that identifies who did it and how.
For now, however, that evidence remains a secret.'' I was a co-
signer with Mr. Waxman of a letter and to make you understand
that there are many of us who really do feel our constituents
are deserving of more information.
So I want to press for answers to this long, sordid chapter
in energy history in California that is still being paid for by
the State.
And is there more. What can we expect from you?
Mr. Wood. Well, first of all, since having spent a lot of
time before this committee, one of the main reasons I was
interested in this job was to clean up that mess.
Ms. Capps. Thank you very much.
Mr. Wood. I think it was a disastrous chapter in energy
history of recent years and not only hurt your State and a
number of others out west, particularly.
Ms. Capps. Yes.
Mr. Wood. But significantly, about the efficiency and
workability of markets. The information, there are two kind of
pots of information I think that are before the commission that
are both done under a, were information that were collected
under protective orders.
One was a process we began a year ago in February 2002, to
investigate the manipulation in the power markets and in the
gas markets out west in 2000-2001.
Much information has been collected in that process,
including information with other agencies, the Securities and
Exchange Commission, Department of Justice, CFTC, are the
principle ones, there are a few others.
They have been doing joint depositions, etcetera, with
those agencies and they are pursuing their own remedies that
they have under their laws. Some of which are ongoing.
So it is important as we go through our declassification of
the data that we have collected, which is separate from the
data that came in Monday, from the California----
Ms. Capps. Right.
Mr. Wood. [continuing] there is significant overlap from my
initial read. It is a lot, but from what I can tell there is a
lot of overlap.
But there are some issues that both, that both sets of
evidence have brought in that don't overlap. It is important
for us to make sure that on the ongoing prosecutions,
particularly of a criminal nature, that we make sure that that
type of information is retained by the Department of Justice,
for example.
And that it is not basically put out there yet so that the
trials are thwarted. Other than that, however, we have begun
our process that is required under our rules to undo a
protective order, to contact the parties to let them know this
specific information is going to be released. To hear back from
them why they would protest that. In fact, they may not. They
may want the full story out and hope that they do. And that is
going through our process, which is relatively abbreviated.
And I think in the next couple of weeks, 3 weeks, perhaps,
we will have that from both camps.
Ms. Capps. And thank you, because now I understand that you
will let us know, not only what you are going to share, but
also kind of a time line so that people can expect that,
granted that in the beginning you needed to protect some of the
information with interdepartmental issues, but now we can
expect such and such and such and on a time line.
But now I have a further question, and that pushes it back.
In addition to disclosure, and as a part of disclosure, then
Californians are going to want to know what you are going to do
with this information and the knowledge of the wrongdoing that
is there.
Part of your task, on our behalf, is to gather the data,
and you certainly have a lot of it. And we now, we have got
certain phrases that just really hurt as we understand how we
were manipulated as a state.
And it is the taxpayers that have been manipulated. FERC
has an obligation to ensure that rates are just and reasonable.
And when flagrant abuses just receive a slap on the wrist
and have to pay a fine, but with the amounts being what they
are, it is hardly a penalty.
And these companies are allowed to go right on, it doesn't
help the confidence that we seek. And also we want redress. I
mean we have a State with a huge budget problem in California
now.
Some of it is other issues, but a lot of it is because of
the burden that was placed upon the State as a governing
agency, but also citizens in the abuse of power that these
companies put upon us.
Can you be specific about what sanctions you can impose.
How can we know that FERC really has a regulating arm to it?
Mr. Wood. Well, we do have, and that is, I think, you have
probably heard from all three of us, we could use some more
penalty authority. And the Senator for your State has put that
forward, as well.
But we do have some existing remedies which we will pursue
to the maximum extent that we can.
Ms. Capps. So you want some guidance from us----
Mr. Wood. Actually we just need increased authority under
both the Gas Act and Power Act to have greater penalty
authority than we do today.
We can get, we can get the refunds----
Ms. Capps. And one final question. Oh, I am sorry.
Mr. Wood. We can get the refunds, we can required
disgorgement of profits from past activities that violated the
law or the rules. And we will do that. That is what we are set
up in the proceeding to go back an identify where violations
happen and force a disgorgement of the profits from those
transactions.
That is the most we can do. We cannot assess additional
penalties for punitive or of a nature like that. We can, and
have considered, yanking certificates, basically saying you are
not in business anymore.
Ms. Capps. Can you do that?
Mr. Wood. Yes. And that is certainly----
Ms. Capps. Will you do that?
Mr. Wood. We will. If merited by the facts, we will do
that. We have got, in fact, from our August report, which was
an interim report to the public, set up, I believe, four or
five proceedings from parties that we found earlier on that had
violated the rules.
And that was one of the remedies we put forth in the trial
before the Judges was to basically yank or amend significantly
their certificates for operating.
But that is, those are really the two. Disgorgement of
profits, i.e., refunds, or yank the certificates.
Ms. Capps. And revoking market rates would have helped as
well.
Mr. Barton. The gentlelady's time has expired. The Chair
would recognize the gentleman from Illinois, Mr. Shimkus, for 8
minutes.
Mr. Shimkus. Thank you, Mr. Chairman, I have four different
items that I want to try to get covered in the time I have
available.
First of all, just a point for the Deputy Secretary
McSlarrow. The Clean Coal Institute at SIU, Carbondale, does a
tremendous amount of work in clean coal technologies and DOE is
a major partner in that and I want to encourage you to continue
in that vein.
I toured the facility last week and I guess what amazed me
was the ability to, the initial separation of the coal and the
microscopic analysis of what is actually good to be used and
what is not to be good.
And early separation might address a lot of the problems.
And also the, I mean there is just a lot of good research done
there.
The other thing they brought about was in the hydrogen
debate, I was on tv with my colleague, Tom Allen, early this
morning for the chairman. And the people who were on prior to
it, I think it was Shell Hydrogen.
And I don't know the automobile maker, but they are
announcing today at a Shell Gas Station that they are going to
place a hydrogen fueling pump there and have a hydrogen cars
in, running around in DC.
So, this is not a farfetched proposal. This is around the
corner and we think it really addresses a lot of the concerns.
Hydrogen cars also need fuel. And fuel will come from a lot of
different locations.
There is some neat research, again, going on at SIU
University, Southern Illinois University at Carbondale at the
Clean Coal Institute where, of course, coal could be a major,
the major commodity for hydrogen production.
So I want to encourage that research and development and
that partnership with the University. The second thing, well
another thing, I do appreciate the chairman's draft.
It moves us forward and we are going to move an energy bill
and there is some contentious issues. But the chairman is
showing leadership and we are going to move on it.
So any comments we can have from all the stakeholders is
going to be, we are all going to appreciate. This great debate
on the standard market design I think is important.
There are transmission constraints across the country.
Illinois is a perfect example of a State that over produces,
but because of some transmission issues cannot get the
overproduced energy to other States.
A good case study is the power line from Chicago to
Wisconsin that is, it has been constrained for years. There has
to be, this is interstate commerce. And it is commerce going
across State lines.
So somehow we need to bring the parties together to get
commerce flowing and there has to be a good cop on the beat. So
I want to applaud this debate.
I am looking forward to the white paper in April. And I
would encourage all the stakeholders to take a good look at
that.
Maybe there is less to be feared in that proposal once it
gets published than what we are hearing right now. So I want to
encourage that addition.
Now for Secretary McSlarrow, this is another issue. The
Department of Energy was sued by environmental groups over the
Federal Government's failure to meet the goals in EPAct. And I
have a long, since my memo to Congress, my first bill that I
passed, signed into law, dealt with EPAct.
And our ability for alternative fueled vehicles to reduce
our dependence on foreign oil. A Judge ended up ruling against
the Federal Government and with the environmental community.
In essence saying we are not meeting the law requirements.
The Judge gave DOE dates to which they were supposed to submit
reports on the progress that the Federal Government was making
and whether or not to include private and municipal fleets in
the EPAct program.
Can you give me an idea of where DOE stands on these
issues?
Mr. McSlarrow. Certainly. My recollection is that the
district court ordered that we produce a notice of proposed
rulemaking by February 27. We did, under EPAct.
The determination that was before us was whether or not to
extend a mandate on fleet requirements to local governments and
private fleets, or as we did actually choose in the notice of
proposed rulemaking, to make a determination that that was not
necessary because in the Department's view doing so would not
appreciably contribute to the goal of replacement fuel
vehicles.
And that should be in the Federal Register today or
tomorrow.
Mr. Shimkus. And we will take a look at that. We, I have
been involved, along with Congressman McCarthy, on the soy
diesel issue. And again, that first piece of legislation, by
giving a 50 percent tax credit, really increased the use of
biodiesel from what was then a 500,000 gallons to almost near
25 million gallons of use.
So I think the increase in the use of the product has a
great affect on the legislation. If we were able to get that
increase in demand based upon the 50 percent tax credit, do you
expect that we would have similar numbers if we would move to
100 percent tax credit, as was debated in the last energy bill,
and may be addressed in this energy bill somewhere down the
line?
Mr. McSlarrow. I am not prepared at this time to say what
the difference would be between 50 and 100 percent.
Intuitively, it strikes me that the problem we have is the
infrastructure and surrounding in terms of availability.
But as you know, the administration has been very
supportive and we have enjoyed working with you on promoting
these kinds of products because we think it is vital that they
be part of the energy mix in the future.
Mr. Shimkus. And I would just say, for just the sake of our
discussions, that the infrastructure needs for biodiesel is
very limited.
And we actually have biodiesel pumps now in major gas
stations and diesel stations across Illinois. The mixing is
simple. So there is no large capital outlay.
And we have seen a great use by governmental fleets and the
like using the tax credit to fuel their vehicles on biodiesel.
And so I would like you to also look at the benefits on how
you affect the EPAct problem by the 100 percent credit, as this
debate moves forward.
And with that, Mr. Chairman, I have addressed my four
issues and I yield back the balance of my time, Mr. Chairman.
Not bad, 45 seconds left.
Mr. Barton. The gentleman yields back his time. The Chair
would recognize Mr. John of Louisiana for 5 minutes.
Mr. John. Thank you, Mr. Chairman. As I said in my opening
statement, I think that now is really a critical time in this
country, in this Congress, revolving around homeland security.
And obviously a huge piece of the puzzle of homeland
security must be energy security. America is so dependent and
addicted to fossil fuels.
So I think we cannot speak about homeland security in the
same breath or we must speak about it in the same breath with
energy security.
So I was listening very intently and curiously to everyone
on the panel that was talking about natural gas, in one respect
or another.
But I repeatedly heard, whether it was from Commissioner
Brownell, who said it is a slow, silent erosion, or Chairman
Massey who talked about the reliance and the importance of
natural gas; its infrastructure, supply and availability.
The chairman talked about connecting Alaska down to the
lower 48s with a natural gas pipeline. I believe that should be
part of this bill.
And of course the Under Secretary talked extensively about
natural gas and its importance. But what is curious to me is
what I said in my opening statement--is that everyone at the
table is in agreement that increasing the domestic supply of
natural gas today is where we need to go.
And therein lies the problem and the hang up that I have.
We are pursuing opening up ANWR for oil and gas, and
constructing a pipeline, which I am supporting, have supported,
and been on record as supporting.
But I don't understand what makes Alaska so special or a
silver bullet standpoint, compared to the eastern Gulf of
Mexico.
It doesn't make any sense. I think I know the answer to
that. But the election is over. And I really believe that we
should look beyond that.
So I ask Mr. McSlarrow, do you believe that we can get
natural gas from the eastern Gulf of Mexico into the domestic
market before we have built a pipeline from Alaska down?
Mr. McSlarrow. Certainly.
Mr. John. Yes. So, again, I think I know the answer to that
and I am going to continue on that road to continue to talk
about, you know, the huge reserves in the Destin Dome.
We have an infrastructure and a pipeline that connects into
Tampa, or is building toward there, to supply natural gas which
seems to be the fuel of choice in a lot of areas because of its
environmental friendliness.
And I am going to continue my quest in making sure that we
open up the eastern Gulf of Mexico, because, I mean, obviously,
Louisiana is poised and ready, along with Alabama and
Mississippi to service that area.
The infrastructure is there today and I think we are
missing it as a big part of the big picture. If we know natural
gas is part of our solution today, and the demand is going to
be through the roof, in the future, then that has to be part of
any comprehensive energy plan.
And we will continue to work on that piece. Second, as a
plan, we passed an energy bill in the House, as you well know,
that did not have an electricity title.
This bill, is a comprehensive energy bill with an
electricity title, and is a little bit different from previous
legislation.
The chairman, Mr. Barton, had a separate electricity title
last year, that we discussed a little bit in this subcommittee.
But I am a little bit concerned about this issue. And I am
slowly educating myself and having to see how it all fits
together.
But what I would like Commissioner Wood to respond to is
the issue Chairman Barton alluded to in Virginia and the
legislative initiative over there that passed and that is going
to prohibit an energy company from joining an RTO.
If we don't continue to work with the States, individual
States, I think you are going to see legislatures in Mr.
Norwood's State, from what I heard, Mr. Burr's State, and
certainly in Louisiana take action.
We are going to continue to have either legal battles or
legislative problems and hurdles that we will have to address
or we are not going to get anywhere.
So I want to encourage the commission to continue to work
with the legislatures in those States that have most at risk.
And I yield the balance of my time.
Mr. Barton. I share the gentleman's frustration and we will
work with him on some of those issues. Chairman Meserve of the
Nuclear Regulatory Commission has an airplane to catch.
So we are going to release you from duty. Everybody else is
smiling and saying they wish they had airplanes to catch too.
But we appreciate your service.
This is probably the last time we will have you before our
subcommittee and we wish you the very best in your future
endeavors.
Mr. Meserve. Thank you, Mr. Chairman, I very much
appreciate that. I very much enjoyed working with you and the
committee.
And I would be very pleased to respond to any questions for
the record.
Mr. Barton. We will have questions in writing if members
who have not yet asked questions, wish to ask you questions.
Mr. Meserve. Good, thank you.
Mr. Barton. Thank you.
Mr. John. May I be recognized, Mr. Chairman?
Mr. Barton. Mr. John.
Mr. John. Mr. Chairman, I just have a quick request. Since
I only, I took up all of my 5 minutes on my own questions, I
didn't get an opportunity for any of the panelists to answer
any of my questions.
Mr. Barton. We noticed that.
Mr. John. Okay, so I just gently request maybe some time a
little later on?
Mr. Barton. I think----
Mr. John. For the panel, not for me.
Mr. Barton. [continuing] we are going to do a second round.
We are going to give them a personal convenience break and then
do a second round with this group. Mr. Shadegg is recognized
for 5 minutes.
Mr. Shadegg. Thank you, Mr. Chairman, and I appreciate you
holding this hearing. I also very much appreciate the
attendance of the witnesses.
Mr. Wood, I want to begin by focusing on an issue that you
are working on, but I don't know that we are getting anywhere.
Unlike some of the other questioners here today, I strongly
favor your efforts, the commission's efforts and the
President's efforts to move this industry from a monopoly
structure into a competitive market structure.
I think that needs to be done and I think that over time it
will produce dramatic cost savings. I know of no place where
competition effectively initiated, has not produced cost
savings.
Having said that, I guess I must say that at least for me
in the west, you are making my life difficult. You have managed
to get my public utility, my investor-owned utility and all of
the Governors of the west united in their concern about SMD.
All of them, even though they have diverse interests, are
saying that SMD does not work. The Western Governors
Association has written you and said SMD will not work in the
west.
Both the IOUs and public utilities in the west have
expressed to me and I presume to you, and I have seen documents
that have been sent to you that SMD does not appropriately fit
in the west.
I note that it appears, and I think it is pretty well
acknowledged that the elements of your standard market design
proposal have been extrapolated largely from the Pennsylvania,
New Jersey, Maryland area, a very dense market without lengthy
transmission lines.
And it seems to me that in their criticism, the western
Governors have pointed out that Arizona is quite different. I
also note that your own staff has acknowledged that the
infrastructure in the west is very different.
For example, on July 17, of this year, I guess of last
year, your staff said energy infrastructure in the west, this
is a quote, is insufficient relative to projected energy
demand, and additional infrastructure as expansions are needed
to support a competitive market.
You said recently at a speech you made within the last few
weeks, that recognizing the differences, east to west, market
to market, that perhaps SMD could be, and the words I am
reading from, phased in regionally rather than requiring
adoption nationwide at the same time.
My first question of you is have you heard of Edmund Burke
and understand his theory on gradualism?
Mr. Wood. I was an engineering major, so I will say I have
heard of him, but I can't----
Mr. Shadegg. Well, he was not an engineering major, he was
a philosopher. And one of this theories was that in bringing
about change, particularly social change in society, one ought
to look at a model of gradualism, making a change gradually.
And I think I would urge that upon you. I would hate to see
rejection of SMD bring about the defeat of competition in the
long run in the energy market.
When you said that you thought perhaps it could be phased
in over time, one of my concerns would be, that then raises the
question, well, would you continue to propose that SMD be
adopted as the rule for the country and leave it in your
discretion to decide where it gets phased in, or are you open
to a proposal under which SMD is adopted for a region of the
country where it might work well, and other regions of the
country are left to have it phased in for them at a later point
in time on a basis other than your discretion?
Mr. Wood. I think what I meant in that statement that you
quoted so accurately, was that there could be different time
tables for different parts of the country to be phased in.
I think it depends on the underlying nature of the
infrastructure, what the retail regulatory structure is in the
markets. Really, where are the markets today.
So, I mean, when we adopted kind of an October 2004,
timeframe, at that time all the forming and working regional
transmission organizations in the country indicated that they
expected to be there by the end of 2004.
So we did not feel like that was really a push to do that.
But, I think there is a realization that we have got to work
with existing RTOs that are there. The one in Arizona is one we
have given conditional approval to.
And the one in the northwest is another. California is
existing. But we cannot ignore that problem. I mean, as I
mentioned to Ms. Capps, there was a significant bad event that
happened out there before we got on the commission, and we
would be remiss in our duties if we did not take steps to make
sure that that never happened again.
Mr. Shadegg. I understand that and I greatly appreciate
that answer and I think it will be very helpful. Let me ask you
one other question. A great deal of the concern in the west and
among our corporation commissioners, who have written you about
SMD, is they believe they are making progress toward voluntary
RTOs already.
One of my questions is what would be objectionable to a
structure in the west where you had a voluntary RTO and if it
was not functioning to allow true competition giving FERC the
authority to impose to, A, investigate it, and B, impose severe
penalties if in fact that RTO was not effectively promoting
true competition?
Mr. Wood. Let me make sure I got that. It was a lot of
interesting thoughts that I haven't really digested before. The
voluntary RTO in the southwest is moving forward.
In fact, the big Salt River project is not under FERC
jurisdiction anyway. So they have got to voluntarily join. And
without them and without western, WAPA, it is just not going to
be an effective grid. That is a big part of the regional grid.
Mr. Shadegg. SRP is already in, though, they are
voluntarily in.
Mr. Wood. And WAPA hopefully will get there. I mean
fundamentally that has got to be the platform on which it is
built.
So I think, as I indicated, we already conditionally
approved that. What we are really focusing on now is making
sure the three in the west actually work well together.
Because the fact there were big dislocations in the market
design out there led to a lot of the manipulation that we have
pointed out and that we are reviewing now.
So that is really the course making sure that what they
look at in the desert southwest works well with the northwest
and with the California market.
So I think we can get there. It is awkward because there is
no one really in charge out there to make kind of a corrective
decision. But I think our work with Governor Hull, who is just
the immediate past President of the Governor's Association out
there, was a good platform to build on that.
And I expect that we will continue work through the
Governors and through the State Commissioners out there----
Mr. Barton. The gentleman's time----
Mr. Shadegg. My time has expired. I appreciate the openness
and I would like to discuss alternatives as we go forward.
Mr. Wood. I would be glad to.
Mr. Barton. All right, we are going to recognize Mr. John,
I mean Mr. Doyle, for 5 minutes.
Mr. Doyle. Thank you, Mr. Chairman.
Mr. Barton. No, no, Mr. Doyle.
Mr. Doyle. I know we look a lot alike Mr. Chairman, thank
you. Mr. McSlarrow, welcome. I have a question. It is widely
recognized in industry that, even in the automotive industry,
that the path to transportation fuel cell applications is
through stationary fuel cells.
And most of the experts that I have talked to tell me that
there are at least two types of stationary fuel cells, solid
oxide and molten carbonate, that are commercially deployable in
the very near future.
We are talking maybe 2 or 3 years. So my question to you is
why are we putting so much money, and I don't necessarily have
a problem that you are putting money into the hydrogen program,
but why are you putting all this money into that program that
we are talking about 15 to 20 years from now.
And at the same time in your 2004, budget, you are cutting
by over $16 million the line item for the stationary fuel
cells.
You know, it seems to me that if we want to get these
vehicles on the road sooner rather than later, and start saving
all of this oil that we talk about saving by getting these cars
on the road, why aren't we putting more resources into the
technologies that are going to be commercially deployable in
the next couple of years, rather than picking winners and
losers.
You know, I am just curious what your thought is on that?
Mr. McSlarrow. No, it is a tough question. And the
interesting thing is it is precisely because things are so
nearly deployable that we will move money away from that.
It is a philosophical choice the administration has made.
And we do it across the board. But we are, as you said, making
great success from solid oxide fuel cells.
We think they have a big future in terms of the stationary
sites. But across the board we have made a commitment to
investing in long-term R&D where the risks are going to be the
greatest and potentially the reward will also be the greatest.
We think that is the appropriate way to direct the R&D. So
the nearer our technology comes to actually going to
commercialization, the more likely you are to see that we are
going to shift resources to another place.
Mr. Doyle. Listen, I am a great supporter of funding long
term R&D too, I think that is very important. It just seems to
me that if the goal here is energy independence, and that seems
to be, you know, a front burner issue now because of all that
is going on around the world.
And, you know, we are getting ready to try to drill oil up
in Alaska because we have got to be energy independent because
we are in a crisis right now.
Why, you know, if we are in a crisis and we can deploy a
technology that is environmental sound, safe, and doesn't
pollute and could save us hundreds of millions or barrels of
oil, and we are 2 to 3 years away from doing that, why are we
cutting the funding to that?
It just doesn't make any sense in the world. And I would
just ask you to go back to DOE and talk with your people there.
These programs, stationary fuel cells, have been
historically underfunded. And this is a real area that has
promise in the next couple of years.
I mean, heck, this could even happen during the Bush
Administration. What did I say, 3 years? Maybe not. But it
could happen soon, and I don't know why the President wouldn't
want to see something happen on his watch than 15 or 20 years
down the road when we don't know who is going to be President
then.
I understand this philosophy as you get close to
commercialization, you start to pull the money back. That is
fine under normal times and when everybody is fat and happy.
That is not where we are at right now. We are in a crisis
right now. The President keeps telling the American people we
are in a crisis, we have to become energy independent so we are
not being held hostage in the Middle East all the time.
And I would just ask you, go back to DOE and put some more
money in these stationary fuel cells. It is just the good,
right thing to do for the country and we are in a crisis.
So I want to bring that to your attention and we will leave
it at that. To the FERC commissioners, welcome. I just have one
question, and maybe you can all take a shot at that.
But we know there is strong support at FERC for formation
of the RTOs, and that a significant portion of the country is
currently being serviced by these entities.
One of the concerns I have, as we move into RTOs, is that
we preserve and in fact enhance the future ability of non-
traditional generation sources easy access to connect to the
grid through these RTOs.
For instance, I am thinking of the advances we are making
in fuel cell technology and the growth of combined heat and
power systems.
What steps do we need to take legislatively or do you need
to do through regulatory action, to ensure that these
innovative generation systems will be available to
interconnect.
I think Commissioner Massey, that in your testimony you
stated that you think the RTO formation will streamline
interconnection standards and help get new generation into the
market.
When you say this, do you have types of new and developing
sources in mind? And I would repeat, that any of you that want
to answer this question, what steps can we take in the future
to ensure access for these types of generation?
Mr. Barton. This will have to be your last question.
Mr. Doyle. You know, I got that right in under the mark.
Mr. Barton. You all, everybody is really good at right in
under the buzzer here.
Mr. Doyle. Don't forget, more money in those stationary
fuel cells, too.
Mr. Barton. But at least you asked it to Mr. Massey, and I
know he will give a shorter answer than Chairman Wood would
have given. He says the commission shares your goal.
Mr. Doyle. It is a right wing conspiracy, Massey. There you
go. Give this guy a microphone.
Mr. Massey. I am not sure, oh, this one is working.
Actually the standard market design is also aimed at
interconnecting and providing a market for the kinds of
resources you are talking about with a day ahead market and
locational marginal pricing, which the distributed generation
organizations and distributed generators strongly support.
No. 2, we have an interconnection rulemaking underway which
would streamline the interconnection processes and rules for
small generators.
And we hope to finalize that soon. And I also believe that
the RTOs will streamline interconnection because they won't
have any incentive to delay the interconnection process.
I believe that they will seek to interconnect these
generators as quickly as possible.
Ms. Brownell. Can I just add something because Mr. Doyle
and I come from the same State where we had an ISO, now an RTO.
And, in fact, what we saw was the introduction of new
technologies because market forces could speak, investors knew
that they had a fair shot at getting interconnected, and
customers expressed, both at the wholesale and the retail
level, some choice in being innovative.
We saw the growth of wind farms in Pennsylvania. So I think
that is a classic working laboratory, albeit, perhaps, based on
regional differences, the very fact that there are wholesale
markets where choices can be expressed and investors can have
confidence in the equity of the rules, will attract just the
very kinds of innovation that you are talking about. And has.
We know that.
Mr. Barton. All right, the gentleman's time has expired.
The Chair recognizes the gentlelady from New Mexico, Mrs.
Wilson, for 8 minutes.
Mrs. Wilson. Thank you, Mr. Chairman. I wanted to thank all
of you for joining us today. I am also one of those that
believes we need a balanced long term energy policy for the
country that includes both increases in production and an
emphasis on conservation and new technologies.
There are some things that I wanted to focus on as far as
questions are concerned. I wanted to associate myself with Mr.
Shadegg's comments about the standard market design, as a
western legislator.
And Mr. Wood, I wonder if you could expand a little bit on
which elements of this standard market design are most
important to you, so that we can figure out how we can work
with you to alter the approach that FERC is taking here?
Mr. Wood. Actually, let me see if I can make that simple,
because I did put that in my testimony, Representative Wilson.
The, and I will just call reference to that, if you want to
look it up later. On Page 7 at the bottom. But I will just go
in those, independent grid operator, single tariff. In other
words, everybody plays by the same rule.
A long term bilateral contract market, which is not
imposed, it just is what it is. A voluntary short term spot
market with transparency.
Regional transmission planning, so it is bigger than just
one utility looking after its plan. Locational price signals
and transmission, basically property rights, so people have a
defined property right.
And appropriate mitigation so that you don't have repeats
of what happened out west. Those would be the eight, kind of
the core eight that I have been talking about in recent
public----
Mrs. Wilson. Of your core eight, which ones are the core of
the core eight. I mean that is a pretty long list. What is the
most important to you? What are the top things we are talking
about here?
Mr. Wood. The independent operator, which is the RTO, which
is what has been proposed in your home state. The spot markets.
Mrs. Wilson. Okay.
Mr. Wood. The transmission rights.
Mrs. Wilson. That is three.
Mr. Wood. And the market monitoring.
Mrs. Wilson. Thank you. Mr. McSlarrow, I wonder if you
could summarize the position of the Department of Energy and
efforts you have underway to reinvigorate the nuclear power
generation capacity in this country? And I wonder if you could
expand on that a little.
Mr. McSlarrow. I would be glad to. As you know, nuclear
energy provides about 20 percent of our electricity generation.
From the President's National Energy Plan forward, we have
made very clear working with you and others that we believe
that nuclear energy is important and has to be part of the
energy mix for the future.
Now we are approaching that several different ways, because
there is no question that nuclear energy brings with it its own
challenges.
One of those, obviously, is what do you do about nuclear
waste. Now Congress has answered that and moved us down the
road a good bit by the suitability and determination and then
the selection of Yucca Mountain.
And we are going to have to move forward with the license
application. Another is what does it take to convince those
people, investors, principally, to front the capital necessary
to build these kinds of projects so that we don't have the kind
of horrific examples with Shoreham and WAPA and other classic
cases that happened in the last 30 years.
And so we are working with the NRC and Chairman Meserve to
move forward with what we call early site permitting processes
designed to speed up and provide more certainty with the
regulatory process.
In addition, we are trying to focus on the future of
nuclear energy in terms of advanced fuel cycle and advanced
reactor concepts.
And I know you are personally very familiar with all of
this, but briefly, one of the things we are doing is a
collaboration called Generation IV, which is a collaboration
with nine other foreign countries on future reactor types.
And then, most recently in the 2004 budget request from the
President, we have asked for $63 million for a program we call
advanced fuel cycle initiatives.
And that is designed to produce technology that will allow
us to reduce the waste in the first instance, reduce its
toxicity and also to make any of the waste from nuclear energy
more proliferation resistant.
And so if you attack all of those things, waste,
proliferation, investor certainty, we believe you can get to a
point whereby 2010, which is another program we have, we can
actually build our first nuclear plant in a long time.
Because, as I said, it is, we believe it is vital for our
future.
Mrs. Wilson. Thank you. Mr. Wood, I have a question about
the gas price indices. As you know, there has been recent
information that the data that is given by the companies that
do submit data is false or manipulated.
And there are companies that rely on those indices in their
contracts to set prices, and I think you also use them for some
pipeline tariffs.
Mr. Wood. Yes, ma'am.
Mrs. Wilson. What is the solution to this? What are you
looking at for getting a more reliable index or what are your
answers?
Mr. Wood. We have had a couple of workshops lately focused
on actually other issues and this issue has crept into it as
well.
We got a report from the Committee of Chief Risk Officers,
which is a group of energy industry, you know, executives that
were trying to figure out the best way to get past the mess
that the financial books are in right now.
And, among other things, looking at accounting fixes. But
one of the issues that they have focused on and proposed some
solutions to last week, was the gas index and how that ought to
be dealt with.
On the other hand, the current providers of those indices
are a number trade journals, publications. They have also
proposed revisions to their own collection methodologies.
At the end of the day, though, there is a question. If
everybody doesn't have to play, in providing data, how do you
know you are really getting the right universe of information
to report an accurate price.
You know, by and large everybody that wants to trade AT&T
stock, trades it through the New York Stock Exchange or one of
the publicly traded exchanges and you have got that range and
that average on the information from everybody.
We have nothing like that in the gas industry. We have got
more like that in the electric industry, but it is pretty new.
It is something that we just installed last year.
We don't have authority to do this fix on the gas side. We
are going to have a conference, we have announced that we are
doing one in April, once we get past all the California dockets
and the important things we have to resolve there, to focus on
this answer.
So if I could maybe beg off a month and give you a good
answer after we hear from the industry what, and the parties
and the customers, what is really the smart thing to do.
But it needs probably a little bit more attention.
Mrs. Wilson. Okay, thank you. And finally, Mr. McSlarrow,
and this is not something you can probably answer here, but I
would like to see the answer probably as a follow up to our
discussion here today.
I understand the department is changing its criteria for
the EnergyStar windows program. And I wonder if the department
could provide me with the criteria the department will be using
as it makes a selection between the two proposals.
And if you could take that back and get us an answer, I
would appreciate it.
Mr. McSlarrow. I would be glad to.
Mrs. Wilson. Thank you, Mr. Chairman.
Mr. Barton. Mr. Markey, you are recognized now.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Barton. For 4 minutes and 1 more minute to go over.
Mr. Markey. Thank you, Mr. Chairman. First I would like to
congratulate the Nuclear Regulatory Commission. They may not
have an emergency evacuation plan for around nuclear power
plants, but the definitely had one to get out of this committee
to escape the full questioning and I want to congratulate them.
Mr. McSlarrow----
Mr. McSlarrow. They left me holding the bag.
Mr. Markey. You have got the cleanest face here, Mr.
McSlarrow. Today's Washington Post reports that some in the
administration, as well as some in South Korea and Japan, have
decided to give up on trying to stop North Korea from getting
nuclear weapons.
Except the fact that they are definitely going to have
dozens of nuclear weapons instead of possibly having one or
two, and focus instead on trying to prevent North Korea from
transferring nuclear technology to other countries.
Mr. McSlarrow, I received a letter from Secretary Abraham
yesterday, responding to a letter which I sent him in October.
In this letter the Secretary acknowledged that in May 2001,
he extended authorization for 5 years to Westinghouse to
transfer nuclear technology to North Korea. This is in May
2001.
He reveals in the letter that, ``to date approximately
3,200 technical documents have been reviewed for export control
concerns. Of these, roughly 3,100 were approved for release to
North Korea, with the stipulation that they only be transferred
when needed and the balance denied.
``Roughly 300 documents have been transferred to North
Korea.'' The Secretary then goes on to say, again, ``recent
actions taken by North Korea clearly violate its international
non-proliferation obligations.''
The administration is now considering appropriate courses
of action, possibly to include suspension or revocation of the
May 2001 Bush Administration authorization to transfer nuclear
technology to North Korea.
First, Mr. McSlarrow, how long have you been considering
the cancellation of this nuclear agreement between the Bush
Administration and North Korea?
Mr. McSlarrow. The--I can't give you a precise date. It is
as long as everybody is aware by reading the papers when this
crisis first erupted on the front pages is about when
discussion took place within the administration as to what the
appropriate steps are.
And we are trying to pursue this through multilateral,
diplomatic negotiations.
Mr. Markey. So did you begin reconsideration of this
agreement immediately after learning of the secret or
confirmation by the North Koreans of their secret nuclear
weapons program?
Mr. McSlarrow. We did. But there is also less there than
meets the eye Congressman. I mean this is not nuclear
technology in the sense that most people would understand it.
This is licensing and safety procedures. We have always
followed a policy of not transferring nuclear technology and we
are following that policy and we won't make a----
Mr. Markey. But this is an agreement to transfer to two
nuclear power reactors to North Korea.
Mr. McSlarrow. Correct.
Mr. Markey. And my question is why haven't you already
revoked the authorization to sell two nuclear power plants to
North Korea? What are you waiting for?
Mr. McSlarrow. We are waiting for, to allow the process to
unfold.
Mr. Markey. What else do they have to do before you would
revoke the sale of two nuclear power plants to a homicidal
sociopath?
Mr. McSlarrow. Well, there is not transfer taking place
right now, so revoking it or suspending is irrelevant to that
point.
What is relevant is the Secretary of State is trying to
pursue this diplomatically and I am not going to say, at least
in an open session, of what the steps are----
Mr. Markey. I don't think, no, the Secretary of State is
not advancing this diplomatically. The Secretary of State has
yet to take this to the United Nations. It is 6 months.
The Chinese and the Japanese and the South Koreans are
basically holding our coat, you know, while we do this alone.
And they have not done anything diplomatically. What is holding
up the Department of Energy from canceling this agreement, Mr.
McSlarrow?
Mr. McSlarrow. We are not going to make a decision without
consulting with the rest of the administration. This is a very
delicate issue with North Korea.
Mr. Markey. This is very----
Mr. McSlarrow. As I know you are very well aware.
Mr. Markey. This is very scary.
Mr. McSlarrow. We did actually go to the United Nations. We
asked the International Atomic Energy Agency to go to the
United Nations Security Council, which they did.
They referred it to experts. But we are pursuing it in
multilateral ways.
Mr. Markey. I think you are holding this up to reserve the
right to still transfer the two nuclear power plants to North
Korea. That is what I think the Bush Administration is going to
do.
I think if this was happening in Iraq, and you were still
considering sending two nuclear power plants to Saddam Hussein,
you would charge those who supported it with appeasement.
I am not saying that here, but what I am saying is that
this is a very serious issue. It is sending the wrong signal
around the world that we are not, with all this evidence about
Kim Jong-il, not just canceling these two nuclear power plants.
And I don't care if Westinghouse wants it, I don't care who
wants it. There is something more important than private
commerce. And it should just be ended.
And we should square up our policy in North Korea with
Iraq, or else the rest of the world is going to think that we
are hypocritical on this nuclear issue.
And it is just time for us to end it, once and for all. And
Bush Administration has to take the lead now.
Mr. Barton. The gentleman's time--I agree with the
gentleman from Massachusetts. I want to associate myself with
what you said. I will give the Deputy Secretary a chance to
respond and then we are going to go Mr. Otter.
Mr. McSlarrow. It is a factual dispute. When this first
erupted and news of what we found out about the uranium
enrichment program took place we halted the oil shipments to
North Korea. No meaningful work is being done on the light
water reactors.
You can quibble with whether or not the agreed frame work
that was agreed to by the Clinton Administration was good
policy or not.
The fact is when we found out what was going on in North
Korea, things have changed, nothing is happening except a
diplomatic initiative to figure out a resolution.
And we are not at the end of that process yet.
Mr. Markey. Does the State Department oppose cancellation?
Mr. McSlarrow. No decision has been made on that.
Mr. Markey. They don't oppose cancellation?
Mr. McSlarrow. No decision has been made.
Mr. Barton. We are going to have to continue this at a
later--we have got two more members on the Republican side. We
have got a series of three votes that are going to start in the
next 20 minutes.
I am going to ask these two gentleman to do their questions
and then I am going to give the panel a chance to have a very
brief personal convenience break.
We will start a second round if we can start it before the
series of votes. But if we have to go vote, then I am going to
have to release the panel, because we won't be back over here
until after 2 o'clock, and we have an entire second panel with
seven witnesses.
So, I know that is a little convoluted. If we are quick, we
can get some second questions in, if these two gentleman ask
their questions in 5 minutes or less.
I will recognize Mr. Otter for 5 minutes and then Mr. Issa
for 5 minutes.
Mr. Otter. Well, thank you, Mr. Chairman, and I appreciate
Mr. McSlarrow and the commission for being here today and
responding to our inquiry.
I would like to get back to the genesis which provided the
opportunity, I guess, the reasons for us to be here today. And
let us go back to the energy crisis of 2000.
And primarily, where it really focused, the greatest
distortion was on the west coast, the southwest coast, if you
will, which caused ripples everywhere else.
Coming from the pacific northwest, I saw some things
happening in the lower southwest that were--I can say
California--thank you, Mr. Issa.
The lower southwest that were very disturbing because they
were running under the guise of deregulation. And, in fact,
although I am new to this committee, I am not new to the issue,
because we held several hearings in the Government Reform
Committee over regulatory agencies.
And what we found was basically that California had
released the wholesale price but set the retail price. And then
were alarmed or disturbed that there wasn't any conservation in
the process.
Had they released, do either one of you gentleman or
anybody on the panel, know of any study that was conducted by
either the Department of Energy or FERC, to find out how much
conservation would have in deed taken place had the market
place allowed to work its magic and floated to a level which
would have got a certain amount of conservation.
And how much conservation would of we in fact gotten in
California?
Mr. Wood. It wasn't a FERC-initiated study, but the
subsequent summer which was, of 2001, which is when California
did implement a number of conservation measures, actually is a
number of non-governmental types were reviewing that.
But I think the data are pretty clear. I mean if there is a
clear price signal in basically either a carrot or a stick, but
one of them, that there is a pretty clear response. A flat rate
clearly I think your point is correct.
The flat rate just continuing as usual does not send a
signal to a customer as my natural gas bill sent a signal to me
last night to really watch and conserve and cut down the
thermostat or up as it may be.
Mr. Otter. Well, one of the concerns, obviously, that I
have is how much additional information, or I guess I should
say regulatory authority that FERC is asking for through either
your own agency or through the Department of Energy.
And it seems like we are asking to override the States. We
are asking to override regional producers, investor-owned
producers of energy.
We are asking to even municipal energy producers. And yet,
we haven't gone back and said we are never going to engage in
this kind of market manipulation.
If there was ever any serious market manipulation that was
engaged in, as far as I am concerned, the reason we gave relief
to those who may have engaged in that later on was the fact
that we released the wholesale price and set the retail price,
therefore allowing, not allowing the market place itself to
work.
But I notice that you didn't ask for any regulatory
authority over allowing folks to do that, which I think was the
very genesis of the problem in the first place.
Let me just run through several very serious questions that
we would have in the pacific northwest and in particular Idaho.
Obviously the transmission contracts under the transmission
authority and organizations that you are asking for, concern me
because it appears that all of our long term transmission
contracts that we are already engaged in, are no longer going
to be allowable under the new rule. Am I wrong?
Mr. Wood. The existing contracts, in fact, we have already
approved in the context of RTO West, which is a filing of Idaho
Power and others that the existing contracts can either choose
to convert to the new service or stay with the old service
until the contract runs out.
So that was actually, yes, sir, we have approved that in an
order about, in the fall.
Mr. Otter. So if we have got a 20 year contract on
transmission----
Mr. Wood. Then that stays and we work around that.
Mr. Otter. Then how would you provide for the standard
market?
Mr. Wood. Well, it is harder. It is just a long transition.
But we, as we did in the gas industry, it was the view of us
that we do not need to abrogate existing contracts to make this
work.
That we work through it over a longer period of time.
Mr. Otter. Well, my time is about out and I appreciate your
response. But, I just want you to know that in my country, in
Idaho, almost everything that we produce in Idaho is a value-
added product.
And every value-added product has a large contingent of
energy in it. Either driving brand new technology or driving
natural resources into a form that the world wants to consume.
And so energy is, not just important in our lifestyle, it is
important in our economy.
It is important to our ability to produce, whether it is on
the farm or in the factory. And our ability to live no matter
where that is. Thank you, Mr. Chairman, I yield back.
Mr. Barton. The gentleman yields back. We recognize Mr.
Strickland of Ohio for 8 minutes.
Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, I
have a question that I was wanting to direct toward Chairman
Meserve and I was wondering if I could submit that? I will get
back to that.
Mr. McSlarrow, if the papers are right, and if we are
prepared to accept North Korea as a nuclear power and basically
move on from there, it seems fairly outrageous to me that we
would accept that without first of all engaging in bilateral
discussions with this country to see if we could prevent that
awful conclusion from becoming a reality.
But I want to thank you for issuing the Department of
Energy's Physician's Panel Rule for the Energy Employees
Occupation Illness Compensation Program Act.
From hearings held in this committee and others, we know
that workers were placed in harms way at many of DOE sites
under the pressures of the cold war. And at least we can
provide some assistance for these workers who have been harmed.
I am pleased that the Department included many
recommendations from the bipartisan congressional group on both
sides of the Capitol.
But today the Energy Department has received approximately
14,000 requests for assistance under DOE's program for claims
related to State worker compensation or Subtitle D of the law.
Your staff indicates that a mere seven claims have been
processed through the Physician's Panel in the 6 months since
the Physician's Rule was issued.
That is seven claims in 2\1/2\ years since the bill became
law. By comparison, the Department of Labor has been tasked
with reviewing claims for cancer, beryllium disease and
silicosis, under this same program.
And to date the Department of Labor has received over
39,000 claims, recommended decisions on over 16,000 claims and
issued $483 million in payments to 6,700 claimants since July
2001.
In deed, DOL began paying claims 9 days after the deadline
for accepting claims and processed and paid thousands of claims
in the first 6 months.
And the question that I have is how long will it take for
DOE to work through its backlog of claims?
Mr. McSlarrow. First, let me just be clear. The policy of
the United States is for nuclear weapons free Korean peninsula.
I don't believe everything I read in the papers, and that
hasn't changed.
Second, I appreciate your question about the Physician's
Panel and the law and appreciate your leadership on all of
that.
First, I do want to at least claim some credit. DOL could
not have processed its claims, as you well know, without DOE
having gathered the records in the first instance.
We did that, it was the first phase of the program. And we
think it is great that they are doing a terrific job on that.
The Rule for our part, that we are monitoring, as you know,
did not go final until September 2002. We have barely gotten it
off the ground, that's correct.
But the good news is that we are now at a point of
processing claims where we gather all the records about a given
site or location or contractor.
The hard case is the first one. Once you do it then you
start moving right through it and the rejections, I can't give
you a final date, I will try to give you one for the record.
But I do know that in short order, going from seven or 14,
is actually what I think we are at today, we are going to be
going through hundreds a week.
Mr. Strickland. Just a follow up, if I may. It is my
understanding that DOE has contracted out the claims processing
to a private entity called SEA. How have they been unable to
move these claims very quickly, as we know.
I further understand that SEA still doesn't have final
claims processing procedures written up and available to
claimants. And I am just asking, would you be willing to take a
hard look at this to see if SEA is going to be able to do this
in an appropriate, expeditious manner?
And, if not, take appropriate action?
Mr. McSlarrow. I would be glad to.
Mr. Strickland. Mr. Chairman, you weren't paying attention
to me earlier, but I had asked if I could submit a question to
Mr. Meserve since he had to leave.
Mr. Barton. Without objection.
Mr. Strickland. Thank you so much. And I yield back my
time, sir.
Mr. Barton. The Chair thanks you for yielding back your
time. The Chair would recognize Mr. Issa for 5 minutes.
Mr. Issa. Thank you, Mr. Chairman. Chairman Wood, I guess,
although this is a FERC general question, it probably falls to
your broad shoulders primarily.
As my colleague alluded to in non-specific terms, perhaps
not fully understanding that California goes considerably north
of some portions of Idaho, maybe he doesn't believe so, but in
either case the pacific coast, dominated by the State of
California, did experience market opportunism or market
manipulation.
But that is open for some debate. But there is no question
that suppliers of energy took full advantage of the opportunity
to get exorbitant rates from the people of California.
And as my colleague, again, loosely alluded to, it was our
own damn fault for having a system that just didn't make any
sense.
and then when we discovered that is was dysfunctional, we
didn't do anything about it for a very long time. Now the part
that is open to debate going forward. When we are looking back
at 2000-2001, I understand that you are in the process of
figuring out the amount of unfair compensation that was
received.
And I would like you to explain for myself, for the record,
and hopefully for the people of California, because I think it
is very important, the difference between our State
administration, the Governor's interpretation of what we are
entitled to in the way or repay and your interpretation.
And I will just be simplistic for a moment. Our Governor
believes that everything over and above the rock bottom rate
that you would have paid if you had long term contracts and you
hadn't deregulated and what was actually paid, is the amount
that the State of California is entitled to.
That is my interpretation. And then I would like you to
explain how you are going to arrive at whatever figure you are
going to arrive at based on the criteria of something else as
to what the wholesale price should have been fairly.
Mr. Wood. When we, last year, voted a mitigation plan in
place to keep the, basically set the price where a competitive
market would have set it. That became the bench mark.
Wherever the competitive market, working on supply and
demand, had set the price. So you look at what plants would
have run. What does it cost to run the most, the marginal plant
that is setting the price.
And that is, a big part of that price is what was the gas
price at the time. So that is really a very key driver here,
and just kind of keep that thought out there.
What we have done, and it took longer than we had hoped,
but it took a while to calculate that amount because you are
looking at every hour, actually every 10 minute segment of an
hour over an 8-month period in the California market with, you
know, numerous power plants and power customers and the like.
The difference between what was charged in that hour and
what this formula would calculate is really where we have gone
forth and sent the calculators off to do.
That, in fact, came back with a number, that is before the
commission for review now as to whether it was right or wrong
or high or low or just right on, of $1.8 billion.
There was a question raised about the use of the gas price
in that number. And if a different gas price is used, that
number could change notably.
One of the, I think, largest issues that we have already
ruled under our law, we can't do, is to go back before the date
that the complaint was filed and do this same calculation going
backwards.
And I think that is just an issue where our Federal Power
Act is pretty clear that a refund obligation can start as early
as 60 days after a complaint is filed.
Now the Chairman's mark goes back and gets rid of the 60
days so that you haven't lost those 2 months, going forward.
But the law we have got to work with today does make that,
going back, and I think that is probably a big part of the
difference between where the Governor and some of the State
officials have talked about on refunds and what the commission
has done on the same issue is the building to go backward.
Mr. Issa. I appreciate that. And I think that will help the
people of California understand how a fair price was realized.
One quick follow up question or separate question.
The use of public lands for transmission lines in
California. Can you briefly State the administration's position
and how we and the Congress, when delineating potential lines
should approach that?
Mr. McSlarrow. Our position is that the Federal Government
has to do its fair share. We can't, on the one hand, talk about
the need for more transmission capacity and just expect to go
in the west where there is such huge areas under Federal
ownership that somehow it is going to get around that.
I know the Department of Interior and the land management
agencies themselves, working with DOE and FERC and some others
who have some signing authority, whether it is for gas
pipelines or electricity transmission grids, have been working
together to try to streamline ensuring that we can make those
available.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Barton. We have a vote, three votes on the floor. We
are going to recognize Mr. Wynn for 5 minutes, and then we are
going to recess.
And then we will ask you folks to come back. Can you all
come back about 2:15? Anybody that has tremendous heartburn? I
don't think the second round of questions are going to take
that long.
We do have another panel after you. So, I recognize Mr.
Wynn for 5 minutes. Then we are going to recess until 2:15, and
begin our second round of questions at 2:15.
So Mr. Wynn is recognized for the last question period of
the first round.
Mr. Wynn. Thank you, Mr. Chairman. Mr., excuse me,
Secretary McSlarrow. Right now our strategic----
Mr. Barton. Mr. Wynn has 8 minutes. You have 8 minutes.
Mr. Wynn. Thank you, Mr. Chairman. Right now strategic
petroleum reserve is down 100 million barrels below capacity.
Is it your expectation that we will be replenishing this in
the near future?
Mr. McSlarrow. Yes. Right after September 11, President
Bush directed us to fill the strategic petroleum reserve to its
full capacity of 700 million barrels.
We began to do that. It is now at 599 million barrels, it
is the highest point ever in its history. Over the last 4
months we have deferred putting oil into the petroleum reserve
because of the crisis in Venezuela in order to ensure that we
minimize any additional price pressure on crude and on gasoline
and home heating oil.
But it is our full intention to get back on track and fill
the reserve by the end of 2005 to the full capacity of 700.
Mr. Wynn. By the end of 2005.
Mr. McSlarrow. Yes, sir.
Mr. Wynn. So that anticipates a likely increase as a result
of our activities in Iraq?
Mr. McSlarrow. It is impossible to anticipate what is going
to happen there. What I do know is that by deferring the oil
that was supposed to go in the last 3 months, we actually get a
premium, is that we get more oil later.
So we should still be on track.
Mr. Wynn. Okay. The other issue you talked about was the
hydrogen vehicle and again our dependency on foreign oil. And
the target that I seem to hear you saying is 2020, based on the
very modest investment of $1.7 billion the President is
recommending.
I guess my question is somewhat rhetorical, but why can't
we put more money into this if it is in fact a priority.
And why can't we move that up with a major commitment to
make it in 2010 rather than 2020, given the fact that after
Iraq we are likely to see a much more volatile situation with
respect to foreign oil and given the instability in Venezuela?
Mr. McSlarrow. Originally when our department studied what
it would take to produce a hydrogen economy, if you will, the
road map showed us, even with high expenditures, not being able
to accomplish these same kinds of decisions that you were just
referencing until like 2035 or 2040.
The Secretary and the President came back to our analysts
and said tell us how fast you can move this up and then tell us
how much it will cost?
The answer came back that we could make a commercialization
decision by 2015, with the idea of mass penetration by 2020.
And it turns out, working with the scientists who have been
working on this, this is one of those things that you just
can't spend more money and speed it up.
There are things that are sequential in nature that
prevents----
Mr. Wynn. So that is the administration's position that
additional funding would not change the timeframe?
Mr. McSlarrow. Not based on what we know right now.
Obviously, if we find out differently down the road, we would
be interested in trying to move up the schedule.
Mr. Wynn. All right. Is there, let's see, Mr. Wood. Do you
support the reliability language introduced in Barton-Tauzin?
Mr. Wood. Yes, sir, I think that language looks fine.
Mr. Wynn. Okay. And the other question, and any of the
three commissioners may want to respond to this. It says, it
proposes three conditions for PURPA relief.
And I don't understand, because they all seem to be relying
on a competitive market, how a competitive market addresses a
problem of expanding utilization of renewable energy.
It seems to me, and I could be way off the mark, but it
seems to me that just the opposite would be the case. If the
renewables were more expensive and less profitable that there
would be a competitive dis-incentive to use renewables.
So maybe I am looking at this wrong, but could you explain
how those three provisions in Barton-Tauzin would work?
Mr. Wood. All right, this is in Section 7062(m)1(a). The
first is, I think to cut to the chase, I think the issue is
that, and I remember this amendment from last year, Senator
Carper, I think, introduced it on the Senate side.
I am pretty sure this is language that mirrors that. Is
that if there is a sufficiently competitive market to sell
into, then the requirement from the 1978 law that the only
person to sell to at that point was the local utility, so they
had to take the power, is that the competitive market is
enough.
Now if there is a resource, such as maybe some renewable
resources or others, may be more expensive, then the clearing
price of the market, I think that would be a problem.
I think there would be perhaps an inability to profitably
generate that power. I don't honestly think that in most of the
competitive markets there is an open retail State, there is a
lot of customers who are interested in renewable power.
I am not sure that that would work out in reality to be a
problem, but theoretically, I think, you know, it could be.
Mr. Wynn. So the plan would be for you to make a
determination with regard to the competitiveness of the market
place.
And if you found competitiveness, you are saying that you
would then allow PURPA relief. Is that----
Mr. Wood. That is what the provision says, yes, sir. That
we have got to make one of these three findings, not all three
together.
You have either got a real market to sell into or something
that resembles that or an RTO. Which would be hopefully a
competitive market to sell into.
So I think A, B or C, really, basically is the same thing.
Do you have an alternative or alternatives to sell to other
than the utility that you have been selling to for 20 years?
And if the answer to that is yes, then the PURPA relief
would happen.
Mr. Wynn. All you need is one alternative? I mean do you
make a determination of----
Mr. Wood. It actually does say competitive market, so it
doesn't just say you have got one other one, but do you have a
competitive market. Which, in, I think, our understanding,
would be certainly more than one alternative.
Mr. Wynn. All right. I relinquish the balance of my time.
Thank you very much.
Ms. Brownell. Mr. Wynn, could I just add that we are about
wholesale choice, but in Pennsylvania where we had retail
choice, 20 percent of the customers who exercised that choice
chose green power, often at a higher price.
Mr. Wynn. Now when you say green power, are you referring
to clean coal or are you referring to renewables?
Ms. Brownell. I am referring to renewables.
Mr. Wynn. Okay, all right, thank you.
Mr. Pickering [presiding]. Thank you, we are closing in on
the time where we have a vote and we will recess. But I do want
to welcome Mr. McSlarrow, an old friend, to the committee. I
thank you for your testimony.
I do have a number of questions that I would like to ask
the panel and specifically Commissioner Wood, Chairman Wood. As
you know, we in the southeast are very concerned about your
work on SMD.
I think we have made progress on trying to perfect the
wholesale markets. Your efforts and the industry's efforts on
regional transmission organizations has made tremendous
progress.
But I do caution you, and as you go forward on the SMD,
that there is a rule, not only in the market place, but in the
political market place, that if you get too far out, it can be
overturned.
And we need to be very careful that as you go forward that
there is a consensus in my region and in other regions as to
how these costs are going to be possibly transferred and what
possible economic harm could be done.
I do want to submit to the record some questions. But, Mr.
Wood, let me ask--people have talked about the concept of
socializing costs when an IPP connects to a transmission grid.
Do you believe that there should be a socialization of
cost?
Mr. Wood. I think it depends on really where the load is
serving. I know there has been a concern in the south that a
lot of that IPP generated power is being exported from the
region so there is nobody benefiting from it being there.
I think we have embraced that, that that should actually
not be born by the local ratepayers because they are not
getting benefit. But I think it should be focused on where the
benefits are.
In many cases across the rest of the country the IPPs are
building near where their load is so putting the transmission
costs in the pot with everybody else's is not objectionable.
But I understand, from hearing back from a lot of the
people you reference, our State colleagues and some of the
customer groups down there that they are concerned that the use
of that power for export really does benefit someone else and
that someone else ought pay the price.
I think we are looking forward to a response from the
filing utilities down there, Entergy, Southern and the others
in the Seatrans proposal for a voluntary RTO to define exactly
how we would determine that beneficiary.
Mr. Pickering. I have some specific questions about the
recent action that you took that could retroactively apply some
of the new interconnection policy agreements to the contractual
agreements that were reached in my region.
And so I want to understand your thinking as to why you
reopened some of those contractual agreements and how you want
to look at participant funding.
But we are out of time today, and I will follow up with
some questions. I thank you and all of you who have spent a
good bit of your day here and for your testimony.
We will recess until 2:15. At that time we will be hearing
from the second panel and continuing the--oh, I'm sorry. The
second, not the second panel, your second round.
So that will start at 2:15. Thank you very much.
[Whereupon, at 1:48 p.m., the subcommittee recessed, to
reconvene 2:19 p.m., the same day.]
Mr. Barton. If we could have our panel reassemble. We
concluded our first round of questions, we are going to start
the second round with members present and any members that show
up.
As we begin, we are going to recognize the ranking member,
Mr. Boucher, for 5 minutes.
Mr. Boucher. Well, thank you very much, Mr. Chairman. And
my thanks also to our witnesses for their willingness to remain
with us for what is proving to be a very lengthy day.
Mr. Wood, I would like to take a few moments to discuss
with you the standard market design proposed rulemaking which
you presently have underway.
It strikes me as a somewhat complex mechanism. I have
reviewed it carefully and I have a number of questions about
just how the mechanics of it would work.
And let me just raise with you some of the questions that
have been brought to my attention and give you an opportunity
to respond.
Reference was made earlier, in the course of this hearing,
to the action taken by the Virginia General Assembly, that in
essence says that investor-owned utilities may not place their
transmission in a regional transmission organization for a
period, I think, of 1 year from the effective date of that
measure. I can tell that what generated that proposal and the
concern that gave fuel to it as it was considered in our
State's legislature, was the provision in your notice of
proposed rulemaking that would say that electric utilities
would no longer be in a position to favor their native load.
That they in effect would be placed in a bid in the market
for transmission access, in competition, perhaps, with
unaffiliated generators. And that the result of their having to
bid for access to their own transmission lines, might be an
increase in the cost of electricity for consumers, occasioned
by an increase in the transmission component of that charge.
And so my question, my first question to you is, how valid
is that concern? Do you think there would be opportunities or
occasions where the price of electricity for consumers might
increase on account of what I have described?
Or would there be offsetting savings coming from lower
generation components for that charge based upon the presumed
freer flow of unaffiliated generation into the service
territory?
How do you balance that and what do you say to those who
have concerns that the price for electricity for consumers will
increase because of this provision?
Mr. Wood. We certainly heard those concerns, Congressman
Boucher, in response to the commission's initial proposal. And
I expect that we will make very clear how current utilities and
current customers can be held harmless on day one.
But what we are really looking after is a longer term plan.
And I think it is important to think of the cost that you are
paying of generation, inefficient generation, which is what we
call congestion, and I just put that as a little small bar on
top, and then transmission.
The rate of transmission is set. Generation, the broader
the market and the more efficient it is, certainly the pressure
is downward on generation is where we expect the bulk of the
savings will come.
But this part in here that we are paying today, is for the
inefficient dispatch of the power grid because of congestion.
Because of the current lack of investment in the grid itself.
And if we can identify that and isolate that out, as our
pricing policies would do, and then allow that to be competed
down and competed away, either through construction of better
sited generation or through demand response.
Or through even renewables, as I heard some of the members
mention. Or through new transmission investment. Those kind of
things can really get that inefficiency, that cost of
congestion whittled down and whittled away.
What we were not clear enough about, and I understand the
concerns. And again, the three of us have heard this in
excruciating detail. Is we want the ability to preserve what we
have today.
And we have committed to doing that in a number of
implementation orders of the RTOs, which really is the same,
really a broad agenda as the SMD.
The SMD is to give some rational frame work for the RTOs.
But, yes, sir, I think we have heard that and we full expect to
address that and hopefully address it fully for the people who
raise those concerns, because I would have them as well.
Mr. Boucher. Did you say there might be some mechanism to
hold harmless consumers so that they would not experience price
increases as a consequence of this rule going into effect?
Mr. Wood. Correct. And one of the things that we have
indicated that we are looking at, and I think we have put in a
couple of orders, but certainly we have talked about
informally, that would be in the white paper, is the ability to
have that day one cut over of your rights today are this, your
rights tomorrow are the same thing if not better.
And then going forward, those rights get in the broad
market place with everybody else's.
Mr. Boucher. I will await with interest your further
illumination on that point. Let me quickly ask one other
question. I just have some doubts about how the mechanism works
for the disposition of the receipts from the bid for congestion
rights in those instances where congestion exists, who actually
gets the money when a bid is made and money is paid for the
right of access during times of congestion?
And then secondarily, at the end of 4 years you are
proposing that the entire congestion receipt mechanism be
eliminated and that there be an auction of the congestion
rights.
Who would get the receipts? Upon the completion of that
auction, where would that money go?
Mr. Wood. The receipt, to take the latter question, I
expect that we will be looking at the 4 year, it just was kind
of an absolute standard.
That we did admittedly indicate after the 4 years we could
just keep continuing what we have. But a lot of people just
viewed that the 4 years, it would be over with.
But none, notwithstanding that, we anticipate clarifying
how the rights will be allocated up front. And I think a lot of
the State commissioner colleagues have indicated they would
like a role in allocating those up so that the current uses of
the grid are maintained.
And I think we are probably pretty comfortable with that.
On the other issues, when congestion is----
Mr. Boucher. So the answer is for an auction at the end of
4 years of the congestion rights, you are not entirely sure you
are going to maintain that structure?
Mr. Wood. Right. But where we do have auctions, the
revenues that are generated at auction are credited back to the
customers or the utilities serving the customers that are
paying the cost of transmission.
So, in other words, the folks in the area that are paying
the access charge to use the grid today. Which are mostly the
local utility customers would be credited back with the auction
revenues.
Mr. Boucher. All right, that is very clear. And the other
question?
Mr. Wood. When you dispatch out of merit, basically you go,
this inefficient dispatch of the, because of congestion I am
having to turn on the unit here as opposed to this one here
which would have been the smarter one.
This is $35, this is $55. That $20 delta is going to be
paid for by the person who does not have transmission rights.
Just unprotected, unhedged rights. He, that customer will, that
required that extra power, will pay that $20 increment to that
generator.
So that is how the congestion works. Is to make sure that
the person who is causing the congestion is the one who is
paying the bill. As opposed to spreading it across the entire
grid and making everybody pay, even though they didn't cause
congestion.
Mr. Boucher. And tell me again who gets that $20?
Mr. Wood. The generator who has dispatched out a merit, who
cost $55 to run as opposed to the market clearing price of $35,
that all generators were getting at the time.
Mr. Boucher. Okay. Well, thank you. It is a very complex
mechanism. I am going to send a letter to you asking for a
statement of the problem that you see, on a national basis,
that this very complex mechanism is designed to address.
And that will give you an opportunity to describe at some
length, exactly why this kind of structure is necessary. Lots
of questions remain about it.
I am sure you are going to be hearing them. I am hearing
them every day and hopefully we will have further opportunities
to discuss this prior to your putting a rulemaking into effect.
And thank you very much, Mr. Wood, and Mr. Chairman, thank
you.
Mr. Barton. I just have one question. Mr. Wood, do you
still expect to issue your final rule in April?
Mr. Wood. No, sir. We are doing a white paper, which is
really our first kind of collective response to the comments
that we have heard, you know, 1,000 comments. Really we have
gotten three rounds of comments on the rule in November,
December and February.
And then a number of probably 300 meetings between, that
either we have had or the staffs have had with parties that are
interested.
So there has been a lot of good debate and actually a lot
of refinement on the issue. But the April white paper will be
our response to, here is what we said, here is what we have
heard, here is where we are today.
Mr. Barton. So what is your expectation if you issue a
rule, a final rule, when would that, when would the earliest
that would occur?
Mr. Wood. I have gotten burned by making that commitment in
the past. I certainly think late summer at the earliest.
Mr. Barton. Okay. The Chair recognizes Mr. Markey for 5
minutes.
Mr. Markey. I thank the Chairman very much. Mr. McSlarrow,
I just wanted to put on the record that I am very impressed
with the confidence the Department of Energy has that they can
construct a Star Wars system to knock down incoming ballistic
missiles on a couple of minutes notice.
And that they can develop that technology. And I am also
very impressed that they have the confidence that they can
develop a hydrogen car 15 or 20 years from now. But I am
extremely disappointed that they can't figure out how to use
off-the-shelf technology today to improve the fuel economy
standards of SUVs, and that is an available technology.
The other technologies are speculative at best. They may or
may not ever develop, and I would just encourage you to
continue to try to move along that front.
Chairman Wood, it is now 3 years since electricity price
spikes afflicted California and the pacific northwest. And 3
years ago your predecessor, Chairman Hebert, told this
subcommittee that these price spikes were just the result of
natural market forces supply and demand.
We now know differently. We now know that Enron, Reliant,
El Paso and others were engaged in a wide array of abusive,
deceptive and manipulative trading practices that helped drive
up prices in the western market.
The FERC staff, State regulators and others have been
investigating these manipulations and hopefully these actions
will result in refunds being given to those victimized by these
frauds.
My concern is that if these refunds are granted, that it
will, at best, be a posthumous victory for those utilities and
consumers that were harmed.
I think that you need to have stronger regulatory tools in
your quiver, than the mere threat of denying market based rates
or seeking a refund for unjust, unreasonable and unduly
discriminatory or preferential rates.
As I understand it, the Federal Power Act does not have a
basic anti-fraud, anti-manipulation provision with civil and
criminal penalties.
The gentleman from Michigan and I crafted an amendment last
year which we offered in the Energy Conference, which would add
such a provision to the Act.
We also introduced this as a free-standing bill. It is
based on the anti-fraud provisions and the Federal securities
laws.
Would you support that kind of power?
Mr. Wood. It certainly sounds appropriate, sir. I would
have to pull that bill, I don't remember from last year. But,
yes, sir, I think, to be sure, one of the items that we are
doing now may be challenged later in court if this provision is
not included, is to include that in the standard market design
rulemaking.
And we have got a list of the seven deadly sins and we are
going to basically put that in FERC regulation. But it may be
challenged if we don't have sufficient statutory authority for
it.
I think we do, but in case we don't, I would certainly
appreciate any buttressing from the Congress.
Mr. Markey. Commissioner Massey and Commissioner Brownell,
do you, would you accept that additional set of powers for you
to act in the manipulation and fraud area?
Mr. Massey. I would, Congressman, and I think it is an
excellent idea.
Mr. Markey. Thank you. Commissioner Brownell?
Ms. Brownell. I would happily do so. Markets do not work
where there is a lack of confidence and a lack of
accountability. So I would applaud your efforts in that regard.
Mr. Markey. Okay. Now, Chairman Wood, the discussion draft
that Chairman Barton circulated last Friday contains a
prohibition against round tripping or wash trades. Is this the
only type of abuse in trading activity that the FERC staff
identified in its investigation into Enron and California
electricity markets?
Mr. Wood. No, sir, there are others. And, again, they are
included in our deadly sins in the----
Mr. Markey. Do you think, in other words, the point I guess
I am getting at is do you believe that all abusive and
manipulative trading practices should be prohibited or just
that, just the couple that are mentioned?
Mr. Wood. I think they should be. I think it is important
to define clearly, as I think that particular sin was defined
pretty clear as to what it is so people know what counts and
what doesn't count.
But conceptually, yes, sir.
Mr. Markey. Okay. Let me turn to an issue which of great
concern to many of us in New England. Recently ISO New England
submitted its standard market design proposal to the FERC.
One part of that plan would designate eastern Massachusetts
and the Greater Boston area as a designated congestion zone. As
a result, electricity generators or marketers in the zone,
would be given a safe harbor, allowing them to charge higher
prices.
A step which the ISO claims is needed in order to
incentivize new generation and transmission. However, we have
been building new generation in Massachusetts.
I have two new gas plants coming on line in Everett and I
have been told that efforts are being made to relieve
transmission constraints in and around Boston.
Here is my concern. Some utilities in my district and some
of their customers have expressed a fear that the proposed safe
harbor could become a pirate's cove for trading abuses, similar
to that which occurred in California.
Specifically the fear that allowing generators to avail
themselves of the proposed safe harbor, even in periods where
there is no actual congestion.
Can you alleviate my concerns about this, Mr. Chairman?
Mr. Barton. This will have to be the last question and then
we will go to Mr. Waxman.
Mr. Markey. Okay, thank you.
Mr. Wood. Certainly the designated control area, safe
harbor issue, is one that is raised before our commission. We
have ruled on it.
It is an attempt to identify congestion and make it, you
know, focused on the areas where it happens. I do note that
just this week the ISO New England filed, just to make sure it
had the authority to yank that without having to go through the
60 day process at FERC if they find that it is not working as
intended.
Now that is something that they just filed and asked for
from us. But I think it is looking at California so they don't
have to wait for 30 or 60 days to make changes to their system.
I think in the past week that there has been this new
mechanism in place, there hasn't been congestion on the system
at all.
So the market clearing price in Maine and Connecticut and
Boston and all the areas, congestion or not, have been the
same. So I don't think that in the times when it is not
congested, that this safe harbor will in fact be and issue at
all.
Because I think the market clearing price will be certainly
probably below it.
Mr. Markey. Shouldn't we be able to get ourselves off the
list, if there is not congestion.
Mr. Barton. Okay, the gentleman's time has expired.
Mr. Markey. Thank you.
Mr. Barton. We have another member that wishes recognition.
Mr. Waxman is recognized for 5 more minutes.
Mr. Waxman. Thank you, Mr. Chairman. Mr. McSlarrow, I want
to follow up on your answers regarding the President's hydrogen
program.
First, I would like for you to submit for the record the
administration's projections on how much oil the Nation will
consume in 2040, and also explain how this projection was
calculated and what assumptions about fuel economy and oil
production were used.
If we can get that for the record. Just so it is clear on
the record, I understood you to say that hydrogen cars, under
the President's hydrogen proposal, would not significantly
reduce the Nation's oil consumption before 2020, however R&D
and tax incentives for new technology would help. Is that
right?
Mr. McSlarrow. What I answered was whether or not there
were any other technologies that could reduce it before that
time, and I said yes.
The tax credits for hybrid vehicles being one example.
Mr. Waxman. Okay. Can you give the committee an estimate of
how much projected oil consumption will decrease as a result of
these new policies and other alternatives? You can do that for
the record, if you don't have it off hand.
Now, you talked about tax incentives. It appears to me that
the President's budget is much more committed to luxury SUVs
than it is to hybrid vehicles.
For example, a Hummer H2 is reported to get 11 miles per
gallon, while a Toyota Prius can achieve over 50 miles to the
gallon while meeting the most rigorous air emission standards,
without question encouraging the purchase of vehicles such as
the Prius over the H2 would help meet the dual goals of clean
air and decreased oil dependence.
Unfortunately, the Bush plan increases incentives for
vehicles such as the H2 instead of energy efficient vehicles
like the Prius.
If the Bush plan were adopted, a small business could
deduct the entire price of the $55,000 H2 in the first year it
is put into service.
The business could only deduct about one-half of the
$20,000 Prius in the first year and the Prius would remain
subject to the luxury car tax. Is this an inaccurate summary of
the President's tax proposal?
Mr. McSlarrow. The tax provision that I am familiar with on
the hybrid vehicles is fairly straightforward and would not, in
my view, drive you toward a vehicle that is a larger
consumption vehicle.
I would be glad to give you an analysis of it, in detail,
for the record.
Mr. Waxman. I would appreciate that and I would like to
submit for the record, Mr. Chairman, a recent article from the
Wall Street Journal, that discusses how city policy forces
around the country are buying significant quantities of hybrid
vehicles.
This articles suggests that when the market isn't distorted
by tax incentives, there is a good market for hybrid vehicles.
Mr. Barton. So ordered.
Mr. Waxman. As I understand the President's proposal, I
think it gives the wrong incentives, but I would be interested
in your further analysis.
Has the administration analyzed how its tax proposal might
discourage or encourage the purchase of hybrid vehicles by
businesses that otherwise would have an economic reason to buy
one?
Mr. McSlarrow. I know we have done an analysis, I don't
know the results of it. But, again, we will get that to you.
Mr. Waxman. You will get that for us. Okay, thanks. To
follow up with you, Mr. Wood, in the last round of my questions
you indicated you would lift the protective order in California
refund case and make evidence submitted by the California
parties available to the public.
As you may know, a bipartisan group of members from
California wrote to you yesterday requesting this. However, I
am interested in knowing if FERC will also seek and release
Reliant transcripts for 2000 and 2001, so that the public can
be assured that FERC hasn't missed anything?
Mr. Wood. I will have to see if that is in the body
evidence that we are in the process of declassifying now. If it
is, then that would be released.
If not, I will communicate that back to you in writing.
Mr. Waxman. Okay, well I would hope it is going to be made
public. Because if we are going to have faith in FERC's
investigation, I think all the activities ought to take place
with public scrutiny.
If there ever were a reason to withdraw market based rate
authority, this would seem to be the appropriate situation.
In fact, on July 15--so anyway, I would like that
information made public and let us know. But on July 15, 2001,
the California PUC petitioned FERC to withdraw the Reliance
market based rate authority.
Why did FERC never act on these petitions and why didn't
FERC withdraw Reliant's market based rate authority?
Mr. Wood. We are as, I think a question from Mr. Norwood
pointed out, we are in a process of revising our market screen.
It was the supply margin assessment. We put that on hold
because there was significant concern if that was the right
screen or not.
We have gotten a lot of comments on that in the past years.
So there was not just Reliant and some other companies, but
probably about 60 companies now that we are waiting to move
forward on.
It is a policy issue that we have not resolved as to what
standards for----
Mr. Waxman. And I am interested in further information for
the record. But if this didn't warrant withdrawal of market
based rates, I would like you to provide the committee with an
example that would warrant such action. Thank you, very much,
Mr. Chairman.
Mr. Barton. The gentleman's time has expired. We are going
to release this panel. You all have been more than gracious
with your time and your answers, your input and your written
testimony.
There may be members that wish to submit written questions
for the record and we would hope that you would reply
expeditiously to those written questions.
But thank you for your time and you now are excused. Let us
welcome, as soon as the first panel vacates the premises, the
second panel.
We have Mr. Marvin Fertel with the Nuclear Energy
Institute. Mrs. Anna Aurilio with the U.S. Public Interest
Research Group.
Mr. Jeff Benjamin with, the Vice President for Licensing
and Regulatory Affairs with Exelon. Dr. Edwin Lyman who is the
President of the Nuclear Control Institute.
Mr. Steven Nadel, Executive Director for the American
Council for an Energy-Efficient Economy. Dr. Malcolm O'Hagan
who is the President of National Electrical Manufacturers
Association.
And Mr. Alden Meyer who is Director of Government Affairs
for the Union of Concerned Scientists. Welcome lady and
gentleman.
Your testimony is in the record in its entirety and we are
going to start with Mr. Fertel. We will give you 5 minutes and
we will just go right down the line, 5 minutes each. And then
we will have some questions. Welcome to the committee.
STATEMENTS OF MARVIN S. FERTEL, SENIOR VICE PRESIDENT OF
BUSINESS OPERATIONS, NUCLEAR ENERGY INSTITUTE; ANNA AURILIO,
LEGISLATIVE DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP;
JEFFREY A. BENJAMIN, VICE PRESIDENT, LICENSING AND REGULATORY
AFFAIRS, EXELON NUCLEAR; EDWIN S. LYMAN, PRESIDENT, NUCLEAR
CONTROL INSTITUTE; STEVEN NADEL, EXECUTIVE DIRECTOR, AMERICAN
COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY; MALCOLM O'HAGAN,
PRESIDENT, NATIONAL ELECTRICAL MANUFACTURERS ASSOCIATION; AND
ALDEN MEYER, DIRECTOR OF GOVERNMENT RELATIONS, UNION OF
CONCERNED SCIENTISTS
Mr. Fertel. Thank you, Mr. Chairman. Chairman Boucher,
Ranking Member Boucher, on behalf of Nuclear Energy Institute I
commend you for your leadership in both the last Congress and
this Congress on pursuing legislation to implement a
comprehensive national energy strategy.
I would also like to commend the committee for its
leadership last year in supporting the President's decision on
the Yucca Mountain repository site, which was a tremendous step
forward in energy policy matters.
Today I will offer a few key points on the proposed
legislation, but I would be remiss if I did not first comment
on the security at our nuclear power plants.
The nuclear industry had extensive and robust security
prior to the tragic events of September 11. Since then, the NRC
has imposed additional requirements.
And during the past 18 months, the nuclear industry has
invested an additional $370 million in security related
improvements, including hiring about a third more security
officers, bringing our total to about 7,000.
The State of our security was recently demonstrated as part
of a study by the Center for Strategic and International
Studies that looked at the vulnerability of our Nation's
critical infrastructure to terrorist actions.
At the end of that assessment, CSIS recognized the
effectiveness of nuclear plant security and acknowledged our
plants as the best protected industrial facilities in the
Nation.
The legislation passed in the last Congress by this
committee and reintroduced in the discussion draft this year,
contains a number of provisions directed at studies and
programs the NRC should implement to improve security at
commercial nuclear plants.
Given both the enhanced security requirements imposed by
the NRC, since September 11, and the extensive requirements for
threat and vulnerability analysis contained in the legislation
creating the Department of Homeland Security, we conclude that
those provisions in Section 4012 are no longer necessary and
respectively suggest that they be deleted from the discussion
draft.
We will, of course, continue to implement every sensible
sound approach as we can for security, drawing on industry
resources and enforcement agencies and national defense forces,
in what we would expect to be a seamless integration of
response to any potential terrorist threats.
Let me turn now to energy policy. Energy drives our
Nation's economy and diversity of energy supply and technology,
as well as demand side management efficiency and conservation
are all necessary.
Nuclear energy is a major part of our Nation's energy
diversity, providing electricity for one in every five homes
and businesses.
The industry's average capacity factor last year was a
record 91.5 percent, the most efficient among all types of
power plants.
And when all the data are in, we estimate that total
electricity production from nuclear energy last year, will
reach 778 billion kilowatt hours, which is another record.
That is more electricity than is used in total by all but
three other countries in the world. America's nuclear plants
are essential to meeting our air quality policy goals.
Nuclear energy produces no air pollution and in fact will
play a major role in helping meet the President's goal for
reducing greenhouse gas emissions.
A comprehensive national energy policy should take full
advantage of the benefits of nuclear energy. To accomplish
this, legislation actions are needed in the following areas.
Congress should, as soon as possible, renew the Price-
Anderson Act, and we would propose it be done indefinitely.
It is a proven frame work that has worked for over 45
years. Congress should also move forward and amend the Atomic
Energy Act, to remove statutory requirements that are no longer
necessary because of changes in time and the responsibilities
of other agencies.
To address the infrastructure investment crisis we face as
a Nation, we have proposed the Secretary of Energy be
authorized to provide financial incentives, such as loans, that
would be paid back, to a limited number of nuclear projects.
We have proposed that is probably also true for any large
capital investment, like coal plants or transmission lines.
Congress should continue to support nuclear energy research
and development programs at DOE, including the Nuclear Energy
Research Initiative, the Nuclear Energy Plant Optimization
Program and Nuclear Power 2010.
Updated tax treatment should reflect today's business
environment. As such, reform of the treatment of
decommissioning funds, as proposed in the House version of H.R.
4 that passed last year, should also be reenacted.
And in order to stimulate continued investment in our
critical energy infrastructure, the depreciation period of
nuclear plants and other large energy related capital projects
should be made equitable for with that for other industrial
investments.
Finally, Congress should ensure that money paid into the
nuclear waste fund by America's consumers is fully available to
support the Yucca Mountain project.
We encourage the committee to support the administration's
proposal to adjust the nuclear waste fund's discretionary
spending cap and to work with the administration on a longer
term permanent fix.
In conclusion, America's economic strength depends on a
strong, reliable energy supply. Nuclear energy is a vital
component of that supply.
Any prudent national energy policy must include provisions
for expansion of the nuclear energy industry for the benefit of
all Americans. Thank you for your time.
[The prepared statement of Marvin S. Fertel follows:]
Prepared Statement of Marvin S. Fertel, Senior Vice President, Nuclear
Energy Institute
Chairman Barton, Ranking Member Boucher and distinguished members
of the subcommittee, I am Marvin Fertel, senior vice president at the
Nuclear Energy Institute (NEI). On behalf of NEI, I would like to
commend you for focusing the 108th Congress' attention today on
legislation to implement comprehensive national energy policy.
NEI is responsible for developing policy for the U.S. nuclear
industry. NEI's 270 corporate and other members represent a broad
spectrum of interests, including every U.S. electric company that
operates a nuclear power plant. NEI's membership also includes nuclear
fuel cycle companies, suppliers, engineering and consulting firms,
national research laboratories, manufacturers of radiopharmaceuticals,
universities, labor unions and law firms.
The nuclear industry continues to play an important part in
addressing the issues that face this country in meeting our energy
needs. Nuclear energy already is a vital part of our diverse energy
portfolio, producing electricity--safely and cleanly--for one of every
five U.S. homes and businesses. Our nation's comprehensive energy
policy must ensure an affordable, reliable supply of energy, and
nuclear energy provides one of the solutions to several policy
challenges that our nation faces. Among these policy challenges are:
generating reliable and affordable electricity to meet
projected increases in consumer demand over the next two
decades
protecting our nation's air and ecological quality through the
emission-free generation of electricity at nuclear power plants
providing secure national energy supplies that are not
susceptible to price spikes or disruptions because of global
politics.
I will speak to each of these points briefly. Before doing so,
however, I feel that I must comment on the readiness of our nation's
nuclear energy facilities in the wake of the events of Sept. 11, 2001.
We support to the fullest the president's creation of the
Department of Homeland Security, and we commend the leadership of the
House of Representatives in supporting his efforts. We believe that a
central organization is essential to provide the necessary integration
of intelligence information, vulnerability and threat assessment and,
ultimately, to assure the availability of necessary government
resources to protect our critical infrastructure.
The nuclear industry's goal is to develop a seamless integration of
private and public capabilities to protect vital facilities within our
country's infrastructure, including nuclear energy facilities. This
integration should coordinate response capabilities of industry, state
and local entities, national defense and homeland security. The nuclear
industry is working diligently with the Nuclear Regulatory Commission
and other federal entities to achieve this comprehensive response
capability.
Since Sept. 11, 2001, the nuclear energy industry has been on a
high state of alert. The defense-in-depth inherent in the robust design
of our plants has been reassessed and augmented. During the past 18
months, our industry has invested an additional $370 million in
security-related improvements, including stronger perimeter security;
improved background checks; and tighter access control at our plants.
As part of this effort, the nuclear energy industry has added about
one-third more security officers, for a total of 7,000 well-trained,
heavily armed security officers at 67 sites.
The industry will continue to make these investments and
improvements to comply with the Nuclear Regulatory Commission's
requirements.
INCREASED NUCLEAR PRODUCTION
With assured security, the industry's 103 operating reactors will
continue to provide safe, affordable and reliable electricity for the
nation. U.S. nuclear power plants generated a record 778 billion
kilowatt-hours of electricity 1 last year and the industry's
capacity factor--a measure of efficiency at power plants--was a record
91.5, well above any other type of power plants in the United States.
The industry will continue to increase the amount of electricity
generated by nuclear power by relicensing current reactors, continuing
to improve efficiency and implementing new technology to ``uprate''
reactors. We also are pursuing major initiatives leading to building
advanced nuclear power plants over the next two decades.
---------------------------------------------------------------------------
\1\ Nuclear Energy Institute estimate for 2002.
---------------------------------------------------------------------------
Nuclear energy is the second largest source of electricity in the
United States. The industry has reached record levels of safety,
reliability, efficiency and output in the United States.
Nuclear energy is the least expensive source of baseload power in
the United States, with very stable forward pricing. It therefore
provides stability to the entire country's electrical supply system and
plays an important role in sustaining our nation's economy.
Nuclear energy's contribution to U.S. electricity supply is
essential to sustain economic growth, meet the electricity needs of our
increasing population, and meet growing U.S. electricity demand for
today and the future. The Energy Information Agency anticipates a 1.8
percent electricity growth rate through the next two decades, requiring
the addition of 400,000 megawatts of new electricity capacity. The
nuclear industry's Vision 2020 strategic plan has set a goal of 50,000
megawatts of additional nuclear generation by 2020, which is required
simply to maintain the nation's current level of electricity production
from emission-free sources, such as hydropower, nuclear and renewable
energy. We must have new sources of energy for economic growth, but we
also must maintain our commitment to improving our air quality and our
environment. With nuclear energy, we can do both.
To satisfy this growing electricity demand, the nuclear industry is
implementing a three-part program:
maintaining the energy production of existing reactors through
license renewal
expanding output from the existing reactors by continuing to
improve efficiency and reliability, and by investing the
capital required to increase the capacity of the reactors
laying the groundwork for construction and operation of new
nuclear plants.
Several of America's nuclear generating companies, working with
NEI, are implementing a broad-based plan to create the business
conditions necessary for construction of new nuclear power plants. The
plan includes:
initiatives to reduce the initial capital cost of new nuclear
power plants
programs to create a stable licensing regime and reduce
regulatory uncertainties, including industry programs to
demonstrate the new NRC processes for siting and licensing new
nuclear plants.
The 1992 Energy Policy Act significantly improved the licensing
process for new nuclear plants. All design, safety and site-related
issues are resolved with full public participation before capital is
invested. The chairman of this subcommittee, Mr. Barton of Texas, was a
principal author of this major improvement to the NRC licensing
process.
The new approach allows the NRC to:
``certify'' a standardized nuclear power plant design.
Certification is a formal rulemaking process. It requires a
substantial up-front investment to prepare a reactor design--
complete and detailed enough to satisfy the NRC that the design
meets all NRC safety standards.
evaluate and pre-approve a prospective site for a new nuclear
plant
issue a single license to construct and operate a new nuclear
plant if a company uses an NRC-certified design and a pre-
approved site.
Three reactor designs--a 1,300-megawatt advanced boiling water
reactor, a 1,300-megawatt pressurized water reactor, and a 600-megawatt
pressurized water reactor--have been certified by the NRC. Two advanced
boiling water reactors have been built in Japan. Taiwan is building two
more. And South Korea is building variants of the large pressurized
water reactor. A design for a 1,000-megawatt advanced pressurized water
reactor is undergoing certification review, and five other designs are
in varying stages of certification.
Private companies would only undertake investments of this size if
new nuclear power plants are competitive in the marketplace with other
sources of electricity and if there is stability in the regulatory
process to license the facilities. Few policy initiatives, however, now
exist to stimulate companies to invest in new nuclear plants sooner
than they otherwise would. Though the Department of Energy is working
with the industry to demonstrate the new plant licensing concepts,
larger initiatives do not exist to reduce the investment risk
associated with a large capital project, such as the construction of
new nuclear power plants.
The policy initiatives necessary to stimulate construction of new
nuclear generating capacity include:
continuation of the Energy Department's ``Nuclear Power 2010''
initiative, which is a government/industry partnership to
pursue two short-term objectives: resolving technical and/or
economic issues associated with new nuclear plant designs, and
validating the new NRC licensing process--verifying that it
works as intended and that it will not place private sector
investment at risk. This initiative requires relatively modest
federal investment in nuclear energy research and development.
new authorization for the secretary of energy to provide
financial assistance through loans, loan guarantees and lines
of credit for a limited number of new nuclear projects
changes to the tax laws to treat depreciation of investment in
critical energy infrastructure--such as nuclear power plants--
equitably with other large capital investment projects.
Additionally, incentives through investment tax credits may be
desirable.
NUCLEAR PLANT SAFETY LAYS GROUNDWORK FOR EXTENDING OPERATIONS
The excellent safety record of U.S. nuclear power plants lays the
groundwork for refining regulatory oversight of these plants for
extending the federal licenses of the reactors for an additional 20
years, to a total of 60 years of production.
Through the NRC's revised nuclear plant oversight process,
regulators now focus their attention on areas that are most significant
to safety at the plant, rather than treating all areas as if they were
of equal significance to safety.
In addition, America's nuclear energy plants represent the gold
standard for industry safety. Working in a nuclear power plant is safer
than working in the banking industry, according to safety statistics
from the Bureau of Labor Statistics.
In addition, the agency has put in place an efficient process for
renewing the licences for today's plants. The average nuclear plant
today is about 18 years old, far from the expiration of its original
40-year operating period established in NRC licenses. The 40-year
license term reflects both the amortization period generally used by
electric utility companies for large capital investments and the
licensing approach used for radio stations. However, as some of the
plants built in the 1970s approach the end of their original license
periods, experience demonstrates clearly that reactors can generate
electricity safely much longer than their original 40-year license.
As computer systems, instrumentation and other technologies have
advanced, whole systems have been replaced in nuclear power plants. In
many of these areas, nuclear power plants are virtually new, and they
are safer and more efficient than ever.
Ten U.S. reactors already have been approved for 20-year license
renewals, and about half of the nation's 103 nuclear power plants have
filed or announced plans to submit license renewal applications to the
NRC during the next few years. NEI expects that nearly all of the
nation's reactors will eventually apply for license renewal.
USED NUCLEAR FUEL MANAGEMENT
The industry safely manages used nuclear fuel today at nuclear
power plant sites. There has never been any health or environmental
impact to the public from used nuclear fuel management.
Federal law has mandated the development of a centralized geologic
repository for long-term stewardship of used fuel from nuclear power
plants and the radioactive byproducts of the federal government's
nuclear programs. The Nuclear Waste Policy Act of 1982 and its 1987
amendments require DOE to locate, build and operate a deep, mined
geologic repository for used nuclear fuel. The 1987 amendments
designated Yucca Mountain, Nev., as the site to be studied for a
potential repository.
President Bush last year approved Yucca Mountain as the site to
develop a federal repository and the decision was upheld by the 107th
Congress. I want to thank this committee for its leadership in moving
the Yucca Mountain resolution in Congress. The next step in that
process is the NRC's licensing the repository site and granting
construction authorization. DOE expects to file a license application
with the NRC by December 2004. It is imperative that DOE meets its
milestones for licensing so the repository can be built and operating
by 2010.
To pay for the repository, the Nuclear Waste Policy Act established
the federal Nuclear Waste Fund. Since 1983, consumers of electricity
generated at nuclear power plants have paid a tax of one-tenth of a
cent per kilowatt-hour of nuclear-energy-generated electricity they use
into the fund, which now totals some $22 billion in payments and
interest. More than $6 billion from the Nuclear Waste Fund has been
used for scientific and engineering studies.
Congress must ensure that the program is adequately funded through
the annual appropriations process. Budget restrictions and processes
that unnecessarily prohibit use of the Nuclear Waste Fund for project
development must be removed. The nuclear energy industry supports the
administration's proposal to adjust the fund's discretionary spending
cap. We encourage the committee to support that proposal, but we
recognize that a more permanent fix is needed to ensure that funds
collected for the waste program are allocated as needed to that
project.
NUCLEAR ENERGY'S PROVEN ROLE IN PRESERVING OUR ENVIRONMENT
Nuclear energy is the only large source of electricity that is both
emission-free and readily expandable. Its exemplary safety record,
outstanding reliability, low operating costs and future price stability
make nuclear energy a vital fuel for the future.
Nuclear energy accounts for three-fourths of all U.S. emission-free
electricity generation. The Bush administration has established a
proposal to cut U.S. greenhouse gas emissions by 18 percent by 2012
through a voluntary approach that is compatible with economic growth.
The administration clearly believes that nuclear energy is a key to the
plan's success. Secretary of Energy Spencer Abraham recently said of
nuclear energy, ``It's obvious to me that an energy source capable of
supplying a significant proportion of the world's power with no
greenhouse gas emissions should be at the center of the debate.''
The electric utility industry and DOE have established a voluntary
partnership called Power Partners to develop and implement voluntary
greenhouse gas reduction activities that will also sustain economic
growth. Power Partners' actions are guided by the principles of
improved energy efficiency, increased investments in research and
development, technological innovation, market-based initiatives, and
cost-effective reductions in carbon emissions.
The nuclear energy industry will play a significant role in the
Power Partners program. The U.S. nuclear industry can increase its
output by about 10,000 megawatts of capacity by 2012, resulting in
incremental reductions of 22 million metric tons of carbon equivalent.
The additional electricity production at nuclear power plants would
come from power uprates, improved productivity and plant restarts.
As a result, the nuclear energy industry could meet one-fifth of
the president's goal of reducing greenhouse gas emissions by 18 percent
in the next 10 years, building upon the nuclear industry's clean-air
accomplishments during the past four decades.
Looking beyond 2012, the nuclear energy industry is prepared to
play a major role in sustaining the president's commitment to reduce
the greenhouse gas intensity of the U.S. economy, as the industry
pursues its goal of building 50,000 megawatts of new nuclear energy
capacity in the United States by 2020. This additional 50,000 megawatts
would reduce U.S. greenhouse gas emissions by approximately 100 million
metric tons of carbon equivalent. At the same time, nuclear energy
avoids emissions of sulfur dioxide and nitrogen oxide.
PUBLIC SUPPORT FOR NUCLEAR ENERGY
Protecting our environment and improving U.S. energy security are
among the reasons why two out of three Americans favor nuclear energy
as one way to generate electricity.
Another reason for the public's steady support for nuclear energy
is that the public views nuclear energy as a fuel of the future.
In an October 2002 survey, a record high 73 percent of college
graduates registered to vote favored the use of nuclear energy. Those
who ``strongly support'' the use of nuclear energy outnumbered those
who ``strongly oppose'' by an increasingly wide margin--three to one.
Nearly two-thirds of the general public favored nuclear energy, and
the gap between those who strongly favor (30 percent) and strongly
oppose (15 percent) nuclear energy is the largest that it has been
during the past two decades. The trends among the general public over
the years have paralleled those among college graduates who are
registered to vote--but the more educated and politically active group
always has been more favorable toward nuclear energy.
Record numbers of college graduate voters--88 percent--also
supported renewing the licenses of nuclear power plants that meet
federal standards, and 77 percent strongly agreed we should keep the
option to build more nuclear power plants in the future. Fifty-nine
percent of college graduate voters and 55 percent of all adults agreed
that we should ``definitely build more nuclear power plants.''
COMPREHENSIVE ENERGY LEGISLATION
NEI believes that diversity of supply and technology are the
strength of our electrical system. With regard to nuclear energy's role
in a comprehensive energy policy, NEI encourages the committee to
support the following recommendations:
Renewal of the Price-Anderson Act. Congress should renew the Price-
Anderson Act as soon as possible. The Price-Anderson Act of 1957,
signed into law as an amendment to the Atomic Energy Act, provides for
payment of public liability claims related to any nuclear incident. It
is a proven framework that has worked for nearly 45 years. Given this
proven record, Congress should renew it indefinitely. If needed,
Congress can reopen the law--as it can any law--at any time if
modifications are needed. In addition, Congress can request periodic
updates on the status of Price-Anderson Act implementation from the NRC
in order to provide a basis for change if necessary.
In its 1998 report to Congress, the Nuclear Regulatory Commission
said that the Price-Anderson Act has ``proven to be a remarkably
successful piece of legislation'' that has grown in depth of coverage
and that proved its viability in the aftermath of the Three Mile Island
accident.
Amendments to the Atomic Energy Act. The Atomic Energy Act should
be amended so that the NRC is positioned to meet the energy challenges
of the 21st century. Recommended amendments to the law include:
Removing the statutory requirement that NRC conduct antitrust
reviews of applications to build new nuclear plants. This
review already is being done by other federal agencies that
have the core competencies to perform it.
Removing the statutory prohibition of foreign ownership of
U.S. commercial nuclear power plants. The NRC would have the
responsibility to ensure that their actions are not inimical to
our national security.
Ensuring that smaller, modular nuclear reactors are not
subjected to inappropriate liability under the Price-Anderson
Act's secondary financial protection provision.
The secretary of energy should be authorized to provide financial
assistance through loans, loan guarantees and lines of credit to a
limited number of new nuclear projects.
Tax treatment updated to reflect today's business conditions and to
enable sustained private sector investment in, and large-scale
commercial deployment of critical energy infrastructure, particularly
large capital projects--such as nuclear projects. Also, reform is
needed for tax treatment for decommissioning funds, as in the House
version of H.R. 4 that was passed last year.
Authorization for nuclear energy research and development should
include:
Funding for government/industry activities, including the
Nuclear Energy Research Initiative, aimed at the development of
new reactor technologies; the Nuclear Energy Plant
Optimization, focused on the optimization of existing reactors;
and the Energy Department's ``Nuclear Power 2010'' initiative,
with an objective of building a new reactor within this decade.
Authorization to support enhanced university nuclear science
and engineering programs to ensure ample nuclear professionals
for the future.
Funding demonstration projects using nuclear energy to produce
hydrogen, both at existing nuclear energy plants and through
new advanced reactors. NEI urges supporting a demonstration
project for using new reactor designs in this effort at a
national laboratory. This would provide a dramatic boost to the
president's Clear Skies initiative to promote the use of this
clean fuel for the future.
Providing increased predictability for the introduction of
uranium from U.S. government inventories into the commercial
marketplace. Market participants must be able to plan prudently
for the introduction of this uranium into the market, and to
avoid adverse affects on the domestic uranium mining,
conversion or enrichment industries.
Elevating the Office of Nuclear Energy at the Department of
Energy to assistant secretary status, thereby assigning the
appropriate level of focus to nuclear energy within the
nation's energy policy.
Creating an Office of Used Nuclear Fuel Research within the
Energy Department.
CONCLUSION
Nuclear energy provides clean, affordable and reliable electricity
to one of every five U.S. homes and business and has been a vital
partner in meeting clean-air requirements since passage of the Clean
Air Act. As our country's electricity demand continues to rise, nuclear
energy will be even more important to American consumers. A prudent
national energy policy must include provisions for expansion of the
nuclear energy industry. One of the most fundamental elements of
America's economic strength is the diversity of energy supply that
drives our economy. Nuclear energy is a critical component to preserve
our diverse energy supply, to continue to lessen our dependence on
volatile foreign energy, and to meet new requirements for emission-free
electricity.
Thank you for this opportunity to share the nuclear energy
industry's perspective on the important policy issues this subcommittee
is considering. NEI encourages the subcommittee to give full
consideration to the policy recommendations the industry has outlined
in this testimony.
STATEMENT OF ANNA AURILIO
Ms. Aurilio. Good afternoon, Mr. Chairman, Congressman
Boucher and others. Thanks for the opportunity to testify.
My name is Anna Aurilio, I am the Legislative Director for
the U.S. Public Interest Research Group. We are the national
lobbying office for the State PIRGs, which are non-profit, non-
partisan, good government, environmental and consumer advocacy
groups active across the country.
Now we have a long history in working for clean energy and
against dirty energy of which nuclear energy certainly has to
be probably the No. 1.
Our vision of the future is a clean energy future. We
propose to increase renewable energy production so that it
results in a fifth of our energy electricity production by
2020.
We proposed to reduce oil consumption in vehicles by a
third, by 2020. We propose to increase consumer protections,
not repeal things like PUHCA, so that electricity consumers are
protected.
And finally, of course, if we do the renewable energy and
energy efficiency policies that we know are possible, we won't
have to drill in places like the Arctic National Wildlife
Refuge or other special wilderness areas.
Let me focus on nuclear power and the draft legislation
which we got on Friday. Our basic position is that nuclear
power is unsafe, uneconomic, unreliable and it generates waste
for which there is no sound solution.
Unfortunately, this legislation is a recipe for nuclear
disaster. It proposes more subsidies, more bail outs. It
actually rolls back a two decades long non-proliferation
policy, and it fails to address basic and major safety concerns
that have been raised both before and after September 11.
Let me go into some specifics. Consumers, myself included.
I couldn't believe it when I opened my gas bill this month,
were faced with skyrocketing energy bills.
Yet this legislation promotes the most expensive
electricity source. I know you have heard different facts and
figures about the cost of nuclear power, but you have to strip
away the subsidies.
So, first and foremost, for existing nuclear power plants,
you need to understand that in almost every State where
deregulation has happened, the nuclear power plant owners got
their mortgages paid off through stranded cost bail outs.
So any forward going costs that they are proclaiming right
now, is because rate payers have already paid. And our estimate
is in 11 States alone, rate payers paid an extra $112 billion
as a cost of deregulation.
So you have to face reality there in terms of what the
actual costs of those nuclear power plants are going forward.
There is no reason then to continue to subsidize the existing
plants.
Policies like the Price-Anderson Act were intended to be
temporary. In 1957, when the legislation was passed, it was
supposed to be for 10 years until the industry could stand on
its own.
Time for the industry to stand on its own. We are gratified
that this legislation at least contains some of the amendments
that the House Energy and Commerce Committee put on to address
nuclear terrorist threats, address contractor accountability,
etcetera.
But, so I am stunned to hear Mr. Fertel say that he doesn't
like those because those are about the only provisions we
approve of there.
But we see no justification for continuing Price-Anderson
anyway. If the nuclear industry is safe, there is no reason to
limit the liability of nuclear power plants.
Second, we have also seen a plea for more money to develop
new nuclear power plants by 2010. My testimony has footnotes
that will drive you to DOE's website where they have
commissioned a company called Scully Capital, to look at what
it would actually take to build a new nuclear power plant by
2010.
Again, don't believe the numbers that you hear. This is a
financial analyst organization that says that the Federal
Government would have to create even more subsidies than
already exist in order to build new nuclear power plants by
2010.
Including potentially entering into power purchasing
agreements at 50 percent or more above market price. This is
not an energy source that the Federal Government should be
investing in.
Next point. While Americans are being asked to sacrifice to
prevent rogue nations from using nuclear weapons, this
legislation actually rolls back important non-proliferation
policies.
The sections which deal with advanced fuel recycling
policies, basically roll back a policy the U.S. has had against
extracting plutonium from commercial fuel.
Plutonium is the problem. Getting it out of the commercial
spent fuel will make it easier for wrong-doers to get their
hands on it. And certainly, as some documents on DOE's website
suggest, to start a commercial nuclear fuel cycle, based on
plutonium, seems to me the silliest thing I have ever heard in
this day and age.
Finally, we have aging nuclear power plants around the
country. In Ohio, the Davis-Besse plant, which several people
actually referenced in their opening statements, is a clear
example of where the Nuclear Regulatory Commission is not
adequately regulating.
Where a company begged and kicked and screamed, according
to NRC Inspector General transcripts of interviews with NRC
employees, and basically convinced the regulators to not shut
down the plant for 3 additional months, even though there was
very, very convincing evidence that there was something wrong
at the plant.
Now I thank God that nothing happened there, but basically
there was an eighth of an inch of stainless steel left by the
time the plant was finally shut down and checked.
So I think we need to and Congress and this committee in
particular, which has oversight of the NRC, needs to do a
couple of things.
One is it needs to demand that NRC enforce its own safety
regulations. And two, it needs to demand that NRC actually send
a report to Congress, every month, like it does on other NRC
issues and report on the progress of that enforcement.
I think my time is up, but I just want to make one more
plea, which is States rights. A lot of Governors and a lot of
folks in the States are realizing that the evacuation plans
which are only ten mile evacuation plans, when we know that if
there is an accident there could be harm in a greater area than
that, are realizing that they are very, very inadequate to
protect public safety.
And I think we should give Governor's the rights to, one,
veto evacuation plans. Shut down plants if they serve an
unreasonable risk. And veto the sighting of any new plants if
they are an unreasonable risk to public health and safety.
Thank you.
[The prepared statement of Anna Aurilio follows:]
Prepared Statement of Anna Aurilio, Legislative Director, U.S. Public
Interest Research Group
Good morning, my name is Anna Aurilio and I'm the Legislative
Director of the U.S. Public Interest Research Group, or U.S. PIRG. U.S.
PIRG is the national office for the State PIRGs, which are
environmental, good government and consumer advocacy groups active
around the country. Thank you for the opportunity to speak today.
The state PIRGs have a long history of working for a clean
affordable energy future. Our goal is shift from polluting and
dangerous sources of energy such as nuclear and fossil energy to
increased energy efficiency and clean renewable energy sources.
Nuclear power is unsafe, unreliable, uneconomic and generates long-
lived radioactive wastes for which there is no safe solution. All
aspects of the nuclear fuel cycle pose a risk to humans and the
environment. It should be phased out as soon as possible and should not
be encouraged as a future energy source.
Since the late 1970's, the PIRGs have worked to protect the public
from unsafe, expensive nuclear reactors. PIRGs successfully opposed the
construction of several nuclear power plants because of cost, safety
and nuclear waste concerns. For example, in 1982, litigation by
MASSPIRG helped cancel the proposed Pilgrim 2 nuclear power plant. In
1983, NJPIRG helped cancel the proposed Hope Creek nuclear power plant.
CoPIRG worked for the creation of the Office of Consumer Counsel (OCC)
in 1984. The OCC was key in protecting ratepayers from being burdened
with ``stranded costs'' in the St. Vrain nuclear power plant case.
During the last reauthorization of the Price-Anderson Act, the
PIRGs successfully advocated for lower taxpayer liability in case of a
nuclear accident. From 1993 through 1995, PIRG helped shift more than
$500 million in nuclear and fossil R&D spending to efficiency and
renewable programs. During that time, we helped convince Congress to
eliminate funding for two extremely expensive advanced reactor
programs, the gas-cooled reactor and the breeder reactor known as the
Advanced Liquid Metal Reactor, saving taxpayers at least $5.6 billion.
In 2002, the PIRGs helped defeat a nuclear-subsidy laden energy bill in
House/Senate conference.
Today I will be addressing nuclear energy issues, especially
focusing on policies that should and shouldn't be included in energy
legislation. Overall we are dismayed that the draft legislation
developed by this subcommittee takes us in the wrong direction. By
extending and increasing nuclear subsidies, reversing decades of
nuclear non-proliferation policy, and failing to address major safety
concerns, this legislation is a recipe for nuclear disaster, not a safe
energy future.
Uranium mining threatens public health. Uranium mining and
enrichment has caused sickness and death in workers and has generated
tons of mining and enrichment wastes, which continue to threaten nearby
communities. Current uranium mining practices include ``in-situ''
leaching, which pollutes precious aquifers in the arid West. We are
particularly disappointed to see that the draft legislation circulated
by this subcommittee contains a subsidy for ``in situ'' leach mining
(Section 4029). This section authorizes the Department of Energy (DOE)
to spend $10 million annually for fiscal years 2004, 2005, 2006 to
identify, test and develop ``in situ'' leach mining technologies. This
uranium mining technology, whereby mining companies inject millions of
gallons of chemical solutions into the groundwater to extract uranium
from the host rock, pollutes groundwater in the West. We are concerned
that a three-year, $30 million subsidy will serve to prop up a failing
industry that has a terrible environmental track record. We are
particularly concerned that this type of subsidy could allow a disputed
project in New Mexico to go forward, threatening a pristine water
supply for the Crownpoint Navajo Nation.1
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\1\ U.S. PIRG, ``Polluter Payday'', November 2001, p. 33. http://
www.newenergyfuture.com/polluter__payday__11__8__01.pdf
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Nuclear power plants threaten nearby communities. Nuclear power
plants are very complex and contain enormous amounts of potential
energy in the fuel at the core of the reactor. The most tragic example
of the dangers posed by this technology is the 1986 accident at the
Chernobyl reactor in the Ukraine. The explosion and core meltdown at
Chernobyl released radiation that generated a plume encompassing the
entire Northern Hemisphere 2. Here in the U.S., in addition
to the partial core meltdown at Three Mile Island in 1979, which forced
the evacuation of nearly one hundred fifty thousand people, there have
been four other nuclear accidents in the U.S. involving at least
partial core meltdown.3
---------------------------------------------------------------------------
\2\ OECD Nuclear Energy Agency report ``Chernobyl Ten Years On,
Radiological and Health Impact', November 1995.
\3\ Public Citizen website http://www.citizen.org/Press/pr-
cmep84.htm
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The potential consequences of a serious accident are staggering. A
1982 study by the Sandia National Laboratories found that a serious
accident at a U.S. nuclear reactor could cause hundreds to thousands of
deaths in the near term.4 In 1985, in response to a question
posed by Representative Markey, an NRC commissioner responded that
there was a 45% chance of a severe nuclear accident in the following
twenty years.
---------------------------------------------------------------------------
\4\ Union of Concerned Scientists, Nuclear Plant Safety: Will the
Luck Run Out? December 15, 1998
---------------------------------------------------------------------------
Nuclear power plants are not secure. The tragic events of September
11, 2001 have raised serious concerns about safety and security at
nuclear facilities in this country. Many facilities cannot even meet
the current security requirements widely considered to be inadequate.
Nearly half have failed to repel small groups of intruders on foot in
``force-on-force'' exercises conducted by the Nuclear Regulatory
Commission. Researchers at Princeton University found that an attack on
irradiated fuel stored at nuclear power plants could cause
contamination problems 8 to 70 times worse than those caused by the
1986 meltdown at the Chernobyl nuclear power plant.5
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\5\ http://www.noradiation.org/hazards/spent__fuel__pre-
print__1__311.pdf
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Even before September 11, we were very concerned about the safety
of nuclear reactors currently operating in this country. We are
encouraged to see that the draft legislation maintains amendments added
by Rep. Markey and Waxman in last year's markup (Sections 4012, 4013).
However, these requirements are not enough to guarantee adequate
protection from the radiation released in case of terrorist attacks or
accident.
For example, Dr. Ed Lyman of the Nuclear Control Institute
estimates that a terrorist attack on the Indian Point 3 nuclear power
plant resulting in core melting and containment breach would result in
an 1500 fold increase in childhood thyroid cancer for children living
35 miles downwind.6 Despite these and other risks, the
Nuclear Regulatory Commission (NRC) has insisted that the NRC does not
have to consider the environmental impacts of terrorist attacks on
licensing new and existing facilities since the threat is
``speculative.'' Despite studies that show harmful impacts beyond
current evacuation zone boundaries, NRC insists on limiting emergency
evacuation zones to only 10 miles.
---------------------------------------------------------------------------
\6\ Statement of Dr. Edwin Lyman, Nuclear Control Institute before
the Committee on Environmental Protection, New York City Council,
February 28, 2003.
---------------------------------------------------------------------------
This committee should require that NRC be obligated to consider the
risk of a terrorist attack on licensing new facilities and extending
the license on existing facilities. The NRC should increase emergency
evacuation zones to fifty miles and re-evaluate the adequacy of
existing evacuation plans to take into account the threat of attacks.
Finally, Congress should restore states' rights and give governors the
right to veto the siting or license extension of facilities that pose a
significant public safety risk.
NRC does not adequately regulate the ongoing safety of nuclear
power plants. There is a consistent pattern and history of lax NRC
enforcement and oversight ranging from fire prevention to worker
fatigue. The agency is focused on increasing the industry's
profitability, not protecting humans and the environment.
We are concerned that utility deregulation and new ownership of
reactors may increase risks of accidents because of increased pressure
to run the plants closer to the margin. This risk is heightened by the
fact that the 103 operating reactors around the country are
deteriorating with age more quickly than expected. Even Vice President
Cheney acknowledged the aging problem on the television show
``Hardball'' (March 21, 2001): ``[T]oday nuclear power--produces 20
percent of our electricity, but that's going to go down over time--
because some of these plants are wearing out.'' Despite industry's
claims that nuclear power is ``safe'', at least ten existing reactors
have experiencing aging-related shutdowns since January
2000.7 One aging-related problem is reactor embrittlement.
Cracks in the reactor vessel caused by constant neutron bombardment
could lead to a meltdown. When problems were found, the Nuclear
Regulatory Commission (NRC) simply changed the safety margins and
allowed the utilities to recalculate their compliance. The recent
events at a reactor in Ohio expose a serious problem in NRC's
management culture and decision-making.
---------------------------------------------------------------------------
\7\ Union of Concerned Scientists, ``Aging Nuclear Plants and
License Renewal,'' Issue Brief, May 22, 2001
---------------------------------------------------------------------------
In November of 2001, the NRC allowed FirstEnergy, the owner of the
Davis-Besse plant in Ohio to ignore warning signs, then delay a
shutdown for three months. Inspectors found a six-inch hole in the
reactor cover that had only millimeters left until it breached the
cover. According to interviews with NRC personnel, the agency backed
down from issuing a safety-related shutdown order after FirstEnergy
argued vigorously against a shutdown at that time because they didn't
want bad publicity nor a drop in their financial ratings. At least one
NRC employee felt that the company withheld important information about
evidence of serious corrosion.8 The NRC's decision to let
the plant operate and rake in profits a few months longer even with
evidence of serious problems jeopardized the health and safety of the
surrounding communities.
---------------------------------------------------------------------------
\8\ Nuclear Regulatory Commission Inspector General Interviews on
Davis-Besse http://www.ucsusa.org/clean__energy/nuclear__safety/
page.cfm?pageID=1123
---------------------------------------------------------------------------
Steam generators are also susceptible to premature degradation. The
failure of as few as ten tubes can lead to a reactor meltdown, yet the
NRC has inadequate steam generator tube standards. For example, the
Indian Point 2 nuclear power plant is located 35 miles north of New
York City, along the Hudson River. It had been scheduled for steam
generator tube replacement in 1993, yet this never happened thanks to
increasingly lax NRC requirements. On February 2, 2000, a tube
ruptured, releasing radioactive steam.
We are astonished that the industry and the regulatory agency have
been lobbying for an even greater relaxation of safety standards and
oversight and limiting the public's access to these processes. This
committee should exercise its oversight over NRC's operations. It
should demand that the commission fully enforce its own safety
regulations and report to Congress monthly on its progress.
Nuclear power is unreliable. Complex and often mis-managed nuclear
power plants are subject to frequent fires, leaks and other accidents.
For example in 2001, the Nuclear Energy Institute's website boasts that
``Increased Nuclear Output Would Satisfy California's Residential
Demand.'' 9 It failed to mention a February 3 fire at the
San Onofre Nuclear Generating Station that shut the plant for weeks and
was a key factor in rolling blackouts in California.
---------------------------------------------------------------------------
\9\ http://www.nei.org/doc.asp?docid=724
---------------------------------------------------------------------------
Nuclear power is uneconomic. Nuclear power would not exist in this
country today if it weren't for enormous subsidies paid for by
ratepayers and taxpayers. Originally touted as being ``too cheap to
meter'', nuclear power plants are still too expensive for America. The
nuclear industry has received the vast majority of energy research and
development funding, a special taxpayer-backed insurance policy known
as the Price Anderson Act, unjustified electric rates from state
regulators, enormous and unwarranted bailouts in state deregulation
plans, taxpayer-funded cleanup of uranium enrichment sites plus a
giveaway of the Uranium Enrichment Corporation, and an ultimately
taxpayer-funded nuclear waste dump. Many of the issues I raise here are
described in more detail in the Green Scissors report
(www.greenscissors.org) released by U.S. PIRG, Taxpayers for Common
Sense and Friends of the Earth.
It is incredible that the nuclear industry shamelessly revises
history to pretend that it has transformed itself into a cost effective
energy source. This is an industry that is addicted to government
handouts, like an addict, it continues to ask for more handouts.
Congress should oppose nuclear research and development funding.
According to the Congressional Research Service, nuclear research and
development has gotten more than 60%, or $66 billion in energy research
and development funding from 1948-1998. Led by Representative Markey,
Mark Foley and others, Congress wisely killed funding for the gas-
cooled reactor and the breeder reactor, saving taxpayers at least $5.6
billion.
Now proposals to revive research programs to develop these
uneconomic and dangerous reactors are creeping into the Department of
Energy's budget. We are extremely disappointed that the subcommittee
draft legislation includes authorization of nearly $2 billion in
commercial nuclear research and development subsidies. These programs
are pure corporate welfare for an industry that has never paid its own
way. DOE's own studies (referenced in the draft legislation)
10 show that new reactors developed through taxpayer-funded
programs such as Generation IV and Nuclear Power 2010 are not cost-
competitive. Private utilities are not interested in building new
nuclear plants. Despite DOE's squandering taxpayer dollars on the gas-
cooled reactor known as the Pebble Bed Modular Reactor, the project's
lone U.S. supporter, Exelon has pulled out of the project. This reactor
design remains uncompetitive despite the fact that its developers
propose cutting costs by not building containment.
---------------------------------------------------------------------------
\10\ http://www.nuclear.gov/nerac/ntdroadmapvolume1.pdf
---------------------------------------------------------------------------
DOE commissioned a report by Scully Capital called ``Business Case
for New Nuclear Power Plants,'' 11which concludes that
existing taxpayer backed insurance (known as the Price Anderson Act),
federal research and development funds and ultimately federally-funded
nuclear waste program are not enough to make these new reactors cost-
competitive. Instead it recommends a mind-boggling suite of new
subsidies including: a federal energy credit program, low interest
loans, power purchase agreements (at up to 50% more than market
rates!), emissions credits and additional insurance. This report
estimates that the federal government would have to spend at least $1.5
to 2.75 billion in subsidies to bring down the capital costs of five
new nuclear plants. This estimate does not include any additional
subsidies for nuclear waste disposal, siting and permitting the new
plants.
---------------------------------------------------------------------------
\11\ http://www.nuclear.gov/home/bc/businesscase.html
---------------------------------------------------------------------------
Congress should oppose programs, which increase the threat of
nuclear proliferation. Plutonium, an element that can only be produced
in nuclear reactors, is the material of choice for nuclear weapons. All
reactors produce it, but it must be separated from highly radioactive
irradiated fuel before it can be used in weapons. This separation
process is known as ``reprocessing.'' For at least two decades, the
United States has had a policy against reprocessing waste from
commercial nuclear reactors and not allowing plutonium to be used as
fuel in nuclear reactors to prevent the proliferation of weapons-usable
material. There are several DOE projects and provisions in the draft
legislation that violate this common-sense policy or otherwise increase
the risk of nuclear proliferation. At a time when U.S. citizens are
asked to sacrifice to reduce the risk of rogue nations deploying
nuclear weapons, these programs will make the world an even more
dangerous place.
Section 6431, the Advanced Fuel Recycling Program specifically
reverses the decades-long U.S. policy against reprocessing commercial
nuclear waste. It advocates reprocessing commercial nuclear fuel and
using several types of reactors, including breeder reactors, to
allegedly reduce the volume and toxicity of the waste. Nuclear
``breeder reactors'' can be configured to produce plutonium. Congress
wisely killed the U.S. breeder reactor program in 1994, citing economic
and non-proliferation concerns. The breeder reactor supporters ignore
the dismal failure of France's breeder reactor program and the chance
of a reactor explosion if the coolant (usually highly reactive sodium)
leaks.
A January 2003 report, entitled ``Report to Congress on Advanced
Fuel Cycle Initiative: The Future Path for Advanced Spent Fuel
Treatment and Transmutation Research, admits that this costly program
will not obviate the need for a geologic repository. Further it
contradicts itself with regard to nuclear non-proliferation. First, it
claims that the program can ``destroy'' plutonium thus reducing the
risks of this material falling into the wrong hands.12 On
the same page, however, it touts the potential for a commercial nuclear
fuel cycle based on the plutonium separated from existing irradiated
fuel--a program that would dramatically increase the risk of weapons
materials falling into the wrong hands by putting separated plutonium
into commercial nuclear reactors!
---------------------------------------------------------------------------
\12\ Report to Congress on Advanced Fuel Cycle Initiative: The
Future Path for Advanced Spent Fuel Treatment and Transmutation
Research, DOE, January 2003, p. II-6.
---------------------------------------------------------------------------
Congress should phase out the Price Anderson Act. We oppose
extension of the Price Anderson Act, which expired in August 2002, and
then was reauthorized for one year in the recently passed Omnibus
Appropriations bill. This insurance program is an unwarranted taxpayer
subsidy to the nuclear industry that has no parallel in any other
industry. This law, passed in 1957 and amended in 1988 provides
taxpayer-funded insurance for the nuclear industry in the event of an
accident. In case of an accident at a nuclear power plant, the industry
gets a guarantee of limited liability while the public gets no
guarantee of full compensation. This confers a substantial annual
subsidy to the nuclear industry in terms of foregone insurance
premiums. The Price-Anderson Act also provides blanket indemnity to
Department of Energy contractors, even in cases of intentional
misconduct and gross negligence. While we are encouraged by some of the
House-passed provisions that would: re-evaluate nuclear security
measures, require consultation with the Department of Homeland Security
and allow for civil penalties in the case of intentional misconduct by
a DOE contractor, this committee should reject Title IV, Subtitle A
which reauthorizes the Price Anderson Act. Not only does this section
reauthorize the Act for an additional fifteen years, it allows new,
untested ``modular'' reactors to pay less money in case of an accident.
If nuclear power is as ``safe'' as its proponents claim, there is no
need for a limit on industry liability.
Protect citizens from unjustified rate increases and bailouts at
the state level. We oppose the draft legislation's repeal of the Public
Utility Holding Company Act of 1935, one of the only laws still on the
books that protects electricity consumers. In analyzing current
electricity problems, it is important to recognize the magnitude of the
ratepayer subsidies enjoyed by this industry and the role these
subsidies have played in blocking competition and propping up
economically marginal nuclear power plants.
In the 1980's, the PIRGs successfully blocked unjustified rate
increases for nuclear power mismanagement. As states across the country
restructured their electricity markets, the promise to consumers was
that these changes would provide competition among electricity
providers. Instead, utilities lobbied, and for the most part received,
an unjustified ratepayer-funded bailout of their uneconomic
investments, usually nuclear power plants. The PIRGs, free market, and
other consumer and environmental groups in several states fought back
against these requests for ``stranded cost'' recovery. We argued that
these bailouts were unjustified and unfair to consumers and would
hamper efforts to shift towards clean energy. According to a report
released in 1998 with the Safe Energy Communication Council entitled
``Ratepayer Robbery'' we estimated these bailouts could total more than
$112 billion for just eleven states. There is strong evidence that
without these bailouts, almost half of the nuclear power plants would
have shut down. Instead, aging plants have been given a new lease on
life, are in some cases, still shielded from market forces. Some have
been sold at rock-bottom prices to new owners who have every incentive
to run them close to the margin. Instead of repealing electricity
consumer protection laws, the subcommittee should strengthen consumer
protections and block the continued bailout of the nuclear industry
through ``stranded cost'' provisions.
Curb taxpayer costs for nuclear waste and index the fee to
inflation. The nuclear industry is the only industry that we are aware
of which has a government program to guarantee disposal of lethal
waste. We agree with the industry that the DOE has mismanaged the
program. However, our solution is stop spending money on the program
and insure that enough money is collected now to adequately cover
future costs of a sound waste disposal program. A 1998 financial review
commissioned by the State of Nevada concluded that the funding
shortfall for the program would range from $12 to $17 billion in 1996
dollars. We urge that the Nuclear Waste Fund Fee be indexed to
inflation so that there will be adequate funds to cover the ultimate
cost of nuclear waste disposition.
There is no current sound solution for the nuclear waste problem.
Nuclear waste is one of the most dangerous substances created by
humans. This waste remains dangerous for at least a quarter of a
million years (based on the decay of Pu-239). One would expect that
policies for dealing with this lethal material would be based on sound
science and protecting public health. Instead nuclear waste policies in
this country have been based on political expediency. The incredible
problems faced by citizens living near former DOE weapons sites, such
as Hanford, Washington should be a lesson to those who want to ignore
science and public health. Irradiated fuel from nuclear reactors is
perhaps the most toxic material generated by humans. Unshielded, it
delivers a lethal dose of radiation within seconds. According to the
Department of Energy, 95% of the radioactive waste (by radioactivity)
in this country has been generated by commercial nuclear reactors.
We believe that the current project should be stopped, as the
proposed dump site at Yucca Mountain cannot meet current standards for
containing the waste. In 1998, PIRG and more than one hundred
environmental, consumer and safe energy organizations petitioned then-
Energy Secretary Richardson to disqualify Yucca Mountain because it
would not meet current standards for containing the waste. Instead, DOE
weakened the site guidelines, a clear case of changing the rules when
science gives the answer that is not wanted.
Last year, Congress ignored serious safety concerns including the
risk of transporting this waste across the country, and overrode the
State of Nevada's veto to designate Yucca Mountain, Nevada as the
nation's nuclear waste dump. The Bush Administration's 2004 budget
proposal would reserve funds specifically for the Yucca Mountain
project within discretionary cap adjustments for 2004 and 2005. This
proposal would inappropriately limit the discretionary authority of
appropriators to balance various budget priorities, essentially
granting the DOE a blank check for Yucca Mountain spending. The General
Accounting Office reported last year that, ``DOE currently does not
have a reliable estimate of when, and at what cost, a license
application can be submitted or a repository can be opened.''
We urge this committee to re-examine nuclear waste policy and
develop a public, fair process based on sound science and protecting
the public for deciding the ultimate fate of this extremely dangerous
material. No country in the world has a permanent solution to this
problem. The U.S. should reject its current mismanaged program that
relies on changing the rules when the science isn't favorable to the
industry's solution. Instead, we should show leadership by developing a
solution focused on sound science and protecting the public.
CONCLUSION
Nuclear power is unsafe, uneconomic, unreliable and generates waste
for which there is no sound solution. It is a failed technology of the
past and would not exist were it not for enormous and unjustified
government subsidies and policies. The U.S. should do everything it can
to protect the health and safety of the public as well as our
pocketbooks. Nuclear power should be phased out as quickly as possible
and replaced by energy efficiency and clean renewable energy.
STATEMENT OF JEFFREY A. BENJAMIN
Mr. Benjamin. Chairman Barton, Ranking Member Boucher and
members of the subcommittee. My name is Jeff Benjamin, Vice
President of Licensing and Regulatory Affairs for Exelon
Nuclear.
I have also led our company's efforts to respond to the
security issues following the tragic events of September 11,
2001. My background includes working at four different reactor
sites over the past 17 years, including as a Site Vice
President at Exelon's LaSalle generating station.
Exelon is the largest operator of nuclear plants in the
United States. We own and operate 17 reactors at 10 sites in 3
States, which represents approximately 20 percent of the
commercial industry here in the United States.
I am particularly grateful for the opportunity to discuss
the matters before you today regarding legislation to define
and implement the comprehensive energy policy for this country.
Mr. Chairman, throughout my career in the nuclear power
industry, safe operation of our plants and the safety of the
public has been job one.
We recognize that operating our plant safely is essential,
both from a public confidence standpoint and as a matter of
good business economics.
The safe operation of our plants also includes providing
effective security to protect the public from radiological
sabotage. Since September 11, the nuclear industry has taken
numerous and comprehensive steps to further strengthen security
at our sites.
We have discussed these steps before you previously and
maintain those improvements today. Suffice to say, with these
improvement in place, we have added real security over the past
17 months.
Security measures that complement the pre-existing robust
security that we had in place prior to September 2001. Recently
the Nuclear Regulatory Commission provided the industry with an
opportunity to comment on the staff view of adversary
attributes for radiological sabotage.
This staff document contains a proposed change to the
design basis threat which defines the nature of threats against
which we are responsible for defending against.
The current NRC proposal contains several significant
changes, that if implemented, present a number of considerable
policy and legal challenges.
Challenges that also translate to other critical
infrastructure. The issue at the heart of these challenges is
improperly defining the division of responsibility between a
civilian guard force and government, largely law enforcement
and the military.
We have asked the NRC to resolve these issues, in full
consultation with the Department of Homeland Security and
Congress prior to proceeding with a revised design basis
threat.
The NRC seems intent on issuing a revised design basis
threat prior to resolving these issues. But the steps we have
taken to strengthen security to date, we have the time to do
this right.
We also feel that the creation of the Department of
Homeland Security has defined the appropriate structure for
threat assessment, response and recovery and has obviated the
need for any additional legislation in these areas.
Much of what is included in Section 4012 of your bill has
been overtaken by events and should be reconsidered. I would
now like to discuss Exelon's view on the viability of nuclear
option going forward.
Our company has a consistent standard for operating our
nuclear plants. We will only operate them if they are both
economical and safe.
I would like to start by addressing the notion that our
industry is heavily subsidized. First of all, and I believe
this is unique from other fuel sources, our industry pays for
the cost of being regulated by the NRC, through the NRC's
collection of fees.
Second, we pay for the existence of an industry watch dog
group, the Institute of Nuclear Power Operations, who's main
focus is plant safety and the sharing of best practices.
And third, and again, unlike the other forms of generation,
we prepay our ultimate environmental clean up costs through
decommission funds and the payments to the Nuclear Waste Fund.
Last year alone Exelon paid close to $119 million into the
Waste Fund. Collectively, this prevents future generations from
inheriting the burden of radiological decommissioning and waste
disposal after our plants have shut down.
Our position on new reactors is simply that we believe that
nuclear power is an option that must be maintained. We also
believe that any new nuclear investment must be based on
rigorous financial and risk evaluations that reflect the
reality of a deregulated market.
Exelon has also been aggressive in upgrading the output of
our units. And we have done that safely. Since 1998, in
Illinois alone, we have added nearly 800 megawatts of capacity
to our existing plants at a cost of just under $300 per
installed kilowatt.
This compares roughly to $600 to $650 per installed
kilowatt for a new combined cycle gas turbine and roughly
$1,000 to $1,100 an installed kilowatt for a new coal plant.
Over the past 4 years, concurrent with installing these
upgrades, we have operated our plants more efficiently and
safely than ever before. Exelon has also submitted an
application to the NRC to extend the licenses for Peach Bottom,
Quad Cities and Dresden, for an additional 20 years.
The preparation of the Peach Bottom submittal alone
involved over 30 man years of engineering effort to meet NRC
application requirements and to assure the plant can operate
safely for another 20 years.
We are expecting approval of our Peach Bottom submittal in
May. The cost of this effort equates to less than $10 an
installed kilowatt, for another 20 years of 2,300 megawatts of
generation.
As a final point regarding the overall economics of our
plants, in the year 2002, we operated our nuclear fleet at a
capacity factor of 92.7 percent.
Our production costs, which includes our operating and
maintenance costs and fuel, was 1.3 cents a kilowatt hour. Our
all end costs for 2002, which includes everything from
operating and capital expense to fuel, our property taxes and
our mortgage, was 2.01 cents per kilowatt hour.
These costs remain relatively steady even with cold
weather. Fuel is not a major driver to our costs. Our costs are
driven by operating and maintenance expenses.
One simply needs to compare these generation costs with
recent volatility in the spot electricity prices to recognize
the stable yet cost-efficient role of nuclear power.
In summary, we recognize the special importance placed on
our industry to operate our plant safely. However, we also feel
that nuclear has an appropriate an important role in assuring
the energy security of America in the future. Thank you.
[The prepared statement of Jeffrey A. Benjamin follows:]
Prepared Statement of Jeffrey A. Benjamin, Vice President, Licensing
and Regulatory Affairs, Exelon Corporation
Mr. Chairman and Members of the Subcommittee: I am Jeff Benjamin,
Vice President of Licensing and Regulatory Affairs for Exelon Nuclear,
a subsidiary of Exelon Corporation.
Thank you for the opportunity to share Exelon Corporation's views
on the nuclear energy provisions of Chairman Barton's draft
comprehensive energy legislation being considered by the Subcommittee.
Exelon Corporation is one of the largest electric suppliers in the
United States, with major interregional operations in generation,
transmission, distribution and marketing. Our two utilities,
Commonwealth Edison of Chicago and PECO Energy of Philadelphia, serve
approximately 5.1 million retail customers, the largest customer base
in the country. Exelon and our affiliates own or control generation
totaling over 40,000 megawatts, the largest generation portfolio in the
country. Our wholesale power marketing division, known as the Power
Team, markets the output of our generation portfolio throughout the
lower 48 states and Canada with a perfect delivery record.
Exelon Nuclear owns the nation's largest fleet of commercial
nuclear plants, operating 17 reactors at 10 sites in Illinois,
Pennsylvania, and New Jersey. These plants--with 17,800 net megawatts
of total operating capacity--represent roughly 20 percent of the
nuclear capacity in the United States.
During 2002, Exelon's fleet of nuclear plants operated at an
average capacity factor of over 92 percent and produced 118.7 million
megawatt-hours of electricity, about 3 percent of all the electricity
generated in the United States last year. All of this electricity was
generated without emitting any criteria air pollutants or greenhouse
gases. In fact, Exelon's nuclear fleet avoided the emissions of over
119 million tons of CO2 during 2002.
Exelon achieved this performance while refueling 11 reactors in a
record average of 22 days and completing the year without a single
lost-time or restricted-duty injury at 9 of our 10 plant sites.
As Congress considers changes to America's energy policy, it is
important to recognize the role of nuclear power and to make changes to
Federal policy that will promote a diversity of generation technologies
in the future. Exelon firmly believes that nuclear power will continue
to play a valuable role in providing the nation with a safe,
affordable, and environmentally-friendly supply of electricity, and I
encourage the committee to move forward with many of the nuclear
energy-related proposals included in Chairman Barton's draft
legislation.
COMMENTS ON TITLE IV
Subtitle A. Price-Anderson Act Renewal
Subtitle A of Title IV would renew the Price-Anderson Act,
legislation that ensures that the public is quickly compensated in the
event of a radiological event at a commercial nuclear reactor. Exelon
supports Price-Anderson renewal, both to continue the operation of our
current fleet of nuclear plants with contractor support and to provide
an essential prerequisite to the potential construction of new nuclear
plants.
While the draft legislation includes the Price-Anderson provisions
approved by the House of Representatives last year, Exelon would
encourage the committee to support the Price-Anderson renewal language
for commercial nuclear facilities that was agreed to last year by House
and Senate conferees to H.R. 4 during conference committee
consideration of that legislation.
One section of the draft proposal that was not included in last
year's conference agreement (Section 4012) addresses the issue of
nuclear facility threats. This section of the bill would direct the
President, in conjunction with the Nuclear Regulatory Commission (NRC)
and other federal, state and local agencies and private entities, to
assess the types of threats faced by commercial nuclear facilities. The
provision would also direct the President to assess the nature of any
threat posed by enemies of the United States and to classify threats as
being the primary responsibility of the Federal government or NRC
licensees.
Much of what is included in Section 4012 has been overtaken by
events, namely the creation of the Department of Homeland and the NRC's
current effort to develop a revised Design Basis Threat. However,
Exelon believes that it remains critical for all relevant agencies of
the Federal government--in conjunction with state and local agencies
and private entities--to fully examine the new threat environment
facing the nation's critical infrastructure industries and to classify
threats as being the primary responsibility of either the government or
private industry. This should be done prior to the issuance of a new
Design Basis Threat.
Additional comments on the issue of nuclear security are included
later in my testimony.
Subtitle B. Miscellaneous Matters
Subtitle B includes a number of miscellaneous provisions to amend
the Atomic Energy Act.
Section 4021 would clarify that the 40-year license period for
commercial nuclear reactors begins once the reactor commences
operation, not upon approval of the license. Exelon supports this
change, which codifies existing Commission policy.
Sections 4022 through 4025 address miscellaneous NRC-related issues
that have been requested by the Commission. Exelon has no objection to
these provisions.
Sections 4026 through 4028 include provisions requested by the NRC
to address security-related issues. Exelon has no objection to these
provisions.
NUCLEAR SECURITY
Protection of the health and safety of the public and our employees
is of paramount importance to the nuclear power industry. The industry
has worked closely with a variety of Federal, state and local officials
to identify safeguards and resources necessary to respond to potential
threats to plant security, and we are fully supportive of taking all
reasonable and necessary steps--whether they be by licensees or the
government--to ensure that nuclear plants are able to withstand an
attack by terrorists.
Commercial nuclear power plants are regarded by many to be the most
well-protected industrial facilities in the United States today.
Indeed, many other industries are turning to the nuclear industry as a
model for providing security at a variety of commercial facilities. For
example, in addition to unique physical protections employed at
commercial nuclear facilities, the nuclear industry is alone among
critical infrastructure industries in using the Federal Bureau of
Investigations to run criminal background checks on applicants for
positions at sensitive facilities.
Since September 11, 2001, the nuclear industry has undertaken
extensive measures to enhance security at the nation's 72 commercial
nuclear reactor sites, including actions to harden site access,
increase security resources, and improve operational readiness.
To harden site access, Exelon has:
established armed owner control area checkpoints for all
vehicles entering the site;
implemented additional vehicle pre-screening and control of
all on-site deliveries upon entry to the owner-controlled area;
positioned barriers to prevent access at alternate Owner
Controlled Area entrances;
restricted visitor access to those required for essential
plant work;
extended background checks for all personnel with temporary
unescorted access; and
checked employee databases against FBI watch lists of
suspected terrorists from all known terrorist organizations.
To increase security resources, Exelon has:
increased the number of security officers at each site;
procured additional weapons and upgraded armaments;
added armed security posts at key plant locations;
increased security presence at the site entrance; and
posted local law enforcement and, at times, National Guard
units at site entrances.
To enhance operational readiness, Exelon has:
enhanced plant procedures and operator training for use during
an attack or credible threat;
implemented a fleet-wide threat assessment procedure to
respond to threat situations;
elevated attention to security and fire protection related
equipment; and
established protocol for augmented federal and state law
enforcement assistance and intervention.
Mr. Chairman, I want to stress the multiplicity of concrete actions
we have taken since September 11, 2001, to respond to the increased
security needs of our Nation and to further enhance our already
substantial preparedness.
Revision of the Design Basis Threat
Since shortly after September 11, the Nuclear Regulatory Commission
has been engaged in a top-to-bottom review of the Design Basis Threat
(DBT), which defines the nature of threats against which nuclear plant
operators are responsible for defending, to reevaluate its adequacy. As
an interim measure, the Commission issued Orders on February 25, 2002,
that impose significant additional requirements on licensees pending
the completion of a more comprehensive review of safeguards and
security program requirements.
On January 2, 2003, the NRC provided the nuclear industry an
opportunity to comment on the ``Staff View of Adversary Attributes for
Radiological Sabotage.'' This staff document contains a proposed change
to the Design Basis Threat. The NRC proposal contains several
significant changes that, if implemented, present a number of
considerable policy and legal challenges. These challenges must be
addressed by the NRC, in formal consultation with the Department of
Homeland Security, other relevant Departments of the Administration,
state and local responders and Congress, prior to moving forward with
changes to the current DBT.
THE FUTURE OF NUCLEAR ENERGY
I would now like to discuss Exelon's view on the viability of the
nuclear option going forward. Exelon has had a consistent standard for
operating our nuclear plants--we will only operate them if they are
economical and safe. Opponents of nuclear power frequently claim that
the nuclear industry is heavily subsidized. Yet, unlike other
generation sources, the nuclear industry incurs several costs unique to
electric generators. First, our industry pays for the cost of being
regulated by a Federal entity (the Nuclear Regulatory Commission)
through the payment of NRC user fees. Second, the industry funds an
``industry watchdog'' group--the Institute of Nuclear Power
Operations--whose main focus is plant safety and the sharing of best
practices. Third, the industry fully prepays our ultimate environmental
cleanup costs through plant-specific decommissioning funds and the
Nuclear Waste Fund. This prevents future generations from inheriting
the burden of radiological decommissioning and waste disposal after our
plants have shut down.
With regard to new nuclear plants, Exelon strongly believes that
nuclear power is an option for the future that must be maintained. We
also believe that any new nuclear investment must be based on rigorous
financial and risk evaluations that reflect the reality of a
deregulated market.
We are one of three companies pursuing approval of an Early Site
Permit (ESP) from the NRC. We are seeking an ESP for our Clinton site
in central Illinois with the objective of ``banking'' the site for
potential use in the future (the permit would be good for 20 years).
Importantly, this process will serve to test the NRC's process for
determining site adequacy. We are also working with the NRC through NEI
to develop improved licensing processes for the consideration of new
plants. All of these efforts are focused on ensuring that when new
plants are built there is a well-defined and predictable regulatory
process in place.
Even without the addition of new plants, the industry is
dramatically increasing the amount of electricity generated from the
nuclear sector. Exelon has been a leader in uprating the output of our
existing units. In Illinois alone, we have added nearly 800 megawatts
of capacity to our plants since 1998 at a cost of just under $300/
installed kilowatt. This compares to roughly $800-1000/installed
kilowatt to build a new gas or coal plant. Coincident with these
uprates, our plants are running more efficiently and safely than ever
before.
The industry has also been active in pursuing the renewal of
operating licenses for existing plants. Exelon has submitted an
application to the NRC to extend the licenses for Peach Bottom, Quad
Cities, and Dresden for an additional 20 years. The preparation of the
Peach Bottom submittal alone involved over 30 man-years of engineering
effort to meet the application requirements and to assure the plant can
operate safely for another 20 years. We are expecting approval of our
Peach Bottom submittal in May.
CONCLUSION
Mr. Chairman, thank you for the opportunity to discuss these issues
with you. Exelon looks forward to working with you and members of the
subcommittee as you consider energy legislation this year.
STATEMENT OF EDWIN S. LYMAN
Mr. Lyman. I would like to thank Chairman Barton and the
other distinguished members of the subcommittee for the
opportunity to present the views of the Nuclear Control
Institute on the role that nuclear power should play in a
comprehensive national energy policy.
In the post-September 11, era, this issue merits most
careful consideration. The Nuclear Control Institute is not an
anti-nuclear organization. However, we do believe that the
nuclear industry and its regulator, the NRC, have an
extraordinary obligation to ensure that this inherently
dangerous technology is used as wisely, safely and securely as
possible.
We also believe that the Department of Energy has a
responsibility to respect longstanding U.S. non-proliferation
policy in considering the development of new nuclear
technologies, both in its domestic and international
cooperative research programs.
We cannot afford to repeat the mistakes of the early
promoters of nuclear energy, who's lack of foresight has
contributed in no small measure to real and growing threat of
nuclear and radiological terrorism that Americans face today.
Unfortunately, the lackluster response of the NRC to the
urgent nuclear security concerns after September 11, calls into
question is credibility as a responsible regulator.
And DOE's misguided plans to revive spent fuel reprocessing
and plutonium recycling in the U.S., and to encourage it
abroad, albeit under the guise of proliferation resistant
technology, will only increase the threat of nuclear
proliferation and nuclear terrorism in the world.
It is therefore up to Congress to ensure that any nuclear
component of a national energy policy be fully consistent with
the fundamental objectives of Homeland Security and non-
proliferation.
This requirement raises difficult issues. It is becoming
increasing apparent that effective Homeland Security cannot be
brought on the cheek.
It may turn out that the cost of measures needed to protect
Americans from nuclear and radiological terrorism will be too
great for the nuclear industry to bear and remain economically
viable.
But if the security of nuclear facilities can be guaranteed
only with public subsidy, Congress should assess how its
constituents feel about using their tax money for this purpose.
If public reaction is negative, Congress needs to
reconsider the role of nuclear energy in the future and whether
efforts should be directed toward technologies that present
less tempting terrorist targets.
I would now like to discuss a few specific objectives I
think are necessary for responsible nuclear energy policy. If
nuclear power is to have a continuing role in the Nation's
energy mix, there has to be a fundamental change in our
approach to protecting nuclear plants and materials from being
used as terror instruments.
Nearly 18 months after September 11, NRC is still dragging
its heels in putting into place a new frame work for nuclear
facility protection.
The industry is bitterly resisting any new security
requirements that will cost it money, and policymakers appear
no closer to resolving a crucial issue.
And I agree with Mr. Benjamin. This is crucial. Who should
have responsibility for protecting nuclear facilities against
September 11 scale threats?
Congressional action is needed to break these logjams and
the section on nuclear facility threats in the draft energy
bill is a step in the right direction.
The draft legislation would authorize a Presidential review
of threats to nuclear facilities in consultation with NRC and
other appropriate agencies. I believe that this review is
needed.
Because the current decision, a revised design basis
threat, is being made entirely within NRC, including closed
door consultations with the industry on the impact of the
revision on its financial bottom line.
This isn't appropriate. The magnitude of today's threat
should be based on the best intelligence information, something
utility executives are not in a position to assess.
And the decision on where the responsibility in the
industry stops and that of the Federal Government begins,
definitely deserves a wider range of discussions.
Now a related issue is the private sector is having
difficulty providing security forces that are flexible enough
to adjust rapidly to changes in the homeland security threat
status.
Utilities are unwilling to hire new security guards to meet
the greater demands associated with an increase in the status
if it appears the alert will only last for a short time.
But this means the existing guard forces are being burdened
with excessive over time in exactly the times they need to be
at peak levels of alertness.
Federal and other public resources, such as a reserve force
of nuclear responders may be needed to smooth out these
transitions.
Other issues that should be considered are the impact of a
jet attack on a nuclear plant and what defenses maybe
necessary, which again would be a responsibility we believe of
the Federal Government.
Also, the draft bill's provisions to establish and
operational safeguards response evaluation program are needed
because the current program, even though NRC is putting into
place, still have a number of weaknesses, including it is going
to remain a voluntary program for at least another year.
And I think that they need to have enforcement and NRC
should have the ability to choose the plants that it wants to
test. We shouldn't wait for the industry to come forward and
put their best foot forward.
Finally, other issues, such as new plant design approval,
license renewal, new plant siting, should take into account the
potential for terrorism.
For instance, for plant siting, there should a required
assessment of the desirability of plant locations as terrorist
targets from the standpoint of symbolic value, consequences,
and inability to evacuate the area.
This would help to avoid ill-advised siting decisions, such
as the one that allowed Indian Point to be built only 30 miles
from New York City.
Many of these issues could be addressed in NEPA
proceedings, but the NRC has recently ruled that out as far as
its own NEPA activities goes.
And so I believe Congress should mandate the NRC carry out
homeland security impact assessments for all significant agency
actions.
In summary, we need to solve today's outstanding security
problems affecting the nuclear industry before we can guarantee
a long term role for nuclear power in our country. Thank you
very much.
[The prepared statement of Edwin S. Lyman follows:]
Prepared Statement of Edwin S. Lyman, President, Nuclear Control
Institute
I would like to thank Chairman Barton and the other distinguished
members of the Subcommittee for the opportunity to present the views of
the Nuclear Control Institute on the role that nuclear power should
play in a comprehensive national energy policy. In the post-September
11 era, this issue merits most careful consideration.
The Nuclear Control Institute is not an anti-nuclear organization.
However, we do believe that the nuclear industry and its regulator, the
Nuclear Regulatory Commission, have an extraordinary obligation to the
American people to ensure that this inherently dangerous technology is
used as wisely, safely and securely as possible. We also believe that
the Department of Energy has a responsibility to respect long-standing
U.S. nonproliferation policy in pursuing the development of new nuclear
technologies, both in its domestic and international cooperative
research programs. We cannot afford to repeat the mistakes of the early
promoters of nuclear energy, whose lack of foresight has contributed in
no small measure to the real and growing threat of nuclear and
radiological terrorism that Americans face today.
Unfortunately, the lackluster response of the NRC to the urgent
nuclear security concerns that arose after the September 11 attacks
calls into question its credibility as a responsible regulator of the
U.S. nuclear energy infrastructure. And DOE's misguided plans to revive
spent fuel reprocessing and plutonium recycle in the U.S. and to
encourage it abroad--albeit under the guise of ``proliferation-
resistant'' technology--will only increase the threat of nuclear
proliferation and nuclear terrorism in the world.
It is therefore up to Congress to ensure that any nuclear component
of a comprehensive national energy policy be fully consistent with the
fundamental objectives of homeland security and non-proliferation. This
requirement raises difficult policy issues. It is becoming increasingly
apparent that effective homeland security cannot be bought on the
cheap. It may turn out that the cost of measures needed to provide the
American people with adequate protection from nuclear and radiological
terrorism will be too great for the nuclear industry to bear and remain
economically viable. If the security of nuclear facilities can be
guaranteed only with public subsidy, Congress should assess how its
constituents feel about using their tax money for this purpose. But if
public reaction is decidedly negative, Congress needs to reconsider
whether nuclear energy should have a significant role in the future or
whether efforts should be directed toward technologies that present
less tempting targets to terrorists.
I would now like to discuss a few specific objectives that are in
our view essential elements of a responsible nuclear energy policy.
If nuclear power is to have a continuing role in the nation's
energy mix, there must be a fundamental change in our approach to
protecting nuclear power plants and materials from being used as
instruments of terror. Nearly 18 months after the September 11 attacks,
NRC is still dragging its heels in putting into place a new framework
for nuclear facility protection, the nuclear industry is bitterly
resisting any new security requirements that will cost it money, and
policymakers throughout the government appear no closer to resolving
the crucial issue of who should have responsibility for protecting
nuclear facilities against September 11-scale threats. Congressional
action is needed to break these logjams, and the section on ``Nuclear
Facility Threats'' in the draft energy bill under discussion is a step
in the right direction.
The draft legislation would authorize a Presidential review of
threats to nuclear facilities, in consultation not only with NRC but
with other appropriate agencies. This review would take into account
realistic assessments of the post-September 11 terrorist threat, and
would identify an appropriate ``design basis threat'' (DBT),
establishing the dividing line between the level of protection that is
the responsibility of NRC licensees and the level that is the
responsibility of the Federal Government. This question raises complex
policy issues requiring high-level consideration and full interagency
involvement, including the appropriate role of Federal assets in
protecting commercial nuclear facilities.
This review is needed because right now the decision on a revised
DBT is being made entirely within NRC, including closed-door
consultations with the industry on the impact of the revision on its
financial bottom line. This is inappropriate. The magnitude of today's
terrorist threat should be based on the best intelligence information,
something that utility executives are not in a position to assess. And
the decision as to where the responsibility of the industry stops and
that of the Federal Government begins should obviously involve a wider
group than just the NRC and the industry it regulates.
A related issue that needs to be addressed is that the private
sector is having difficulty providing security forces flexible enough
to adjust rapidly to changes in the homeland security threat status.
Utilities have proven to be unwilling to hire new security guards to
meet the greater demands associated with an increase in the threat
status if it appears that the higher alert will only last for a short
time, as has been the case so far. But this means that the existing
guard forces are being burdened with excessive overtime at exactly the
times that they need to be at peak levels of alertness and performance.
Federal or other public resources--such as a reserve force of nuclear
plant responders--may be needed to smooth out these transitions.
Moreover, more general Federal assistance to nuclear plant guard
forces may also be appropriate. To remedy the wide variations in
qualifications, fitness and training among private security forces, the
U.S. could standardize the process for hiring, training and retraining
guards by instituting a Federal academy for this purpose. Graduates of
this course would be certified to work as nuclear plant armed
responders, subject to periodic recertification.
Broader government involvement and interagency expertise are also
needed in considering how to deal with the ultimate September 11 threat
of a jet aircraft attack on a nuclear plant. Although anti-aircraft
weapons are now guarding the skies around Washington, the NRC continues
to scoff at suggestions that it seriously consider requiring such
protection at nuclear plants. Unsupported industry claims that nuclear
power plants are essentially invulnerable to a jet attack are of little
comfort to people who know that these plants remain undefended from the
air.
The draft bill's provision to establish an ``operational safeguards
response evaluation'' program for periodic force-on-force testing of
nuclear facility security is also needed. But this provision would be
strengthened if establishment of the program were put on a fast track
and made more specific to addressing the deficiencies in NRC's own
program. Although NRC finally appears to be resuming force-on-force
testing after an 18-month hiatus, it is commencing with only a
voluntary ``pilot program'' in which the exercises will not be graded
on a pass-fail basis and no enforcement actions will be taken in the
event of poor performance. At a time when America is facing the threat
of terrorist reprisals in response to the imminent war in Iraq, we do
not have the luxury of engaging in a drawn-out experimental program, or
being patient if nuclear plant security forces prove unable to protect
their facilities from a terrorist-caused meltdown. The NRC should
immediately start formally testing the security at nuclear plants of
its choosing, utilizing credible adversary characteristics (for both
outsiders and insiders), and sanctioning plants that fail.
Finally, Congress should ensure that, if nuclear power is to remain
an option in the United States, the regulatory processes for license
renewal, new plant design approval and new plant siting should take
into account the potential for deliberate acts of malice in addition to
spontaneous accidents. The growing yet unpredictable threat of
catastrophic terrorism has thrown a monkey wrench in NRC's traditional
regulatory decision-making process, which is predicated on the
assumption that the most severe accidents are the most infrequent and
hence require far less consideration. But today, NRC should be required
to seriously assess the potential for severe radiological releases
resulting from a terrorist attack.
For emergency planning, NRC should determine all who are at risk
from a terrorist attack and ensure that they can be protected, using
methods grounded in science rather than public relations. Such an
effort should result in the designation of emergency planning zones far
larger than the 10-mile radius zones in place today. According to
calculations I have performed using NRC-approved codes, these zones may
have to extend more than a hundred miles downwind. If such zones are
impractical and the residents cannot be adequately protected, then
there must be a clear regulatory mechanism for shutting down plants
that pose unacceptable risks.
For license renewal and new plant siting, there should be a
required assessment of the desirability of plant locations as terrorist
targets from the standpoint of symbolic value, potential consequences
and inability to evacuate the area at risk. This would help to avoid
ill-advised siting decisions, such as the one that allowed the Indian
Point nuclear plant to be built only thirty miles from New York City.
And for new plant designs, resistance to terrorist attack should be
a fundamental design requirement--in contrast to the current generation
of nuclear plants, which are vulnerable to common-mode failures that
terrorists can induce with a minimum of effort.
Many of these issues could be addressed in National Environmental
Policy Act (NEPA) proceedings. However, the NRC recently ruled that the
consequences of terrorist attacks need not be considered in
Environmental Impact Statements because ``the possibility of a
terrorist attack . . . is speculative and simply too far removed from
the . . . consequences of agency action to require a study under
NEPA.'' Congress should mandate that NRC carry out ``homeland security
impact assessments'' for all significant agency actions.
In summary, we need to solve the outstanding security problems
affecting our nuclear industry today before we can guarantee a long-
term role for nuclear power in our country. I would point out that in
an interview last September 11, Khalid Sheikh Mohammed said that al
Qaeda decided to omit nuclear facilities from its list of targets ``for
now.'' As terrorists become increasingly desperate and dangerous, it
would be foolish to expect that U.S. nuclear facilities will remain off
that list much longer.
Now I would like to briefly comment on the Department of Energy's
Advanced Fuel Recycling and Generation IV programs. The Nuclear Control
Institute is opposed to spent fuel reprocessing on proliferation
grounds, and believes that the U.S. moratorium on reprocessing, the
outcome of a review begun in the Ford Administration, is sound policy.
It allowed the U.S. to avoid the cost and risk associated with the
accumulation of large stockpiles of separated civil plutonium, in
contrast to countries that did not follow our lead, including the
United Kingdom, France, Russia and Japan. It also gave the U.S. the
moral authority to block the transfer of reprocessing technology to
countries like South Korea.
Therefore, in our view, the desire of the White House and the
Department of Energy to overturn this policy and pursue research,
development and deployment of new reprocessing technologies is deeply
troubling. This shift will send the wrong signal to the rest of the
world, giving a boost to countries like Japan whose own plutonium
recycling programs are in disarray, and removing the brakes on the
ambitions of many other nations to reprocess their spent fuel. This
will increase the risk of theft or diversion of plutonium at a time
when the threat of nuclear terrorism has never been as great.
DOE's claim that the technologies it will develop are
``proliferation-resistant'' gives little reassurance. There is nothing
new about these concepts that would change the conclusion reached by
numerous analyses in the 1970s that the proliferation risks associated
with reprocessing cannot be fixed with technical means. Unless the most
rigorous safeguards and physical protection measures are applied to
nuclear material during processing, transport, storage and utilization,
plant insiders or suicidal attackers will be able to defeat the modest
deterrent effect of the ``proliferation-resistant'' fuel cycles that
DOE has proposed. And diversion of plutonium will be even harder to
detect in ``proliferation-resistant'' facilities than in conventional
reprocessing plants because the ability to make precise measurements
would be diminished.
DOE's advanced fuel recycling research is not likely to win any
converts among nations that already operate conventional reprocessing
plants, such as France, but it is likely to give encouragement to
countries that do not now reprocess but would like to, such as South
Korea. The net effect of this program will be to increase the quantity
of poorly safeguarded and protected nuclear weapon material in the
world.
DOE's January 2003 report to Congress on its Advanced Fuel Cycle
Initiative failed to answer nearly all of the questions that it was
required to address for the technologies under study, providing no
information on waste streams, life cycle costs, proliferation
resistance or facility siting strategy. Before spending a penny more on
this wasteful and dangerous program, Congress should demand and receive
substantive answers to these questions.
Thank you for your attention.
STATEMENT OF STEVEN NADEL
Mr. Nadel. My name is Steve Nadel, I am here representing
the American Council for an Energy Efficient Economy. We are a
non-profit research organization that has been working on
energy efficiency technology and policy issues for more than 20
years.
I am going to be commenting on the energy efficiency
aspects of the bill and there are quite a few energy efficiency
aspects scattered among the five out of the ten titles in the
draft Barton bill.
First, I wanted to note that energy efficiency has been a
major resource for the United States. Since 1973, the U.S. has,
through efficiency, reduced energy use more than 25 percent. So
that makes it a very large resource.
Our analyses, also analyses by DOE, indicate that we can
continue that trend and save an equivalent amount of energy
over the next 20 or so years.
We think it is very important that the Unites States do so.
It will help reduce oil imports. It will help with economic
development.
It will provide downward pressure on prices. Prices are
peaking now and they depend on the balance between supply and
demand. If we can moderate demand, we can also moderate prices.
Finally, energy efficiency policy is part of a, I call it a
no regrets policy toward climate change. These are things that
are cost-effective that we can all agree on today that will
help reduce emissions while we are figuring out what other
steps, if any, to take.
Title I of Representative Barton's bill is the heart of
energy efficiency. We wanted to praise Representative Barton
for including this. There are a lot of good provisions in this
Title.
It began with, in 2001, with the initial House energy bill,
which had some useful provisions for energy efficiency. The
Senate had a lot more time to work on things and expanded the
energy efficiency provisions quite significantly on a bi-
partisan basis.
Last year the House conferees accepted many of those
provisions. We had consensus. Representative Barton has really
picked up where this discussion left off last year and included
a lot of good provisions in Title I.
In particular, we would note that Title I includes a
variety of consensus efficiency standards. We worked with Dr.
O'Hagan and other associations to negotiate consensus
agreements in terms of new efficiency standards or in some
cases provisions that DOE would set new standards.
There are some very significant savings from these
provisions. There is also some very useful work dealing with
Federal Energy Management Program, helping to improve that
program and helping to save a lot more energy in the future
building on its past successes.
A good provision dealing with industrial voluntary
programs. Some very useful provisions dealing with State energy
programs. A lot of good provisions, and we hope that Title I
will be enacted.
We are also working with Dr. O'Hagan and other people to
look at some possible consensus modifications, additions to
this. Those discussions are still ongoing, but hopefully we
will have consensus and some recommendations to share with you
shortly.
I would also note that Title V includes lots of useful R&D
activities. Advanced lighting, combined heat and power, many
useful programs there. So that's a good Title.
Title V includes a section on hydrogen R&D, both for
vehicles and for the infrastructure. Again, some very useful
sections that we support.
We particularly support the fact that in Title V it
actually sets some concrete goals for hydrogen vehicles. And
these were discussed in the first panel.
In terms of decisions to produce vehicles by 2015 and
actually start selling these vehicles by 2020. We think some
concrete targets really will help to focus some of these
efforts.
Title X of the bill deals with automobile fuel economy. It
has a provision to authorize the Department of Transportation
to set new fuel economy standards. We think this is helpful.
We also like the fact that the bill, unlike the 2001 bill,
does not include an extension of the dual fuel credit for fuel
economy.
This was a very well-intentioned provision to help
encourage use of alternative fuels. While we support use of
alternative fuels, that particular mechanism hasn't worked.
Research by the Department of Transportation indicates that
99 percent of the dual fuel vehicles actually just burn
gasoline. But that provision effectively is allowing all
vehicles to burn more gasoline because it reduces fuel economy,
and it is not really resulting in any alternative fuel use.
So we think that section either needs to be reformed or
dropped. And we praise Chairman Barton for not including it and
hope that will continue as the bill moves forward.
Electricity is a major provision in the bill. One of the
aspects that we work on from an efficiency point of view is
combine heat and power plants.
These have enormous potential to save a lot of energy
because they can be up to twice as efficient as separate
boilers and separate power plants.
Currently there are quite a few obstacles toward these
plants in terms of the utility regulations, in terms of hook up
requirements, back up power prices, etcetera.
We recommend that FERC be given the authority, subject to,
commensurate with their existing authority, to help us guide
buy-back rates, interconnection requirements.
We know that several members of this committee are actually
thinking of introducing legislation shortly on this and we hope
you will include it.
I guess to summarize, I would note that in our estimation
the provisions, particular in Title I, will reduce U.S. energy
use, we figure, by about 2 percent by 2020.
That is fairly significant. We are talking on the order of
40,000 megawatts of power reduction. It is equivalent to about
130 power plants, 300 megawatts each.
So some very significant savings there. But some of the
additions that we suggest could increase these savings many
fold and we hope you will buildupon the solid foundation that
is in the bill and add a number of these new provisions. Thank
you.
[The prepared statement of Steven Nadel follows:]
Prepared Statement of Steven Nadel, Executive Director, American
Council for an Energy-Efficient Economy
INTRODUCTION
ACEEE is a non-profit organization dedicated to increasing energy
efficiency as a means for both promoting economic prosperity and
environmental protection. We were founded in 1980 and have contributed
in key ways to energy legislation adopted during the past 20 years,
including the Energy Policy Act of 1992 and the National Appliance
Energy Conservation Act of 1987. I appreciate the opportunity to appear
again before this Committee.
Energy efficiency improvement has contributed a great deal to our
nation's economic growth and increased standard of living over the past
30 years. Energy efficiency improvements since 1973 accounted for
approximately 25 quadrillion Btu's in 2002, which is about 26% of U.S.
energy use and more energy than we now get annually from coal, natural
gas, or domestic oil sources. Consider these facts which are based
primarily on data published by the federal Energy Information
Administration (EIA):
1. Total primary energy use per capita in the United States in 2002 was
almost identical to that in 1973. Over the same 29-year period,
economic output (GDP) per capita increased 74 percent.
2. National energy intensity (energy use per unit of GDP) fell 43
percent between 1973 and 2001. About 60% of this decline is
attributable to real energy efficiency improvements and about
40% is due to structural changes in the economy and fuel
switching.1
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\1\ Murtishaw and Schipper, 2001, Untangling Recent Trends in U.S.
Energy Use. Washington, D.C.: U.S. Environmental Protection Agency.
---------------------------------------------------------------------------
3. If the United States had not dramatically reduced its energy
intensity over the past 29 years, consumers and businesses
would have spent at least $430 billion more on energy purchases
in 2002.
4. Between 1996 and 2002, GDP increased 21 percent while primary energy
use increased just 2 percent. Imagine how much worse our energy
problems would be today if energy use had increased 10 or 20
percent during 1996-2002.
Even though the United States is much more energy-efficient today
than it was 25 years ago, there is still enormous potential for
additional cost-effective energy savings. Some newer energy efficiency
measures have barely begun to be adopted. Other efficiency measures
could be developed and commercialized in coming years, with proper
support:
The Department of Energy's national laboratories estimate that
increasing energy efficiency throughout the economy could cut
national energy use by 10 percent or more in 2010 and about 20
percent in 2020, with net economic benefits for consumers and
businesses.2
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\2\ Interlaboratory Working Group, 2000, Scenarios for a Clean
Energy Future. Washington, D.C.: Interlaboratory Working Group on
Energy-Efficient and Clean-Energy Technologies, U.S. Department of
Energy, Office of Energy Efficiency and Renewable Energy.
---------------------------------------------------------------------------
ACEEE, in our Smart Energy Policies report, estimates that
adopting a comprehensive set of policies for advancing energy
efficiency could lower national energy use from EIA projections
by as much as 11 percent in 2010 and 26 percent in
2020.3
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\3\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money and
Reducing Pollutant Emissions Through Greater Energy Efficiency,
Www.aceee.org/ energy/reports.htm. Washington, DC: American Council for
an Energy-Efficient Economy.
---------------------------------------------------------------------------
The opportunity for saving energy is also illustrated by
experience in California in 2001. Prior to 2001 California was
already one of the most-efficient states in terms of energy use
per unit gross state product (ranking 5th in 1997 out of 50
states 4). But in response to pressing electricity
problems, California homeowners and businesses reduced energy
use by 6.7% in summer 2001 relative to the year before (after
adjusting for economic growth and weather) 5, with
savings costing an average of 3 cents per kWh, 6 far
less than the typical retail or even wholesale price of
electricity.
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\4\ Geller and Kubo, 2000, National and State Energy Use and Carbon
Emissions Trends. Washington, DC: American Council for an Energy-
Efficient Economy.
\5\ California Energy Commission, 2001, Emergency Conservation and
Supply Response 2001. Report P700-01-005F. Sacramento, CA.
\6\ Global Energy Partners, 2003, California Summary Study of 2001
Energy Efficiency Programs, Final Report. Lafayette, CA.
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Unfortunately, a variety of market barriers keep these savings from
being implemented. These barriers are many-fold and include such
factors as ``split incentives'' (landlords and builders often don't
make efficiency investments because the benefits of lower energy bills
are received by tenants and homebuyers); panic purchases (when a
product such as a refrigerator needs replacement, there often isn't
time to research energy-saving options); and bundling of energy-saving
features with high-cost extra ``bells and whistles.''
Furthermore, recent developments indicate that the U.S. needs to
accelerate efforts to implement energy-efficiency improvements:
Oil, gasoline and natural gas prices have been climbing
steadily in recent months. Energy-efficiency can reduce demand
for these fuels, reducing upward price pressure and also
reducing fuel-price volatility, making it easier for businesses
to plan their investments. Prices are determined by the
interaction of supply and demand--if we seek to address supply
and not demand, it's like entering a boxing match with one hand
tied behind our back. For example, the Smart Energy Policies
study referenced above used the Department of Energy's (DOE's)
National Energy Modeling System to assess the impacts of
energy-saving policies and found that these policies could have
a large impact on natural gas prices, reducing average prices
in 2020 from $3.10 per million Btu's in the EIA basecase
projection to $1.90 per million Btu's if a comprehensive set of
efficiency policies is implemented.
The U.S. is growing increasingly dependent on imported oil,
with imports accounting for about 60% of U.S. oil consumption
in 2000 of which nearly half came from OPEC and nearly a
quarter came from the Persian Gulf.7 Energy-
efficiency can slow the growth in oil use, allowing a larger
portion of our needs to be met from sources in the U.S. and
neighboring friendly countries.
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\7\ Energy Information Administration, 2001, Annual Energy Review
2001. Washington, DC: U.S. Dept. of Energy.
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The U.S. economy has been in the doldrums for more than two
years. Energy-efficiency investments often have financial
returns of 30% or more, helping to reduce operating costs and
improve profitability. In addition, by reducing operating
costs, efficiency investments free up funds to spend on other
goods and services, creating what economists call the
``multiplier effect'', and helping the economy broadly. A 1997
study found that due to this effect, an aggressive set of
efficiency policies could add about 770,000 million jobs to the
U.S. economy by 2010.8
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\8\ Alliance to Save Energy et al., 1997, Energy Innovations: A
Prosperous Path to a Clean Environment. Washington, DC: American
Council for an Energy-Efficient Economy.
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Emissions of gases contributing to global climate change
continue to increase. Early signs of the impact of these
changes are becoming apparent in Alaska. Energy-efficiency is
the most cost-effective way to reduce these emissions, as
efficiency investments generally pay for themselves with energy
savings, providing no-cost emissions reductions.
Energy-efficiency also draws broad popular support. A nationwide
poll conducted for the Los Angeles Times found that when people were
asked how to meet our energy needs, ``15% called for greater
conservation efforts, 17% supported development of new supplies and 61%
said they favored both steps in equal measure''.9 Similarly,
in a May 2001 Gallop Poll, 47% of respondents said the U.S. should
emphasize ``more conservation'' versus only 35% who said we should
emphasize production (an additional 14% volunteered ``both''). In this
same poll, when read a list of 11 actions to deal with the energy
situation, the top four actions (supported by 85-91% of respondents)
were ``invest in new sources of energy,'' ``mandate more energy-
efficient appliances,'' ``mandate more energy-efficient new
buildings,'' and ``mandate more energy-efficient cars.'' Options for
increasing energy supply and delivery generally received significantly
less support.10
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\9\ Barabak, Mark, 2001, ``Bush is Criticized as Environment
Weighed,'' Los Angeles Times, April 30, p. A1.
\10\ Moore, David, 2001, ``Energy Crisis: Americans Lean toward
Conservation over Production,'' www.gallup.com/poll/releases/
pr010515.asp. Princeton, N.J.: The Gallup Organization.
---------------------------------------------------------------------------
Furthermore, increasing energy efficiency does not present a trade-
off between enhancing national security and energy reliability on the
one hand and protecting the environment on the other, as do a number of
energy supply options. Increasing energy efficiency is a ``win-win''
strategy from the perspective of economic growth, national security,
reliability, and environmental protection.
We are not saying that energy efficiency alone will solve our
energy problems. Even with aggressive actions to promote energy
efficiency, U.S. energy consumption is likely to rise for more than a
decade, and this growth, combined with retirements of some aging
facilities, will mean that some new energy supplies and energy
infrastructure will be needed. But, aggressive steps to promote energy
efficiency will substantially cut our energy supply and energy
infrastructure problems, reducing the economic cost, political
controversy, and environmental impact of energy supply enhancements.
COMMENTS ON THE DRAFT ``ENERGY POLICY ACT OF 2003''
In the bulk of my testimony, I want to comment on the energy-
efficiency sections in the draft ``Energy Policy Act of 2003'' released
by Chairman Barton last week. Five of the bill's titles address energy
efficiency in some fashion including Titles I (Energy Conservation), V
(Vehicles and Fuel), VI (DOE Programs), VII (Electricity), and X (
Automobile Efficiency).
Overall, with the exception of Title VII, these provisions
represent modest but significant steps to improve energy efficiency in
the U.S. These provisions are also a significant improvement over the
efficiency related provisions in the energy bill passed by the House in
2001.
Title I--Energy Conservation
Most of the efficiency gains are contained in Title I. This title
is based almost entirely on the energy efficiency title negotiated last
summer and fall by House and Senate energy bill conferees of both
political parties. We support this title and recommend that it be
included in the final House bill.
Most of the savings in this title come from Subtitle C on Energy-
Efficient Products. This section includes consensus energy-efficiency
standards negotiated by ACEEE and industry to improve the efficiency of
various products used in homes and businesses. In cases where there was
clear consensus on what the new standard should be, the specific
standard is included in the bill. Placing these standards in the bill
speeds up implementation (saving the three years for a typical DOE
rulemaking) and also provides clear direction for manufacturers on the
products they need to produce (with a rulemaking, manufacturers face
uncertainty until a final rule is published). In cases where such
consensus was lacking, the bill directs DOE to set standards by rule.
Overall, we estimate that these standards will have a benefit-cost
ratio of about five to one (energy bill savings will be about five
times greater than the incremental cost of the more efficient
equipment).11 This Subtitle also includes a useful provision
directing the Federal Trade Commission to review and improve the Energy
Guide label that now is displayed on many types of appliances. The
current label is ineffective at educating and motivating consumers and
needs updating.
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\11\ Kubo and Nadel, 2001, Opportunities for New Appliance and
Equipment Efficiency Standards: Energy and Economic Savings Beyond
Current Standards Programs. Washington, DC: American Council for an
Energy-Efficient Economy.
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We do have a few small changes to suggest to this section. Most of
these are too small and technical to mention here (we will instead note
them in a separate letter to staff), but one item is worth mentioning.
In the energy bill passed by the House in 2001, there was a provision
directing DOE to consider efficiency standards furnace fans (these are
the fans that circulate heated air through the ducts and into the
living space). The Senate did not include this provision because
furnace manufacturers argued (with ACEEE accent) that DOE already had
this authority and should consider furnace fans as part of a current
rulemaking on furnace efficiency. Recently DOE counsel has questioned
whether DOE in fact has this authority. We recommend that the House
bill clarify that DOE does in fact have authority to regulate the
efficiency of furnace fans as part of rulemakings to set new furnace
efficiency standards.
We are also talking with industry about a few possible additional
consensus standards, such as a standard for compact fluorescent lamps
that would be based on the present Energy Star specification for these
products. As soon as these negotiations are completed we will bring our
recommendations to Committee staff so that members may consider them.
Subtitle A addresses Federal Leadership in Energy Conservation. It
is important for the federal government to continue to lead the nation
in energy efficiency by setting an example of energy use in its own
buildings. Few federal programs have been as cost-effective as DOE's
Federal Energy Management Program (FEMP). At an average cost of only
$20 million per year, FEMP has cut federal building energy use by
nearly 21% from Fiscal Year 1985 to Fiscal Year 1999--a reduction that
now saves federal taxpayers roughly $1 billion each year in reduced
energy costs. The draft Energy Policy Act of 2003 includes an agreement
from last year's Conference Committee on provisions to update and
strengthen FEMP efforts including: (1)updating agency energy reduction
targets; (2) extending and expanding Energy Savings Performance
Contract (ESPC) authority; (3) requiring cost-effective metering; (4)
increasing performance standards for new federal buildings; (5)
strengthening federal procurement requirements; and (6) increasing
federal fleet fuel-economy requirements. We fully support these
provisions. This Subtitle also includes a useful new program to
encourage and assist industry to make voluntary reductions in
industrial energy intensity.
Subtitle B authorizes several new state and local energy-saving
programs. These could be useful programs if funding is provided, but
absent new funding these sections will probably have little impact.
Overall, preliminary estimates by ACEEE are that Title I will save
about 18.5 quadrillion Btu's of energy (``quads'') over the 2004-2020
period, including about 2.8 quads in 2020. These savings are nearly 1%
of predicted U.S. energy use over this period, and about 2% of
predicted energy use in 2020. Most of these savings will be in
electricity, eliminating the need for about 130 new power plants (300
MW each) by 2020.
Title X--Automobile Efficiency
This section, according to the summary released by Committee Staff,
authorizes the National Highway Transportation Safety Administration
(NHTSA) to conduct fuel-economy rulemakings and also directs the
National Academy of Sciences to conduct another fuel-economy study.
What is most useful about this section is that is does not contain
provisions from the 2001 House energy bill that extend the dual-fuel
credit and that set overly modest goals for new efficiency standards.
We hope that these omissions are permanent.
The dual-fuel credit was a well-intentioned effort to increase use
of alternative fuels by giving a fuel-economy credit to manufacturers
for producing cars that can use both gasoline and alternative fuels.
However, this provision has resulted in little use of alternative fuels
and instead has increased gasoline consumption by allowing the entire
fleet of vehicles to decrease average fuel economy by up to 1.2 miles
per gallon. According to a recent joint report by U.S. Department of
Transportation (DOT) and other agencies, dual fuel vehicles use
gasoline 99% of the time.12 The draft bill does well not to
extend the dual-fuel credit. This action could save up to 55 million
barrels of oil annually, which is more than the oil-savings target in
the 2001 House energy bill. In addition, we recommend the further step
of reducing the 0.9 mpg dual-fuel credit that DOT has proposed for
model years 2005 to 2008. Alternatively, the dual fuel credit could be
extended, but the amount of credit based on actual use of alternative
fuels by dual-fuel vehicles (as determined by DOT). Such a provision
would encourage manufacturers and alternative fuel providers to work
together to increase the use of alternative fuels by these vehicles.
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\12\ DOT, DOE, and EPA, 2002, Report to Congress, Effects of the
Alternative Motor Fuels Act CAFE Incentives Policy, March. Washington,
DC: U.S. Dept. of Transportation.
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The 2001 bill also included a fuel savings target of 5 billion
gallons of oil savings over the 2004-2010 period. While this number may
sound significant, it's really a ``fig leaf'' and represents a fuel-use
reduction of only 0.5% over this period. In fact, this target only
captures modest fuel economy improvements that manufacturers have
already announced, and that are also covered in a proposed NHTSA
rule.13 For a fuel-savings target to be useful, it needs to
be significant. If a target is added to the bill, we would suggest 1
million barrels per day of oil savings by 2010. This level of savings
is about 30% more than the U.S. imported from Iraq in 2001and would
represent a 22% average improvement in vehicle fuel economy by 2010
(e.g. from the current 24 mpg under the EPA test procedure to 29 mpg).
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\13\ NHTSA, Dec. 16, 2002, ``Light Truck Average Fuel Economy
Standards Model Years 2005-07.'' Washington, DC: National Highway
Transportation Safety Adminstration.
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Ultimately, the U.S. needs much larger improvements in fuel economy
in order to substantially reduce our reliance on oil imports. The last
study by the National Academy of Sciences (NAS) found that a
significant and cost-effective increase in mpg is possible over the
next ten years.14 Analysis by ACEEE has found that an
average fuel economy of 41 mpg is possible and cost-effective by
2012.15 Furthermore, both NAS and ACEEE have found that the
largest percentage improvements in fuel economy can be achieved in SUVs
and other light trucks, indicating that it is possible to improve fuel
economy and still sell these types of vehicles. We recognize that there
may not be the political will today to increase fuel economy
significantly, and therefore that Congress is unlikely to take any
significant action on this issue. However, such a course has a price--a
price at the pump (since increased demand for gasoline tends to
increase prices) and also a price in terms of the long-term
competitiveness of the U.S. auto industry (if U.S. manufacturers pay
less attention to fuel economy than foreign manufacturers, U.S.
manufacturers will be at a competitive disadvantage when fuel supplies
inevitably tighten up at some point in the future).
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\14\ National Research Council, 2002, Effectiveness and Impact of
Corporate Average Fuel Economy Standards. Washington, DC: National
Academy Press.
\15\ DeCicco, An and Ross, 2001, Technical Options for Improving
the Fuel Economy of U.S. Cars and Light Trucks by 2010-2015.
Washington, DC: American Council for an Energy-Efficient Economy.
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Title's V and VI
Title VI authorizes DOE energy-efficiency programs for the next
five years. By and large this title contains a variety of useful ideas
(we particularly support the work on lighting and distributed energy
systems). However, the impact of this title will primarily depend on
future appropriations. Title V also includes specific authorization for
the Freedom Car and Hydrogen Fuel programs. We think these are useful
programs, and the draft bill improves upon DOE's formulation of the
program by setting real-world goals for the introduction and
performance of fuel cell vehicles. However, it will be at least 2030
before these vehicles have any significant impact. For example, Title V
sets a goal of 2015 for production decisions and 2020 for selling
vehicles that will be accepted by consumers. Since most new
technologies only gradually penetrate the market, it will be at least
2030 before these vehicles have a significant presence on the road. In
the interim, increased efforts will be needed to improve the efficiency
of gasoline-powered vehicles. Also, it is far from certain that efforts
to develop a hydrogen economy will be successful, so that rather than
putting all of our ``eggs'' in the hydrogen basket, we recommend that a
diverse range of advanced high-efficiency technologies be pursued.
Title VII--Electricity
In times of increasing energy costs, combined heat and power (CHP;
sometimes also called cogeneration) represents one of the most
important opportunities available for improving efficiency, the
environment and economic competitiveness. With fair rules, 50,000 MW of
CHP capacity can be added by 2010 and an additional 95,000 MW added by
2020, reducing the fuel needed to generate electricity by up to
50%.16 A recent ACEEE study identified utility practices
toward CHP and other distributed generation technologies as the most
significant barrier to their expanded use.17 However, in
many utility territories, due to these utility practices, current PURPA
provisions represent the only opportunity to make such facilities
viable.
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\16\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money
and Reducing Pollutant Emissions Through Greater Energy Efficiency,
Www.aceee.org/ energy/reports.htm. Washington, DC: American Council for
an Energy-Efficient Economy.
\17\ Brown, Scott and Elliott, 2002, State Opportunities for
Action: Review of States' Combined Heat and Power Activities.
Washington, DC: American Council for an Energy-Efficient Economy.
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Subtitle E removes the mandatory purchase and sale requirements
under Section 210 of PURPA once a competitive market is present. While
we support this concept in principle, we are concerned that the actual
provisions in the bill are not sufficient to protect new and existing
qualifying facilities (QFs) from predatory behavior by utilities. To
make the PURPA provisions in the bill workable, more explicit
requirements are needed to ensure that a functioning market exists,
where facilities can be interconnected at reasonable cost and in a
reasonable timeframe, where excess power can be sold at fair prices,
and where backup and supplemental power can be purchased at fair rates.
In addition, we are disappointed that the bill does not include
provisions that would address these underlying market problems
directly, providing an orderly transition from the current PURPA QF
structure to one in which distributed generators participate in a fair
market place that values their benefits and prices services in a truly
competitive manner. We understand that several members of this
Committee are now attempting to craft language that would provide
protection for distributed generation from predatory practices by
utilities. We urge the Committee to give such provisions serious
consideration. If a provision cannot be crafted that assures fair
protections for distributed generation facilitiess, the existing
protections afforded by PURPA are preferable to the current draft bill.
We also recommend that a provision be added to establish an Energy
Efficiency Performance Standard (EEPS) to establish energy-savings
targets for electricity suppliers. Such a program was established in
Texas as part of electricity restructuring legislation and appears to
be working well.18 A federal EEPS should require savings
from efficiency programs of about 1% per year, starting in 2005 (in
order to permit time for programs to start-up), thereby requiring 5%
savings in 2010, 10% savings, in 2015, etc. Such a program should
permit trading, so that utilities that save more than their target can
sell savings credits to utilities that fall short of their savings
targets. Trading would also permit the market to find the lowest-cost
savings nationwide.
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\18\ Kushler and Witte, 2001, A Revised 50-State Status Report on
Electric Restructuring and Public Benefits. Washington, DC: American
Council for an Energy-Efficient Economy.
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CONCLUSION
Energy efficiency is an important cornerstone for America's energy
policy. Energy-efficiency has saved consumers and businesses billions
of dollars in the past two decades, but these efforts should be
accelerated in order to:
save consumers and businesses even more money;
change the energy supply and demand balance and put downward
pressure on energy prices;
decrease reliance on imported oil;
help with economic development (since savings from energy
efficiency generates jobs); and
reduce carbon emissions, helping to moderate growth in the
gases that contribute to global climate change.
The provisions in the draft Energy Policy Act of 2003 take modest
steps in this direction, particularly the section establishing new
appliance and equipment efficiency standards. We are also happy to see
that the bill does not extend the gasoline-wasting credit for dual fuel
cars. Overall, we estimate that this bill will reduce U.S. energy use
by about 2% by 2020.
But much more can and should be done. We recommend that Congress
include provisions:
Clarifying in Title I that DOE can address furnace fan energy
use in its current rulemaking for a new residential furnace
efficiency standard;
Adding other new efficiency standards in Title I when and if
negotiations with industry are successfully completed;
Setting a fuel-savings goal in Title X of 1 million barrels
per day of oil savings by 2010 for future passenger vehicle
fuel-economy rulemakings (an increase of about 5 mpg, thereby
displacing imports from Iraq);
Encouraging combined heat and power and other distributed
generation systems by adding provisions to Title VII that would
provide an orderly transition from the current PURPA structure
to one in which distributed generators participate in a fair
market place that values their benefits and prices services in
a truly competitive manner;
Including an Energy Efficiency Performance Standard in Title
VII, modeled after a program now operating in Texas.
These provisions would increase the savings under the bill by more
than a factor of five. Failure to take these steps now will make it
more likely that Congress will have to address energy problems in the
not very distant future.
This concludes my testimony. Thank you for the opportunity to
present these views.
STATEMENT OF MALCOLM O'HAGAN
Mr. O'Hagan. Good afternoon, Mr. Chairman, Congressman
Boucher, my name is Malcolm O'Hagan, I am President of the
National Electrical Manufacturers Association.
NEMA applauds the leadership of your committee in
addressing the energy needs of our Nation, and we are fully
supportive of Chairman Barton's bill.
The 400 members of NEMA manufacture all of the products in
the electricity supply chain, from the generator at the power
plant to the outlet in your home.
We also manufacture the products that consume most of this
electricity, namely lighting and electric motors. NEMA strongly
supports the enacted of the comprehensive energy bill.
This year, in fact, we had hoped that it would pass last
year. Electricity has become an essential part of our economy,
powering industry, commercial sector and our homes, as well as
becoming essential to public health and safety.
However, we could use electricity a lot more efficiently
without any, without in any way compromising our lifestyle. Let
me offer a few examples of how we could realize large savings.
The use of high-efficiency distribution transformers,
meeting the industry consensus standard, NEMA TP-1, could save
an average of 5 to 10 billion kilowatt hours per year.
Upgrading commercial buildings to meet or exceed the
consensus standard ASHRAE 90.1 would result in substantial
savings in electricity demand for lighting and air
conditioning.
The installation of high efficiency electric motors, both
to industry standard NEMA premium, could save 5,800 gigawatt
hours of electricity and prevent the release of 80 million
metric tons of carbon per year.
Replacing incandescent bulbs with compact fluorescent
lamps, would reduce electricity consumption by 75 percent for
the same level of lighting.
Market based incentives and solutions should be the primary
vehicle to enhance energy efficiency and conservation. However,
NEMA acknowledges that on a case-by-case basis there is value
in other interventions such as targeted incentives and
standards.
We are pleased to see that the bill relies on standards
which I just cited. Market based incentives include EnergyStar,
and we support making this a statutory program.
NEMA also recommends that the legislation include energy
conservation standards for medium-based compact fluorescent
lamps, which is not currently the case.
Although tax provisions will be added later in the energy
legislation process, I would like to point out that NEMA and
the National Resources Defense Council strongly supported the
provision in the last Congress which will spur significant
energy savings.
This provision has wide support on both sides of the aisle.
The proposal would provide $2.25 per square foot tax deduction
for commercial buildings with efficiencies 50 percent over
ASHRAE 19.1 standard.
This tax benefit would flow to the building owner, who is
the one bearing the cost, an important principle of incentives.
NEMA believes that the Federal Government should lead by
example by upgrading its own facilities to the highest
efficiency standards.
NEMA supports the revision and upgrading of Federal
building energy efficiency performance standards. We also
advocate that the Federal Government procure NEMA premium
motors.
Finally, Mr. Chairman, NEMA is a member of the High Tech
Energy Working Group. Its members are the Association of Home
Appliance Manufacturers, the Air Conditioning and Refrigeration
Institute, the Gas Appliance Manufacturers Association, the
Electronic Industries Alliance, the Consumer Electronics
Association, the Association for Competitive Technology and the
Information Technology Association.
All of these organizations have concerns regarding the
issue of standby power and the recent proliferation of State
energy efficiency standards.
In the case of standby power, we support the compromise
reached by the conferees last year and applaud its inclusion in
the current bill.
In the case of proliferation of standards in the States, we
urge you to work with stakeholders to draft effective
preemption legislation that will result in nationwide energy
efficiency and labeling standards.
Federal standards should preempt State standards for the
same products. Thank you, Mr. Chairman, for the opportunity to
testify this afternoon.
[The prepared statement of Malcolm O'Hagan follows:]
Prepared Statement of Malcolm O'Hagan, President, National Electrical
Manufacturers Association
INTRODUCTION
Good morning Chairman Barton and members of the Subcommittee on
Energy and Air Quality. I am Dr. Malcolm O'Hagan and I am President of
the National Electrical Manufacturers Association (NEMA). NEMA is the
leading trade association in the United States representing the
interests of electroindustry manufacturers. Founded in 1926 and
headquartered near Washington, D.C., our 400 member companies
manufacture products used in the generation, transmission and
distribution, control, and end-use of electricity. Domestic shipments
of electrical products within the NEMA scope exceed $100 billion.
NEMA strongly supports the enactment of comprehensive energy
legislation this year. Our national energy policies must be updated to
reflect technological advances and changes in energy markets. A
comprehensive national energy policy must address and balance important
goals such as electricity conservation, energy production, and the
widespread deployment of new technologies that promise greater
efficiency and environmental protection. Moreover, the Subcommittee has
recognized and addressed the need for energy efficiency in the
electrical transmission grid.
We commend you for your initiative in beginning the debate this
year through your draft legislation, the ``Energy Policy Act of 2003.''
We very much appreciate this opportunity to offer testimony on Title I,
the energy efficiency proposals, contained in your draft proposal.
These proposals reflect much of the hard work done by the members of
the House and Senate conference committee on H.R. 4 last year, and
provide, we believe, a very solid foundation for moving forward this
year. These proposals will achieve meaningful reductions in energy
usage and greater energy efficiency in a variety of important areas.
My testimony today will highlight:
The role of NEMA products and services in achieving energy
efficiency and conservation and helping to meet out national
energy needs--a role we are very pleased to say is acknowledged
in several of the provisions of the draft legislation;
Specific provisions of Title I of the draft legislation that
are of great significance to NEMA members; and
Other provisions that we believe should be included in
comprehensive energy legislation.
NEMA ELECTRICAL ENERGY AND ENERGY EFFICIENCY POLICY PRINCIPLES
NEMA has crafted a set of electrical energy and energy efficiency
principles for your guidance and consideration as you and your
colleagues proceed on a comprehensive national energy policy. Let me
take this opportunity to highlight the three main points from our
principles:
1. A comprehensive electrical energy policy should rely on affordable,
proven technology to address energy supply and demand;
2. Second, it is critical to understand that energy efficiency and
conservation don't mean sacrifice and reduced access, but
rather doing more with existing capacity by achieving reduction
in energy usage through the use of more efficient products and
systems; and
3. Third, market-based incentives and solutions should be the primary
vehicle to enhance energy efficiency and conservation. However,
NEMA acknowledges that, on a case-by-case basis, there is value
in other interventions such as targeted government research and
development, incentives and standards.
With regard to energy efficiency issues, NEMA specifically proposes
the following concepts as guidelines:
NEMA believes market forces to achieve energy efficiency and
conservation. The litmus for efficient products and control
systems is technological feasibility, economic justification,
energy savings and commercial availability.
NEMA acknowledges the key role the federal government should
play in fostering public use of energy efficient products and
systems. Specifically, NEMA believes that the federal
government should promote user education on energy efficiency;
support energy efficient upgrades through programs such as the
Federal Energy Management Program; encourage performance-based
incentives in the private sector; and promote the use of
economically sound energy efficient products and systems.
NEMA MEMBER COMPANY PRODUCTS AND SERVICES ACHIEVE ENERGY EFFICIENCY AND
CONSERVATION
NEMA recognizes that a comprehensive national energy policy
requires a mix of conservation and production, and the promotion of new
technologies that promise greater efficiency and environmental
protection. NEMA member products are at all stages of the electrical
energy process, from generators, transformers, wire and cable, to
lighting, motors, and switches at the consumer and end-user points. As
an intriguing example of how technology can save energy, NEMA
manufacturers have developed technology and products for Intelligent
Transportation Systems (ITS), a project under the auspices of the
Department of Transportation. This project is a highly cost effective
means of reducing transportation fuels consumption, associated air
pollution, and also reduces the non-productive time workers spend
commuting. As you will see in our recommendations, these and other NEMA
products serve to make the system work better and faster without
compromising availability. NEMA members are able to do this by taking
the best of industry technology and standardizing those products so
that they are available globally, delivered locally, competitively
priced, able to perform predictably and are safe and environmentally
sound.
Members of NEMA produce the products that will enable increases in
energy efficiency. From Fort Wayne, Indiana (where Rea, Superior Essex
and Phelps Dodge produce magnet wire, one of the keys to increased
energy efficiency in motors) to California, NEMA members are on the
front line of the battle to increase energy efficiency. NEMA-member
software products, such as ABB Energy Interactive's Energy Profiler
Online TM, facilitate energy load management for commercial
and industrial customers, and have been used in California and
elsewhere to manage a variety of mandatory and voluntary utility load
curtailment programs.
KEY PROVISIONS OF TITLE I OF THE DRAFT ``ENERGY POLICY ACT OF 2003''
We see the energy efficiency title of the draft Energy Policy Act
of 2003 as particularly valuable because it represents a consensus of
views on steps that can be taken beginning now to make real
improvements in energy efficiency. NEMA believes that energy efficiency
should be evaluated and rewarded on an energy savings and systems
basis. When creating incentives, the beneficiary of the cost incentive
should be the investor in the equipment. Very simply put, if a building
owner makes the capital investment, that owner should get the benefit.
This approach can be applied in the public sector as well, as proposed
in the draft legislation, which would allow federal agencies to retain
the savings they achieve through energy efficiency improvements.
While the technology exists to achieve broad cost savings through
energy efficient devices and controls, there is a lack of awareness of
the benefits of a systems and control based approach. This is opposed
to a piecemeal component approach, to achieve the maximum level of cost
effective energy efficiency. To that end, NEMA proposes that the
federal government move from strictly encouraging products or
components, to promoting the implementation of systems and controls to
efficiently manage energy on a wider basis. For example, California
enacted legislation that would provide energy efficient upgrades for
lighting systems. California recognized the large efficiency gains that
would be realized by encompassing lighting controls, occupancy sensors,
and luminaires added to any upgrade. Similar efficiency gains can be
achieved at the commercial level with industrial and automated
controls.
Industry and government both strive to achieve the best
performance. But for too long, the hopeful and anticipated approaches
of both camps have been belied by the unintended consequences of
mandated standards. Voluntary, consensus-driven codes and standards
will achieve the greatest level of cooperation and distribution of
energy efficient technology in the marketplace. Already, the
marketplace recognizes industry-driven standards to achieve efficient
products. In particular, the NEMA Premium TM Motor program
recognizes efficient motors above the standards contained in current
law. The same can be said for distribution transformer consensus
standards represented by NEMA TP-1. Industry believes that industry
consensus building codes can be a valuable part of ensuring that
cooperative goals are achieved and efficiency gained. We are
particularly grateful that the energy efficiency provisions in the
draft legislation build on these consensus agreements.
NEMA believes that technological solutions combined with industry
consensus and proven results will lead to enhanced energy efficiency.
This formula is made even stronger if the cooperative efforts of
industry and policymakers are joined. We see this happening in the
energy legislation, and look forward to supporting the bill as it moves
through the legislative process.
We offer the following specific comments on the proposals contained
in Title I:
Provisions to Assert Federal Leadership in Energy Efficiency
Improvements (Sections 1001-1004)
NEMA believes that the federal government can set the standard--and
a good example--for energy efficiency by starting with the public's own
facilities. NEMA urges that the Federal government emphasize the
implementation of systems approaches, not merely component replacement,
to achieve energy reduction requirements, along with the adoption of
new technology, such as NEMA Premium TM motors and
distribution transformers that comply with the NEMA TP-1 standard, as
discussed below.
We are pleased that the draft legislation requires the Federal
government to take a leadership role in expanding the use of energy
efficient technologies. Section 1001 appropriately requires that
Congress start with itself, by adopting energy and water savings
measures in Congressional buildings. In my past testimony before this
Subcommittee, I noted that the lighting used in this very hearing room
is perhaps a bit less than the most efficient on the market. The
initiatives proposed in your legislation will speed the updating of
these important public facilities.
Section 1002 proposes energy management goals for Federal agencies,
calling for progressive reductions in energy consumption per gross
square foot through 2013. As the President and Congress have
recognized, the federal government is a major consumer of energy. NEMA
has long supported an approach of establishing performance standards,
rather than prescriptive requirements for specific technologies, which
encourage the selection of the most appropriate technologies and
systems approaches in the areas of lighting, controls, and heating,
ventilation and air conditioning. A program to require energy efficient
upgrades of building systems in existing federal buildings offers the
potential for significant energy savings. NEMA supports the approach in
section 1002, which does not require adherence to a rigid standard, but
rather provides flexibility to agencies to adopt the most efficient
systems that meet their needs.
Section 1003 would require the metering of energy use in all
Federal buildings. Advanced metering technologies are an important tool
in the energy efficiency arsenal, and offer a cost-effective means to
identify energy savings potential. We endorse this provision, and look
forward to participating in the development of the guidelines called
for under proposed NECPA section 543(e)(2).
NEMA supports the revision and upgrading of Federal Building Energy
Efficiency Performance Standards. Section 1004 of the draft seeks to
achieve energy savings in new facilities based on the industry
consensus ASHRAE 90.1 standard. NEMA recommends, however, that you
consider setting the level of required improvement over the ASHRAE
standard at 10%, not 30% as in the current draft. Achieving an
efficiency level 30% above the ASHRAE standard for energy improvements
would require custom designs that would greatly increase costs and
could actually discourage the deployment of energy efficient
technologies in new Federal buildings.
Procurement of Energy Efficient Products by the Federal Government
(Sec. 1005)
Executive Order 13123 sought to encourage the acquisition of energy
efficient products by the federal government. In addition, programs
such as the Federal Procurement Challenge encourage agencies to buy
energy efficient products. However, while the Executive Order and the
Federal Procurement Challenge have resulted in many efficient upgrades,
many agency heads have not had their feet held to the fire to comply
with such orders. Many opportunities still exist in federal agency and
Congressional offices to achieve energy efficiency.
NEMA believes that provisions to require the procurement of highly
efficient products by the Federal Government, as proposed in section
1005, are vitally important. It is fully appropriate to use the
purchasing power of the Federal government to build the market for
highly efficient products. Aligning these Federal procurement efforts
with voluntary industry efforts to mark and market the most highly
efficient products promises great rewards.
Section 1005 generally relies on Energy Star and FEMP product
designations, which is appropriate. The opportunity is also available,
as the draft recognizes, to take advantage of voluntary industry
efforts to improve product efficiencies. With respect to electric
motors of 1 to 500 horsepower, we believe that the procurement standard
for such motors should be based on the existing NEMA Premium
TM standard. Specifying NEMA Premium TM will
ensure accurate and real conformance with a proven consensus standard
without delay.
By way of background, the NEMA Premium TM motor program
is a collaborative effort with the Department of Energy, motor
manufacturers and electric utilities. It is an excellent model of how
voluntary industry standards can improve efficiency thereby providing a
benefit to consumers and the environment. The NEMA Premium
TM standard has been endorsed by the Consortium for Energy
Efficiency, manufacturers, utilities and several states. NEMA Premium
TM is used widely to distinguish the most energy efficient
motors.
The NEMA Premium TM motor program expands high
efficiency motors standards beyond current requirements. The program
covers a broader range of motors than do minimum federal energy
efficiency standards (up to 500 horsepower, whereas Federal energy
conservation standards apply only up to 200 hp), and it is a more
exacting standard. In fact, Department of Energy analyses shows that
the NEMA Premium TM motor program, including commercial and
agricultural applications, would save 5,800 gigawatt hours of
electricity and prevent the release of nearly 80 million metric tons of
carbon into the atmosphere in the next ten years. Electric-motor-driven
equipment consumes about 60% of all the electricity produced in the
country, according to the Department of Energy.
The NEMA Premium TM motor program has significant real-
life impact. The Cummins Engine Company's Columbus Engine Plant in
Columbus, Indiana retrofitted energy efficient motors on to existing
machining and transfer lines and installed the most efficient motors
available onto the new lines. Cummins saw a 2.75 percent reduction in
total energy costs for the Columbus plant, which was hailed by company
executives as a significant savings. The Department of Energy indicated
that if every plant in the United States integrated motor system
upgrades to the extent that Cummins did, American industry would save
an estimated one billion dollars annually in energy costs. This would
be the equivalent of the amount of electricity supplied to the State of
New York for three months.
We are hopeful that in performing the duties required under
proposed section 1005, the Secretary of Energy would take advantage of
the NEMA Premium TM standard in designating appropriate
energy efficient motors for procurement pursuant to the legislation.
Doing so would enable all new equipment acquisitions to be based on
current energy efficiency standards with the dual result of energy
savings to the government and widespread market penetration of the most
highly efficient technologies in energy-intensive equipment. It would
also serve as a valuable demonstration of energy efficient savings to
the private sector. Government should recognize these industry-led
efforts to increase energy efficiency and provide for the most rapid
possible integration of technologies meeting the latest efficiency
standards into federal facilities. Increasing the deployment of these
technologies throughout the Federal government offers a ready means to
significantly reduce energy consumption in Federal facilities.
NEMA recommends further that the federal government should use NEMA
TP-1 transformers in its purchase specifications and be required to
replace failed transformers with new units meeting TP-1 efficiencies.
Acquisition of distribution transformers that meet the NEMA TP-1
standard will improve distribution transformer efficiency over the low
first cost transformers that are typically selected for government
procurement.
Energy Saving Performance Contracts (Sec.1006)
The extension of energy savings performance contracts proposed in
section 1006 is also an important element to enable Federal leadership
in energy conservation programs. The extension of the program to
include replacement facilities is important to greatly expand the reach
of this initiative. NEMA members Honeywell and Johnson Controls make
extensive use of this program to help Federal agencies save energy.
Voluntary Commitments to Reduce Industrial Energy Intensity (Sec. 1007)
Greater attention must be focused on the reduction of energy use in
the industrial and commercial sectors. The potential for energy savings
is significant, but cost barriers and lack of information too often
prevent the adoption of new energy efficiency technologies and systems
in industrial facilities and businesses of all sizes. NEMA encourages
the Committee to explore additional means of supporting the deployment
of highly efficient new technologies through programs targeted
specifically to the industrial sector. Consideration might be given,
for example, to a program modeled on the highly successful
Weatherization Assistance Program but targeted to small businesses.
Weatherization Assistance Program (Sec. 1021)
The Weatherization Assistance Program has been an important element
in the nation's effort to assure that the burdens of high energy costs
do not fall disproportionately hard on those least able to afford them.
Including electricity efficiency retrofits as an element of the
Weatherization program would have long term benefits for residents and
property owners. For example, the State of California made upgrades to
major systems, such as the installation of high efficiency air
conditioners and high efficiency water heaters, as well as other
efficient technologies, including set-back thermostats, eligible for
the State's residential upgrade program. Taking a similar approach at
the Federal level could significantly increase the long term benefits
of the Weatherization program. As resources permit, the eligibility of
more capital-intensive measures should be fully considered.
State Energy Program (Sec. 1022)
NEMA supports the concept of updating the State energy efficiency
goals. As with the Federal government, state energy efficiency plans
should not be limited to encouraging certain energy efficient products
or components, but rather should focus on promoting the implementation
of systems and controls that will enable more efficient energy
management. States should also make special outreach to the commercial
and industrial sector to reach the untapped energy conservation
potential of those sectors. Importantly, however, state energy
efficiency initiatives must not conflict with areas in which the
Federal government has already exercised its authority pursuant to the
National Appliance Energy Conservation Act (NAECA) of 1987 and the
Energy Policy Act (EPAct) of 1992.
Energy Star Program (Sec. 1041)
NEMA supports the statutory authorization for the Energy Star
program. Under the new statutory authorization, preserving the
integrity of the Energy Star label is an express requirement for the
Secretary of Energy and the Administrator of the Environmental
Protection Agency (EPA). We believe this is very important. Consumers
today rely on the Energy Star label to designate superior products with
superior performance. Vigilant oversight is needed to assure that
products are properly labeled, so that purchasers can be sure up front
of the quality of the products that they are purchasing.
The Energy Star program should require the DOE and EPA to develop
public plans for the Energy Star program, including the criteria for
expansion and program implementation and opportunities for public
comments on new and revised product categories and response to
comments. Moreover, DOE and EPA should consider the cost effectiveness
of the Energy Star program as compared to other programs, and should
assure that production lead times are considered and adequate notice
given of program changes. These considerations should be balanced
against the need for the Energy Star program to remain agile and
flexible while allowing for more accountability, commensurate with its
increasing stature in the marketplace.
The Energy Star Buildings Program has made significant advances in
improving the efficiency of commercial buildings. However, the vast
majority of Federal facilities have not yet achieved the Energy Star
rating, a classification given only to the top 25% of buildings in
terms of watts used per square foot. Therefore, NEMA recommends that
existing buildings be upgraded to meet the Energy Star Building Program
requirements.
Test Procedures for Determining Energy Efficiency (Sec. 1044)
NEMA fully supports the approach taken in the draft to specify
testing requirements for products for which energy efficiency standards
would be set in the legislation. Adoption of existing test procedures
developed through the Energy Star program, where energy conservation
standards are proposed to be set based on Energy Star performance
requirements, is appropriate. Similarly, in the case of transformers,
it is appropriate to establish the test procedures based on the TP-2
Standard Test Method, developed on a consensus basis by the industry.
TP-2 is the test procedure associated with the TP-1 energy efficiency
standard that would be established in the legislation as the energy
efficiency standard for distribution transformers.
Energy Efficiency Standards for Specific Products (Sec. 1045)
Subtitle C contains a number of specific energy efficiency
provisions on which consensus was reached between the time that the
House initially passed H.R. 4 in August 2001 and the Senate's passage
of its version of the legislation in April of last year. We are pleased
to see these agreements carried forward into the draft legislation. We
believe there are significant energy savings offered by the product
standards called for in the draft legislation, and that the best way to
recognize these savings is through the proposals contained in Subtitle
C.
As a general matter, with regard to any additional product
standards, NEMA believes that efficiency standards should be based on
industry consensus standards achieved through recognized standards
setting processes endorsed in the private sector. To the extent that
standards are developed within the Department of Energy or other
Federal agencies, it is imperative that there be careful adherence to
established regulatory processes and procedures, such as those
contained in DOE's July 1996 process improvement interpretive rule. The
process improvement rule incorporates critical principles for every
stage of the energy efficiency standards setting process. However, as
good and practical as this rule is, it is not a binding requirement on
the Department of Energy. NEMA manufacturers require additional
assurance that there will be faithful adherence to all aspects of the
process improvement rule in all future standards setting rulemakings
for consumer, commercial and industrial products. Greater certainty
would be provided if the process improvement rule were formally
incorporated into the Department of Energy's regulations governing the
establishment of energy efficiency standards.
Standby Power
On the issue of energy efficiency standards for products in a
standby mode, your legislation adopts the compromise on this issue
ratified last year by the conferees. This approach has been supported
by an ad hoc group of manufacturers and concerned trade associations,
commonly known as the High Technology Energy Working Group, for the
establishment of standards for battery chargers and external power
supplies. It is particularly important to concentrate regulatory
efforts on those products that are major sources of energy consumption
in the standby mode and which are assigned a high priority for
regulation, and to rely on voluntary efforts to address other products.
Distribution Transformers
Of particular importance to NEMA are the provisions of the
legislation that adopt industry consensus standards as the energy
efficiency standards and testing requirements for low voltage dry type
distribution transformers. These standards already form the basis for
the performance specification for these transformers in the Energy Star
program. As indicated below, NEMA believes that the energy efficiency
standards should be expanded to cover all distribution transformers.
In 1996, the Transformers Products Section of NEMA developed
voluntary energy efficiency standards for distribution transformers.
This standard was revised to further increase efficiency in 2002. As
virtually all electricity used flows through distribution transformers,
the appropriate choice of energy efficiency is very significant. The
basic efficiency standard, known as NEMA TP-1 and the associated test
and labeling standards (TP-2 and TP-3, respectively) have gained
widespread acceptance as the industry norm for energy efficient
transformers.
As another excellent example of industry led consensus standard
making, if TP-1 were used nationwide, NEMA estimates an energy savings
would be in the range of 2-3 quads over a 30-year period. This is an
average energy savings of between 5 and 10 billion kilowatt-hours per
year. By using NEMA Standard TP-1, the energy used by low-voltage
transformers can be cut by over one-third, and by twenty-five percent
for medium voltage transformers.
In light of the 2002 revision to TP-1, NEMA requests that the
current language in the legislation referring to NEMA TP-1-1996 be
updated to refer to NEMA TP-1-2002.
Energy Labeling (Sec. 1046)
The draft legislation calls for a rulemaking on energy efficiency
labeling requirements for products for which energy conservation
standards would be set in the legislation, including distribution
transformers. NEMA recommends that the labeling section of the
legislation be revised to specify that the labeling requirements for
distribution transformers would be those set under the NEMA TP-3
labeling protocol for all distribution transformers satisfying TP-1.
The legislation already adopts the testing and efficiency standards
requirements of the NEMA protocols for distribution transformers, and
therefore it would be appropriate to apply the TP-3 labeling
requirements as well. Doing so would also save the resources that would
otherwise be expended to carry out what would essentially be a
duplicative rulemaking process to develop a labeling requirement when
one is already in place.
Standards for Other Products
NEMA also supports the provisions of the legislation to adopt the
performance requirements of the Energy Star program as the energy
conservation standards for lighted exit signs, traffic signal modules
and torchiere fixtures. Adoption of these standards will expand the
benefits of the Energy Star program by increasing the use of highly
efficient products in the marketplace without the need for costly and
time-consuming agency rulemaking processes for these products.
Effectiveness of Federal Standards
Consistent with the Energy Policy and Conservation Act, these
Federal standards should preempt state standards for the same products.
The essence of legislation such as NAECA and EPAct is that Federal
standards were either legislated or required to be developed by DOE in
exchange for broad preemption of state standards except under extremely
limited circumstances. Recently, however, a proliferation of state
energy efficiency standards and legislation has appeared for numerous
products, including the NEMA products that are the subject of this
draft legislation. We urge you and your staff to work with stakeholders
to address this priority issue as it concerns the realm of proposed
standards and rulemakings in this legislation.
Additional Recommendations
NEMA is actively working with other stakeholders to develop
additional consensus recommendations to increase the already
significant energy savings that will result under the draft
legislation. At this time, NEMA has the following recommendations for
improving the energy efficiency provisions of the draft legislation.
First, we recommend that the legislation be expanded to set energy
efficiency standards for all distribution transformers, including
medium-voltage and liquid-filled transformers, to meet the NEMA TP-1
standard already required under the legislation for low-voltage dry-
type distribution transformers. Expanding the provisions agreed to by
the conferees last year and included in your draft legislation to
include all distribution transformers would more than triple the
transformer annual product electrical capacity covered by higher
efficiency requirements. The proposed legislation would complete the
process of establishing energy efficiency requirements for distribution
transformers called for in EPAct, but which has yet to result in
minimum energy conservation standards.
As all electricity used goes through transformers, transformer
losses are a major portion of losses in the distribution system.
Specifying TP-1 efficiency reduces losses by about one third over low
first cost transformers. Thus, requiring TP-1 will raise electrical
efficiency in the commercial and industrial sector significantly. The
latest revision to the standard, TP-1-2002, includes modest efficiency
increases for some transformer sizes.
The TP-1 standards already form the basis for the performance
specifications for low-voltage dry-type distribution transformers in
the EPA/DOE Energy Star ' program. Low-voltage dry-type
distribution transformers are typically used in commercial buildings
and often purchased based on low initial cost with little consideration
of efficiency. Less than 2% of the low-voltage dry-type units shipped
met TP-1-1996. The draft legislation already includes provisions to
assure that these transformers will meet higher efficiency standards;
as noted above, the reference in the current draft legislation to TP-1-
1996 should be updated to refer to TP-1-2002.
Medium-voltage dry-type distribution transformers are used in
commercial and industrial buildings. While some buyers do consider
energy savings, most medium-voltage dry-type buyers order lowest first
cost units. A little less than half the medium-voltage dry-type
transformers met TP-1-1996.
Liquid-filled distribution transformers are typically owned by
electric utilities. About two-thirds of the liquid-filled distribution
transformers shipped met TP-1-1996. Therefore, setting the threshold at
the consensus TP-1 standard will substantially increase the overall
efficiency of the fleet of new distribution transformers installed.
In conjunction with the energy efficiency standards for
distribution transformers, there is a need to clarify the criteria for
exempting products from the mandatory energy conservation standards.
This is important in order to ensure that the named exempted products
are used primarily in special-purpose niche applications and to prevent
instances of misuse or confusion as occurred with a few of the
standards enacted under EPAct. A requirement that exempted products be
``unlikely to be used in general purpose applications'' would give the
Department of Energy necessary guidance and authority to prevent such
situations.
Consistent with the recommendation above to expand the scope of the
transformer standards, the TP-2 testing protocol should be used for all
distribution transformers, and the TP-3 labeling protocol should be
used for all transformers for which TP-1 energy efficiency standards
would be established in the legislation.
Second, we encourage you to consider adding to the legislation
energy conservation standards for medium base compact fluorescent
lamps. Energy conservation standards for general service fluorescent
lamps were added to the Energy Policy and Conservation Act (EPCA)
through EPAct, which designated these lamps as ``covered products.''
EPAct did not establish energy conservation standards for medium base
compact fluorescent lamps (CFLs) nor include them explicitly in the
list of ``covered products''. EPAct did, however, contain a definition
of ``medium base compact fluorescent lamp'' and a requirement that the
Federal Trade Commission establish labeling requirements for these
lamps. Although EPCA does not include energy conservation standards
specifically applicable to medium base CFLs, the voluntary DOE/EPA
Energy Star program does include energy efficiency specifications, test
requirements, labeling requirements and specifications for parameters
other than energy efficiency for medium base CFLs.
Medium base CFLs are a direct screw-in replacement for incandescent
lamps in most applications. Medium base CFLs consume only approximately
one-fourth of the electricity used by an incandescent lamp to achieve
the equivalent light output. Thus, the energy savings for replacement
of even a modest fraction of existing lamps would be substantial.
Moreover, medium base CFLs offer highly favorable economics on a life
cycle cost basis.
BARRIERS TO THE WIDESPREAD APPLICATION OF ENERGY EFFICIENT PRACTICES
AND TECHNOLOGIES
While much good has been done to promote energy efficiency, there
remains work to be finished. NEMA believes the primary barriers to
investing in energy efficient technology include: (1) the cost of
investment in energy efficient technologies and whom should receive the
financial benefit of the energy efficient investment; (2) the lack of
awareness of a systems and controls based approach for energy efficient
cost effectiveness; (3) and issues surrounding codes and standards.
Currently, the federal tax code does not fully encourage an
investor to make energy efficient investments, upgrades or retrofits to
facilities. While recognizing that tax matters are not specifically the
subject of today's hearing, NEMA would like to note the need for tax
incentives to encourage investment in devices that promote energy
efficiency. NEMA believes that there are situations where the
marketplace does not adequately reward innovations in energy-saving
technology. In such cases, the right types of tax incentives will
provide the necessary impetus for investments in property that will
address the energy needs of individual firms and consumers, as well as
our nation as a whole. Properly designed tax incentives will also
encourage manufacturers to develop innovative technology to respond to
the increased demand for energy-efficient devices.
NEMA believes that a particular tax provision included last year in
both the House and Senate versions of the energy bill warrants support
and special attention this year. This provision would allow taxpayers
to expense and deduct (rather than capitalize and depreciate) a portion
of the cost of energy efficient property placed in service in
commercial buildings. Targeting the tax benefits delivered by the
provision to the commercial sector, where there are substantial
opportunities to save energy that are not being realized today, is a
cost-effective means to achieve significant energy savings. Last year,
NEMA joined with the Natural Resources Defense Council (NRDC) in
analyzing the legislative language and making recommendations that will
insure that the tax benefits provided by the provision are commensurate
with the level of additional investment needed to achieve energy-
savings standards. NEMA has and will continue to support the agreement
it has reached with NRDC and will work closely with the Congress to
support enactment of these important provisions.
CONCLUSION
In conclusion, let me reiterate the three points I began with
today. A comprehensive electrical energy policy should rely on
affordable, proven technology to address energy supply and demand.
Second, it is critical to understand that energy efficiency and
conservation don't mean sacrifice and reduced access, but rather doing
more with existing capacity by achieving reduction in energy usage
through the use of more efficient products and systems. Third, market-
based solutions should be the primary vehicle to enhance energy
efficiency and conservation.
Chairman Barton, we thank you for your efforts, and for holding
this hearing today. I am happy to answer your questions.
STATEMENT OF ALDEN MEYER
Mr. Meyer. Thank you, my name is Alden Meyer, I am Director
of Government Relations for the Union of Concerned Scientists.
We are a non-profit group of more than 60,000 citizens and
scientists working for practical, environmental solutions. I
have a little powerpoint presentation which, if we can get
turned on, a little entertainment at the close of the panel for
you here.
This first slide shows cost trends for renewable energy
technologies. And I think we need to acknowledge that this is a
real American success story in this area.
And it is the result of research and development, tax
incentives and actions by States like California starting as
early in 1980, to run with these technologies.
This is data from NREL, National Renewable Energy Lab,
showing actual costs to date and then projections out of 2020.
To realize additional reductions, of course, we need to
continue R&D, we need to have additional tax incentives and we
need measures like net metering and interconnection standards.
But the most important driver we believe is going to be
expanding the markets for these technologies which allows
manufacturers to attract the low cost financing they need to
build new production facilities and continue lower costs.
This is why we believe the most effective policy in the
renewable area is the renewable energy standard, also known as
the renewable portfolio standard.
This would require electric suppliers to increase their
share of electric generation coming from non-hydro renewable
sources over time.
It could be met by self-generation or by purchasing credits
from other companies. It is like the clean air trading system
in that regard.
It assures producers an expanding market an access to lower
cost financing. It works together with other policies, and 13
States have already adopted such standards, several others
appear poised to do so this year.
What I am going to show you now is a slide that compares
where we have been, which is the black trend line here in terms
of actual renewable energy generation.
The red line is business as usual projections, which
includes the actions of the 13 States I mentioned, as well as
public benefit funds and other incentives.
The top blue line shows what the provisions in the Senate
energy bill passed last year would do by the year 2020.
The public overwhelming supports these technologies and let
me talk about the Energy Information Administration and their
analysis on the cost of these technologies. There has been a
myth out there that the portfolio standard would dramatically
increase consumer energy bills.
EIA conducted an analysis at the request of Senator Frank
Murkowski, and actually found just the opposite. That largely
as a result of reducing the cost, the demand for natural gas,
and therefore price pressures on natural gas, an RPS of 10
percent by 2020 would not only not increase electricity cost to
consumers, it would result in overall lowering of non-
transportation consumer energy bills because of the savings
largely on the natural gas side.
And if you look at what EIA is talking about in natural gas
price projections in the analysis they used, you can see they
were projecting $3, $3 to $4, out as far as the eye could see.
And the little asterisk on this chart shows you where spot
prices were last month. And as Chairman Barton mentioned, they
have gone higher since then.
To the extent that these gas price projections are overly
optimistic, obviously the economics of the RPS improve even
further and the natural gas savings from reduced consumption
improve further.
We also did an analysis that confirms the EIA findings and
also quantifies some of the direct benefits, particularly for
rural economic development over $1 billion in new property tax
revenues, hundreds of millions of dollars in lease payments to
farmers and rural land owners.
And these programs are already proving very popular in
States like Texas and throughout the Great Plains where it is a
new source of revenue for the depressed farm economy.
Of course we are all concerned about greenhouse gas
emissions. This line shows business as usual trend on
greenhouse gas emissions from the power sector which accounts
for roughly 40 percent of U.S. carbon dioxide emissions.
The 1990 trend line here is what would be required under
the four pollutant legislation introduced last year in the
Senate.
This is the result of our very aggressive analysis of a
package of renewable energy and energy efficiency policy, the
clean energy blueprint. This line is what Senator Jeffords' 20
percent renewable energy standard would do, basically
flattening out from now through 2020, greenhouse gas emissions
for this sector.
This is what Senator Bingaman's RPS combined with the
Senate electricity efficiency provisions would do. So you can
see that these policies can start to make a difference on
greenhouse gas emissions from this sector, and it is something
we think the committee really ought to take seriously.
The bottom line is that RPS is good for consumers. It is
good for the environment. It is good for fuel diversity and for
energy security and we believe the committee ought to include a
strong RPS in any bill it reports to the floor of the House.
Thank you very much.
[The prepared statement of Alden Meyer follows:]
Prepared Statement of Alden Meyer, Director of Government Relations,
Union of Concerned Scientists
I. INTRODUCTION
The Union of Concerned Scientists (UCS) is a nonprofit organization
of more than 60,000 citizens and scientists working for practical
environmental solutions. For more than two decades, UCS has combined
rigorous analysis with committed advocacy to reduce the environmental
impacts and risks of energy production and use. Our clean energy
program focuses on encouraging the development of clean and renewable
energy resources, such as solar, wind, geothermal and biomass energy,
and on improving energy efficiency.
We favor the adoption of policies to increase the use of renewable
energy resources in our nation's electricity generation mix. Such
policies are needed to meet our future electricity needs, diversify our
electricity supply, reduce the vulnerability of our energy system,
stabilize electricity prices, and protect the environment.
Specifically, we endorse a renewable electricity standard, sometimes
also known as a renewable portfolio standard--a market-based mechanism
that requires utilities to gradually increase the portion of
electricity produced from renewable resources.
The electricity industry penetrates every sector of the economy and
our lives. It keeps our food fresh. It lights up the darkness. It
powers the manufacturing process. It runs life-giving medical systems
and mind-enriching information systems. It helps warm us in the winter
and cools us in the summer.
As important as electricity is to the economy, the tragic events of
September 11th have brought renewed attention to how vital and
connected our energy system is to national security. The vulnerability
of the energy infrastructure to attack has been increasingly recognized
as a significant issue, with terrorist threats reported to nuclear
power plants and natural gas pipelines, and heightened security
implemented at dams, power plants, refineries, liquefied natural gas
tankers and terminals, and the electrical grid.
Electricity use also has a significant impact on the environment.
Electricity accounts for less than three percent of US economic
activity. Yet, it accounts for more than 26 percent of smog-producing
nitrogen oxide emissions, one-third of toxic mercury emissions, some 40
percent of climate-changing carbon dioxide emissions, and 64 percent of
acid rain-causing sulfur-dioxide emissions.
Unfortunately, there are no quick fixes to make the United States
energy independent, ensure price stability, or clean up the air we
breathe. However, investments in domestic renewable energy sources,
together with continued efficiency improvements, can gradually reduce
our dependence on imports and reduce the vulnerability of the US energy
system to disruption of supplies or to attack. Investments that
increase fuel diversity strengthen the ability of our economy to
withstand supply interruptions or price shocks from any one fuel
source. Investments in indigenous renewable energy sources keep money
circulating and creating jobs in regional economies, and create export
opportunities. And of course, investments in clean air benefit everyone
that breathes the air.
By investing in renewable energy, our nation promotes a host of
important public goods: national security, fuel diversity, price
stability, universal and reliable electric service, economic
development, and a healthier environment. Most importantly, investing
in renewable energy can provide all these benefits and reduce
electricity costs.
In this statement, I review the potential for renewable energy and
how it can help promote these public goods. I then present the
renewable energy standard for electricity as the best policy mechanism
for reducing market barriers and stimulating the development of
renewable energy resources. Finally, I review three recent studies that
show we can significantly improve our efficiency and increase the
contribution of renewable energy to our electricity mix, while lowering
consumer energy bills.
II. RENEWABLE ENERGY POTENTIAL, BENEFITS, AND BARRIERS
The United States is blessed by an abundance of renewable energy
resources from the sun, wind, and earth. The technical potential of
good wind areas, covering only 6 percent of the lower 48 state land
area, could theoretically supply more than one and a third times the
total current national demand for electricity. An area just over one
hundred miles by one hundreds miles in Nevada could produce enough
electricity from the sun to meet annual national demand. We have large
untapped geothermal and biomass (energy crops and plant waste)
resources. Of course, there are limits to how much of this potential
can be used economically, because of competing land uses, competing
costs from other energy sources, and limits to the transmission system.
The important question is how much it would cost to supply a specific
percentage of our electricity from non-hydroelectric renewable energy
sources. As this testimony will later show, recent analyses demonstrate
we could affordably generate at least 20 percent of our electricity
from non-hydro renewable energy by 2020.
The benefits of renewable energy are as plentiful as the resource
itself--environmental improvement, economic development, and increased
fuel diversity and national security.
Harnessing renewable energy conserves natural resources for future
generations, and reduces the environmental and public health impacts of
mining, refining, transporting, burning, and disposing of wastes from
fossil fuels, as well as reducing air emissions. Renewable resources
also provide insurance against increased costs from stricter
environmental regulations in the future.
Renewable energy provides new economic development opportunities,
especially in rural areas that are rich in wind and biomass resources.
According to the US Department of Energy, generating 5 percent of the
country's electricity with wind power by 2020 would add $60 billion in
capital investment in rural America, and create 80,000 new jobs.
Renewable energy technologies also offer the potential for a very large
export market, as many countries around the world are increasing their
use of renewable resources.
Renewable energy technologies diversify our energy resource
portfolio, reducing exposure to energy supply interruptions and price
volatility, which can affect the entire economy. Indeed, Stephen Brown,
director of energy economics at the Dallas Federal Reserve Bank, notes
that ``nine of the 10 last recessions have been preceded by sharply
higher energy prices.'' Two years ago, soaring natural gas prices was
one key factor in the California energy crisis that caused rolling
blackouts and cost energy consumers billions of dollars. There are now
significant indications that the natural gas price volatility
experienced during 2001 was not an isolated event. Just last week, as
the composite price of March natural gas on the New York Mercantile
Exchange jumped 65 percent in one day, the Wall Street Journal reported
industry observers as saying that ``the U.S. is entering a prolonged
period of higher natural-gas prices, and the days of $3 natural gas,
which lasted from the mid-1980s until about 2000, may be gone.''
There is also a growing recognition that renewable energy and
efficiency can enhance energy security. An official banner at the
Administration's Renewable Energy Summit in the fall of 2001 read:
``Expand Renewable Energy For National Security.'' James Woolsey,
former head of the Central Intelligence Agency, Robert McFarlane,
President Reagan's former national security advisor, and Admiral Thomas
Moorer, former chair of the Joint Chiefs of Staff, together wrote
Congressional leaders in September 2001 urging enactment of minimum
standards for renewable fuels and electricity, along with an increase
in energy efficiency funding, in order to increase national security.
In spite of these compelling environmental, economic, and security
benefits, renewable energy technologies continue to face many market
barriers, which unnecessarily keep them from reaching their full
potential.
Renewable energy has made great strides in reducing costs, thanks
to research and development and growth in domestic and global capacity.
The cost for wind and solar electricity has come down by 80-90 percent
over the past two decades. However, like all emerging technologies,
renewable resources face commercialization barriers. They must compete
at a disadvantage against the entrenched industries. They lack
infrastructure, and their costs are high because of a lack of economies
of scale.
Renewable energy technologies face distortions in tax and spending
policy. Studies have established that federal and state tax and
spending policies tend to favor fossil-fuel technologies over renewable
energy. A recent study by the Renewable Energy Policy Project showed
that between 1943 and 1999, the nuclear industry received over $145
billion in federal subsidies vs. $4.4 billion for solar energy and $1.3
billion for wind energy. Another study by the non-partisan
Congressional Joint Committee on Taxation projected that the oil and
gas industries would receive an estimated $11 billion in tax incentives
for exploration and production activities between 1999 and 2003. In
addition to these subsidies, conventional generating technologies enjoy
a lower tax burden. Fuel expenditures can be deducted from taxable
income, but few renewable technologies benefit from this deduction,
since most do not use market-supplied fuels. Income and property taxes
are higher for renewable energy, which require large capital
investments but have low fuel and operating expenses.
Many of the benefits of renewable resources, such as reduced
pollution and greater energy diversity, are not reflected in market
prices, thus eliminating much of the incentive for consumers to switch
to these technologies. Other important market barriers to renewable
resources include: lack of information by customers, institutional
barriers, the small size and high transaction costs of many renewable
technologies, high financing costs, split incentives among those who
make energy decisions and those who bear the costs, and high
transmission costs.
Some have called for future support of renewable energy through
``green marketing,'' selling portfolios with a higher renewable energy
content (and lower emissions) to customers who are willing to pay more
for them. We strongly support green marketing as a means to increase
the use of renewable energy and reduce the environmental impacts of
energy use. Surveys show that many customers are willing to pay more
for renewable energy, and pilot programs have shown promising, but not
overwhelming results.
Green marketing is not a substitute for sound public policy,
however. There are many barriers to customers switching to green power,
not the least of which is inertia. More than fifteen years after
deregulation of long-distance telephone service, half of telephone
customers still had not switched suppliers, even though they could get
much lower prices by doing so. A recent study by the National Renewable
Energy Laboratory projects that in an optimistic scenario, green
marketing could increase the percentage of renewable energy in our
electricity mix from about 2 percent today to only about 3 percent in
ten years.
With green electricity, the benefits of any individual customer's
choice accrue to everyone, not the individual customer. Green customers
gets the same undifferentiated electrons and breathe the same air as
their neighbors choosing to buy power from cheap, dirty coal plants,
creating a strong incentive for people to be ``free riders'' rather
than pay higher costs for renewable resources. People recognize this
public benefits aspect of green power. While they consistently say they
are willing to pay more for electricity that is cleaner and includes
more renewable energy, they overwhelmingly prefer that everyone pay for
these benefits to relying on volunteers. A deliberative poll by Texas
utilities found that 79 percent of participants favored everyone paying
a small amount to support renewable energy, versus 17 percent favoring
relying only on green marketing.
III. THE RENEWABLE ENERGY STANDARD
A number of complementary policies should be enacted to reduce
market barriers to renewable energy development:
Extending production tax credits of 1.7 cents per kWh and
expanding them to cover all clean, renewable resources
(excluding hydropower)
Enacting a federal public benefit fund to match state programs
for energy efficiency, renewable energy, research and
development, and protecting low-income customers
Adopting national net metering standards, allowing consumers
who generate their own electricity with renewable energy
systems to feed surplus electricity back to the grid and spin
their meters backward, thus receiving retail prices for their
surplus power production
Increasing spending on renewable energy research and
development
The deployment of all these policy solutions will be required to
truly level the playing field for renewable energy. However, we believe
that a national Renewable Energy Standard for electricity--also known
as a Renewable Portfolio Standard (RPS) is the cornerstone of any
comprehensive policy approach to stimulate renewable energy
development. A national RPS can diversify our energy supply with clean,
domestic resources. It will help improve our national security,
stabilize electricity prices, reduce natural gas prices, reduce
emissions of carbon dioxide--which are heating up the earth and
threaten to destabilize the climate--and other harmful air pollutants,
and create jobs--especially in rural areas--and new income for farmers
and ranchers. For these reasons, we believe a national RPS should be
included in any electricity bill.
The RPS is a market-based mechanism that requires utilities to
gradually increase the portion of electricity produced from renewable
resources such as wind, biomass, geothermal, and solar energy. It is
akin to building codes, or efficiency standards for buildings,
appliances, or vehicles, and is designed to integrate renewable
resources into the marketplace in the most cost-effective fashion.
By using tradable ``renewable energy credits'' to achieve
compliance at the lowest cost, the RPS would function much like the
Clean Air Act credit-trading system, which permits lower-cost, market-
based compliance with air pollution regulations. Electricity suppliers
can generate renewable electricity themselves, purchase renewable
electricity and credits from generators, or buy credits in a secondary
trading market. This market-based approach creates competition among
renewable generators, providing the greatest amount of clean power for
the lowest price, and creates an ongoing incentive to drive down costs.
Thirteen states--Arizona, California, Connecticut, Iowa, Maine,
Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Pennsylvania,
Texas, and Wisconsin--have enacted minimum renewable energy
requirements. But energy production creates national economic and
environmental problems that need national solutions. The U.S. Senate
recognized this need last year when they passed the first-ever national
renewable energy standard with strong bi-partisan support. As part of
comprehensive energy legislation (H. 4), the Senate passed a 10 percent
by 2020 renewable energy standard that, if signed into law, would have
saved consumers money on their energy bills and resulted in the U.S.
increasing its total homegrown renewable power to over 74,000 megawatts
(MW). This level of renewable development would produce enough
electricity to meet the needs of 53 million typical homes.
The RPS is the surest mechanism for securing the public benefits of
renewable energy sources and for reducing their cost to enable them to
become more competitive. It is a market mechanism, setting a uniform
standard and allowing companies to determine the best way to meet it.
The market picks the winning and losing technologies and projects, not
administrators. The RPS will reduce renewable energy costs by:
Providing a revenue stream that will enable manufacturers and
developers to obtain project financing at a reasonable cost and
make investments in expanding capacity to meet an expanding
renewable energy market.
Allowing economies of scale in manufacturing, installation,
operation and maintenance of renewable energy facilities.
Promoting vigorous competition among renewable energy
developers and technologies to meet the standard at the lowest
cost.
Inducing development of renewables in the regions of the
country where they are the most cost-effective, while avoiding
expensive long-distance transmission, by allowing national
renewable energy credit trading.
Reducing transaction costs, by enabling suppliers to buy
credits and avoid having to negotiate many small contracts with
individual renewable energy projects.
Some people have asked why hydropower is not eligible to earn
renewable energy credits in most RPS proposals. The primary reason for
not including hydro is that it is a mature resource and technology. In
most cases, it is already highly competitive. It will not benefit
appreciably from the cost-reduction mechanisms outlined above, and an
RPS that included hydro would produce negligible, if any, increases in
hydro generation.
Some people have also expressed concerns about the variable output
of renewable sources like solar and wind, and believe that an RPS would
affect the reliability of our energy system. However, the electric
system is designed to handle unexpected swings in energy supply and
demand, such as significant changes in consumer demand or even the
failure of a large power plant or transmission line. Solar energy is
also generally most plentiful when it is most needed--when air-
conditioners are causing high electricity demand. There are several
areas in Europe, including parts of Spain, Germany, and Denmark, where
wind power already supplies over 20 percent of the electricity with no
adverse effects on the reliability of the system. In addition, several
important renewable energy sources, such as geothermal, biomass, and
landfill gas systems can operate around the clock. Studies by the EIA
and the Union of Concerned Scientists show these non-intermittent,
dispatchable renewable plants would generate about half of the nation's
non-hydro renewable energy under a 10 percent RPS in 2020. Renewable
energy can increase the reliability of the overall system, by
diversifying our resource base and using supplies that are not
vulnerable to periodic shortages or other supply interruptions.
IV. BENEFITS OF A RENEWABLE PORTFOLIO STANDARD
Three recent studies, one by the U.S. Energy Information
Administration (EIA) and two by the Union of Concerned Scientists, show
that a 10 percent RPS by 2020 is easily achievable and can stimulate
economic development and increase energy security, while reducing
consumer energy bills as well as local and global environmental
hazards. Increasing the RPS to 20 percent by 2020 would result in
greater diversity, environmental, and economic development benefits
compared to the 10 percent standard, and would still provide savings to
energy consumers. When combined with energy efficiency measures and
additional renewable energy policies, the RPS can significantly lower
consumer energy bills.
EIA Analysis: The EIA study was conducted at the request of Senator
Frank Murkowski, as the Senate considered inclusion of the RPS as part
of comprehensive national energy legislation (S.1766). As part of their
analysis, the EIA examined the costs of using the RPS to achieve levels
of 10 percent (both with and without the sunset provision in S.1766)
and 20 percent renewable electricity supplies by the year 2020.
The EIA scenarios found benefits to consumers from increasing
renewable energy use despite including a number of assumptions that are
extremely unfavorable to renewable energy. Many of these assumptions
were examined and rejected by the Interlaboratory Working Group--made
up of experts from the National Renewable Energy Lab, Oak Ridge
National Lab, Pacific Northwest Lab, Battelle Memorial Institute, and
Lawrence Berkeley National Lab--in their Scenarios for a Clean Energy
Future (IWG, 2000). In some of the most important such assumptions, EIA
Used higher cost and worse performance assumptions for most
renewable technologies than recent experience or projections by
the Electric Power Research Institute and DOE;
Arbitrarily increased the capital cost of wind, biomass, and
geothermal technologies by up to 200 percent in a given region
after a fairly small amount of the regional potential is met;
more than 90 percent of the highest value wind resources in the
US, for example, are assigned a capital cost multiplier of 200
percent; and
Limited the penetration of variable output resources like wind
and solar power to 15 percent of a region's electricity
generation; in parts of Germany, Denmark and Spain, wind power
is already providing more than 20 percent of total electricity
generation.
These assumptions, and others, led to projections of very high
renewable energy prices in high renewable energy penetration scenarios.
With the availability and penetration of the lowest cost wind and
biomass resources assumed to be sharply limited, higher RPS levels in
EIA's version of the model require deploying more expensive renewable
resources.
Despite these overly conservative assumptions for renewable energy
cost and availability, EIA still found that the 10 percent RPS would
have virtually no impact on retail electricity prices. Figure 1 shows
that, in 2020, electricity prices would be only one-tenth of one cent
per kilowatt-hour higher than business as usual under a 10 percent RPS.
Even these small increases in electricity prices are largely
offset, however, by lower natural gas prices. Diversifying the
electricity mix with renewable energy helps stabilize electricity
prices by easing pressure on natural gas prices and supplies. Under a
10 percent RPS, EIA found that average consumer natural gas prices are
2.2 percent lower than business as usual in 2010, and 1.9 percent lower
in 2020. These lower prices would save gas consumers $1.7 billion per
year by 2020 (2000 dollars, 8 percent discount rate).
In the key results section of its report, EIA recognizes this
benefit of increased renewable energy use by noting that ``the retail
electricity price impacts of the RPS are projected to be small because
the price impact of buying renewable credits and building the required
renewable energy is projected to be relatively small when compared with
total electricity costs and to be mostly offset by lower gas prices
that result from reduced gas use.''
However, EIA did not report on the extent to which these lower
natural gas prices offset higher electricity costs. By adding total
residential, commercial and industrial energy expenditures, it can be
seen that total non-transportation energy costs would actually be $2.7
billion lower in 2010 and only $1.5 billion or 0.3 percent higher in
2020 under the 10 percent RPS than under business as usual (Figure
2).1 The net present value savings of the RPS scenario would
be $6.7 billion compared to the business as usual case (2000 dollars, 8
percent discount rate).
---------------------------------------------------------------------------
\1\ Results obtained through personal communication with Laura
Martin at EIA, on March 7, 2002. Tables available upon request.
---------------------------------------------------------------------------
A 10 percent RPS would also help reduce emissions from power
plants. Under an RPS, carbon emissions from power plants would be 23
million metric tons or 3 percent lower than business as usual in 2010
and 53 million metric tons or 7 percent lower in 2020, according to
EIA.
``No Sunset'' Case: The EIA report also examined a 10 percent RPS
by 2020 without a key provision included in the original RPS proposed
in S.1766--a 2020 sunset date. EIA found that this sunset provision
would cause electric generators to chose an alternative compliance
mechanism rather than develop additional renewable energy sources in
the later years of the requirement. If the sunset provision was removed
from S. 1766--as was effectively the case in the RPS passed by the
Senate--EIA found that there would be a significant impact on the costs
and benefits of the RPS.2
---------------------------------------------------------------------------
\2\ The sunset does not actually have to be removed, but it must be
at least ten years after the date at which the renewable energy ramp-up
ends, in order to allow generators that come on-line late in the RPS
ramp-up enough time to recover their costs. Otherwise, no renewable
energy generation would be added in the last few years of the RPS, and
suppliers would instead buy proxy credits from or pay penalties to DOE.
The early sunset thus produces less renewable generation and higher
costs.
---------------------------------------------------------------------------
EIA results show that under a 10 percent RPS with no sunset,
average retail electricity prices would be unchanged through 2020
compared to business as usual. Average consumer natural gas prices
would be 2.3 percent lower than business as usual in 2020. With no
change to consumer electricity prices, lower natural gas prices result
in savings for consumers on their electricity and natural gas bills
throughout the 2002-2020 period (Figure 3). Total non-transportation
energy costs would be $3.1 billion lower in 2010 and $3 billion lower
in 2020 under the 10 percent RPS than under business as usual (Figure
2). Removing the sunset provision from the 10 percent national standard
would also nearly double total energy consumer savings to $13.2 billion
through 2020.
EIA 20 percent analysis: Results from the EIA analysis also show
that increasing the renewable energy standard to 20 percent by 2020
would result in greater diversity and environmental benefits compared
to the 10 percent standard, and would still provide savings to energy
consumers.
Under a 20 percent RPS, EIA results show virtually no impact on
retail electricity prices compared to business as usual through 2015.
In 2020, electricity prices would be just two-tenths of one cent per
kilowatt-hour higher than business as usual.
By diversifying the energy mix even further with a 20 percent RPS,
EIA results show an even greater impact on natural gas prices and
supplies. Average consumer natural gas prices are 3 percent lower than
business as usual in 2010 and 3.6 percent lower in 2020. These lower
prices would save gas consumers $3.3 billion per year by 2020.
Similarly to the 10 percent RPS case, EIA results show that lower
natural gas prices more than offset the very small increases in
electricity prices caused by adding more renewable energy sources to
the generation mix. Total consumer energy savings would be $5.7 billion
over the next 18 years.
According to EIA, a 20 percent by 2020 RPS would also result in
greater carbon emissions savings from power plants. Carbon emissions
would be 43 million metric tons or 6 percent lower than business as
usual in 2010 and 76 million metric tons or 10 percent lower in 2020.
UCS Analysis: The Union of Concerned Scientists, in Renewing Where
We Live: A National Renewable Energy Standard Will Benefit America's
Economy, investigated the costs and benefits of a 10 percent RPS by
2020 RPS combined with an extension of the Federal renewable energy
production tax credit as passed by the Senate in March 2002.
Our analysis used the US Energy Information Administration's NEMS
computer model, with scenarios run for UCS by the Tellus Institute. We
based our business-as-usual scenario on Annual Energy Outlook 2002
(EIA, 2001), the EIA's long-term forecast of US energy supply, demand,
and prices. The year 2000 is the last year of history in the model,
which makes projections through 2020. We modified several NEMS
assumptions for renewable energy, generally in line with the IWG Clean
Energy Future analysis, in order to model these technologies more
accurately.
We found that the national portfolio standard and renewable energy
tax credits passed by the Senate would reduce long run energy costs to
consumers. Total annual consumer energy bills (not including
transportation) would be $100 million lower than business as usual in
2010, and $3.8 billion or 1 percent lower in 2020 (Figure 4). The
present value of total consumer savings would be $7.8 billion between
2002 and 2020. If taxpayer costs from the tax credits and increased
federal research and development funding for renewable energy are
included, total consumer savings would be $2.8 billion.3
Increased competition from renewable energy leads to lower natural gas
prices, which more than offset the slightly higher costs of generating
renewable electricity in the United States.
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\3\ Last year's House and Senate energy bills included renewable
energy tax credits worth between $2.6 billion (Congress' estimate) and
$5.2 billion (UCS' estimate) over the next 10 years. The bills also
included 10 years' worth of subsidies for fossil fuel and nuclear power
totaling about $9.1 billion in the Senate bill and $28 billion in the
House bill. (Note: these dollar figures are not discounted.)
---------------------------------------------------------------------------
UCS analysis found that under a 10 percent RPS, the United States
would increase its total homegrown renewable power to over 74,000
megawatts (MW) by 2020. The majority of this development would be
powered by America's strong winds, with significant contributions from
biomass and geothermal. This level of renewable development would
produce enough electricity to meet the needs of 53 million typical
homes.
Renewable energy development resulting from the Senate-passed RPS
would bring significant economic benefits to the United States. Through
2020, the national standard would produce
$17 billion in new capital investment
$1.2 billion in new property tax revenues for local
communities
$410 million in lease payments to farmers and rural landowners
from wind power
UCS also found that the increased use of renewable energy in the
United States would reduce air pollution from power plants. Nationally,
the renewable energy standard will reduce about 27 million metric tons
of carbon emissions a year by 2020. The renewable standard will also
reduce harmful water and land impacts from extracting, transporting,
and using fossil fuels.
In the future, natural gas is projected to fuel much of the new
electricity generation built in the United States without additional
policies for renewable energy. This increase in demand for natural gas
may lead to natural gas prices that are higher and more volatile than
those used in our base case analysis. Based on these assumptions, UCS
also examined the effects of a 10 percent RPS on an alternative
scenario where wholesale natural gas prices are 35 percent higher by
2020.
UCS found that the more expensive natural gas is, the greater the
savings will be from reducing natural gas use through a renewable
energy standard. In the scenario that we analyzed, total consumer
energy bill savings through 2020 from the renewable standard would more
than double to $17.6 billion. Renewable energy generation and related
economic development benefits would also increase significantly if gas
prices were higher.
In Clean Energy Blueprint: A Smarter National Energy Policy for
Today and the Future, the Union of Concerned Scientists investigated
the costs and benefits of two energy efficiency and renewable energy
scenarios, compared to business as usual. We did not examine RPS-only
scenarios, as in Renewing Where We Live or as EIA did, but looked at a
20 percent RPS in combination with other renewable energy and energy
efficiency policies.
We examined a scenario consisting primarily of the policies in the
Renewable Energy and Energy Efficiency Investment Act of 2001 (S.
1333), sponsored by Senator Jeffords. In addition to a 20 percent RPS,
S. 1333 would have established a federal public benefit fund and net
metering. We also assumed that research and development spending on
renewable energy and efficiency would increase 60 percent over three
years to levels recommended by the President's Committee of Advisors on
Science and Technology.
We also investigated the costs and benefits of the RPS with an
expanded suite of renewable energy and energy efficiency policies. In
addition to the above policies, these included:
Production tax credits of 1.7 cents per kWh for renewable
energy would be extended and expanded to cover all clean, non-
hydro renewable resources, helping to level the playing field
with fossil fuel and nuclear generation subsidies.
Combined heat and power: Incentives would be provided and
regulatory barriers removed for power plants that produce both
electricity and useful heat at high efficiencies.
Improved efficiency standards: National minimum efficiency
standards would be established for a dozen products, generally
to the level of good practices today. In addition, existing
national standards would be revised to levels that are
technically feasible and economically justified.
Enhanced building codes: States would adopt model building
codes established in 1999/2000, as well as new more advanced
codes established by 2010.
Tax incentives would promote efficiency improvements for
buildings and equipment beyond minimum standards.
Industrial energy efficiency measures: Industry would improve
its efficiency by 1 to 2 percent per year through voluntary
agreements, incentives, or national standards.
Like Renewing Where We Live, this analysis used the US Energy
Information Administration's NEMS computer model, with scenarios run
for UCS by the Tellus Institute. For this report, we based our
business-as-usual scenario on Annual Energy Outlook 2001 (EIA, 2000).
The year 1999 is the last year of history in the model, which makes
projections through 2020. The efficiency policies were developed by and
modeled by the American Council for an Energy Efficient Economy. The
calculated energy savings were used to adjust the AEO forecasts. The
energy efficiency costs were annualized and added to the results. Once
again, we modified several NEMS assumptions for renewable energy,
generally in line with the IWG Clean Energy Future analysis, in order
to model these technologies more accurately and applied these
modifications to both the business-as-usual scenario and the Clean
Energy Blueprint.
Combined with increased research and development, S. 1333 would
save consumers a total of $70 billion between 2002 and 2020, with
savings reaching $35 billion per year by 2020. Under a higher-gas-price
scenario, cumulative savings would reach $130 billion between 2002 and
2020. In 2020, monthly bills for a typical household would be $34 per
month under S. 1333, compared to $38 per month under business as usual
and $25 per month under the Clean Energy Blueprint.
Carbon dioxide emissions from power plants would be nearly one-
third lower than under business as usual by 2020, while sulfur dioxide
emission levels would be 8 percent lower and nitrogen oxide emissions
15 percent lower.
When combined with the energy efficiency and additional renewable
energy policies included in the Clean Energy Blueprint, the economic
and environmental benefits of the RPS are even greater. Under the
Blueprint, total energy use would be 19 percent lower than business as
usual by 2020 and only 5 percent higher than 2000 levels, due to
increased energy efficiency in homes, offices, and factories. Natural
gas use would grow by 8 percent from today's level, but be 31 percent
less than business as usual by 2020. Coal-fired electricity generation
is 61 percent below business as usual in 2020 and 53 percent lower than
today's levels.
Oil use would be reduced by 5 percent, saving over 400 million
barrels per year by 2020. More oil would be saved over the next 18
years than is projected to be economically recoverable from the Arctic
National Wildlife Refuge over 60 years. The Clean Energy Blueprint did
not include oil savings from increased energy efficiency and renewable
energy use in the transportation sector. Another recent UCS study,
Drilling in Detroit: Tapping Automaker Ingenuity to Build Safe and
Efficient Automobiles, has shown that fuel economy improvements in cars
and light trucks would provide significant oil savings (UCS, 2001). If
these savings were combined with the savings from the Clean Energy
Blueprint, the United States would save more than 15 times the oil
available in the Arctic Refuge at 2001 oil prices (Figure 5) and total
oil use would be 9 percent lower in 2010 and 23 percent lower in 2020
than under business as usual. The combined net savings to consumers
would increase to over $150 billion per year by 2020 and $645 billion
between 2002 and 2020.
Non-hydro renewable energy sources (wind, biomass, geothermal, and
solar) would produce 20 percent of the nation's electricity by 2020.
Energy efficiency measures would offset projected growth in electricity
use. Combined heat and power plants would meet 39 percent of commercial
and industrial electricity needs. Thus, the Clean Energy Blueprint
would eliminate the need for 975 of the 1,300 new power plants the
administration's National Energy Policy says we need by 2020, and
retire 180 existing coal plants and 14 nuclear plants, reducing the
number of vulnerable energy facilities.
By 2020, because of lower electricity demand and because natural
gas is used both to generate electricity and to produce useful heat,
overall natural gas generation is 33 percent lower than business as
usual in 2020. The Blueprint's efficiency and renewable energy policies
reduce natural gas prices by 27 percent by 2020, saving businesses and
homes that use natural gas nearly $30 billion per year.
Under the Clean Energy Blueprint, net energy savings would grow to
$105 billion per year by 2020, totaling $440 billion between 2002 and
2020 (total savings between 2002 and 2020 are in 1999 dollars using a 5
percent real discount rate.) A typical family would save $350 per year
in lower energy bills by 2020 (Figure 6).
The Clean Energy Blueprint would reduce power plant carbon
emissions two-thirds by 2020 compared to business-as-usual projections
(Figure 7). Sulfur dioxide emissions, which are the primary cause of
acid rain, and nitrogen oxide emissions, a major cause of smog, would
both be reduced more than 55 percent.
The Clean Energy Blueprint would reduce the need to drill for
natural gas and to build some significant portion of the over 300,000
miles of new pipelines called for in the administration's National
Energy Policy. It would also reduce the need to mine, transport, and
burn 750 million tons of coal per year by 2020 compared to business-as-
usual projections. Moreover, energy efficiency measures and renewable
energy facilities can be deployed faster than new fossil and nuclear
energy supplies could be developed.
VI. CONCLUSION
Survey after survey has shown that Americans want cleaner and
renewable energy sources, and that they are willing to pay more for
them. A survey conducted last year by Mellman Associates found that
when presented with arguments for and against a 20 percent RPS
requirement, 70 percent of voters support an RPS, while only 21 percent
oppose it.
The combination of EIA and UCS studies demonstrate that with
appropriate policies, renewable energy technologies can provide
Americans with the clean and reliable electricity they desire, while
also saving them money, contributing to our nation's energy security
and achieving significant reductions in harmful emissions.
The net metering and renewable energy production incentive
provisions included in the current draft bill before the committee are
laudable and deserving of support. But by themselves, these provisions
will not get the job done. A strong, market-friendly renewable energy
standard is required to realize the full potential of America's
renewable energy resources.
For all of these reasons, we respectfully urge that as the
Committee moves forward with its development of national energy
legislation, you support inclusion of a renewable portfolio standard.
Thank you.
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Mr. Fossella [presiding]. Thank you, each of you, for your
testimony and your time and patience. We will jump right into
the questions. Mr. Fertel, with respect to the Davis-Besse
nuclear power plant that experienced a large corroded hole on
the top of its reactor vessel head last spring, the plant has
been shut down for almost a year.
Industry, otherwise has a good safety record. Why do you
think this particular plant was allowed to corrode to such a
dangerous degree, and how, if at all, is this typical of how
other plants are operating?
Mr. Fertel. Let me start with the second part of your
question first, Congressman. The NRC has required all the
plants that are similar in design, pressurized water reactors,
to do inspections.
And what we found over the last year is that none of the
plants had a similar problem. So, I think, starting with the
second part of your question of do we have a vulnerability
elsewhere, the answer right now is no.
How did it occur at Davis-Besse? We have understood
corrosion, like you saw at Davis-Besse, for a lot of year now
and all the plants have programs that they are implementing to
basically monitor and manage that.
In Davis-Besse's case they were not doing it as well as
they should have been doing it and that is why the plant had a
problem. That is why the plant has been down for a year.
And that is why there have been dramatic changes there. As
a result of Davis-Besse, a number of things have happened. The
NRC has done a major lessons learned and about 3 weeks ago the
commission approved, I think, 51 out of 52 recommendations to
change things that the NRC does based upon what happened at
Davis-Besse.
On the industry side, also a number of things have
happened. As I mentioned, we have had a number of programs
going on looking at corrosion and aging of materials, which is
not a phenomena that is unexpected.
What we found was there had been going on probably very
good technically, but in a bunch of different areas without a
lot of integration.
And we have now taken steps to bring them basically under
NEI, in some respects, in an integrated way with much more
senior people looking at both the priorities and the funding
for those programs.
Just also to react to the Davis-Besse question from what
Anna said, Davis-Besse did have a bad event. That should not
happen, there is no excuse for it.
On the other hand, both the analysis that they have done
and the analysis that NRC has recently done, says that there
was no threat to health and safety from the situation there at
the time or for probably up to 2 years.
Now again, that does not excuse the event. And in 2 years,
if something happened, it wasn't going to be a threat to health
and safety offsite.
It was going to be a real problem at the plant, but not a
threat offsite. So I am not excusing what went on there, but I
think we need to keep a perspective on what the consequences
are that could have happened.
There was not a threat offsite.
Mr. Fossella. Follow on the other side of the equation, in
effect, the NRC has not licensed a new plant in over 20 years.
What do you think, I mean what is your opinion of when we might
see the next one?
Mr. Fertel. As far as license renewal, first, even there,
you know, our plants had a 40 year license that was issued
originally.
There was no technical basis for the 40 year license. As
best we could determine from looking back at the Atomic Energy
Act and its evolution, there were two primary reasons it is 40
years.
One, it was a normal depreciation period that you use. And
two, it was what we used to issue FCC licenses for 40 years. So
basically you got a 40 year license.
Nothing at our plants is designed to stop working or fail
in 40 years. You analyze your plant from a safety standpoint
performance for certain systems based upon 40 years of
operation.
When you renew the license, what NRC does is they take a
look at what you are doing, because there is really no
difference in plant operation in year 39 or year 41, in many
respects.
But what they ask you to do is analyze those systems that
are not in a maintenance program for basically long term
management of performance and see whether you need to put them
in that.
And they ask you to re-analyze those portions of the plant
that were analyzed for 40 years, now analyze it for 60 years.
So our conclusion is that the NRC's process is pretty
rigorous. There is no reason the plant can't operate for 50, 60
or potentially 70 or 80 years, because you are basically
changing it out and maintaining it as you go.
Mr. Fossella. My question was when do you think the next
new plant will be licensed?
Mr. Fertel. Oh, I am sorry. Okay, the next new plant, there
are a couple of things happening there. There is a significant
effort by the industry, and really I will mention the Scully
report.
We are not asking, nobody I am aware of is asking for 50
percent above market prices. That may be something the DOE
people have looked at but it is not something the industry is
looking at.
Right now what is going on in the industry is there is an
effort to certify new designs before the Nuclear Regulatory
Commission, Chairman Meserve mentioned that.
There are also right now three companies looking at banking
sites. You are allowed to bank a site for future use. And three
companies are planning on filing early site permits this year.
It doesn't mean they are necessarily build there, but it
means they are banking it. We are working with the NRC to
define the licensing process better and those are all public
meetings and everybody can attend them.
And our expectation is that based upon the electricity
markets right now and what appears to be a glut of capacity
that people are waiting to buy at distressed prices, there
won't be a need for new baseload capacity decisionmaking until
the 2005-2006 timeframe.
What we are trying to do is have everything ready by then
and we are expecting that we could see potential plant orders
in the time period. And then it would be probably, for the
first plant, about a 7-year timeframe.
And then after that we think we are down in the 5 or 6. So,
in the 2000, latter part of this decade, Congressman.
Mr. Fossella. Other than what you have provided in your
testimony, there are those, including some on the panel here,
who feel that the industry wouldn't exist but for, and I am
quoting one, for enormous subsidies paid for by rate payers and
taxpayers. Do you agree with that?
Mr. Fertel. No, I don't agree with it, but it is a long
answer to explain it. And Price-Anderson may be a good example.
This committee has supported Price-Anderson and we
appreciate that, and so has the Congress over and over again.
Anna is right on one thing she says that when Price-Anderson
was passed in 1957, it was a subsidy.
The government was basically capping liability at $560
million. The government was picking up $500 million and the
commercial market would only provide $60 million.
Over the ensuing 45 years, Congress has modified Price-
Anderson to be, what I believe, is an extremely good public
policy. It is probably the best public policy in the world for
a third party liability protection.
It creates a pool that all the plants, Jeff Benjamin, it
works for Exelon. If there is an accident at my plant, Jeff has
to help pay for it.
It creates a pool across all of our companies that puts
$9.5 billion available. No other industry has $9.5 billion.
In fact, they don't have anything close to it. Okay, that
you have to share, you can't walk away. What you hear is we
should have unlimited liability. Well, there is no such thing.
Companies declare bankruptcy when there is unlimited liability.
We see it every day, unfortunately, over the last 2 years.
So it has turned out to be, because again of Congress, you
changed it from a subsidy to an extremely good public policy.
If you were talking about 1957, you would be correct in
saying it is a subsidy. It isn't now. It is a very good public
policy. So I would disagree respectfully with Anna.
Mr. Fossella. Thank you. Shifting to your left, Ms.
Aurilio, according to your testimony, ``spent nuclear fuel from
reactors cause perhaps the most toxic material generated by
humans.''
Jumping ahead, ``unshielded it delivers a lethal dose of
radiation within seconds.'' How many people have died in the
last 20 years due to exposure to unshielded spent nuclear fuel?
Ms. Aurilio. Well, hopefully none because I am hoping no
one has stood next to unshielded nuclear fuel.
Mr. Fossella. So that sort of answers the second question.
You are unaware of anyone who has ever died from exposure to
unshielded spent nuclear fuel, right?
I am going to shift to your left, because I have about 2
minutes left. Mr. Benjamin, according to your testimony,
according to the testimony of Dr. Lyman, who sits on the panel,
``the nuclear industry is bitterly resisting any new security
requirements that will cost it money.''
Is this true, in your opinion, and how much money has
Exelon spent on new security requirements since September 11?
Mr. Benjamin. I will answer the second part of your
question first. We have spent, across our fleet, around $12
million in capital expenditures by putting new hardware in our
plants.
And we have increased our operating and maintenance budget
for security from roughly $45 million per year, which is about
4.5 percent of operating budget, up to close to $64 million per
year. Just a little bit under 6.5 percent.
I think it is fair to say that we have worked very
aggressively and in concert with the Nuclear Regulatory
Commission over the past 17 months to put in real security
improvements at our sites.
You drive up to our plant sites today, you will be met out
in the owner controlled area. Your identification will be
verified.
If you are driving a vehicle of sufficient size, it will be
searched. Again, at a distance sufficiently far from the plant
site itself, so that any potential terrorist act wouldn't pose
a threat to the plant itself.
We have taken a number of additional measures for
operational readiness. We have gone back and made sure that we
have checked again on the people who have unescorted access to
our sites.
At Exelon alone, we have added over 260 new security
officers and we have trained them. We have provided them
improved weapons and we have bought additional weapons for the
previously existing guard force.
So I think we have acted both responsibly and in concert
with the wishes of the Nuclear Regulatory Commission and
believe we have effected real security improvements.
The issue in front of us now, again, as I stated in my oral
remarks, is one of public policy in terms of where do we draw
the lines?
Where do we establish the limitations on what we want and
need a civilian guard force to carry out in terms of its
security mission.
And where do we then bring in the roles of local law
enforcement, State law enforcement, Federal law enforcement and
the military.
And those are the issues before us that we are simply
seeking the NRC acting in full consultation with the Department
of Homeland Security and Congress to get sorted out before
issuing a new design basis threat.
Our job one is safety. Safety to the public. We want to do
what is proper. We think we have done what is proper. The
security that we have put in place, I think gives us the time
to do it right.
Mr. Fossella. Thank you, Mr. Benjamin. We have other
questions, but at this point I turn to my colleague, Mr.
Boucher.
Mr. Boucher. Thank you very much, Mr. Chairman, I am going
to be very brief. Mr. Nadel, I want to ask for your assistance
in perhaps providing a primer on the steps that we need to take
in order to make sure that our society receives from combined
heat and power the added benefits both on the environmental
side and the energy efficiency side that would come from an
expansion of capacity. What do we need to do? What steps should
we take?
Mr. Nadel. Several things. Probably the most important is
to address some of the barriers in terms of individual utility
and sometimes individual State regulations on hook ups of these
types of systems on back up power, how much they get charged
for back up power.
What the rates are that they can sell. Some facilities have
good access to this, they are qualified facilities, many do
not.
We think it is real important to get these signals right,
and we recommend that the energy bill, that hopefully this
committee reports out, gives FERC explicit authority to develop
those so that we have fair and reasonable hook up requirements,
back up power rates, etcetera.
That is by far the most important thing that I think needs
to be done. In addition, some tax credits could be useful. The
President has proposed that in his budget.
The House Ways and Means Committee did report out a bill in
2001, so that will be an aspect of it. We think those should
particularly target the medium and smaller size plants, that is
where the assistance is most needed.
Not in the very large plants where the market is starting
to take off a little bit more. There is some R&D in terms of
the more advanced technologies, and the bill, I think it is in
Title VI, does include quite a bit on that.
So that is good. But particular dealing with the back up
power, the interconnection, I think that would be very useful.
Mr. Boucher. All right, that is helpful to know. Would you
like to take just a minute to underscore what some of the
benefits of using combined heat and power facilities are, in
comparison with the national electricity generation-based
generally, specifically with respect to the more
environmentally benign nature of CHP and the higher energy
efficiency that CHP achieves.
Mr. Nadel. Right, as you point out, and you are absolutely
correct, combined heat and power or CHP, by using the same fuel
effectively twice, both to provide heat and provide power,
tends to be much more efficient.
We are talking about efficiencies, you know, 75, 80, 85
percent compared to your typical existing power plant which is
just over 30 percent.
Even some of your newer power plants are maybe in the 40's
or something like that. So you are talking a major efficiency
advantage, if you will.
That, in turn, means much lower emissions per kilowatt hour
of output. Also, it depends on the type of system, but many of
these systems use very advanced combustion techniques, using
natural gas and other fuels, they can burn extremely cleanly
which helps reduce emissions.
So that is another major advantage.
Mr. Boucher. Well, thank you. As you may know, I am
considering recommending to the committee that some of the
steps you have outlined be taken.
And it is helpful to have your statement on the record of
very strong support for that happening. Ms. Aurilio, let me ask
you a question, if I may.
The administration is recommending an R&D program of about
$2 billion to be expended at $200 million increments over a 10-
year period, for, primarily for the development of advanced
coal gasification technologies.
The theory being, I suppose, that coal gasification is an
appropriate way to derive hydrogen which in turn could power
fuel cells.
And from the environmental side, the gasification process
conveniently enables CO2 to be drawn off in a
separate stream and it then potentially could be sequestered
and dealt with in a better way than simply releasing it into
the atmosphere. What do you think of that?
Ms. Aurilio. That is a great question. I don't think I have
seen enough of the goals or specifications of the program to
have an overall opinion on it.
A couple of concerns I think, and things that I would look
for in evaluating that kind of program is first of all what is
the goal of the program?
So others have testified, for example, about the hydrogen
car and the fact that there is no actual promise that taxpayers
will get a product at the end of the billions of dollars that
are spent.
I would like to see what taxpayers will get for their money
at the end of that kind of program. In the past we have
questioned the clean coal technology program because it is
developed technologies that weren't even as good as stuff that
was developed without government subsidy.
So I would want to see what the criteria were. Finally, I
think the President's budget, as we looked at it, took money
out of a lot of very deserving programs like renewable energy
programs to put into some of these new initiatives.
And I don't think that we should be taking money out of
existing renewable energy programs to be paying for stuff like
this.
If someone wants to make a case to do this brand new
technology that again, I think has been very vague in terms of
its goals and guarantees, we ought to be preserving the
existing programs as well.
Mr. Boucher. Okay, thank you. Mr. Meyer, would you like to
comment on the same question?
Mr. Meyer. Yeah, I agree with Anna that we need much
clearer goals set out here. We also need to look at the
permanence issue, I think, with carbon sequestration.
Because I think this is a technology that has some promise,
but it is a technology where you have to be very certain that
the carbon you put down in the ground stays there for centuries
and longer.
Because if you had some pulse of carbon being emitted from
underground storage, it could be quite troubling to the climate
system.
Again, I agree totally with Anna that the shell game of
cutting some of the core of renewable energy programs, such as
biomass, wind and geothermal. To switch money into either this
coal initiative, the FutureGen initiative or the hydrogen
initiative is misguided.
We need a balanced portfolio. And as I said in my oral
statement, we need to increase R&D on renewable technologies if
we want to keep those positive cost trends going in the right
way. So I think that was a mistake.
We are supportive of some additional R&D on these
technologies. Clearly, if you look at countries like China and
India, which are going to use their tremendous indigenous coal
resources to modernize their economies, we need to find ways to
square the circle in terms of carbon emissions from coal over
the long term.
And I think gasification technology is clearly the way to
go there. As you said, it makes it much easier to separate the
carbon before it is combusted.
So, some additional R&D is useful. I agree with Anna, you
need to see clear goals and what you are going to get for your
buck.
We need to see what other countries are going to come in on
this kind of technology with us. I know they are trying to get
international partnerships launched here.
Let's see what the Europeans, the Japanese and others that
are looking at this are willing to ante up in the bar and do.
Mr. Boucher. Thank you very much. In deference to the fact
that we have all had a very long day and you have devoted, as
we have, virtually your entire day to informing us, let me
thank each of you for your participation.
Your written statements and your testimony will be most
helpful to us. And Mr. Chairman, having said that, I would
recommend that we call it a day. Thank you very much, I yield
back.
Mr. Fossella. Thank you, Mr. Boucher, I will take that
suggestion under advisement. We have just a few more quick
questions and then everybody can go home, if you don't mind.
Mr. Meyer, your testimony states that you support net
metering and the draft energy proposal contains a provision on
net metering. Do you support the net metering provision in the
discussion draft?
Mr. Meyer. Yes, we think this is a positive step forward.
As I said, it is not sufficient in and of itself to move
renewable technology where we want to go.
Net metering is aimed at onsite, small scale technologies
which are important and you want to continue the cost trends.
But that is sort of a niche market in terms of overall
renewable contribution to the country long term. So we also
need policies like tax incentives.
We ought to be extending and expanding the production tax
credit which unfortunately Congress has only reauthorized in
year or 2 year increments, which doesn't provide the long term
certainty to the industry that it needs to achieve low cost
financing.
We also need the renewable energy standard, which will
drive the bulk power technologies, such as geothermal, biomass
and wind into the major contribution that they can make.
We see no reason why we can't get 20 percent of our
electricity from non-hydro renewables by the year 2020. We
think that ought to be the goal.
We understand the Senate made some compromises there and
only went for 10 percent, but we think we ought to go as far as
we can, particularly given the gas price volatility and some of
the energy security concerns we are seeing currently.
Mr. Fossella. And the Union of Concerned Scientists
supported the net metering provisions in the Senate's energy
bill last Congress, correct?
Mr. Meyer. Yes, we did.
Mr. Fossella. Which is identical to the one in the draft?
Mr. Meyer. Yes.
Mr. Fossella. Dr. O'Hagan, can you comment, and if you feel
you covered it in your testimony, that is fine. NEMA's role in
helping the Federal Government implement its energy management
goals?
Mr. O'Hagan. Mr. Chairman, when I testified here last year
I suggested that a good place to start would be in this hearing
room by installing energy efficient lighting. I am afraid to
see it hasn't happened yet.
We, I think there are two important things. One is that the
government should lead by example in upgrading its own
facilities.
And the other is widely promoting the use of the voluntary
consensus standards that have been developed collaboratively in
the private sector.
Mr. Fossella. And also discuss an involvement with the
American Council for Energy Efficient Economy to develop the
energy efficiency standards in the H.R. 4 conferees adopted,
which I understand again are the same provisions in the draft
bill.
Mr. O'Hagan. That is right Mr. Chairman. We are all on the
same page on the energy efficiency standards. I don't think
there is anybody that opposes conservation.
There is enormous waste. One point I would make that, and
we have made this point to the Department of Energy.
In the case of energy efficiency the technology exists. We
are not waiting for new technologies to come. Unfortunately it
hasn't been deployed to the extent that it should be.
And primarily because the first cost is higher, but the
life cycle cost is much lower. So we would like to see the
Department of Energy and the government lead a major, national
education effort to really try to get the country to adopt the
energy efficient technologies.
Pointing out that it is cost saving in the long run and
that is of great benefit to the Nation and our energy policy.
Mr. Fossella. Thank you, sir. Mr. Nadel, in your testimony
you State that while you strongly support the energy efficiency
Title of the draft bill, you would like to add certain energy
efficiency standards, ``When and if negotiations with industry
are successfully completed,'' that is your quote. What is the
status of the negotiations and where are they headed at this
time?
Mr. Nadel. We are talking with several industry
associations about possible new standards. In general, all the
standards in the bill were consensus, so people both on the
House side and the Senate side have made clear that they are
really looking for consensus on these issues.
So we are trying to work with groups like NEMA. We are
talking with them about compact fluorescent lamp standards.
We are also talking with them about extending the
transformer standard to another type of transformer I will call
liquid-immersed.
So we are having discussions with the association, with
their members to see if we can work out the technical details.
And if we can fairly soon, hope to have something to present to
the members for consideration.
Also talking with one other trade association, I don't
think I should say in public until it is farther along, but
hopefully there may be something there as well.
Mr. Fossella. In addition, you State that the energy
efficiency provisions in the draft bill are, ``a significant
improvement relative to the efficiency provisions passed by the
House in 2001.''
Can you elaborate on this and tell us in what specific
respects this draft is stronger than the House passed H.R. 4 on
energy efficiency?
Mr. Nadel. Okay, a number of provisions were added in this
bill that were not in the 2001 bill that I think significantly
strengthened it.
The efficiency standards is a prime example. The four
standards that are specifically in the bill now were not in the
bill in 2001.
It has to do with exit signs, traffic lights, torchiere
lighting fixtures and transformers. In addition, the bill now
directs the Department of Energy to develop some standards on
additional products that were not in the House bill.
Commercial refrigerators, for example, comes to mind, as an
example. The requirements for Federal Government, the Federal
energy management provision. So it has been significantly
strengthened.
There has been, more than a year has elapsed and there was
time for people to really sharpen their pencil and come up with
some additional improvements.
There is a section on industrial voluntary programs to
encourage industrial customers to voluntarily improve their
efficiency. Meaning reduce their energy use per value of
product by 2.5 percent per year.
That was not in. So those are some examples of some very
concrete provisions that have been added. And we very commend
the Chairman for including them.
Mr. Fossella. The last question is for Dr. Lyman. In your
testimony you State that the Nuclear Control Institute is not
an anti-nuclear organization.
Can you provide me with one, two or three examples of how
nuclear power is beneficial, and if so, what would they by?
Mr. Lyman. Well, we are not an anti-nuclear organization,
but neither are we pro-nuclear. We are anti-pro-nuclear. So
let's say our position is neutral.
I can see obviously there are, it is wrong to not consider
any options when you are thinking about future energy needs.
And, but I do believe there are risks associated with n
nuclear energy generation that do have to be fully taken into
account. And if they are, I haven't seen any analysis that
would indicate that it would remain an economic form of
electricity generation.
So, I mean, you have to satisfy both safety, security and
an economic consideration simultaneously. And the day when that
is possible is the day when I will look at the other purported
advantages.
But that is the first bar in my view.
Mr. Fossella. So to be clear, what exactly is the benefit,
if any, in your opinion? If you don't believe there are any,
that's fine. But I am just curious, for the record.
Mr. Lyman. Simply, from the point of view that I don't
think options should be limited.
They have to be evaluated on their merits. And until the
safety and security issues are fully resolved, I can't look
forward to even discussing that question.
Mr. Fossella. Do you think there are any benefits to
nuclear power?
Mr. Lyman. There is a limited benefit associated with
greenhouse gas generation, there is no denying that. Although
you do have to take into account the full life cycle emissions
associated with that.
And, again, I haven't the analysis that would fully justify
even that statement. What you really do need is a full life
cycle analysis that does, in which you are able to compare
apples and oranges, for instance, the purported benefits of
nuclear power against the risks and the benefits of other
energy technologies.
And that is a difficult calculation. But I would simply
reserve until I have seen a convincing calculation to answer
that question.
Mr. Fossella. Ms. Aurilio, do you think there are any
benefits to nuclear power? And if so, what do you think they
are?
Ms. Aurilio. Well, I don't. I think until we solve the
waste and the safety problem that we are still very concerned
and I am actually almost floored by the industry's response to
the Davis-Besse incident, where one, the response was there was
no offsite threat. I disagree with that.
It could have caused the most serious loss of coolant
accident that we have seen. And in the case to Three Mile
Island, which was a loss of coolant accident, there was a melt
down.
No. 2, I was floored by the response that said that none of
the other plants had similar kinds of problems because in
October 9, 2002, the North Anna Plant, not named after me, in
Virginia, actually disclosed that it had serious cracking
problems.
I was also floored when I heard that the nuclear industry
hasn't uncovered any problems with aging related problems in
license extension. Because in fact similar reactor vessel
cracking was found in the Oconee plant after the NRC approved
its license.
Mr. Fossella. That is interesting that you bring that up.
What exactly were the offsite problems associated with Three
Mile Island?
Ms. Aurilio. Well, there was a release of radiation. Now no
one can quantify exactly what happened there. The evacuation
order wasn't given, I believe, until days after the accident.
So I don't know that anybody actually had the monitoring in
place to see what the problems were in the folks who might have
been exposed to that radiation.
But there certainly was a release of radiation.
Mr. Fossella. So you are saying there was a health impact
from Three Mile Island?
Ms. Aurilio. I mean I can only assume that there was a
health impact, because there was no monitoring in place and
because there was denial on the part of the decisionmakers
until hours and potentially days after the accident.
I don't think we will ever know.
Mr. Fossella. But in your, I am just trying, I want to make
sure I understand this. In your, are you saying there is
documented evidence or any evidence whatsoever that says there
was a health impact?
Ms. Aurilio. There was a release of radiation. And there is
a theory that says that there is no level of exposure to
radiation below which there is no risk.
So if you buy into that theory, which is shared by many
health physicists, and you know that there is a release of
radiation that could come into contact with a human being, then
you have to assume that there was a health risk.
Mr. Fossella. So if anybody lives around there, you are
basing your response on a theory and following that through?
Ms. Aurilio. Yes.
Mr. Fossella. As opposed to some sort of hard evidence that
there was in fact.
Ms. Aurilio. Well, I think there wasn't a good faith effort
in trying to monitor and find out the evidence.
Mr. Fossella. I see. Okay. Well, unless Mr. Boucher has any
more questions, this hearing--I want to thank all the panelists
for coming, for insightful testimony and thank you for your
prompt response to questioning and this hearing is in recess.
Thank you.
[Whereupon, at 3:53 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Responses for the Record of Hon. Kyle McSlarrow
QUESTIONS OF CONGRESSMAN WAXMAN
Question 1: I requested and you agreed to provide the
Administration's projection on how much oil the nation will consume in
2040, including an explanation of how this projection was calculated
and what assumptions about fuel economy and oil production were used.
Answer: The Department's Office of Energy Efficiency and Renewable
Energy (EERE) used the VISION model to estimate the light vehicle oil
use to 2040. The EERE baseline projection to 2040 assumed that the fuel
economy of light vehicles remained constant at the 2000 levels and all
vehicles used gasoline. Estimated increases in the total stock of light
vehicles and estimated increases in the annual number of miles traveled
per vehicle lead to an estimated baseline light vehicle oil use of
14.81 mbpd in 2040. No assumptions about oil production were made. EERE
has not made projections for other U.S. uses of oil, such as in heavy
trucks, aircraft, industry, buildings, or electricity generation.
Question 2. Although you declined to say so clearly, I understood
your testimony to be that under the President's proposal, hydrogen cars
would not significantly reduce the nation's oil consumption before
2020, but that the President's proposals on research and development
and tax incentives for new technology would reduce oil consumption
prior to 2020. You agreed to provide an estimate of how much projected
oil consumption will decrease as a result of each of the
Administration's new policies. Please include a list of each proposal
and the reduction in projected oil consumption attributed to policy.
Please also include the timeframe during which the expected decrease in
projected oil consumption will occur.
Answer. The following are a list of proposals and a discussion of
fuel savings:
Increase light truck Corporate Average Fuel Economy (CAFE)
standards.
This proposal would increase the current 20.7 miles per gallon
(mpg) CAFE standard for light trucks to 21.0 mpg for Model Year (MY)
2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007.
This increase in CAFE standards is projected to decrease annual
petroleum use by 140,000 barrels per day by 2010, and by 250,000
barrels per day by 2020. Cumulative petroleum energy savings through
2020 are estimated to be 900 million barrels.
Credit for qualified hybrid and fuel cell vehicles.
This proposal would provide temporary tax credits for certain
hybrid and fuel cell vehicles. The tax credits would be available
through December 31, 2007. For hybrids, the credit would be based on
the amount of power provided by the electric drive train and the
improvement in fuel economy compared to a 2000 model year vehicle. The
electric drive train tax credit ranges from a low of $250 for a vehicle
that gets 5 percent of its maximum power from the electric drive to
$1,000 for a vehicle that gets 30 percent or more of its power from the
electric drive train. The fuel economy improvement credit increases
from $500 (for a hybrid that achieves 125 to 150 percent of the fuel
economy of a model year 2000 vehicle) to $3,000 (for a hybrid that
achieves at least 250 percent of the fuel economy of a model year 2000
vehicle).
For hybrid vehicles, estimates of the reduction in petroleum use
resulting from the tax credit program will be affected by several key
factors:
1) Interaction with State policies to promote hybrids. In addition
to the proposed Federal tax credit for hybrid vehicles, several States
(Colorado, Maryland, and Oregon to name a few) have also enacted
various tax breaks for hybrid vehicles. States have also implemented
other non-financial policies to encourage the sales of hybrid vehicles.
Policies of this type typically provide reduced or no cost parking and/
or single occupant hybrid vehicle access to high occupancy vehicle
(HOV) lanes (Arizona, Maryland, and Virginia allow hybrid vehicles
access to HOV lanes). State incentives can magnify the impact of
Federal tax credits, but their availability is difficult to project
given present State-level budget difficulties.
2) Interaction with the Zero Emission Vehicle (ZEV) program. Hybrid
vehicles will likely play a significant role in meeting mandated sales
requirements under California's ZEV program, which is now being revised
to remove explicit reliance on fuel economy as a factor in determining
ZEV credits. Providing Federal tax credits for hybrid vehicles will
make the ZEV program, which several Northeastern States also plan to
adopt, more attractive to policymakers by reducing net vehicle costs to
consumers. Assuming that the ZEV program is successful in California
and the Northeast, the Annual Energy Outlook 2003 reference case shows
that hybrid sales would exceed 9 percent of new vehicles sold by 2020.
3) Interaction with CAFE Standards. If CAFE standards are binding
on one or more manufacturers, the projected reduction in petroleum use
could be partially offset if manufacturers change their product or
sales mix to use up the CAFE ``breathing room'' provided by additional
sales of hybrid vehicles due to the tax credit. The level of the CAFE
standards will determine the likelihood that they will bind, with
higher standards causing the standards to be binding for more
manufacturers.
4) Learning Benefits and Cost Reduction. By increasing market
penetration of hybrids, Federal tax credits can help to accelerate cost
reduction for hybrid technologies. With sufficient cost reduction,
Federal tax credits could have a significant impact on hybrid vehicle
penetration long after the proposed tax credits have expired.
5) Consumer Acceptance Issues. Given that wide consumer acceptance
of hybrid vehicles is unproven at this time, the impacts of proposals
designed to stimulate this market are clearly uncertain. Product
offering is another issue that cannot be ignored. Although several auto
manufacturers have announced plans to offer hybrid vehicles in the
future, others have deferred or canceled the introduction of new
hybrids.
In sum, the impact of Federal tax credits for hybrid vehicles on
petroleum consumption depends on many factors, including other policy
decisions at the State and Federal levels that are not yet fully
resolved. Estimates are highly uncertain, and they can also be
sensitive to the order in which the variety of state and Federal
programs affecting vehicle characteristics and choices are considered.
Plausible estimates of cumulative reductions in petroleum use through
2007 range from zero to as much as 7 million barrels. For a 2020
horizon, the cumulative reduction in petroleum use from tax credits
alone could be as much as 29 million barrels. The cumulative combined
reduction in petroleum use from tax credits and the state ZEV programs
whose implementation they may help to facilitate could be as much as
140 million barrels by 2020 in a scenario where CAFE standards are not
binding.
For fuel cell vehicles, the proposal provides a minimum credit of
$4,000 plus an additional credit based on the improvement in fuel
economy compared to a model year 2000 vehicle ($1,000 for a fuel cell
vehicle achieving 150 to 175 percent of the fuel economy of a model
year 2000 vehicle to $4,000 for a fuel cell vehicle achieving at least
300 percent of the fuel economy of a model year 2000 vehicle). The cost
hurdles that must be overcome to achieve viable market penetration of
fuel cell vehicles is not expected within the time frame of the
proposed tax credit, resulting in few new sales of fuel cell vehicles
through 2007.
REPLY TO CONGRESSMAN WAXMAN RE VEHICLE EXPENSING
Question 3. We also briefly discussed the Administration's tax
proposals. You stated that the Administration had analyzed how its
proposal to allow small businesses to deduct the entire value of a
vehicle during the first year it is put into service might create
greater incentives for inefficient vehicles than for highly efficient
hybrid vehicles. You agreed to provide me with the analysis.
Answer: The Department of Treasury indicates that existing tax law
does enable greater cost recovery for heavier vehicles, compared to
lighter passenger cars, because heavier vehicles are not subject to the
``luxury car'' limits on depreciation that are applied to autos.
However, Treasury staff have concluded that the Administration's
proposal to allow small businesses to deduct the entire value of a
vehicle during its first year would not materially affect this existing
relationship and the enactment of the Administration's energy tax
proposals, which include tax credits for hybrid and fuel cell vehicles,
would provide an incentive equivalent to a first year deduction of 115
percent of the cost of these energy efficient vehicles. The following
is summary of the basis for these conclusions.
Heavier vehicles, by virtue of not being subject to the ``luxury
car'' limits on depreciation, are provided with larger cost recovery
allowances under current law when compared to equally priced, lighter
passenger automobiles that are subject to those limits. The advantage
of not being subject to the ``luxury car'' limits is also larger if the
taxpayer is a small business that is able to expense property under
section 179. This general result is true under current law whether the
vehicle is a conventional vehicle, a clean-fuel vehicle, or a hybrid
electric vehicle. The distinction is potentially less important for
electric vehicles, where the depreciation limits are tripled and
therefore generally less constraining.
Nevertheless, the Administration's proposal to raise the expensing
limit for small businesses will not materially alter the current law
relationships between passenger automobiles and heavier vehicles exempt
from the depreciation limitations. This is because current law provides
expensing and depreciation deductions that are nearly equivalent to
full expensing for most trucks and vans that are not subject to the
depreciation limits. For example, a $35,000 pickup truck with a GVWR in
excess of 6,000 pounds can potentially benefit from $29,400 in first-
year deductions (comprised of a $25,000 expensing deduction, a $3,000
bonus depreciation deduction, and a $1,400 MACRS depreciation
deduction). When the remaining MACRS deductions are added to this
first-year deduction, the present value of deductions (using a 4
percent discount rate) are nearly 99 percent of cost. Even if full
expensing is allowed, as is possible under the Administration's
proposal, the present value of the deductions cannot be increased to
above 100 percent. Expensing will, however, provide a simplification
benefit to these taxpayers.
Finally, under the Administration's energy tax proposals, hybrid
and fuel cell vehicles are granted a significant tax benefit in the
form of tax credits. For example, a $25,000 hybrid car with a hybrid
vehicle credit of only $1,400 (the maximum credit is $4,000) will
receive tax benefits that are equivalent to deductions having a present
value of 115 percent of cost, despite the fact that the car remains
subject to the depreciation limits.
Question 4: You testified that the goal of the administration's
FreedomCAR initiative is to enable automakers to decide by 2015 whether
to offer hydrogen fuel cell vehicles for sale. Assuming that automakers
do decide in 2015 to offer such vehicles, what proportion of the
vehicles fleet will consist of hydrogen fuel cell vehicles by 2020,
2030 and 2040?
Answer: If fuel cell and hydrogen infrastructure technology
development is successful, a 2015 commercialization decision by
industry could lead to hydrogen fuel cell vehicles being offered 3 to 5
years later. In that case, we estimate that 3% of the total U.S. fleet
would be light duty hydrogen fuel cell vehicles by 2020, 38% by 2030
and about 79% by 2040.
Question 5: Assuming that hydrogen fuel cell vehicles are offered
to consumers in the mass market starting in 2020, what are the
projected oil savings and pollutant reductions that will be realized
over business as usual projections by 2020, 2030 and 2040?
Answer: The Department believes that successful fuel cell and
hydrogen infrastructure technology development efforts can lead to a
commercialization decision by industry in 2015. We estimate that sales
of light duty fuel cell vehicles (FCVs) may start as early as 2018.
With this assumption the oil savings (million barrels per day) that
could be realized over business as usual projections are as much as:
By 2020--400,000 barrels per day
By 2030--5 million barrels per day
By 2040--11 million barrels per day
This reduction in oil demand is relative to what light duty
conventional vehicles might otherwise consume and emit. Significant
energy savings could also result from the widespread use of hydrogen in
stationary applications.
DOE has not attempted to model the pollutant reductions (such as
NOx, SOx, and particulate matter) associated with
the introduction of fuel cell vehicles.
Question 6: Will a complete, nationwide hydrogen refueling
infrastructure, roughly equal in extent to today's petroleum refueling
infrastructure, be in place by 2020? If not, when do you estimate that
a nationwide hydrogen refueling infrastructures, roughly equal in
extent to today's petroleum refueling infrastructure, will be in place?
What proportion of existing petroleum fueling stations do you estimate
will offer hydrogen fuel by 2020, 2030 and 2040?
Answer: The Department believes that successful fuel cell and
hydrogen infrastructure technology development efforts can lead to a
commercialization decision by industry in 2015. If this decision is
positive, it will take 3-5 years to install initial hydrogen refueling
capability. The full transition to a hydrogen-based energy system,
including refueling infrastructure equal in extent to today's petroleum
refueling infrastructure will take several decades and depends on many
technical and economic factors.
A consumer study showed that mass market penetration of fuel cell
vehicles would require hydrogen availability in at least 25% of
stations in urban areas and in at least 50% in rural areas
Question 7: Assistant Secretary Garman recently testified that the
FreedomCAR and FreedomFuel initiatives contain research projects for
fuel cells that will have applications other than for vehicles, and
that the first applications will be applied to consumer electronics,
then stationary sources, including power plants and homes, and then
vehicles. What is your approximate timeline for deployment into the
mass consumer market of fuel cell technology for consumer electronics,
then stationary sources and then vehicles?
Answer: Deployment of fuel cells in portable and stationary power
markets can be dependent on technology development success for
automotive applications, especially related to cost, hydrogen delivery/
availability, and the ability to build a component supplier base.
Certain portable power applications could become available within the
current decade. Stationary applications will likely occur in the 2010-
2020 timeframe. If an industry decision to commercialize hydrogen fuel
cell vehicles is made by about 2015, mass-market penetration could
begin in 2018.
The Department's Fuel Cell Report to Congress submitted in February
2003 provides more discussion on timelines for commercialization of
stationary and automotive applications.
Question 8: A recent MIT study finds that if hydrogen fuel is
derived from fossil fuels, the benefits of fuel cell cars in terms of
total energy use and greenhouse gas emissions will not exceed the
benefits of relying on petroleum-electric hybrid cars. On the other
hand, deriving hydrogen fuel from renewable sources of energy will
produce greater benefits than hybrids in term of total energy use and
greenhouse gas emissions.
a. What is DOE doing to promote the deployment of hybrid vehicles,
a technology that already exists, prior to the deployment of a national
hydrogen refueling infrastructure?
Answer: DOE's has significant research and development efforts to
improve the performance of hybrid vehicles and reduce the cost of the
core technologies. Today's hybrid technology is not yet cost effective,
lacks the needed performance, and has been applied to a fairly narrow
niche market of smaller and lighter vehicles. Improving the technology
(e.g., batteries or capacitors for energy storage, power electronics
for energy conversion and management, and efficient electric traction
motors) so that it could be cost effectively applied across the entire
vehicle market is an important objective of the FreedomCAR Partnership.
The hybrid technologies we are developing support not only improving
our energy security in the mid-term with hybrid internal combustion
vehicles, but are also essential to realizing the full potential of
fuel cell powered vehicles.
The President's National Energy Policy also endorsed a tax credit,
for fuel efficient vehicles between 2002 and 2007, to purchase of
hybrid vehicles and advance their market penetration, which the
Administration has proposed in its Fiscal Year 2002, 2003 and 2004
budget requests to Congress. The Clean Cities Program is the key
deployment activity for light vehicles in DOE. This program now
promotes the use of hybrid vehicles in their partnerships.
b. What energy reductions and greenhouse gas reductions will result
between now and 2020 as a result of DOE's measures to promote
deployment of hybrid vehicles?
Answer: It is difficult, if not impossible, to predict the impact
of hybrid technology between now and 2020 because we do not know the
rate or degree to which these technologies will be introduced. These
are business decisions that will be influenced by many factors: the
success of our research; the cost of fuel in the market; the importance
the public places on energy security; the extent that government
incentives are available; and others. The key point, however, is that
when introduced in substantial numbers the impact will be significant.
Fuel economy would improve by 50 percent to 200 percent per vehicle
(depending on the vehicle) and greenhouse gases would be released in
proportion to the reduction in fuel use.
Despite difficulties in predicting the future, the Department
models potential benefits of its programs assuming certain
technological successes. While the Department has not estimated
benefits specifically for deployment of hybrid vehicles, it has modeled
benefits of its FreedomCAR and Vehicle Technologies Program, which
supports hybrid and other technologies. Estimated annual energy savings
from the program in 2020 are 1.58 quadrillion BTUs, and estimated
annual carbon emissions reductions total 29.8 million metric tons.
Details on the Department's models and assumptions for estimating these
benefits will soon be available on line at: http://www.eere.energy.gov/
office__eere/budget__gpra.html
c. Assistant Secretary Garman testified that DOE intends to derive
hydrogen fuel from fossil fuels. What proportion of the hydrogen fuel
for transportation uses will come from fossil fuels in 2020, 2030, and
2040?
Answer: The Department's scenarios indicate that the proportion of
the hydrogen fuel for light duty vehicle transportation uses that comes
from natural gas (rather than from a source with no net carbon
emissions) will be 90% in 2020, 55% in 2030, and 15% in 2040. However,
fuel cell vehicles powered by hydrogen that is derived from natural gas
deliver significant efficiency improvements and carbon reductions when
compared with petroleum-powered vehicles. Our studies show that even
without carbon sequestration, natural gas-based hydrogen fuel cell
vehicles use 50% less energy and emit 60% less carbon dioxide than
today's vehicles.
d. What proportion of the FreedomFuel budget will go toward the
development of hydrogen fuel from (i) fossil fuels, (ii) nuclear power,
and (iii) renewable energy?
Answer: The Department's FY2004 Budget Request for the President's
Hydrogen Fuel Initiative is $181.7 million. In this request, there is a
total of $38.5 million for hydrogen production research. It includes
$17.3 million from renewables (44.9%), $17.2 million for fossil
(44.7%), and $4 million for nuclear (10.4%).
e. What are the benefits of utilizing hydrogen derived from fossil
fuels? Please specifically address the effect of this approach on
greenhouse gas emissions?
Answer: Domestic coal as a feedstock to make hydrogen is a vast
energy resource which can reduce our dependence on imported oil. The
U.S. has over 10,000 Quads (quadrillion BTUs) of coal which could
supply our demand of 27 quads per year of oil consumed for
transportation applications. On February 27, 2003, Secretary Abraham
announced FutureGen, an initiative to demonstrate the world's first
coal-based, zero emissions electricity and hydrogen power plant. This
project will be undertaken with international partners to dramatically
reduce air pollution and capture and store emissions of greenhouse
gases.
Combined with other hydrogen production technologies using both
fossil feedstocks and renewable energy sources, we estimate that as
much as 170 MMTCe in 2030 and 500 MMTCe in 2040 of greenhouse gas
reductions could be realized over business as usual projections.
QUESTIONS FROM CONGRESSMAN JOHN DINGELL
Question 1(a): Section 3001 of Chairman Barton's draft, entitled
``Alternative Fishways and Conditions,'' would amend the Federal Power
Act to permit applicants for hydroelectric licenses to propose
``alternative conditions'' to those required by the resource agencies
for the protection of river systems. It appears that the provision
would require the Secretary of the Interior to accept the applicant's
proposal unless he or she could demonstrate, subject to judicial
review, that the proposal does not provide for adequate protection of
the reservation. Does the Administration support this provision and
exact language, and why or why not? To what extent are any
Administration concerns about the hydropower licensing process
addressed by the proposed rule issued by the Federal Energy Regulatory
Commission (FERC) on February 20, 2003, entitled ``Hydroelectric
Licensing under the Federal Power Act''?
Answer: It is the Administration's policy to fulfill its statutory
responsibilities to preserve and protect public and Indian trust
resources. We also wish to encourage a license applicant's ingenuity in
crafting approaches to fulfilling these responsibilities.
The President's National Energy Policy called for making the
licensing process more clear and efficient, while preserving
environmental goals. The Federal Energy Regulatory Commission (FERC)
has made substantial progress in achieving these objectives. In its
integrated licensing process, to be completed this summer, FERC and the
resource agencies have developed a streamlined process that increases
collaboration among all parties. In addition, the Department of the
Interior is in the process of designing a fair, objective, expeditious,
and transparent appeals process that recognizes the importance of
hydroelectric generation and ensures that high standards for resource
conservation, efficiency, and reasonableness are maintained.
The development of a substantive appeals process in the agencies,
coupled with process improvements underway at FERC may obviate the need
for Congressional action. If Congress decides to act, the Department of
the Interior would like to work with the Committee on wording to ensure
that all objectives are met without unduly extending the licensing
process and burdening agency budgets.
Question 1(b): What effect, both procedurally and substantively,
would Section 3001 of the Barton Draft have on current law, the
responsibilities of the resource agencies and those of the Secretary of
the Interior? Are you aware of any other statute designed to protect
health or the environment or wildlife under which (a) the head of an
agency must carry the burden of proof in order to prove a license
application does not meet the statutory standard for approval and (b) a
license applicant is the sole party that can propose an alternative to
a Federal agency's determinations regarding an application?
Answer: Procedurally and substantively the Administration is
committed to addressing the issues raised in Section 3001. The
Administration believes that the combination of the revised FERC
procedures and the appeals process under development at the Department
of the Interior will meet these needs in the most efficient and cost-
effective manner.
The Administration believes that the public interest is best served
when all parties are committed to mitigation measures based on sound
science. As in all areas of resource management, the Administration
holds its agencies to that high standard by requiring that their
conditions and prescriptions be supported by substantial evidence and
capable of supporting judicial review. The Administration believes that
an applicant's alternatives to agency proposals must meet the same
sound science standards.
In developing an appeals process, the Administration believes that
the applicant's intimate knowledge of its own systems puts it in an
excellent position to propose alternatives. The Administration also
believes that other interested and affected parties should be heard in
any appeal. This is especially important when hydroelectric projects
affect Indian trust resources. The Administration also believes that
other groups with specialized knowledge should also be heard.
Question 3. Section 7022 of the draft, titled ``Regional
Transmission Organizations,'' includes a subsection (d)(3) concerning
``Federal Utility Participation in RTO's'' denoted ``Existing
Authorities and Obligations.'' This section provides that ``Where a
contract, agreement, or other arrangement . . . conflicts with any
statutory authority, duty, or obligation, under any authority of law,
of a Federal utility, such authority shall be suspended for the
duration of the contract, agreement, or other arrangement.'' Does the
Administration support this provision, and why or why not? What other
Federal laws would be affected, and how? In particular, how would
obligations of the Bonneville Power Administration and the Tennessee
Valley Authority be affected? What would be the legal impact of this
provision on existing contract rights between Federal authorities and
private parties, and could this provision give rise to claims against
the Federal Government for breach of contract.
Answer 3. Section 7022 of the draft House bill as introduced dealt
with Federal utility participation in a regional transmission
organization (RTO). It provided the Secretary the authority, which may
then be delegated to a PMA, to enter into contracts or other
arrangements to participate in an RTO approved by the Federal Energy
Regulatory Commission.
The Administration supports participation by Federal utilities in
RTOs. However, and as I said in my written testimony at the
Subcommittee hearing on March 5, 2003, we had concerns about section
7022 of the draft House bill because, among other things, it did not
explicitly provide for Federal cost recovery when a power marketing
administration joins an RTO, or for preserving prior contracts and
third-party financing obligations of the PMAs. However, in the full
Committee markup of the bill, the Committee substituted a new RTO
provision that resolved our concerns. We believe that this new
provision, which we support, ensures the sanctity of existing
contracts, agreements and financing obligations of the power marketing
administrations and TVA, and that compliance with this provision will
not give rise to claims against the Federal Government for breach of
contract.
QUESTIONS FROM CONGRESSMAN PICKERING
Question 1: Does the Administration support the FERC's proposed SMD
order?
Answer: The Administration supports the goals of the Standard
Market Design proposed rule: customers to receive the benefits of
lower-cost-and more reliable electric supply, prevent market
manipulation and market power abuse, prevent undue discrimination and
preference, make competitive markets work better, assure adequate
electricity supplies, eliminate transmission constraints, and encourage
investment in new generation and new transmission. We believe those are
the right policy goals. The proposal is complicated, and public
comments total many thousands of pages. It is important that the record
be properly weighed to determine whether the proposed rule effectively
advances the policy goals, and what changes to the proposed rule are
needed.
Question 2: Included in the Omnibus Appropriations bill was
language that required DOE to conduct a study to evaluate the potential
of the SMD order. Can you explain to me how DOE will conduct this
study? Who at DOE will conduct this study?
Answer: A DOE's analysis is being managed by small team of the
Department's electricity policy staff. The analysis will consist of
both quantitative and qualitative analysis. The quantitative analysis
will be done using two economic models, DOE's POEMS model (managed by
OnLocation Inc.) and General Electric's MAPS transmission model.
Charles River Associates will also assist us, chiefly on certain
questions related to our input assumptions and interpretation of the
output of the MAPS model. The qualitative analysis will be done by DOE
staff, aided by specialists on selected subjects.
General Electric and Charles River Associates are under contract
with CERTS, the consortium of labs and universities that DOE used for
our National Grid Study.
This is a strong team of consultants. GE and Charles River
Associates, for example were involved in the study of Standard Market
Design conducted for the Southeastern Association of Regulatory Utility
Commissioners (SEARUC).
The scope of the study is consistent with the appropriations report
language accompanying the FY 03 omnibus bill. The calls for the
Secretary to submit to Congress:
``an independent analysis of the impact of the SMD rule that
FERC proposes to finalize. This independent analysis must
compare wholesale and retail electricity prices and the impact
on the safety and reliability of generation and transmission
facilities in the major regions of the country both under
existing conditions and under the proposed SMD rule. This
analysis must also address the proposed SMD rule's: (a) costs
and benefits, including its impacts on energy infrastructure
development and investor confidence; (b) impact on state
utility regulation, (c) financial impact on retail customers;
(d) impact on the reasonableness of electricity prices; and (e)
impact on the safe, reliable, and secure operation of the
Nation's generation and transmission facilities.''
The conference report calls for DOE to ``work in consultation with
the FERC so that the Secretary's analysis will most accurately address
the contents and conclusions of the most current version of the
proposed rule.''
The study is to be completed by April 30, 2003.
Question 3: What is the Administration's goal in regards to
electricity policy?
Answer: Developments in recent years have brought the electricity
industry to a crossroads. Twice in the past 25 years Congress has
enacted laws to promote competition in wholesale power markets. While
the move to competitive markets has fostered significant benefits,
major challenges exist. Competitive markets have great potential to
benefit consumers. Between 1985 and 2000, wholesale power prices fell
23 percent. While the electricity crisis in California and the West in
2000 and early 2001 reversed some of these gains, prices have continued
to fall since then. There are still challenges confronting wholesale
power markets. It is important to start by identifying the problems
that exist under the status quo. In recent years we have witnessed
dramatic price spikes in wholesale power markets, attempts to
manipulate power markets, a large expansion of generation by
independent power producers, followed by serious challenges facing many
of these producers, and stagnant investment in the transmission grid.
Reforms--some of which already are possible under existing law and are
being pursued by FERC right now--that would promote effective
competition and address these challenges include the following:
Prevent market manipulation and market power abuse.
Promote reliability of electricity service.
Ensure open access to the interstate transmission grid.
Eliminate undue discrimination in wholesale power markets.
Ensure that customers have the ability to respond to price in
real-time.
Encourage investment in new generation and transmission
facilities.
Support transmission policy options, including participant
funding, and appropriately allocate costs.
Lower barriers to entry to electricity markets.
The Administration believes there is a need to complete the
transition to effective competition in wholesale power markets that
deliver reliable, abundant, and affordable electricity.
Question 4: Does the Administration support the formation of RTOs?
Answer: The Administration believes regional transmission
organizations have great potential to promote effective wholesale
competition in regional power markets.
Question 5: Does the Administration believe that the FERC should
allow and account for regional differences in the creation of RTOs?
Answer: Yes. The United States has and most likely will continue to
have a series of regional power markets. There are important
differences among these regional power markets. For that reason, it is
important to consider regional differences in the development of
regional transmission organizations.
Question 6: What role do you see for the states in the development
of RTOs?
Answer: Among other authorities, States have jurisdiction over the
retail sales of electricity and the siting of generation and
transmission facilities. As a result, States must play a strong role in
the development of regional transmission organizations, and FERC should
work closely with the States in the development of market rules that
reflect differences in regional power markets.
QUESTIONS FROM CONGRESSMAN WHITFIELD
Former Worker Medical Screening Program
Question 1. DOE requested approximately 14.9 million for the former
worker medical screening programs within the Office of Environment,
Safety and Health for FY 04, a $1 million increase over FY 03 request.
Of the amount for FY 04, how much is allocated for the medical
screening programs for workers at the gaseous diffusion plants for
screening workers, including the early lung cancer detection program?
Response. The funding for former worker medical screening programs
supports three different programs, including the Former Beryllium
Workers Medical Surveillance Program, the Rocky Flats Former Radiation
Workers Medical Screening Program and the Former Workers Program.
Medical screening for former gaseous diffusion plant workers is
budgeted in the FY 04 Former Workers Program budget request at a level
of $1 million, including early lung cancer detection screening.
Uranium Enrichment
Question 2: What action would or has the Department taken to ensure
continued supply of enriched uranium in the event that USEC and LES are
not able to deploy advanced gas centrifuge technology?
Answer: The Department has taken a number of major actions to help
assure a continued supply of U.S. enrichment to USEC's nuclear utility
customers:
On June 17, 2002, the Department of Energy and USEC signed an
agreement that, in part, commits the corporation to operate the
Paducah Gaseous Diffusion plant at a level at or above 3.5
million SWU per year. USEC may not reduce this level until six
months before USEC has the permanent addition of 3.5 million
SWU per year of new capacity installed based on advanced
enrichment technology.
The June 17 agreement also requires USEC to take ``actions
appropriate to maintaining the Paducah plant to operate at an
annualized rate of 5.5 million SWU per year.''
Pursuant to the June 17 Agreement, if USEC ceases enrichment
operations at Paducah, as that phrase is defined in the
Agreement, DOE may take actions it deems necessary to
transition the operation of the Paducah Gaseous Diffusion Plant
from USEC operation.
The Department maintains the Portsmouth Gaseous Diffusion
plant in cold standby with the ability to operate at 3 million
SWU within 18 to 24 months of a supply disruption.
The Department is actively pursuing with Russia other
initiatives to accomplish the mutual goals of the 1993 U.S./
Russian HEU Agreement of converting Russian HEU extracted from
nuclear weapons to LEU. In this regard, initial efforts of a
U.S./Russian Joint Experts Group established by Presidents Bush
and Putin in May 2002 have focused on an agreement and
implementing contract for the U.S. to purchase LEU derived from
Russian HEU to be maintained as part of the Department's
uranium stockpile. In the event of supply disruption, DOE could
sell the LEU purchased from Russia for use in commercial
reactors.
The Department will continue to monitor the domestic nuclear fuel
markets to assure U.S. energy security requirements are met.
Energy Employees Occupational Illness Compensation Program
Question 3(a): To date, the Energy Department has received 14,000
requests for assistance under DOE's program for claims related to state
worker compensation. Your staff indicates that approximately 7 claims
have been processed through the DOE's Physicians' Panel in the 6 months
since the rule was been issued. And we understand that there are only
about 20 claims sent to the Physicians' Panel. The rest are backlogged
with a support service contractor, SEA. By comparison, the Department
of Labor has been tasked with evaluating claims for cancer, beryllium
disease and silicosis under the Energy Workers Compensation program.
The Department of Labor has received over 39,000 claims, recommended
decisions on almost 20,000 claims, and issued $475 million in payments
to 6,600 claimants since July 2001. Comparisons are said to be odious,
but in this case, the comparisons are less than flattering to the DOE.
How many years will it take for DOE to work through this backlog of
claims? Three years? Four years? Five years?
Response: As of April 7, 2003, the Department has initiated the
processing of more than 7900 claims and has completed the development
of 44 case files for the physician panels. We continue to work to
process claims quickly and effectively. As more information is
developed about exposures at specific sites through site profiles and
we continue to work with sites to optimize processes, the Department
expects that it will be processing claims at a rate of 100 per week by
August 31, 2003. At this rate, our goal is that the current caseload
(existing claims plus new claims received) will be processed through
physician panels in approximately five years, depending on new cases
coming in. However, DOE will continue to do everything it can to
expedite the consideration for requests for assistance under Subtitle
D.
The separate sections of the EEOICPA program delegated to the
Departments of Energy and Labor are not directly comparable. The DOE
portion of the program faces unique challenges. In addition to basic
information on eligibility, the applicant's case must include enough
information for the physician's panel to determine if the illness or
death of a DOE contractor employee arose out of and in the course of
employment and exposure to a toxic substance at a DOE facility. This
will be based on whether it is at least as likely as not that the
exposure was a significant factor in aggravating, contributing to or
causing the worker's illness or death. The law requires that DOE obtain
additional evidence within the control of the DOE and relevant to the
panel's deliberations. Therefore, the DOE is working closely with the
applicants and the DOE sites to obtain the relevant information. The
final outcome is to assist applicants in filing a claim under the
appropriate State workers' compensation system.
Energy Employees Occupational Illness Compensation Program
Question 3(b). Given that DOE had two years to get these claims
ready for review by the Physicians' Panels before DOE's rulemaking was
complete in August 2002, what explains the lack of performance?
Response: The Department was first able to begin processing claims
under Subtitle D in September 2002 when the rule governing operation of
the program became effective. As a result of comments from the public
and Members of Congress, significant and substantive changes were made
to the rule throughout the rulemaking process and after the public
comment period had closed. These changes had a direct impact on
eligibility requirements and the types of documentation needed in
support of a worker's claim. As a result, the Department was extremely
limited in its ability to process claims prior to the issuance of the
final rule. Since September 2002, DOE has initiated processing of over
7900 claims and prepared 44 cases for review by physician panels,
including informing 731 that they do not qualify for the program. The
preparation of cases is a multi-faceted process that involves gathering
employment records, establishing relevant occupational histories
(which, for some workers, involves multiple sites), and medical records
in possession of DOE and in possession of the claimant. We expect that
the pace with which we are able to prepare cases will rapidly increase
as we gain experience, streamline efforts such as shared agency
databases, develop generic information on facilities and their hazards
(site profiles) that can be used for all cases at that site, and
benefit from economies of scale. We believe these process improvements
will allow us to be at a production rate of 100 cases per week through
the Physicians Panels by August 2003. We are developing options for
further accelerating the rate with which we process claims.
Energy Employees Occupational Illness Compensation Program
Question 3(c). What obstacles does DOE face going forward to assure
rapid and accurate processing of claims?
Response: The Department does not anticipate major obstacles in
implementing the requirements of Subtitle D. To date, the greatest
challenge has been the time and effort required to locate employment
and occupational history records that are up to 50 years old. The
challenge is greater for those who have worked at multiple sites, or
for contractors and subcontractors that no longer have a relationship
with the DOE. As we move more and more cases through the process, the
upcoming challenge will be the ability of the independent physician
panels to handle the case loads.
Energy Employees Occupational Illness Compensation Program
Question 3(d). How much is DOE paying SEA per year to provide
claims processing services?
Response: DOE does not have a contract with SEA for this program.
DOE has a cooperative agreement with the U.S. Navy's Space and Naval
Warfare Information Center (SITC) for assistance with the EEOICPA
program. As part of that agreement, the Navy has made available its
SITC management and operating contractor to assist the Office of Worker
Advocacy. DOE is using expertise from SITC in a number of ways--to
process cases, to develop Office of Worker Advocacy business processes,
and to implement an integrated claims and records management system.
DOE paid $3.8 million for this assistance in FY 02 and is budgeted to
pay $12 million in FY 03.
Energy Employees Occupational Illness Compensation Program
Question 3(e). What are SEA's specific qualifications to carry out
this worker compensation administration and case management activity?
Is it time to look to others with more expertise?
Response: DOE has the expertise needed to meet its responsibilities
under Subtitle D. At the SITC, SEA has successfully integrated numerous
military data systems into an integrated personnel management framework
allowing for a single point of contact for naval veterans or current
naval personnel for their human resources, occupational medical, and
posting/assignment information.
Energy Employees Occupational Illness Compensation Program
Question 3(f). Was the SEA contract awarded on a competitive basis?
Response: DOE does not have a contract with SEA for this program.
DOE has a cooperative agreement with the U.S. Navy's Space and Naval
Warfare Information Center (SITC) for assistance with the EEOICPA
program.
Energy Employees Occupational Illness Compensation Program
Question 4(a). Last year the DOE General Counsel indicated that the
DOE does not have entities who will serve as a payor for as many as 50%
of the claims which have been approved by the DOE Physicians' Panels.
This problem has not been solved in Kentucky for USEC workers and
perhaps others at the Paducah Plant. Approximately 2000 Subtitle D
claims are pending at Paducah. Nationwide, this involves thousands of
claims. This problem was revealed to Congress nearly a year ago, and
was identified by DOE's advisory committee nearly 18 months ago. Late
last year, legislation I cosponsored HR 5493 which would authorize the
Department of Labor to solve the willing payor problem. Would you
support the idea of having the DOL assigned the responsibility of
paying valid claims instead of sending workers back to the states where
they won't have someone to pay their claim?
Response: To meet our requirements under the Act, DOE is
identifying the contractual arrangements that exist with current and
former DOE contractors that will allow as many workers with positive
findings to receive benefits as possible.
Energy Employees Occupational Illness Compensation Program
Question 4(b). Please provide a list of all contractors,
subcontractors and facilities/locations for which the DOE has not yet
identified a willing payor under Subtitle D. Please identify by time
period and location.
Response: EEOICPA did not confer on DOE any authority to identify
or seek ``willing payors.'' It simply directed DOE to exercise its
contract administration authority with respect to its existing
contractor in a manner that would encourage those contractors not to
contest workers workers' compensation claims filed by their employees
who had received a favorable final determination from a DOE Physician
Panel. DOE is so directing its current contractors.
Energy Employees Occupational Illness Compensation Program
Question 4(c). Congress deemed that workers in Special Exposure
Cohorts (SEC) would not be able to obtain accurate radiation dose
estimates. Paducah workers employed for more than 250 days prior to
1992 who were badged with a dosimeter are in the SEC. What policy will
DOE apply under Subtitle D for workers whose claims have been approved
by the DOL under the Special Exposure Cohort and are requesting
assistance with State worker compensation? Will DOE require workers to
obtain dose reconstructions for cases where doses cannot be
reconstructed? Or will DOE accept those with positive SEC findings?
Response: The law requires that physician panels provide DOE with
impartial and independent determinations as to whether the illness or
death of a DOE contractor employee arose out of and in the course of
employment by a DOE contractor and exposure to a toxic substance at a
DOE facility. DOE's requirement is to provide the physicians with as
complete a record of exposures as is possible for them to make this
determination. If the physicians cannot make a determination with
information provided, DOE will work with the physicians to obtain the
information they feel they need, including, if necessary, dose
reconstructions similar to those being performed by NIOSH.
Energy Employees Occupational Illness Compensation Program
Question 5(a). The DOE requested $16 million for the Office of
Worker Advocacy to implement the nuclear workers' compensation program,
yet we understand that $26 million is what your staff estimates will be
needed in FY 04. Has DOE requested sufficient funds in the FY 04 budget
request to eliminate the DOE's backlog of claims in the next 12-18
months?
Response: The Department has requested sufficient financial and
personnel resources in its FY 2004 budget to meet its goals of
processing 100 claims per week through the physician panels and
processing all claims currently on hand and to be received within five
years. We expect to meet this milestone in August, 2003. We are
developing options for further accelerating the rate with which we
process claims.
Energy Employees Occupational Illness Compensation Program
Question 5(b). How many staff are required (both contract and
federal) to eliminate the backlog in the next 12-18 months?
Response: The Department has requested sufficient financial and
personnel resources in its FY 2004 budget to meet its goals of
processing 100 claims per week through the physician panels and
processing all claims currently on hand and to be received within five
years. We expect to meet this milestone in August, 2003. We are
developing options for further accelerating the rate with which we
process claims.
Energy Employees Occupational Illness Compensation Program
Question 5(c). What is the carryover funding from FY 02 into FY 03
for the Office of Worker Advocacy? What is the projected carry over
funding for FY 03 into FY 04?
Response: Carryover funding from FY02 amounted to approximately
$3.9 million. At the current time, the Department expects no carryover
into FY04.
Energy Employees Occupational Illness Compensation Program
Question 6. What is the source of funds for paying D claims where
DOE does have a willing payor? What is the expected outlay in 2003,
2004 and 2005? Will DOE use line program funds or is there a separate
line item for paying these claims in the budget?
Response: The Department expects that claims under Subtitle D will
be paid in the same manner as current State workers' compensation
claims. If a worker who has an illness caused by DOE work exposure to
toxic substances, the worker may file a claim for a physician panel
review. If the worker receives a positive finding from the Panel, and
the worker files a State workers compensation claim, DOE will support
the claim. When DOE is able, it will order DOE contractor employers to
accept rather than deny the claim for state benefits. Claims paid by
the contractor employer will be reimbursed from DOE Program funds. DOE
pays its contractors an amount sufficient to cover all workers'
compensation claims. The Department will continue to evaluate this need
as it gains more experience in processing Subtitle D claims and can
better estimate the cost of claims.
Workers' compensation costs are covered in current contracts. If
DOE contractors require additional funding, it will be identified to
DOE. It is difficult to predict, at this time, how many claimants have
lost wages and have unpaid medical bills, and in which facility and
state those claims will be made.
Occupational Safety and Health Rulemaking
The FY 03 Defense Authorization Act (Section 3173) contained a
requirement for DOE to cover its worker health and safety orders for
industrial and construction safety into regulations and begin enforcing
these through the DOE's Office of Enforcement within a year. The Armed
Services Committee members that worked on this provision intended that
the DOE's new safety program would mirror the existing Price Anderson
nuclear safety enforcement program, with clearly defined safety
requirements specified in the rules based on the requirements of the
DOE's existing Order 440.1A and OSHA. Since DOE is responsible for
safety, the legislation and report language did not intend for the DOE
contractors to be defining minimum requirements for safety in plans
they would be proposing.
Question 7a. What type of approach is the DOE taking in
implementing this requirement?
Answer 7a. Pursuant to section 3173 of the Bob Stump National
Defense Authorization Act for Fiscal Year 2003 (Section 234C of the
Atomic Energy Act, 42 U.S.C. 2282c), DOE is preparing proposed
regulations for worker safety and health at DOE facilities that will
incorporate all of the requirements mandated by section 3173. As
required by this section, these regulations will be promulgated by
notice and comment rulemaking under the Administrative Procedures Act.
DOE intends to issue a final rule that meets the statutory mandate to
``provide a level of protection for workers at such facilities that is
substantially equivalent to the level of protection currently provided
to such workers at such facilities'' and to provide for enforcement of
the rule by assessment of civil penalties or contract fee reductions.
Occupational Safety and Health Rulemaking
Question 7b. What is the schedule for a draft rule being issued?
What will be the basis for minimum safety requirements, DOE's rules or
plans proposed by contractors?
Answer 7b. DOE is working diligently on a notice of proposed
rulemaking that would be issued on a schedule that would provide
promulgation of a final rule by December 2, 2003, as provided by
section 3173 of the Bob Stump National Defense Authorization Act for
Fiscal Year 2003 (Section 234C of the Atomic Energy Act, 42 U.S.C.
2282c). DOE is still considering the details of the proposed rule and
will review comments on the proposed rule after publication in the
Federal Register.
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COMPREHENSIVE NATIONAL ENERGY POLICY
----------
WEDNESDAY, MARCH 12, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:30 p.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Shimkus, Shadegg,
Radanovich, Walden, Issa, Otter, Wynn, Allen, Markey, Brown,
and Dingell (ex officio).
Staff present: Jason Bentley, majority counsel; Andy Black,
policy coordinator; Peter Kielty, legislative clerk; and Sue
Sheridan, minority counsel.
Mr. Barton. The subcommittee will come to order. Without
objection, the subcommittee is going to proceed pursuant to
Committee Rule 4(e) which governs opening statements by members
and the opportunity to defer them for extra questioning time.
What that means in layman's term, members that are here that
with to give a 3-minute opening statement will be allowed to do
so. Under the rules, if they wish to defer, they get an extra 3
minutes on the question period. Is there any objection to that?
Mr. Allen. No objection.
Mr. Barton. Hearing no objection, I will recognize myself
for a 5-minute opening statement. Today the subcommittee is
going to continue its hearings on a comprehensive energy
policy. We will hold another day of hearing tomorrow which will
focus on electricity and gasoline. Today we are going to focus
on hydropower and hydroelectric relicensing.
I want to thank the four witnesses that are going to be
before us today for being here to comment on the hydro issues
and on Title III of the discussion draft that I have circulated
to members of the subcommittee.
The hydro provisions in the draft that has been circulated
from H.R. 1013, which is legislation sponsored in the House by
Congressman Radanovich and Congressmen Towns and Walden. Last
Congress, the House Energy Bill had a hydro title that made a
few small reforms to the current relicensing process. During
the energy conferences, I became familiar with the Senate hydro
section. I believe it to be superior to what we had started
with in the House. Revisions in the draft today build on the
Senate language from the last Congress.
Hydroelectric power is our Nation's leading renewable
energy resource. The process for relicensing FERC's licensed
dams has become very distorted into one that threatens the
future of hydroelectricity as a viable means of producing
power. Hydropower project owners are facing higher costs, loss
of operational flexibility, and loss of generation due to new
operating constraints imposed during the relicensing. These do
not effectively balance our energy needs with important
environmental goals.
The typical hydro project can take from 8 to 10 years to
weave its way through the licensing process, and cost millions
of dollars. After legislation which was passed by this
committee in 1986, the Federal Energy Regulatory Commission, or
FERC, has been required to give, and I quote, ``Equal
consideration to a variety of factors when issuing hydro
project licenses and relicenses.'' This authority requires the
FERC to consider the power, economic, and development benefits
of a particular project, as well as energy conservation and the
protection and enhancement of fish and wildlife. The courts
have interpreted the Federal Power Act, however, as amended, to
prevent effective balancing from taking place. The courts have
given Federal natural resource agencies and others the
authority to set mandatory conditions on FERC licenses,
conditions that are automatically made a part of the final
license. FERC has no opportunity to question the basis of these
mandatory conditions set by the agencies. The net result is
that no one is balancing, no one has the authority to look at
the big picture that hydro fits into our National Energy
Policy.
The draft before the subcommittee restores this balance, in
my opinion, giving certainty and accountability to the
licensing process, while leaving Federal Resource Agency
conditioning authority intact. It provides an opportunity once
mandatory conditions are drafted, for an agency hearing on the
record of any disputed issues. The draft would allow a licensee
to propose a cost-saving or energy-saving alternative
condition, an alternative that the Federal Resource Agency
would have to accept if that agency determined that it met the
existing statutory requirements for environmental protection.
The draft would also require Federal Resource Agency to
document that it gave equal consideration to the economic,
environmental and other public impacts of the mandatory
conditions before imposing them on licensees, something the
agencies are not now doing. It would also provide for a
nonbinding dispute resolution process should FERC find a final
mandatory condition to be inconsistent with the requirements in
the existing Federal Power Act.
Over half of all FERC-regulated hydroelectricity capacity
is due to be relicensed in the next 15 years. If the current
trends continue, the Nation could lose substantial hydropower
generation and, with it, enormous clean air reliability,
drinking water, flood control, irrigation, and recreation
benefits. Additionally, electricity consumers could face higher
energy costs as hydro facilities are replaced or closed. Given
the enormous role that hydro plays, and must, in my opinion,
continue to play in our national energy electricity grid, the
time for balancing is now.
This new hydro language has bipartisan support in the House
and the Senate. I know it is not the work of the agreement of
the Ranking Member of our subcommittee and full committee
Chairman. I and Chairman Tauzin will welcome any and all ideas
as we move through the process, and we hope that we achieve
both a consensus and a bipartisan consensus on needed reforms
to the relicensing process. It makes a difference for
consumers.
With that, I would be happy to recognize Mr. Allen for an
opening statement, if he is prepared to give it.
Mr. Allen. I am. Thank you, Mr. Chairman. Thank you for
holding this hearing today on hydropower and the hydroelectric
relicensing title of the chairman's draft legislation. I
understand that this title represents a significant departure
from what this subcommittee agreed to before I joined the
committee, and I am disappointed that the draft abandons the
bipartisan negotiated title that required so much effort and
compromise last year.
Our experience in Maine suggests that the draft
hydroelectric relicensing title would not be consistent with
our commitment to protect the public interest. Maine has more
than 31,000 miles of rivers and 111 hydroelectric dams. We also
have a fishing industry employing thousands in a State with
some of the most spectacular wild rivers in the world.
This draft legislation attempts to rubberstamp licenses on
the West's massive hydro dams, but in the process it sweeps up
Eastern hydropower which has a different history. Some Eastern
dams have powered industry since the 18th Century. They are
generally quite small, 78 percent of Maine's hydro dams have
generating capacities under 10 megawatts, and the power they
produce is sometimes of less economic value than the fisheries
and natural resources that they disrupt.
I support relicensing dams because hydroelectricity is a
clean renewable source of power, but the law should acknowledge
that damming our rivers can inflict real and significant costs
to our environment and our fisheries. No matter where we live
in this country, we share a broad public interest in balancing
the need for hydropower with the help of our riparian
ecosystems. The relicensing process should not, as this draft
does, weaken the ability of citizen groups and Federal agencies
to participate effectively in the administrative process.
The current system has had its successes. Due to the
concern of Maine citizens, in 1997 FERC decided for the first
time not to renew a dam license for the Edwards Dam which had
blocked fish passage and reduced water quality on the Kennebec
River since 1837. The commission concluded that the benefits of
removing this dam outweighed its usefulness.
I was present at the breaching of this dam in 1999. Within
months, valuable striped bass were spawning in the newly
reopened river section, and in 2000 the State DEP declared that
the Kennebec had significantly improved water quality. Under
the legislation proposed today, the Edwards Dam would still be
degrading 17 miles of the Kennebec River.
Dam removal has only occurred in exceptional cases under
the current relicensing system. Dozens of Maine's hydro
facilities have been relicensed over the past decade, and the
process has not significantly decreased hydropower production
in our State, but it has dramatically improved our fisheries
and riparian ecosystems.
Dam owners do not own our rivers. Rivers have been and must
remain the waters of the United States. The public interest
must remain the priority when we license private companies to
rent our rivers to produce power.
Unfortunately, the bill before us today equates private
interest with public interest in the waters of the United
States. First, it limits the public's access to the relicensing
process, ensuring that the private dam owner has more
opportunity to influence the administrative outcome than
citizen users of our rivers. Second, the bill increases FERC's
authority while decreasing the influence of the Fish and
Wildlife Service. Third, it changes the standards that dam
owners must meet in order to protect the natural required
migratory routes of fish species that are often depleted and
sometimes endangered. The dam owner no longer has to provide
fish passage under this bill, as long as the fish resource can
be protected by other means. This standard would allow the dam
owner to artificially stock the river if providing adequate
passage is too expensive.
I hope that during this hearing we will weigh the
inevitable tension between private interests and the common
good, and I hope that this subcommittee will craft legislation
that will maximize the long-term public value of our rivers.
Thank you.
Mr. Barton. Thank the gentleman from Maine. I would now
recognize the gentleman from California, Mr. Radanovich. Do you
wish to give an opening statement?
Mr. Radanovich. I do wish to comment.
Mr. Barton. The gentleman is recognized for 3 minutes.
Mr. Radanovich. Thank you, Mr. Barton. I don't want to go
into the details of the bill because you did such an excellent
job of outlining the basic tenets of the bill, and I appreciate
the comments from the gentleman from Maine. However, when it
was mentioned seeking a balance between the economics and the
environment of some of the dams in the West, particularly in
California where we are facing an ever-increasing energy
shortage, it is this legislation we believe that will achieve
that balance because--I am not sure what the gentleman from
Maine's experience has been with the Federal resource agencies
on relicensing, but the ones that we have experienced have been
completely out-of-balance, and we need this legislation in
order to bring balance back to it by more FERC involvement in
the permit process.
We have got some licenses and permits that have been going
on for 10 or 15 years in the relicensing project, and it is
creating quite a disincentive on an industry that is much in
need in my State.
So it is my hope and my desire to achieve the balance that
Federal resource agencies are mandated to provide in the
relicensing process that is not there, and these changes are
much necessary in order to bring that balance back.
So I appreciate these comments but, for my part of the
United States, this is legislation that will bring balance back
to our policy for energy, and look forward to the hearing and
the comments from folks out there.
Mr. Barton. Thank the gentleman, as one of the co-sponsors
of the underlying bill.
I would recognize the distinguished full committee Ranking
Member, the former chairman and good friend from Michigan, Mr.
Dingell, for 5 minutes.
Mr. Dingell. Mr. Chairman, I thank you for your courtesy to
me and for holding this hearing and for coordinating with the
Minority on witness participation. That is all very important,
and I am appreciative.
I wish this subcommittee had been afforded more time to
consider this issue. Since we were unable to arrange for the
full panoply of witnesses that this important subject warrants
within the time afforded, but I understand you are under
substantial time constraints imposed by our leadership, and
regrettably we will then have to do the best we can under the
circumstances.
Mr. Chairman, I also note with regret your decision to
include Section 3001 in your draft energy bill sends a clear
signal that you are not inclined to advance the compromise
hydropower language which was developed in committee during the
107th Congress. That is regrettable, since it is a compromise
that arose from a process involving give-and-take by all
relevant parties, something which I do not believe should be
lightly thrown away.
In fact, I would like to request that the subcommittee
accept for the record a letter to you dated July 9, 2001----
Mr. Barton. Without objection, so ordered.
Mr. Dingell. [continuing] signed by the Hydroelectric
Licensing Reform Task Force, the National Hydropower
Association, the Edison Electric Institute, and the American
Public Power Association, indicating support for last year's
compromise, recognizing that while it does not represent their
ideal bill it nonetheless is a positive step. I would also like
to introduce into the record a letter to you dated July 10,
2001, signed by the American Rivers, the Hydropower Reform
Coalition, and Trout Unlimited, indicating support for the same
provisions.
Mr. Barton. Without objection, so ordered.
Mr. Dingell. Mr. Chairman, it is regrettable that the draft
bill upends this compromise, and seems in fact to abandon hope
for a consensus on hydropower policy. Section 2001 tips the
procedural and substantive balance to the hydropower industry,
undercutting the resource agencies' ability to impose necessary
conditions on hydropower projects and giving license
applicant's ``super party'' status in license proceeding. I am
not aware of a reason that that should be done.
This language would give the industry alone procedural
rights unavailable to other parties. This is something that
will cause an explosion, I think, on the floor, something that
I am not aware has been done in other statutes bearing on
public health and safety. Specifically, it allows industry
proposals that conflict with resource agency decisions an
unprecedented advantage. It allows an applicant's proposal for
resource protection to trump the agencies' proposals unless the
Secretary of the Interior can show in court that the industry
proposal is inadequate. If that is to be the way we run our
decisions in this area, it is perhaps open to question whether
we ought to even bother having the resource management agencies
or the protections that they have afforded our citizens with
regard to questions of safety, protection of natural resources,
protection of fish and wildlife and other things, which are
values of great importance to our people.
Mr. Chairman, I hope you will listen closely to the
testimony today, and it is my hope that you will be persuaded
to return to the compromise which we worked out together during
the last Congress with participation of all relevant parties.
That is a good way to begin and will save a lot of unnecessary
fighting and ill will. The hydroelectric provisions before us
today will undercut the prospects for bipartisan support of
this important energy bill. Thank you, Mr. Chairman.
[The prepared statement of Hon. John D. Dingell and the
letters follow:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, thank you for holding this hearing and for
coordinating with the minority on witness participation. I wish this
Subcommittee were afforded more time to consider this issue, since we
were unable to arrange for the full panoply of witnesses this important
subject warrants within the time afforded for planning the hearing. But
I understand you are under severe time constraints imposed by your
leadership, and regrettably we will have to do the best we can under
the circumstances.
Mr. Chairman, I also note with regret that your decision to include
section 3001 in your draft energy bill sends a pretty clear signal that
you are not inclined to advance the compromise hydropower language
developed in Committee during the 107th Congress. That is a shame,
since that compromise arose from a process involving give and take by
all the relevant parties, something not to be lightly thrown away.
In fact, I would like to request that the Subcommittee accept for
the record a letter to you dated July 9, 2001, signed by the
Hydroelectric Licensing Reform Task Force, the National Hydropower
Association, the Edison Electric Institute, and the American Public
Power Association indicating support for last year's compromise,
recognizing that while it does not represent their ideal bill it
nonetheless is a positive step. I also would like to introduce into the
record a letter to you dated July 10, 2001, signed by American Rivers,
the Hydropower Reform Coalition, and Trout Unlimited indicating support
for the same provisions.
It is regrettable that the draft bill upends this compromise, and
seems in fact to abandon the hope for a consensus on hydropower policy.
Section 3001 tips the procedural and substantive balance to the
hydropower industry, undercutting the resource agencies' ability to
impose necessary conditions on hydropower projects and giving license
applicant's ``super party'' status in license proceeding. The language
would give to industry alone procedural rights not available to other
parties--something I am not aware has been done in other statutes
bearing on public health and safety. Specifically, it allows industry
proposals that conflict with resource agency decisions an unprecedented
advantage. It allows an applicant's proposal for resource protection to
trump the agencies' proposals unless the Secretary of the Interior can
show in court that the industry proposal is inadequate.
Mr. Chairman, I hope you will listen closely to the testimony today
and be persuaded to return to the compromise we worked out together
during the last Congress with the participation of all the relevant
parties. The hydroelectric provisions before us today will undercut the
prospects for bipartisan support of this important energy bill.
______
American Rivers, Trout Unlimited,
Hydropower Reform Coalition
July 10, 2001
The Honorable Joe Barton, Chair
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
The Honorable Rick Boucher
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
Dear Chairman Barton and Representative Boucher: Our organizations
sincerely appreciate the effort you and your staff have made to work
with Representative Dingell, the hydropower industry and conservation
groups to craft an alternative to the environmentally damaging
rollbacks of hydropower regulation proposed by the Federal Energy
Regulatory Commission and some members of Congress. The results of this
discussion thus far have avoided much of the demagoguery and finger-
pointing that has characterized this debate in the past.
We have reviewed Title II of the ``Consensus Staff Draft'' of the
Energy Advancement and Conservation Act of 2001. While it offers
nothing in the way of additional environmental protection in the
hydropower licensing process, it does offer the potential for improving
federal agency conditions and prescriptions without the damaging
rollbacks of environmental standards that had been included in earlier
proposals.
In this light, we are prepared to offer limited support for this
language, with the following understandings:
1) There will be no amendments adopted to alter this language during
Subcommittee consideration, full Committee consideration, or on
the House floor.
2) There will be language included in the report on the bill that
clarifies that the process for considering alternatives to
Federal Power Act section 4(e) and 18 conditions will be
incorporated into the agencies' existing procedures for
devising preliminary and modified conditions and prescriptions,
in order to avoid any additional delays in the licensing
process.
Again, thank you for your efforts to bring closure on this
contentious issue.
Sincerely,
S. Elizabeth Birnbaum
Director of Government Affairs, American Rivers
Steven Malloch
Counsel, Trout Unlimited
Andrew Fahlund
Chair, Hydropower Reform Coalition
cc: The Honorable Billy Tauzin
The Honorable John D. Dingell
______
The Hydroelectric Licensing Reform Task Force
July 9, 2001
The Honorable Joe Barton
Chairman
Energy and Commerce Subcommittee on Energy and Air Quality
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
Dear Chairman Barton, on behalf of our four organizations, we are
writing to you, Chairman Tauzin, Ranking Member Dingell and Ranking
Member Boucher to express our support for the hydroelectric licensing
provisions (Sections 201 and 202) of ``The Energy Advancement and
Conservation Act of 2001.''
For much of the last decade, the hydroelectric industry has worked
to focus the attention of Congress on the need to improve the Federal
Energy Regulatory Commission (FERC) hydroelectric relicensing process.
Indeed, the record compiled in oversight and legislative hearings on
this issue over the previous two Congresses demonstrates that
legislative reform of the FERC hydroelectric relicensing process is
needed if our nation is to preserve consumer access to clean, reliable
and cost-efficient hydropower.
While we believe that more comprehensive legislative reform is
necessary to fully address the problems inherent in the current FERC
hydroelectric relicensing process, Sections 201 and 202 of ``The Energy
Advancement and Conservation Act of 2001'' represent a positive first
step. Accordingly, we support these sections and agree to oppose any
and all amendments that might be offered to Sections 201 and 202 of
``The Energy Advancement and Conservation Act of 2001'' in
subcommittee, in full committee, or during consideration by the full
House of Representatives.
We remain committed to pursuing more comprehensive legislative
reform of the FERC hydroelectric relicensing process and are pleased
with the commitment recently made by both majority and minority staff
of the Committee on Energy and Commerce to revisit the issue later in
the 107th Congress.
Thank you for your efforts to date. We look forward to continuing
to work with you and your staff in the weeks and months ahead on this
most important issue.
Sincerely,
Joel Malina, Executive Director
Hydroelectric Licensing Reform Task Force \1\
---------------------------------------------------------------------------
\1\ Task Force members are drawn from the memberships of the
American Public Power Association, the Edison Electric Institute and
the National Hydropower Association and include: American Forest and
Paper Association, Carolina Power & Light, Chelan County Public Utility
District, Cowlitz County Public Utility District, Douglas County Public
Utility District, Duke Engineering and Services, Duke Power, Grant
County Public Utility District, Idaho Power, Kaukauna Electric & Water,
Louisville Gas & Electric, New York Power Authority, PacifiCorp,
Portland General Electric, Sacramento Municipal Utility District,
Santee Cooper, SCANA Corporation, Snohomish County Public Utility
District, Southern California Edison, Southern Company, and the Vermont
Public Power Supply Authority.
---------------------------------------------------------------------------
Rebecca K. Blood, Senior Legislative Representative
American Public Power Association
John Neumann, Vice President, Government Affairs
Edison Electric Institute
Linda Church Ciocci, Executive Director
National Hydropower Association
Mr. Barton. We thank the gentleman from Michigan, and look
forward to working with him on this issue.
The Chair would recognize the gentleman from Oregon, Mr.
Walden, who again is co-sponsor of the underlying bill that we
put in the discussion draft. Mr. Walden.
Mr. Walden. Thank you very much, Mr. Chairman. I would like
to commend you for having this most important hearing on an
issue that of course is of vital importance to the Pacific
Northwest, the State of Oregon, and my congressional district.
Mr. Chairman, this hearing will examine hydropower
relicensing provisions included in your draft proposal which
would add some balance to the incredibly time-consuming and
costly process that investor-owned utilities, municipalities,
and public or people's utility districts must wade through when
they seek to relicense a facility with hydropower generation.
My district alone will account for 82 percent of the power
that is generated from non-Federal hydropower facilities in the
State of Oregon and subject to relicensing under the Federal
Power Act. Over 99 percent of the hydropower generated comes
from facilities up for renewal over the next 3 years. Together
these projects have the cumulative potential to produce up to
1,602.36 megawatts. To put it in perspective, Mr. Chairman, it
takes approximately 1,000 megawatts to power a million homes,
or it is enough power to serve the load needs of everyone with
a home in the Pacific Northwest cities of Portland, Seattle,
and Spokane. Hydropower is extraordinarily important to our
region.
In the Pacific Northwest region as a whole, the hydro
relicensing situation concerning non-Federal isn't much better.
Seventy-six percent of the power generated from non-Federal
projects in Oregon, Idaho and Washington is up for relicensing
over the next 15 years.
Since 1986, the Federal Energy Regulatory Commission has
been required, as you know, under the Federal Power Act, to
give equal consideration to a variety of factors when issuing
these hydropower licenses and relicenses. This authority
requires FERC to consider the power, economic and development
benefits of a particular project, as well as energy
conservation and the protection and enhancement of fish and
wildlife.
Unfortunately, the courts have interpreted the Federal
Power Act in a manner that prevents any effective balancing
from taking place. Moreover, the courts have given Federal
natural resource agencies the authority to set mandatory
conditions on FERC licenses. We are here today to try and fix
that problem, Mr. Chairman.
In the Northwest, we have seen 43 percent rate increases
last year, proposed 15 percent rate increases this year. If
hydro licensing and relicensing isn't cleaned up and done
properly, we are going to suffocate in the Northwest from high
power rates. And it is ironic since this is the renewable
energy source in America. I don't know how you get more
renewable than hydropower. Solar and wind, we are doing that,
too, and geothermal in my district. But the Northwest is so
unique and so dependent on hydropower, this is an issue of
great significance to all of us out there.
I commend you for this hearing, and my colleague, Mr.
Radanovich, for introducing the legislation that is contained
in the underlying bill. Thank you, Mr. Chairman.
Mr. Barton. Thank you Congressman Walden, we look forward
to working with you. The Chair would now recognize Mr. Issa for
a 3-minute opening statement, or do you wish to defer?
Mr. Issa. Defer.
Mr. Barton. Okay. The Chair would recognize Mr. Shadegg, or
does he wish to defer?
Mr. Shadegg. I just would make a statement, Mr. Chairman.
Mr. Barton. The gentleman from Arizona is recognized for 3
minutes.
Mr. Shadegg. Thank you, Mr. Chairman, and only because I am
afraid that if I offer to speak less than 3 minutes, I will
wind up breaking that offer. I am not going to make that
promise at this point.
I do want to commend you for holding this hearing. I think
it is extremely timely and important. As the chairman knows, I
have been involved in and interested in hydroelectric issues
for quite some time.
I want to reiterate the point just made by my colleague,
Mr. Walden. The reality is hydropower is the ultimate renewable
resource in the sense that we have already figured out how to
harness it and it is, in fact, renewable.
Beyond that, Mr. Chairman, I have tried to make the point
in prior hearings, one of which I think the chairman will
recall where I brought in the hydrologic chart which proves
that this truly is a renewable resource. But beyond that, it
can be an environmentally sensitive renewable resource.
I listened only in part to the Ranking Member's remarks and
the remarks of the Ranking Member of the full committee, and I
know there are genuine concerns about the environmental impact
of hydroelectric power, except that I think it is very
important to note that we can deal with those concerns, and
particularly it is possible with today's technology to do
several things. One, to add turbines to facilities where there
are not turbines now, without environmental impact. Two, to
improve the efficiency of turbines in facilities where we
already have turbines and the environmental impact has already
occurred it is possible to put in place more efficient turbines
where we can generate electricity without any additional
environmental impact, and we need to be looking into that.
Three, it is possible to add hydroelectric generating capacity
to in-stream flows in ways that we couldn't have done in the
past. In years gone by, the only way to produce hydroelectric
power was to build a dam holding back a supply of water with
the consequent environmental impacts that that caused.
I remain a supporter of hydropower dams and think they are
necessary, and have opposed the efforts in this Nation to drain
some of those dams where they are vitally important, but I
think it is important to note that our technology today allows
us to insert hydroelectric generating capacity in the in-stream
flows where you don't even have to build a dam.
So, I commend you, Mr. Chairman, for holding this hearing.
I think it is vitally important that we move forward on this
topic, and that we do so with open minds, and that we try to
find an accommodation. We cannot continue to remain as
dependent as we are on foreign sources of energy.
Mr. Barton. Thank the gentleman from Arizona. The Chair
would now recognize one of the workhorses of our committee and
subcommittee, the gentleman from Ohio, Mr. Brown. Does he wish
to give an opening statement?
Mr. Brown. Yes, I do, Mr. Chairman. Thank you.
Mr. Barton. The gentleman is recognized for 3 minutes.
Mr. Brown. Last year's energy policy debate had few moments
of true bipartisan cooperation. One moment, however, was the
hydroelectric relicensing provisions of last year's bill, which
was agreed upon in advance of our markup, as a result of long
and hard work by the chairman's staff and by the Minority
staff, and for that we are all appreciative.
It is particularly disappointing, therefore, that the
Energy Bill discussion draft makes significant changes to that
carefully crafted compromise language. The hydro relicensing
provision of this discussion draft would allow only power
companies to submit alternative license conditions for review
by Federal Environmental Protection Agencies. This is a vast
and troubling departure from last year's agreement which also
would have let environmental groups and States and other
advocates to propose such alternatives.
The discussion draft also seems to significantly lower the
bar for review of alternative conditions. Under the bipartisan
agreement, alternative conditions had to provide no less
protection than the conditions proposed by the government.
Under this draft, no less drops to adequate, and the long-
standing goal of protection is muddled with the potentially
conflicting objective of utilization.
If an environmental agency rejects what well may be a less
protective alternative condition but the power company
disagrees, FERC can force the cabinet agency to explain itself
to FERC's own dispute resolution service. No such FERC power-
grab is included in last year's bipartisanly crafted bill.
Mr. Chairman, the law recognizes that using America's
rivers as sources of electric power requires delicate balancing
of competing concerns and interests. The bipartisan provision
was seen by many on this subcommittee as facilitating the
licensing process while maintaining that balance.
The discussion draft provision seems to upset that
balancing, giving the interest of power production much greater
weight than the equally valid interest of environmental
protection. I hope our witnesses will further illuminate this
important issue. Thank you, Mr. Chairman, I yield back the
balance of my time.
Mr. Barton. We thank the gentleman from Ohio. The Chair
would recognize one of our new subcommittee members, the
Congressman from Idaho, Mr. Otter. Does he wish an opening
statement, or to defer?
Mr. Otter. Thank you, Mr. Chairman. I have nothing at this
time.
Mr. Barton. The gentleman defers his 3 minutes for opening
statement.
Seeing no other members present, all members not present,
without objection, have the right to put a written opening
statement in the record.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you, Mr. Chairman. This Subcommittee will soon conclude the
hearing we began last week on a National Energy Policy and move on to
marking up legislation.
None of the elements we are proposing in our draft energy policy
are new. Hydroelectric power licensing, a topic we will consider today,
is one of those issues with a long history in this Committee. In fact,
this Committee was responsible for important reforms in the Federal
Power Act in 1986 and 1992 that recognized the environmental impact of
hydropower projects and sought to address their potential harm.
I appreciate the need for such protections. Those of you who know
me know that I, like the Ranking Member Mr. Dingell, am an avid
fisherman. I know the importance of protecting fish habitat. I know
what water quality means to commercial and sport fishermen. I've fished
all over the country, and I know the effect hydropower projects can
have on the environment.
I also know that a balance can be struck between energy production
and environmental protection in a way that both win. We demonstrate
this in Louisiana every day.
The fact of the matter is that many of these dams have been around
for 50 years or more. We've come to rely on them as clean, affordable
sources for about 12% of our Nation's electricity. If the government is
imposing conditions that force them out of business, we will have to
make up that power somewhere. If there are ways we can meet our
environmental objectives and keep these dams operating, we should
pursue them.
What is at issue today is the ability of a resource agency to
impose mandatory conditions on hydropower projects irrespective of the
impact on energy production or costs. This Committee gave the
agencies--Fish and Wildlife Service, Forest Service, and others--that
power. However I think they now exercise it in a way that we probably
didn't expect. There is little accountability in their decision-making,
and the chance to review their decisions only comes very late in the
process.
We've had bipartisan legislation introduced in the House and marked
up in this Subcommittee in recent Congresses that would fundamentally
change that authority. But that is not what we included in the energy
bill last Congress, and that is not what we are talking about in the
discussion draft today.
What the discussion draft proposes, and what I think we can agree
is good public policy, even if we don't yet agree on the specific
language, is to require the resource agencies to give greater
consideration to the impacts of their decisions. If they can achieve
their mission for resource protection and use in a way that costs less
or allows better power production, then they should adopt that
approach.
If we can agree on this principle, as we generally did in the last
Congress, then I think we can come to agreement on the language. I
think we can achieve this without eroding the ability of the agencies
to protect the resource.
We had productive discussions on this issue in the energy
conference. It is my hope that we can build upon those discussions,
learn from them, and come to agreement on a strong House position for
this Congress, stronger than last Congress.
Thank you, Mr. Chairman, I look forward to hearing the testimony of
our witnesses today on that subject, and yield back the remainder of my
time.
Mr. Barton. We would like to call forth our panel now. We
have Mr. J. Mark Robinson, who is the Director of the Office of
Energy Projects of the Federal Energy Regulatory Commission. We
have Ms. Julie Keil, who is Director of Hydro Licensing and
Water Rights of Portland General Electric. We have Mr. Rob
Masonis, who is the Director of the Northwest Regional Office
for American Rivers. And we have Mr. Leon Szeptycki, who is the
Eastern Conservation Director and General Counsel of Trout
Unlimited.
The Chair would welcome our witnesses, and make one point
of personal privilege. I have former staffer in the audience,
Ms. Doreen Williams. We are glad to have you here observing the
hearing. And we are going to recognize you, Mr. Robinson, and
we will just go right down the row and give each of you such
time as you may consume, but we would hope that you all would
try to limit your opening statements to 5 or 6 minutes. So,
welcome to the subcommittee and, Mr. Robinson, you are
recognized.
STATEMENTS OF J. MARK ROBINSON, DIRECTOR, OFFICE OF ENERGY
PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION; JULIE KEIL,
DIRECTOR OF HYDRO LICENSING AND WATER RIGHTS, PORTLAND GENERAL
ELECTRIC; ROB MASONIS, DIRECTOR, NORTHWEST REGIONAL OFFICE,
AMERICAN RIVERS; AND LEON SZEPTYCKI, EASTERN CONSERVATION
DIRECTOR AND GENERAL COUNSEL, TROUT UNLIMITED
Mr. Robinson. Mr. Chairman and members, my name is Mark
Robinson. I am the Director of Energy Projects at the
commission. We support the commission in the areas of
interstate natural gas pipelines certification, liquid natural
gas terminaling, and also, more importantly today, hydropower
licensing and administration.
I will just make two points today in this oral portion. I
would like to bring you up to speed on what the commission has
been doing in developing a new licensing process, and then
comment on Title III. I will say from the outset that both of
these efforts that are going on, one at the commission and one
here, will act to improve the licensing process.
Starting with the efforts on developing a new licensing
program at the commission, around 1997 a number of groups
started discussing how we could improve licensing at the
commission, and that continued for a number of years in several
different venues, including all stakeholders that you can
imagine.
This past summer it clearly had reached critical mass. It
was time for the commission to take some action to improve the
licensing process. So, in September our commission issued a
notice that started us on a 1-year journey of trying to develop
a new licensing process.
We, from the outset, wanted to make this the most open
commission proceeding that we could imagine. We included in
this 1-year effort regional forums across the country, drafting
sessions that included all stakeholders, inviting the agencies
in to help draft the actual rule, and then just a continuous
review and feedback to all parties to make sure that nothing
would be a surprise.
I am happy to tell you today that we have now issued a
Notice of Proposed Rule on what has become known as the
``integrated licensing process.'' And I can also assure you
there were no surprises. Everyone knew what was going to be in
that NOPR and it in fact it is there.
From here on out, we will continue that open process to
finalize the codification of the integrated licensing process.
We will include the agencies in redrafting that rule to make it
final. We will include all stakeholders with another series of
regional forums. We are well on the way to administratively
improving the licensing process, and I look forward to that
conclusion. That is only, however, half the game.
The ILP, integrated licensing process, will do nothing
directly to improve the quality of the content of mandatory
conditions and fishway prescriptions. That is where Title III
comes in. These two efforts are complementary, they are not
redundant in any way, and I don't believe that they are in any
way in conflict.
Title III has two aspects that I want to point out
specifically--accountability, which is added to the mandatory
conditioning and fishway prescription process, and also a
standard of review which has been lacking to this point. By
accountability, what I mean there is--I have worked at the
commission--let me just diverge here for a second. I have
worked at the commission for 25 years, and one thing I have
learned is that if somebody is looking at what you produce, it
certainly sharpens your pencils. I think the agencies will have
the same effect--the same thing will affect them. The personnel
who are developing these mandatory conditions and fishway
prescriptions will have their pencils sharpened by knowing that
what they produce is subject to review. So that accountability
I think is an important component of Title III for those two
requirements.
The second is the standard of review. To this point, the
agencies don't have a standard of review in any way similar to
what the commission has in issuing a license for a hydropower
project. That standard of review roughly can be stated as equal
consideration to developmental and nondevelopmental values.
Things like irrigation, navigation, flood control, power
production, have to be looked at in the same vein as
environmental protection, fish and wildlife protection, water
quality protection, recreational development. That standard of
review has worked well for the commission in developing
balanced licenses. I think providing the same sort of standard
for the review of mandatory conditions and fishway
prescriptions will add that same sort of--it will make them
more amenable to insertion into a license that has as its
overall purpose to ensure that the public interests are served
across the board. Right now what we have are conditions that
are mandatory and prescriptions which are mandatory, which are
single-purpose, they fit the bill for what they are trying to
do. Integrating that into a license that has every other
consideration as its basis is sometimes very difficult and
sometimes impossible, as the commission has noted in several of
its orders.
So, in summary, I would just say the commission is making
great progress, I believe, in improving the licensing process.
And, Mr. Chairman, I think that your efforts on Title III serve
that same goal. Thank you very much.
[The prepared statement of J. Mark Robinson follows:]
Prepared Statement of J. Mark Robinson, Director, Office of Energy
Projects, Federal Energy Regulatory Commission
Mr. Chairman and Members of the Committee: My name is Mark Robinson
and I am the Director of the Office of Energy Projects at the Federal
Energy Regulatory Commission (Commission). I appreciate the opportunity
to appear before you to discuss Title III of Chairman Barton's
legislative discussion draft relating to the Commission's hydropower
licensing program. As a member of the Commission's staff, the views I
express in this testimony are my own, and not those of the Commission
or of any individual Commissioner.
The Commission currently regulates over 1,600 hydroelectric
projects at over 2,000 dams pursuant to Part I of the Federal Power Act
(FPA). Together, these projects represent 57 gigawatts of hydroelectric
capacity, more than half of all hydropower in the U.S., and over five
percent of all electric generating capacity in the United States.
Hydropower is an essential part of the Nation's energy mix and offers
the benefits of an emission-free, renewable energy source.
The Commission's hydropower activities generally fall into three
categories. First, the Commission licenses and relicenses hydroelectric
projects. Relicensing involves projects that originally were licensed
30 to 50 years ago. The Commission's second role is to manage
hydropower projects during their license term. This post-licensing
workload has grown in significance as new licenses are issued and as
environmental standards become more demanding. Finally, the Commission
oversees the safety of licensed hydropower dams. This program is widely
recognized for its leadership in dam safety.
My testimony today will provide brief overviews of the current
hydroelectric licensing activity and the licensing process. I will then
focus on Title III, Section 3001, of the proposed legislative draft.
I. CURRENT HYDROELECTRIC LICENSING ACTIVITY
The Commission will process 218 relicense applications this decade.
These projects include many large capacity and complex projects, and
have a combined capacity of about 22 gigawatts, or 20 percent of the
Nation's installed hydroelectric capacity.
New opportunities to balance competing resources
Relicensing of projects, upon expiration of the current license, is
of particular significance because it involves projects that originally
were licensed up to 50 years ago. In the intervening years, enactment
of numerous environmental, land use, and other laws, as well as
judicial interpretation of those laws, has greatly affected the
Commission's ability to control the timing and conditions of the
licensing process. Under the standards of the FPA, projects can be
authorized if, in the Commission's judgment, they are ``best adapted to
a comprehensive plan'' for improving or developing a waterway for
beneficial public purposes, including power generation, irrigation,
flood control, navigation, fish and wildlife, municipal water supply,
and recreation. The Electric Consumers Protection Act of 1986 (ECPA)
amended the FPA to require the Commission to give ``equal
consideration'' to developmental and non-developmental values.
Integrating need for power and stakeholder concerns
The Commission integrates, and weighs the concerns of, the
licensee, resource agencies, non-governmental organizations (NGOs),
tribes and other members of the public in its licensing process to
ensure that relicensed projects are consistent with the public
interest. Toward this end, the Commission also considers the need for
sustainable power provided by these projects.
While the Commission's responsibility under the FPA is to strike an
appropriate balance among the many competing developmental and
environmental interests, as required by the public interest standards
of Sections 4(e) and 10(a) of the FPA, various statutory requirements
give other agencies a significant role in licensing cases. Several
entities have mandatory authorities that limit the Commission's control
of the cost and time investments for licensing. For example, Section
4(e) of the FPA authorizes federal land-administering agencies to
provide mandatory conditions for projects located on federal
reservations under their jurisdiction. Further, Section 18 of the FPA
gives authority to the Secretaries of the Departments of the Interior
and Commerce to ``prescribe'' fishways. And, Section 401(a)(1) of the
Clean Water Act precludes the Commission from licensing a hydroelectric
project unless the project has first obtained state water quality
certification, or a waiver thereof.
The Commission also must ensure compliance with other statutes,
including the Coastal Zone Management Act, Endangered Species Act
(ESA), Federal Land Policy and Management Act, Wild and Scenic Rivers
Act, National Historic Preservation Act, and Pacific Northwest Electric
Power Planning and Conservation Act, each with its own procedural and
substantive requirements. Compliance with all these requirements
involves a multitude of different processes ancillary to licensing,
which has lengthened the time required to obtain a license.
Complexities and regional variation in relicenses
Primary issues being addressed at those 218 projects with
applications for relicensing filed this decade vary by region, but
include power, water use, fish passage, endangered species, recreation,
shoreline management, reservoir level fluctuation, and instream flows.
Water quality and cultural resources are concerns in all regions. The
projects are distributed about equally between the eastern and western
United States, but are concentrated in the Northwest and Southeast
regions.
Many of the projects will involve more than one state, and in a few
instances, Canada, in the licensing process. Each governing entity is
likely to expand the scope of concerns and regulatory goals that must
be considered in licensing. Following is a discussion of the primary
complexities in this decade of relicensing, by region.
In the Southeast, projects have many large reservoirs with
considerable shoreline area. For example, in 2005, Alabama Power
Company will be filing applications to relicense nine projects in the
Coosa River Basin with a combined capacity of 1,160 MW. These projects
have 103,000 acres of reservoir area with 2,000 miles of shoreline.
Another example is Duke Power Company's Catawba-Wateree Project with a
capacity of 841 MW, whose filing for relicensing is due in 2006. The
project has 11 reservoirs and over 1,700 miles of shoreline. Therefore,
shoreline management can be expected to be a major issue in
relicensing, and numerous waterfront property owners and other water
users can be expected to participate in the licensing process.
Hydropower issues in the northwestern United States and California
often concern federally listed threatened or endangered salmonids
(salmon, trout, and char). Most relicensing proceedings in these
regions require formal consultation with resource agencies under the
ESA.
At the beginning of 1996, the National Marine Fisheries Service
(NMFS) had listed four strains (geographically distinct groups of a
species) of salmonids. Today, there are 33 strains of salmonids listed
by NMFS and the U.S. Fish and Wildlife Service (USFWS). There is a
significant overlap in the range of the listed salmonid strains and the
concentration of hydropower sites in the Northwest and California
(e.g., about 130 licensed projects in these regions are located within
the geographical boundaries of listed chinook salmon and steelhead
trout). Thus, these listings, often requiring formal consultation under
the ESA, have added considerable complexity to the processing of
relicensing applications.
In addition to the complexities associated with listed salmonid
species, California has significant issues related to conflicts in
water use (e.g., municipal water supply, irrigation, flood control,
power, recreation, and fisheries). For example, in 2005, we expect a
relicense application for the Oroville Hydroelectric Project. The
reservoir for this project, Lake Oroville, is also the principal water
storage facility of the State Water Project, which conserves and
delivers water to over two-thirds of California's population and almost
1,000,000 acres of farmland.
In the northeastern U.S., a variety of issues prevail, ranging from
re-establishment of runs of Atlantic salmon and clupeids (i.e., shad
and alewife) to water quality issues. Recreation use of project waters
and riparian areas is a primary issue in this region. In addition, two
large projects on the Canadian border are undergoing relicensing during
this decade, the 912 MW St. Lawrence-FDR (filed in 2001) and the 2,755
MW Niagara (to be filed in 2005) Hydroelectric Projects, which
complicates the relicensing process in resolving cross border issues
like American Eel protection.
Measures to efficiently process projects
Staff at the Commission has undertaken numerous measures to
efficiently process these complex projects. Toward that end, the
Commission has held hydropower licensing status workshops to move
stalled cases, held licensing workshops with state agencies on
integrating state processes, introduced electronic filing, implemented
an improved ex parte communications rule, and provided numerous
guidance documents for stakeholders on our web page, in addition to
proposing a new hydropower licensing process, developed with sister
agencies, in a recent rulemaking discussed below.
II. THE COMMISSION'S LICENSING PROCESS
The traditional licensing process
The Commission currently uses two different processes in licensing:
the ``traditional'' process and the ``alternative'' process. Under the
traditional process, three to three and one-half years prior to filing
an application, license applicants must consult with federal and state
resource agencies, affected land managing agencies, Indian tribes, and
state water quality certifying agencies to provide these entities with
information describing the proposed project. The applicant must also
conduct studies necessary for the Commission staff to make an informed
decision on the application. Under the Commission's detailed
regulations concerning prefiling consultation and processing of filed
applications, the formal proceeding does not begin until the license
application is filed with the Commission. As a result, the Commission
staff does not generally participate in pre-filing consultation under
the traditional process.
After an application is filed, two years prior to license
expiration, the federal agencies with responsibilities under the FPA
and other statutes, the states, Indian tribes, and other participants
have opportunities to request additional studies and provide comments
and recommendations. Federal agencies with mandatory conditioning
authority also provide their conditions. The Commission staff may ask
for additional information that it needs for its environmental
analysis. All of this information is incorporated into the Commission
staff's environmental review under the National Environmental Policy
Act (NEPA) upon which the Commission bases its licensing decision.
Because of the sequential nature of the traditional process and the
frequent need to gather further information after the application is
filed, the traditional process can be lengthy. The median processing
time after application filing is 47 months.
The alternative licensing process
In an effort to improve the efficiency and the timeliness of the
licensing process without sacrificing environmental protection, the
Commission embarked on a journey of administrative and regulatory
licensing reform. Beginning in 1997, the Commission altered its
regulations to provide for an alternative to the traditional licensing
process. The alternative licensing process adds efficiency by combining
the pre-filing consultation process with the environmental review
process under NEPA. Using this process, participants, and in some cases
Commission staff, work collaboratively prior to the filing of the
application to develop, in most cases, a preliminary draft NEPA
document. Participants in the alternative licensing process generally
anticipate that their efforts will culminate in a settlement agreement.
The alternative process has been successful in reducing the post-filing
processing time to a median of 16 months.
Integrated licensing process
Even in light of successes associated with the use of the
alternative licensing process, stakeholders have continued to develop
additional procedural modifications to the more formal traditional
process that would further improve the efficiency and timing of
licensing while maintaining environmental protections. In 2001, senior
managers from the Commission staff and the Departments of the Interior,
Commerce, and Agriculture formed the Interagency Hydropower Committee.
This committee developed a proposal for an integrated licensing
process. Another integrated licensing process proposal was developed by
the National Review Group (NRG), a multi-stakeholder forum consisting
of representatives from the hydropower industry and NGOs.
An integrated licensing process would integrate an applicant's
prefiling consultation with resource agencies, Indian tribes, and the
public into the Commission staff's NEPA scoping process. This approach,
however, would differ from the alternative licensing process in several
respects, such as ensuring Commission staff involvement at all stages,
and better integrating the licensing process with the actions and
processes of other federal and state agencies and Indian tribes.
The Commission is now engaged in an open rulemaking proceeding
whereby the Commission is seeking public input on a new licensing
process. Our open proceeding allows for public and tribal input, both
before and after the issuance of a Notice of Proposed Rulemaking. This
proceeding also allows for joint drafting of rule language by
Commission staff and the federal agencies with mandatory conditioning
authority under the FPA.
This rulemaking proceeding was initiated in September 2002, when
the Commission and the federal agencies with mandatory conditioning
authority under the FPA issued a notice requesting comments on the need
for a new licensing process. The notice also established a series of
open regional public and tribal forums to discuss issues and proposals,
including proposals for an integrated licensing process.
Following the regional forums and submission of written comments in
early December 2002, the Commission hosted public drafting sessions in
which discussion of the results of the regional forums and comments was
followed by a broadly-based collaborative effort to develop consensus
recommendations on an integrated licensing process and, where possible,
develop preliminary draft regulatory text. Subsequent to the December
public drafting sessions, the Commission staff and staff from the
federal agencies with mandatory conditioning authority worked together
to develop regulatory language for a proposed rule.
Based on written and oral comments and the public drafting
sessions, the Commission issued a Notice of Proposed Rulemaking on
February 20, 2003. In that notice, the Commission circulated for public
comment a proposal for an integrated licensing process. The new
integrated process would be added to the traditional and alternative
processes as an option. The integrated process would be the default.
The Commission's proposed integrated approach improves both the
efficiency and timeliness of the licensing process by merging pre-
filing consultation with the Commission's NEPA scoping; enhancing
consultation with Indian tribes; improving coordination of processes
with federal and state agencies, especially those with mandatory
conditioning authority; increasing public participation during pre-
filing consultation; and developing a study plan and schedule,
including mandatory, binding study dispute resolution. Further, unlike
the more sequential traditional licensing process, an integrated
process would allow for these multiple federal and state processes to
take place simultaneously in a more parallel fashion. With these
features, the Commission's proposed process should make it much more
likely that the Commission, federal agencies with mandatory
conditioning authority, and state agencies or Indian tribes with water
quality certification authority obtain all the information they need to
carry out their respective statutory responsibilities by the time the
application is filed.
We believe that the efficiency and timeliness of the proposed
integrated licensing process will reduce costs associated with the
license application process by minimizing the redundancy and waste
caused by the often duplicative information needs of the Commission and
the various federal and state agencies associated with the
hydroelectric licensing process.
To obtain further public input on the proposed rule, we are
currently engaged in a series of six regional workshops. These regional
workshops, co-hosted by Departments of the Interior, Commerce, and
Agriculture, will be geared toward members of the hydropower community,
federal and state resource agencies, environmental organizations,
Indian tribes, and the general public. As part of the workshops,
Commission staff will facilitate a session where workshop participants
will be asked to identify and discuss key issues associated with the
proposed process. Following conclusion of the regional workshops, the
Commission will again host a four-day public drafting session at the
end of April to begin developing final rulemaking language. At the
conclusion of the public drafting session, Commission staff, with the
assistance of the federal agencies with mandatory conditioning
authority, will draft the final rule language. I anticipate that the
Commission will issue a final rule codifying a new integrated licensing
process in July of this year.
III. COMMENTS ON TITLE III OF THE LEGISLATIVE DISCUSSION DRAFT
Section 3001 would amend Section 4(e) [mandatory conditions] and
Section 18 [fishway prescriptions] of the FPA. Section 3001(a) would
amend FPA Section 4(e) to provide that, where an applicant for a
hydroelectric license proposes an alternative to a mandatory condition
proposed by the Secretary with supervision over a reservation on which
a hydropower project is located, the Secretary shall accept the
alternative condition, if the Secretary determines that the alternative
would provide adequate protection of the reservation and will either
cost less or result in improved project generation as compared to the
original condition. In making the decision, the Secretary must give
equal consideration to power and other developmental purposes as well
as preservation of environmental quality. Further, if the Secretary
does not accept an alternative condition and the Commission finds the
Secretary's original condition to be inconsistent with law, the
Commission could refer the dispute to the Commission's Dispute
Resolution Service for an advisory opinion.
The provisions of Section 3001(b), which amends FPA Section 18,
basically mirror those for mandatory conditions but provide that the
basis for the Secretary of the Interior or Commerce's decision on
accepting an alternative fishway prescription is if it would be no less
protective of the fish resources than the fishway initially prescribed.
As discussed previously, the FPA requires that the Commission can
authorize projects that are best adapted to a comprehensive plan for
improving or developing a waterway for beneficial public purposes,
including power generation, irrigation, flood control, navigation, fish
and wildlife, municipal water supply, and recreation, giving equal
consideration to developmental and non-developmental values. Aligning
the criteria that the agencies must use to more closely parallel the
Commission licensing criteria under the FPA should act to minimize
conflict between mandatory conditions and the Commission's conditions
recommended to reflect the public interest.
For example, in the order relicensing the Holyoke Hydroelectric
Project (MA), the Commission required measures to enhance fish passage
set forth in the water quality certification and fishway prescriptions,
even though, in the Commission's judgement, a number of the conditions
entail measures that are very costly in light of their benefits, and
therefore do not reflect a balancing of developmental and environmental
considerations. Presumably, the proposed legislation would help to
minimize this type of conflict.
I support the idea of greater interaction between the resource
agencies and the licensees in the development of environmental
measures, which Section 3001 would encourage. I believe that both the
language for mandatory conditions and fishway prescriptions would add a
degree of accountability that currently does not exist. As Congress
considers any legislation, however, it should be careful to ensure that
any procedures that could add time or expense to the process are
justified by improved outcomes.
Thank you. I will be pleased to answer any questions you may have.
Mr. Barton. Thank you.
Ms. Keil?
STATEMENT OF JULIE KEIL
Ms. Keil. Chairman Barton, Congressman Allen, members of
the subcommittee, thank you so much for inviting me to speak to
you today. I would also like to note and especially thank
Congressman Walden from my home State, and Congressman
Radanovich, for their leadership on this issue. My name is
Julie Keil. I am the Director of Hydro Licensing and Water
Rights for Portland General Electric. We are an investor-owned
utility located in Portland, Oregon. I am responsible for the
licensing actions surrounding our five FERC hydro licenses, and
all of the water rights and other things that go with that.
Those are the cornerstone of our ability to provide economical
and efficient service to our customers.
I am the company's front-line negotiator with tribes,
conservation groups and agencies with regard to the terms and
conditions of those licenses.
The issue I am here to talk to you about today is one of
our favorites in the Northwest, thought of in its broadest
terms the balance between energy production and environmental
protection, a discussion that has been going on in many forums
for a very long time in the Northwest.
That tension is nowhere more apparent than in the
relicensing of federally licensed hydro projects. I have
appeared before Congress three times now, this will be the
fourth time, to talk about this issue. I am back again today
because the issue has become more urgent with the passing of
time rather than less.
Over the next 15 years, as Congressman Walden pointed out,
over one-half of all the non-Federal hydroelectric capacity,
over 30,000 megawatts of power, must undergo the relicensing
process. PGE alone is in the process of relicensing more than
600 megawatts all before the year 2006. The fact is, hydropower
has played and must continue to play a vital role in our
Nation's energy policy and energy supply. And absent
legislation reforming the FERC hydro relicensing process, that
role is in jeopardy.
Hydropower is our largest, most flexible and most reliable
renewable resource. It is low-cost, efficient, and truly
domestic. More than any other form of power production, it also
provides a myriad of other benefits that you have heard already
this morning, or this afternoon, including recreation, flood
control, water supply, and irrigation. It is also emissions-
free, which cannot be overlooked in a time of ongoing concern
over greenhouse gases and other pollutants.
All across the West, utilities continue to struggle to
provide the reliable power that is the engine of economic
growth, and I will tell you today that the margin for error is
perilously thin. In these circumstances, hydro's unique
capabilities become even more important. Unlike most thermal
projects, hydropower projects can be turned on and off almost
instantaneously. This is a critical component of a system that
must match generation-to-load every minute of the day, every
day of the week.
Despite these benefits, America is in danger of losing
substantial hydropower capacity and operational flexibility at
a time when it is most needed. Characterized by excessive cost
and delays, the Federal hydro licensing process threatens to
reduce generation capability and operational flexibility at
projects throughout the Nation.
So, how did we get to this point? Simply put, the process
fails to properly balance the environmental impacts of hydro
projects with the crucial energy and on-energy values of the
resource. It suffers from a dispersed decisionmaking authority
and an inability to weigh competing values.
The net result of the existing statutory scheme is that no
one has the authority to balance in the public interest. No one
has the authority to look at the broader picture and make sure
that important energy benefits are considered in the exercise
of resource agency mandates. To call the process a three-ring
circus does not do justice to the complexity we face.
To take the analogy one step further, in my role I juggle
several interests. I am charged with providing reasonably
priced and reliable electricity to PGE's customers. I must
ensure that PGE's investors receive a reasonable return on
their investment. And I must negotiate terms and conditions
which reflect PGE's deeply held environmental stewardship
ethic. Our goal in relicensing is to make the environmental
footprint of our projects as small as possible while
maintaining a viable project.
To meet all of my responsibilities requires creativity and
innovation. My agency counterparts, on the other hand, often
juggle only one ball, that of the protection of natural
resources. As a result, they have no incentive to think
creatively about how to meet the interests of others. This
fundamental disparity is at the core of the hydro licensing
conundrum.
You will undoubtedly hear the argument that problems with
the FERC relicensing process can be solved solely through
administrative means. I disagree. My experience is a good
example of industry's commitment to seek reform in every
available forum. I was a member of the Federal Advisory
Committee that worked with the InterAgency Task Force toward
improvements in the hydro licensing process. I was a member of
the EPRI National Review Group that also explored
administrative improvements. And I am participating in the
current FERC rulemaking. In each one of these forums, our goal
has been a more efficient and more effective process.
Nonetheless, I cannot help but conclude that administrative
reforms cannot fully address the fundamental flaws in the
process. The problems are embedded in a statutory scheme that
is outdated, encourages delay, and serves no one's interest. It
certainly doesn't serve the interest of energy production and,
I would argue, ill serves the environment as well, as
environmental protection delayed is environmental protection
denied.
The process encourages all involved to spend money on
lawyers rather than on the environment. To craft a process that
truly advances all interests, energy and environment,
legislative solutions are necessary.
For the hydro industry, the No. 1 legislative priority is
to reinject balance into the relicensing process to make sure,
if you will, that everyone is required to juggle multiple and
perhaps conflicting interests and needs. I believe that the
language in Title III of Chairman Barton's discussion draft
which echoes that of the Radanovich/Walden/Towns bill
successfully addresses this priority in a reasonable and
environmentally responsible manner. The Barton discussion draft
offers a fair and reasonable approach to reform, one that would
restore balance, certainty and accountability to the licensing
process, while leaving the Federal resource agency conditioning
authority fully intact.
As I mentioned earlier, this is not a new issue, it has
been considered now in multiple sessions of Congress. Through
those years of debate, the solutions have evolved. From the
industry perspective, this evolution came about through careful
consideration, deliberation, and compromise. The result is a
bill and a discussion draft that we believe achieves the
admittedly difficult and delicate balance between clean energy
needs and environmental protection.
With hydropower licensing improvements, resource
enhancement and protection will continue, but they must
continue in a process that also recognizes and protects the
value of the product that is the subject of relicensing in the
first place. We can and must achieve balance in this arena. We
strongly believe that healthy rivers and hydropower can co-
exist, and we continue to work toward that end. Thank you.
[The prepared statement of Julie Keil follows:]
Prepared Statement of Julie Keil, Director of Hydro Licensing and Water
Rights, Portland General Electric Company
Chairman Barton, Ranking Member Boucher, Chairman Tauzin, Ranking
Member Dingell, Members of the Subcommittee, thank you very much for
giving me the opportunity to appear before you today to discuss the
hydropower licensing language contained in the Subcommittee's
discussion draft.
I appear before you today in two capacities. First and foremost, I
am Director of Hydro Licensing and Water Rights for Portland General
Electric Company. PGE is an investor owned utility based in Oregon,
serving more than 700,000 customers in the Portland metropolitan area
and the Willamette Valley. PGE owns 5 FERC-licensed hydroelectric
projects. Like most energy companies that possess hydropower assets,
the capabilities of these projects form the cornerstone of our ability
to provide efficient and economical service to our customers. They are
vital to the successful operation of my company, as indeed hydropower
is essential to the entire Western power grid.
I am also here representing a broad cross-section of the hydropower
industry. As a former President of the National Hydropower Association,
I have participated over the years in hundreds of discussions with
industry colleagues and non-industry stakeholders as to the challenges
and opportunities facing hydropower in the 21st century. At the local
level, I have participated in numerous task forces aimed at improving
state participation in the hydro relicensing process. I have also
played a lead role in federal efforts to bring about administrative
improvements to the relicensing process, as a member of the Federal
Advisory Committee that worked with the Interagency Task Force, as a
member of the Electric Power Research Institute (EPRI) National Review
Group that also explored administrative relicensing process reform, and
as a stakeholder in FERC's present hydropower rulemaking.
As you know, the issue of hydro relicensing improvement is not new
to this Subcommittee. In fact, it's an old issue. In numerous oversight
and legislative hearings held before this Subcommittee during the
previous three Congresses, a detailed record has been compiled as to
the complexity, costs, delays, and conflicting mandates inherent in the
FERC relicensing process. Committee members have learned that the
process is broken and that, more importantly, almost every hydropower
stakeholder wants to see it repaired. The energy issues that continue
to impact California and the Pacific Northwest have only underscored
the need for, and importance of, Congress acting as soon as possible to
reform the relicensing process so we can preserve consumer access to
clean, reliable, domestic, and cost-efficient hydropower.
The urgency surrounding this issue has not changed with the passage
of time. In fact, with each passing year the stakes increase
considerably. Today, as we look at the next 15 years, over one-half of
all non-federal hydroelectric capacity--over 30,000 MW of power (enough
to serve approximately 30 million homes)--must undergo the FERC
relicensing process. This includes 296 projects in 37 states, much of
it the West. PGE alone is in the process of relicensing nearly 600
megawatts, all before 2006. We are not unusual in this respect.
What has changed, however, is the bipartisanship that now
characterizes efforts to improve the relicensing process. All of us
within the hydropower industry are encouraged by this shift towards a
bipartisan consensus on this issue. The fact that last year both the
Democratic-controlled Senate and Republican-controlled House passed
energy bills with hydro licensing improvement titles is a testament to
the important consumer benefits to be gained from relicensing reform.
We are hopeful that this year we can finally see hydro licensing reform
legislation enacted into law. I want to especially thank Congressman
Walden of my home state for his commitment to this issue. The fact is,
hydropower has played--and must continue to play--a key role in our
nation's energy policy; and absent legislative reform of the FERC
relicensing process, that role is in jeopardy.
Hydropower is currently the most abundant and lowest-cost renewable
energy technology in the United States. The benefits of hydropower, and
its continued importance to our nation's environmental and energy
policy objectives are well documented. Hydropower is a purely domestic
resource and it provides Americans with abundant recreational
opportunities, as well as many flood control, water supply and
irrigation benefits. What's more, it is also an emissions-free
resource, which cannot be overlooked in a time of ongoing concern over
greenhouse gases and other pollutants.
In 1999, hydro displaced the emissions of 77 million metric tons of
carbon; that is the equivalent of removing 62.2 million passenger cars,
nearly 50% of the current fleet, from our nation's roadways. In
addition, hydropower generation helps us avoid significant amounts of
Nitrogen Oxide, Sulfur Dioxide, and Mercury, which are all major
contributors to decreased air, river and lake quality. The importance
of hydropower to our nation's clean air goals cannot be overstated. We
must prevent issues, such as a broken licensing process, from weakening
hydropower's ability to contribute to air quality for us and for future
generations.
Another major benefit of hydropower, its reliability, has taken on
increased importance over the past few years. The management of the
nation's electric grid depends upon fast, flexible generation sources
like hydropower to meet peak power demands to maintain level system
voltages and to restore service after a blackout. Hydropower's ability
to go from zero power to maximum output quickly and predictably makes
it exceptionally good at meeting changing loads and providing ancillary
electrical services.
Despite these multiple benefits, our supply of hydropower is waning
and America is in danger of losing substantial hydropower capacity and
operational flexibility at a time when we feel it is most needed. As we
face uncertainty in energy markets, increased levels of pollution,
reliability concerns, and a real need for more domestic and renewable
resources, we must consider ways to counter these trends. In short, now
is the time for policymakers at the federal level to fix the hydro
relicensing process, for it is this process that poses the greatest
threat to the future viability of this important, renewable resource.
As documented in Congressional hearings and by FERC in its May,
2001 Section 603 Report, the relicensing process suffers from dispersed
decision-making authority and an inability to balance competing values.
The bottom line is that costs, delays, and conflicting mandates greatly
undermine this process.
How did we get to this point? Why such a dysfunctional process?
While there is no shortage of explanations, most of it can be boiled
down to one unfortunate reality: the relicensing process fails to
properly balance the environmental impacts of hydro projects with the
crucial energy and non-energy values of the resource.
Since 1986, FERC has been required, under the Federal Power Act, to
give ``equal consideration'' to a variety of factors when issuing hydro
project licenses and relicenses. This balancing authority requires FERC
not only to consider the power, economic, and development benefits of a
particular hydro project, but also to consider energy conservation and
the protection, mitigation of damage to, and enhancement of fish and
wildlife. In other words, under Federal law, FERC has the
responsibility and authority to strike a balance between power and
environmental values.
If this were the provision of the Federal Power Act that governed
in this situation, relicensing might have a chance to succeed. The
courts, however, have interpreted the Federal Power Act so as to
prevent any balancing from taking place. The courts, in effect, have
given Federal resource agencies unilateral authority to set
``mandatory'' conditions on FERC relicenses. FERC has no opportunity to
question the basis of mandatory conditions set by the agencies, or to
fit those conditions into the final license.
This would not be as much of a problem if federal resource
agencies, when imposing a mandatory condition, considered the many
factors that FERC is required to examine pursuant to the Federal Power
Act. However, this is simply not done. While all of the agency
personnel with whom I have worked over the years have been intelligent,
well-intentioned people, their statutory mandates simply do not require
them to look beyond the narrow resource areas they are charged to
protect. The net result is that no one is balancing. No one has the
authority to look at the big picture of how hydro fits into our
national energy policy. I go back to my earlier observation: in today's
uncertain energy climate, where every megawatt counts, this is a
situation that must be remedied, and remedied soon.
Some have suggested that the problems with the FERC relicensing
process can be solved solely through administrative, rather than
legislative means. I disagree. And I draw that conclusion after having
invested considerable time and energy in recent years in search of
substantive administrative remedies.
While I am 100% committed to exploring and securing administrative
reform, I have come to the following conclusion: properly developed and
implemented administrative remedies can certainly help on a number of
fronts and should be encouraged. But taken alone, administrative
reforms can not fully address the fundamental and substantive problem
with the process: the fact that federal resource agencies mandate
restrictive conditions on the operations of hydropower projects without
either comprehensive analysis of their impacts or an independent review
of the conditions.
These thoughts were echoed by FERC in its aforementioned Section
603 Report:
``. . . changes in regulations, policies, and procedures, while
expected to alleviate the situation, are no substitute for
legislative action. They are, at best, partial mitigation for
the unorthodox legislative scheme.'' 1
---------------------------------------------------------------------------
\1\ ``Report on Hydroelectric Licensing Policies, Procedures, and
Regulations: Comprehensive Review and Recommendations Pursuant to
Section 603 of the Energy Act of 2000''; Federal Energy Regulatory
Commission Staff, May, 2001.
---------------------------------------------------------------------------
Let me say once again: legislative fixes are necessary if we are to
truly reform the hydroelectric relicensing process.
So, what legislative fixes are needed? For the hydro industry, the
number one priority is to re-inject balance into the relicensing
process--a balance between important environmental protection and the
valuable energy and non-power benefits of hydro projects. I believe
that the language in Title III of Chairman Barton's discussion draft,
which echoes that of the Radanovich, Walden, Towns bill (H.R. 1013),
successfully addresses this priority in a reasonable and
environmentally responsible manner. And as you heard from Commissioners
Brownell and Massey last week, they agree as well.
As mentioned earlier, the FERC licensing process suffers from
dispersed decision making authority. The process is splintered among
multiple federal and state agency decision makers, ranging from the
U.S. Departments of Interior and Agriculture under Federal Power Act
section 4(e), the U.S. Departments of Interior and Commerce under
Federal Power Act section 18, and state water quality agencies under
Clean Water Act section 401, among others. This fractured license
decision-making authority essentially prevents FERC from being an
ultimate arbiter of how well individual license conditions fit into an
overall license and from being able to ensure that the end result of
the licensing process is reasonable. It also makes FERC's ability to
manage the licensing process a real challenge.
Many would argue that the most effective solution to this
fundamental problem would be to bring the ultimate decision-making
authority back to FERC, where it originally resided under the Federal
Power Act. While such a solution has merit, the Barton discussion draft
offers an alternative approach, one that would restore balance,
certainty and accountability to the licensing process while leaving
federal resource agency conditioning authority fully intact. The idea
behind the Barton discussion draft is to ensure that at least the
federal agencies involved in setting license conditions under sections
4(e) and 18 of the Federal Power Act take a broader perspective in
setting those conditions, as FERC itself must do in setting license
conditions under Part I of the Federal Power Act.
Title III of the Barton discussion draft would allow a licensee to
propose a cost and/or energy-saving alternative condition--an
alternative that the federal resource agency would have to accept if
the agency--and the agency alone--determined that it met its existing
statutory requirements for environmental protection. While this concept
is similar to the provisions of the House-passed H.R. 4 from the 107th
Congress, there are some significant differences.
Last Year's Bill Too Restrictive to Allow for Acceptance of Reasonable
Alternatives
For mandatory conditions having to do with management of federal
lands (Section 4(e) conditions), last year's bill would have created a
new environmental standard for alternative conditions, to be set on a
case-by-case basis by agency personnel exercising delegated authority.
This, in turn, would bind the hands of the Secretary to consider
reasonable alternatives.
By contrast, the Barton discussion draft simply mirrors the
existing environmental protection standard found in Section 4(e) of the
Federal Power Act, and upon which federal land management agencies base
their environmental conditions. This language would ensure the
protection of environmental resources while giving an applicant some
added flexibility to save water or power, or keep costs down.
For mandatory prescriptions for fish passage (Section 18
prescriptions), last year's bill would have restricted the Secretary's
consideration to a narrow range of prescribed alternatives. By
contrast, the Barton discussion draft takes a more goal-oriented
approach that permits the Secretary to determine and set a protective
goal and decide whether the licensee's alternative meets that goal.
In both cases (4e and 18 conditions), the Barton language ensures
that the decision-making authority remains with the Secretaries of the
federal resource agencies.
Barton Discussion Draft Provides Reasonable Treatment of Applicant and
Third Party Alternatives
The Barton discussion draft allows any party to propose alternative
conditions or prescriptions; but a license applicant's ``least-cost''
or ``more power'' alternative would have to be accepted if the
Secretary determines that it satisfies the environmental protection
standard. Given that the licensee and the electric consumer ultimately
bear the cost of license conditions, it is appropriate and reasonable
that a Secretary be required to accept a licensee's alternative if the
Secretary determines that it satisfies the environmental protection
standard.
By contrast, last year's bill would have invited conflict,
confusion and further delay. It would have required resource agencies
to accept any and all alternative conditions or prescriptions
(regardless of who proposes them) if they were found to meet the
specified criteria, and without providing a mechanism for resolving
competing alternative proposals.
Barton Discussion Draft H.R. 1013 Contains Sunshine Provisions; Holds
Government Agencies Accountable
The Barton discussion draft contains a number of ``good
government'' provisions aimed at providing accountability in agency
decisions and returning balance to the licensing process through the
recognition of the many public benefits served by hydropower projects,
such as water supply, flood control, irrigation, pollution-free energy,
and recreation. Specifically, the Barton discussion draft would:
provide an opportunity--once mandatory conditions are
drafted--for an agency hearing on the record on any disputed
issues of material fact;
require agencies to document that they gave ``equal
consideration'' to the economic, environmental and other public
impacts, to the extent the information is available, of their
mandatory conditions before imposing them on licensees and/or
rejecting alternative mandatory conditions--something that
agencies are not doing now;
require agencies to submit into the public record all studies
and data that are available and relevant to their decisions;
and
provide for a non-binding dispute resolution process should
FERC find a final mandatory condition to be inconsistent with
its requirements under the Federal Power Act.
By contrast, last year's bill had no such sunshine provisions.
Over the last decade, Portland General Electric and--indeed--the
entire hydropower industry, has devoted significant time and energy to
finding the appropriate, legislative fix to the ills of the current
FERC hydro licensing process. In that time, I have witnessed a steady
evolution; an evolution both of the industry's increasing dedication to
the issue as well an evolution of the legislative vehicle that would
best solve the problem at hand.
In the 106th Congress, the Towns bill laid out a comprehensive
blueprint for reform. In the 107th Congress, this subcommittee led the
way in putting forth a new approach, that of an alternative mandatory
condition; an approach that the Senate last year built upon and that
has been further refined this year with introduction of the Radanovich,
Walden, Towns bill (H.R. 1013), whose language mirrors that of Title
III of the Barton discussion draft.
From the industry perspective, this evolution came about through
careful consideration, deliberation and compromise. The result is a
bill (H.R. 1013) and a discussion draft that we believe achieves the
admittedly difficult and delicate balance between clean energy needs
and environmental protection.
In conclusion, I would like to offer the following thoughts on the
relationship between energy priorities and natural resources. The river
and fisheries resources administered by hydro project operators are
very important ones, and essential and long-lasting commitments are
being made in relicensing processes. Portland General and the
hydropower industry as a whole take seriously their role as stewards of
the rivers we are privileged to use. Licensees go to great lengths to
involve stakeholders and members of the public in licensing and
relicensing processes. These consultations take years and, without
question, natural resource issues constitute the bulk of those
discussions. Ultimately, the majority of direct and indirect
expenditures made by licensees are spent on environmental protection,
mitigation and enhancement measures.
Some rhetorically argue that the hydropower industry wants to
``roll back'' environmental regulations in this process. That is
absurd. With hydropower process improvements, resource enhancement and
protection will continue. But they must continue in a process that also
recognizes and protects the value of the product that is the subject of
the relicensing in the first place. We can and must achieve balance in
this arena. We strongly believe that healthy rivers and hydropower can
coexist and we continue to work toward that end.
Time is short. As we look to self-sustaining energy strategies, now
is the time for policymakers to better incorporate hydropower into the
nation's energy mix. We urge you to pass Title III of the Barton
discussion draft. The language will bring efficiency, certainty,
accountability and transparency to the licensing process. Its
provisions will benefit hydro producers, the environment and energy
consumers, and, as such, is public policy that all Americans should
support.
Thank you.
Mr. Barton. Thank you, Ms. Keil.
We now would recognize Mr. Masonis for his statement.
STATEMENT OF ROB MASONIS
Mr. Masonis. Good afternoon, Mr. Chairman, Congressman
Allen, and members of the subcommittee. I appreciate the
opportunity to appear before you this afternoon. My name is Rob
Masonis. I am the Regional Director of the Northwest of
American Rivers, a national river conservation group. We also
chair the Hydropower Reform Coalition, a coalition of 117
national and local organizations dedicated to improving the
licensing of hydropower projects.
Hydropower produces about 10 percent of total generation in
the Nation, but it is important regionally in the Pacific
Northwest, where I live, supplying about 70 percent of our
electricity.
As the President's 2001 Energy Plan acknowledged, it is not
an environmentally benign power source. Hydropower dams can
block fish, drown rivers and riverside wildlife habitat, and
radically change water temperatures. Some projects completely
dewater rivers for miles at a stretch. Some increase river flow
from nearly nothing to thousands of cubic feet per second, and
reduce it again to a trickle, decimating the finely turned
ecology of rive ecosystems. For example, the Hells Canyon
complex, a series of three large dams in the Snake River along
the Idaho-Oregon border, blocks access of Snake River salmon
and steelhead to their spawning grounds, including 85 percent
of the Chinook spawning grounds in the Snake River basin.
Idaho Power's original license required it to provide fish
passage as a condition of the dams' construction, but attempts
to pass fish failed and were ultimately abandoned shortly after
the dams were built. The loss of these fish and their decaying
carcasses at the end of their spawning cycle has had a ripple
effect throughout the ecosystem, robbing headwater streams and
forests of a valuable source of nutrients. The project also
drowned critical wildlife habitat and alters flow and water
quality for hundreds of miles downstream.
Scores of hydro projects were licensed before modern
environmental standards and an adequate understanding of river
ecology existed. Relicensing represents our first opportunity
to place conditions on these dams that will protect and restore
our rivers for our children and grandchildren. Relicensing
hydropower projects has produced some spectacular successes. My
own electric utility, Seattle City Light, finished relicensing
its large Skagit River project in 1996, and it resulted in a
settlement agreement with diverse parties. The company was so
proud of the results for Skagit River salmon and steelhead that
just last month it published an Op Ed in the Seattle Times
touting its success, and I quote. ``Research indicates these
salmon also owe their comeback to changes in the way City Light
operates its hydroelectric dams.'' As the Op Ed further noted,
``When the cost of salmon restoration finally gets to the City
Light's customer's bill, it seems reasonable, about 20 cents
per customer each month.'' American Rivers helped negotiate
that settlement. In the past 10 years, many similar settlements
have produced both river restoration and profitable power
generation for utilities.
The current licensing process is far from perfect. When the
process takes too long, modern environmental conditions for the
project are delayed and the environment suffers as a result. In
the Pacific Northwest where I live, an example is the Cushman
Hydroelectric Project in the State of Washington, where the
license expired in 1974, yet today it still operates under
antiquated license terms, with no immediate relief in site.
As Mr. Robinson pointed out, for the last 5 years we have
been working with industry, Federal and State agencies, and the
commission to improve the hydropower relicensing process. Those
efforts resulted in a proposed rule issued just last month. The
commission estimates that this rule would reduce the time for
licensing by 30 months and reduce applicant costs significantly
as well.
Unfortunately, Title III of the chairman's discussion draft
would increase delays in the relicensing process, abandon the
basic Federal Power Act principle of public participation on
equal footing, unduly burden the natural resource agencies, and
harm the environment. The current draft is based on language
that was negotiated last Congress and agreed to by
representatives of the conservation community and the
hydropower industry, but the current proposal bears only a
passing resemblance to that negotiated language. The new
language would add at least 4 months to licensing, create four
new administrative processes, and requiring Federal resource
agencies to consider 11 new factors in developing their
environmental conditions. Many natural resource agencies
already have inadequate resources to do the work currently
required, let alone the much more onerous analysis that would
be required by Title III as currently drafted.
The current draft would establish a new environmental
standard that would invite litigation and judicial second-
guessing of resource agency decisions. The worst aspect of
Title III is the preferential treatment offered to license
applicants. Currently, the Federal Power Act creates an open
equitable process in which the applicant starts the
proceedings, but other interested stakeholders have equal
rights to participate and have their comments weighed equally
by the agencies and the Federal Energy Regulatory Commission.
Title III would upset this balance by giving only the
applicants the right to compel the resource agencies to adopt
different conditions or to review their evidentiary record and
cutting a host of other interested parties out of the process,
not just conservationists but also State agencies, Tribal
interests, irrigators, neighborhood landowners, and
recreationists. And although the bill says other parties may
also offer alternative conditions, the clause is meaningless
without equal footing to present those alternatives.
Being a good environmental steward is a legitimate cost of
doing business. We urge the committee not to make environmental
protection the scapegoat for licensing marginal projects, nor
to allow utilities that have never adequately mitigated for
their environmental impacts, to continue to benefit from a
sweetheart deal at the public's expense.
The rulemaking currently underway that would establish an
integrated licensing process holds the promise of fairly
streamlining the process while not tipping the scales in favor
of the hydropower industry, as Title III of the chairman's
discussion draft would most certainly do.
Those of us in the environmental community, and especially
the Pacific Northwest, understand and appreciate the value of
hydroelectric power, but the benefits it provides have come at
a very high cost to our Nation's rivers and the fish and
wildlife and human communities that depend on them.
In the Pacific Northwest, it has profoundly harmed salmon
and salmon-dependent communities and, I would add, unlike power
which can be generated in a number of ways, salmon and other
fish and wildlife need healthy, functioning rivers to survive.
There is no substitute. I appreciate your time and attention.
[The prepared statement of Rob Masonis follows:]
Prepared Statement of Rob Masonis, Director, Northwest Regional Office,
American Rivers
I. INTRODUCTION
Good afternoon, Mr. Chairman, Congressman Boucher and members of
the Subcommittee. I appreciate the opportunity to appear before you
here today. My name is Rob Masonis, and I am the director of the
Northwest Regional Office of American Rivers, a national conservation
organization dedicated to protecting and restoring the nation's rivers.
American Rivers has more than 33,000 members across the country, and
works in partnership with more than 4,000 river and conservation
organizations. American Rivers also chairs the Hydropower Reform
Coalition, a coalition of 117 national and local organizations
dedicated to improving the licensing of hydropower projects by the
Federal Energy Regulatory Commission.
There are three basic messages in my testimony:
1. Hydropower relicensing significantly improves environmental quality
at little cost to power generation.
2. Administrative reforms are working to make the licensing process
more efficient.
3. Title III of the Chairman's draft would further complicate and
increase the cost of the licensing process, interfere with full
participation by states, tribes and the interested public, and
diminish environmental quality.
Hydropower represents an important part of the nation's energy mix,
producing about 10% of total generation nationally, depending on the
water year. It is more important regionally in the Pacific Northwest
where I live, supplying about 70% of our electricity capacity.
Nationally, about 9% of our electricity comes from hydropower and about
half is generated by non-federal producers and regulated by the
Commission. The licensees pay nothing for an essentially free and
renewable fuel--river water--and well below market value for the use of
federal lands. (Hydrowire, May 20, 2002)
Although hydropower can generate flexible, emission-free
electricity, it is not an environmentally benign power source.
Hydropower projects include dams that can block fish, sediment and
water flow; drown rivers and riverside wildlife habitat; and radically
change water temperatures. They include bypass canals that may
completely dewater rivers for miles at a stretch. They may be operated
to meet daily peak demand for electricity, increasing river flow from
nearly nothing to thousands of cubic feet per second, then reducing it
again to a trickle at night. And they depend on turbines that destroy
aquatic life entrained in their spinning blades.
For example, the Hells Canyon complex on the Snake River along the
Idaho-Oregon border blocked access of Snake River salmon and steelhead
to their spawning grounds, including blocking approximately 85% of the
spawning habitat for fall Chinook salmon. Idaho Power's original
license required them to construct fish passage as a condition of the
dams' construction, but sadly this construction was never carried out.
The loss of these fish and their decaying carcasses at the end of their
spawning cycle has had a ripple effect throughout the ecosystem,
robbing headwater streams and forests of a valuable source of
nutrients. The project also alters flows and water quality for hundreds
of miles downstream and occupies and affects significant tracts of
public lands managed by Forest Service and Bureau of Land Management.
This hydropower complex further drowned critical wildlife habitat and
greatly diminished animal populations.
The President's 2001 Energy Plan plan acknowledged and catalogued
the impacts of hydropower dams on natural resources. ``Hydropower,
although a clean energy source, does present environmental challenges.
Unless properly designed and operated, hydropower dams can injure or
kill fish, such as salmon, by blocking their passage to upstream
spawning pools. Innovations in fish ladders, screens, and hatcheries
are helping to mitigate these adverse impacts. Ongoing dam relicensing
efforts are resulting in community involvement and the industry's
application of the latest technologies to ensure the maintenance of
downstream flows and the upstream passage of fish. These efforts also
have been successful in identifying and removing older, nonfunctioning
dams and other impediments to fish movements.'' (President's Plan, 3-8)
The harmful effects of hydropower projects can be reduced or
mitigated, but this requires careful review and oversight by federal
and state agencies that are responsible for protecting the affected
natural resources. The Federal Power Act's licensing process is
designed to ensure that the impacts of hydro projects are fully
evaluated, that lands, fish and wildlife are protected, and that each
project is suited to the river where it is installed. The license for
each project expires every 30 to 50 years--once a generation--so that
we can evaluate again the impacts of the project and the terms under
which it should operate for the next generation. In the Hells Canyon
example, the project license is currently under review and is scheduled
to expire in 2005.
Unfortunately, the scores of hydroelectric licenses scheduled to
expire over the next decade were licensed so long ago that modern
environmental standards had not yet come into play and our
understanding of complex ecological systems was in its infancy. For
decades, these projects have been operating with minimal environmental
controls. Current relicensing represents our first opportunity to
review these dams, canals and turbines, and to place conditions on them
for the next 30 to 50 years that will improve our rivers and protect
fish and wildlife for our children and grandchildren.
Relicensing hydropower projects has already produced some
spectacular successes. My own electric utility, Seattle City Light,
finished relicensing their Skagit River project in 1996. The resulting
changes to the flows from these three dams have produced significant
and tangible improvements to the Skagit River salmon runs--in fact,
Seattle City Light was so proud of the results that just last month it
published an Op Ed piece in the Seattle Times touting its success.
``(R)esearch indicates these salmon also owe their comeback to changes
in the way City Light operates its hydroelectric dams.'' (A copy of
that Op Ed is appended to my testimony.) Importantly, these changes,
among the most expensive required of any hydropower licensee in the
past several years, have proven to be affordable. As the article noted,
``These measures cost money. The Skagit system provides about 25
percent of Seattle's electricity. Managing flows for fish sometimes
means water must be released in ways that may result in less
electricity generation. That means the utility must find more power
elsewhere that is likely to be more expensive. However, when the cost
of salmon restoration finally gets to the City Light customer's bill,
it seems reasonable: about 20 cents per customer each month.'' This and
other examples of improved river health are the real story of
hydropower relicensing.
Over the past ten years, settlements have been commonplace and
resulted in both ecological restoration and profitable power
generation. New England Power Company signed two major settlement
agreements with resource agencies, conservation groups, and other
stakeholders on the Deerfield and Connecticut Rivers, leading to
tremendous growth in rural economies. The Menominee River in Wisconsin
and Michigan is another river where collaborative relicensing yielded
significant benefits and was accomplished prior to license expiration.
In New York State, Niagara Mohawk Power Company, resource agencies, and
other stakeholders have worked river basin by river basin to settle
Niagara Mohawk's numerous dam relicensings. In the past ten years,
several significant settlement agreements have been signed, affecting a
total of 35 dams on six major river basins across the state. And in
Maine, settlements have not only resulted in fish passage and restored
flows, but parties agreed to support expansion of the hydropower
facilities to enable increases in power generation. Each of these was
accomplished under existing law.
II. RELICENSING--AN IMPORTANT BALANCING ACT
The relicensing process is necessarily complex. Because rivers are
public resources with many competing interests and significant
environmental issues, the licensing process for hydropower dams
involves multiple stakeholders. Unlike most electricity generating
technologies, hydropower does not have ``end of pipe'' standards to
ensure that the dam's operations do not unduly damage the environment.
This is because every dam and every river is different, and generic
standards cannot be applied to each project. Individual conditions
suited to each project must be established.
The Federal Power Act (FPA), although commonly considered an energy
statute, also occupies an important role in environmental protection.
The statute was amended in 1986 to require the Commission to give
``equal consideration'' to power (electricity generation) and non-power
(fish and wildlife protection, recreation, etc.) benefits of the river.
The FPA contemplates that the economics of the hydropower facility will
be taken into account by the Commission in this process.
However, this balancing requirement is not the sole environmental
constraint placed on of hydro projects. Congress determined--and
rightly so--that some basic environmental protections must be afforded
at every dam, and should not be balanced away to promote cheap
hydropower. Under these statutory requirements, expert federal and
state resource managers establish conditions, based on substantial
evidence to protect public trust resources. These basic protections
form a floor above which FERC then establishes license conditions in
the public interest.
Sometimes referred to as mandatory conditions, the statutory
requirements assure that:
(1) Fish can be passed upstream and downstream of a dam (FPA Section
18);
(2) If a nonfederal dam is located on federally owned land, the
purposes of the federal land are protected (FPA Section 4(e));
and
(3) The dam complies with state-developed water quality standards (CWA
Section 401).
Both fish passage and federal lands protection have been part of the
relicensing process since enactment of the Federal Power Act in 1920.
Section 18's mandate, setting fishways apart as a special
consideration, is in keeping with the law and practice that came to us
from Europe at the time of settlement. Millers--dam owners--have
provided fishways at their own expense for many hundreds of years,
reflecting the understanding that fish are important to commerce and
have substantial non-commercial value.
Section 4(e)'s grant of authority to land management agencies to
ensure that projects on their lands meet current management goals and
objectives is simple and is based on common sense. Projects located on
federal or tribal lands are already getting the benefit of cheap rent.
In order to adequately manage the lands entrusted to them and ensure
that hydro projects do not interfere with other uses of the land,
federal land management agencies must be able to constrain how these
projects are operated.
The protection of water quality is a responsibility that has been
delegated to the states since the Clean Water Act was adopted 30 years
ago. Section 401 ensures that private hydro projects will not interfere
with state standards, by requiring that each federally licensed project
obtain a state certification that the project is consistent with state
standards, including the designated uses for each water body. The
Supreme Court confirmed in PUD No. 1 of Jefferson County v. Washington
Dep't of Ecology, 511 U.S. 700 (1994), that these standards may be
numeric or narrative and include chemical, physical, and biological
parameters.
These laws establish the simple rule that a project must meet basic
environmental standards before we allow it to operate on our rivers--
just as we would not allow a coal-fired plant or a nuclear plant to
operate without basic protections for the environment, so too we must
not license hydro plants without this basic level of protection.
III. IMPROVEMENTS TO THE RELICENSING PROCESS CAN WORK
On the other hand, American Rivers would be the first to
acknowledge that the current licensing process is far from perfect.
Agency environmental reviews are not well coordinated and agencies
frequently experience significant delay in getting the necessary
information to establish environmental conditions. In many cases, the
process takes too long. Unfortunately, it is the environment that truly
suffers from delays in relicensing. When a license expires the dam
owner receives ``annual licenses'' that maintain status quo conditions
at the project until a final license is issued. The longer the process
takes, the longer it takes to set modern environmental conditions for
the project.
In May 2001, FERC issued a report to Congress reviewing ``policies,
procedures, and regulations for the licensing of hydroelectric projects
to determine how to reduce the cost and time of obtaining a license.''
1 The report shows that Section 4(e) and 18 requirements by
federal resource agencies are not a major cause for relicensing delays.
(Report at pg. 38) In cases where agencies have been late with
conditions it is often because licensees have not provided adequate
information and the Commission has not required it.
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\1\ Report on Hydroelectric Licenseing: Policies, Procedures, and
Regulations. Comprehensive Review and Recommendations Pursuant to
Section 603 of the Energy Act of 2000.'' FERC Staff, May 2001.
---------------------------------------------------------------------------
For the last five years, American Rivers and members of the
Hydropower Reform Coalition have been working with industry, federal
and state agencies, and the Commission to make administrative
improvements to the hydropower licensing process. We have made steady
progress in a number of areas including federal agency actions and
procedures to ensure consistency, timeliness, and coordination. The
past year those efforts have culminated in the development of a
proposed rule, issued by the Commission just last month. The proposed
rule draws heavily from proposals developed by two very different
groups--the National Review Group, a coalition of hydropower interests
and environmental groups, and the Interagency Hydropower Committee, a
federal interagency working group--and reflects a remarkable degree of
consensus.
The Commission estimates that the proposed rule would reduce the
average time it takes to complete the licensing process by 30 months,
cutting down 47 months of preparation and processing time to 17 months.
Further, it estimates that the proposed process would reduce the cost
of licensing for a project under 5 megawatts by $150,000 and for a
project greater than 5 megawatts by $690,000. (Testimony by
Commissioner Brownell before the House Energy and Commerce Committee).
According to the Notice of Proposed Rulemaking the proposal,
referred to as the ``integrated'' process, would become the
Commission's primary licensing process. The highlights of the proposed
rule are:
increased assistance by Commission staff to potential
applicants and stakeholders during the development of license
applications;
greater coordination among the Commission and federal and
state agencies with mandatory conditioning authority;
coordinated environmental scoping between the Commission and
the applicant's pre-filing consultation;
increased public participation in the pre-filing consultation
process;
clear and rational schedules and deadlines for all
participants, including Commission staff;
development of a Commission-approved study plan, with informal
resolution to study disagreements, followed by mandatory,
binding study dispute resolution, if necessary;
elimination of the need for post-application study requests;
and
creation of a new Commission Tribal Liaison, to be the point
of contact for American Indians' concerns regardless of the
proceeding or issue.
In addition, the traditional licensing process would be modified by
increasing public participation, and by establishing mandatory, binding
dispute resolution for necessary studies.
The Commission will obtain public input through written comments
and regional workshops around the country in March and April 2003 to
discuss stakeholder reaction to the proposed rule. A four-day
collaborative drafting session is scheduled in April in Washington to
draft language for the final rule. While we continue to advocate
improvements to the proposed rule, American Rivers and the members of
the Hydropower Reform Coalition believe that the Commission is on the
right track toward making lasting improvements to the hydropower
relicensing process without jeopardizing public participation or
environmental quality.
iv. current proposals would hurt the process and the environment
The legislative proposal contained in H.R. 1013 and Title III of
the Chairman's discussion draft would increase delays in the
relicensing process, abandon the basic Federal Power Act principle of
public participation, unduly burden the natural resource agencies, and
harm the environment. It should be rejected in favor of support for the
Commission's ongoing rulemaking process.\2\
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\2\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review
(October 1995).
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The current draft is based on language that was negotiated last
Congress and agreed to in writing both by representatives of the
conservation community and by representatives of the hydropower
industry. Unfortunately, the current proposal bears only a passing
resemblance to that agreed-upon language. Rather than providing a
simple fix to the industry's complaint that the resources agencies
sometimes fail to give adequate consideration to lower-cost
alternatives for resource protection, this language would blow a hole
in the entire resource agency process by: 1) giving hydropower
interests preferred treatment in the management of a public resource
over states, tribes and the interested public; 2) reducing standards
for environmental protection; and 3) creating a new referral to middle-
tier Commission staff to review the agencies' conditions.\3\
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\3\ Report on Hydroelectric Licensing: Policies, Procedures, and
Regulations. Comprehensive Review and Recommendations Pursuant to
Section 603 of the Energy Act of 2000.'' FERC Staff, May 2001.
---------------------------------------------------------------------------
The legislative proposal before the Committee contains detailed
revisions to an aspect of federal hydro licensing that is foreign to
most. Rather than walk through the bill step by step, my testimony will
describe several of its most obvious problems. For a complete critique
of the bill, see the attachment to this testimony.
A. Title III will make a complex process more so.
Efficiency in the hydropower relicensing process is a constant
challenge because of the complexity of the issues and the number of
stakeholders involved. The Commission's rulemaking proposal makes a
good first effort at addressing this challenge. Unfortunately, Title
III would make a complex process more so. It adds four new
administrative processes at a time when FERC and the same agencies are
struggling to streamline licensing. It further requires federal
resource agencies to consider eleven new factors in developing their
environmental conditions, and establishes a new standard that invites
litigation and both staff and judicial second-guessing of resource
agency decisions.
Many of the new procedures and considerations placed on resource
agencies are redundant with the Commission's role in relicensing. Title
III would require the agencies to consider several factors beyond the
scope of their resource protection responsibilities and well beyond
their expertise. Evaluation of these factors currently falls to the
Commission under the FPA and NEPA with the cooperation and input of
federal agencies on issues where they add expertise--in this case
fisheries and land management. Having the agencies undertake this
additional evaluation would be redundant, but it would also
fundamentally realign the agencies' role in the licensing process,
which is currently to establish necessary and appropriate environmental
protections--a floor of environmental protection--and to leave the
balancing of power development versus other factors beyond those basic
protections to the Commission.
Title III's requirement that the natural resource agencies consider
eleven additional factors also places a virtually impossible burden on
the resource agencies. At present, many of the relevant state and
federal agencies do not have sufficient staff dedicated to relicensing.
As a result, a range of individuals (few of whom are trained in the
relicensing process) may participate in different parts of a
relicensing proceeding as time allows, or the appropriate staff is
overburdened and cannot spend the time to conduct an adequate review of
the environmental needs at the site or participate constructively in
the relicensing. Because of the complex nature of the proceedings, and
because of the new, more productive trend toward collaborative
relicensing efforts, a consistent presence of qualified staff with an
appropriate workload would make agency efforts more efficient and
productive.
The staffing problem in the state of Alabama, where licenses for 12
dams on three major rivers will expire by 2007, is instructive.
Relicensing these projects will involve regular meetings, extensive
studies, and detailed negotiation. Currently, the U.S. Fish and
Wildlife Service, which must make recommendations under section 10(j)
as well as prescribing fishways under section 18 of the FPA, has only
one staff person to cover this area. His situation is not unique.
Without additional resources, there is a risk of inefficient or
incomplete participation on the part of the Fish and Wildlife Service
and potential disruption or delay in the process. This can be avoided
with additional resources.
One potential solution is Section 1701(a) of the Energy Policy Act
of 1992, which provides authority for FERC to reimburse resource
agencies for their costs associated with licensing FERC projects. The
provision calls for FERC to pass these costs on to licensees through
annual fees. Since 1992, FERC has been collecting fees from licensees
for some of the federal resource agency relicensing expenses, but this
money has not found its way back to these agencies. Instead, it has
gone to the Treasury where these reimbursements to federal and state
resource agencies have not been made available through annual
appropriations from Congress. This system is not working. To provide
adequate resources to these agencies and facilitate more efficient
relicensings, section 1701(a) should be implemented so that monies
collected on behalf of state and federal natural resource agencies are
reimbursed directly to those agencies.
Title III offers even further complexity to the process via the
curious step of establishing an appeal to Commission staff if the
license applicant continues to disagree with the agencies following
their detailed internal alternatives analysis. While this process is
non-binding, it asks the Commission's Dispute Resolution Service,
currently a facilitation group, to make a finding regarding this
appeal. Such an action would be a significant departure for the Dispute
Resolution Service, given their traditional role as simply a
facilitator. Staff in this part of the agency are neither equipped nor
positioned with adequate seniority to make such determinations. This
office is accustomed to creating process, not issuing opinions. In
addition, this appeal would add 90 days to the licensing process--over
all, Title III can be expect to add more than four months to the time
necessary for adoption of resource agency conditions.
B. Title III would give hydro applicants unprecedented power.
Currently, the Federal Power Act's hydropower licensing provisions
create an open, equitable process in which the applicant starts the
proceedings, but other interested stakeholders have full rights to
participate and have their comments weighed equally by the Commission
and other relevant agencies. Title III would drastically alter this
process, by giving only the applicants the right to compel the resource
agencies to adopt different conditions under sections 4(e) and 18.In
offering this new authority only to license applicants, this
legislation
would cut a host of other interested parties out of the process--
not just conservationists, but also state agencies, tribal interests,
irrigators, neighboring landowners and recreationists. The agency would
be required to adopt the applicant's proposal if it met the statutory
criteria, regardless of whether another alternative was more efficient
or more beneficial to the environment. And although the bill says other
parties may also offer alternative conditions, there is not requirement
that they be considered by the Secretary. It is obvious that nothing
would prohibit others from proposing alternatives but the clause is
meaningless unless there is equal footing on which those alternatives
may be heard. The preferential treatment of hydropower interests is
patently inconsistent with every other element of the Federal Power Act
and runs counter to the right of the public to maintain control over
the nation's rivers.4
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\4\ ``The public must retain control of the great waterways. It is
essential that any permit to obstruct them for reasons and on
conditions that seem good at the moment should be subject to revision
when changed conditions demand.'' President Teddy Roosevelt, 1908
---------------------------------------------------------------------------
C. Title III would diminish environmental quality
The compromise language agreed to last Congress would have ensured
that the alternative license conditions established under this new
procedure would provide equivalent protection to those originally
proposed by the agencies. The language of Title III eliminates that
basic guarantee, establishing a new standard that invites
administrative and judicial second-guessing of the protections for
fisheries and federal lands. In addition, it forces the resource
agencies to give private costs the same level of consideration as the
protection of public resources.
The new standard for section 4(e) conditions requires simply that
the new condition ``provides for adequate protection and utilization''
of the federal lands. While this is the standard used in the underlying
section of the Federal Power Act, its inclusion here has the perverse
consequence of inviting the courts to second-guess the land management
agencies' assessment of what is necessary for the protection and
utilization of their lands. The language adopted by this Committee last
year, requiring that the alternative ``provides no less protection''
than the condition proposed by the resource agency, properly defers to
the agencies' expertise with regard to their own lands. Judicial review
of that standard would start with the condition initially developed by
the agency. Under Title III a court would be invited to make a de novo
interpretation of what conditions are ``adequate.''
The standard for section 18 alternative conditions is even more
harmful. Rather than requiring the installation of a fishway, this
proposal would establish a standard that the alternative be ``no less
protective of the fish resources'' than the fishway originally proposed
by the fishery agency. This language appears to be directly intended to
allow the substitution of hatcheries, habitat restoration, or even
mitigation funds, which will not serve the purpose of a fishway--to
move fish past the dam. Loss of spawning habitat cannot be mitigated by
hatcheries or downstream habitat improvements. There are many interests
in moving fish past dams that go beyond the ``protection of fish
resources,'' such as fishing access and treaty obligations.
VI. CONCLUSION
Being a good environmental steward is a legitimate cost of doing
business. Should the federal government guarantee profitability of
hydropower? If a project is already unprofitable because of market
forces or because it is run poorly, should it be exempted from any
environmental conditions? The answer to these questions is clearly no.
According to the courts, ``There can be no guarantee of profitability
of water power projects under the Federal Power Act; profitability is
at risk from a number of variable factors, and values other than
profitability require appropriate consideration.'' 5 We urge
the Committee not to make environmental protections the scapegoat for
licensing marginal projects nor to allow utilities that have never
mitigated for their environmental impacts to continue to benefit from a
sweetheart deal at the public's expense.
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\5\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th
Cir. 1994)
---------------------------------------------------------------------------
No regulatory process is perfect and this one is no exception. Many
in the environmental community believe that there should be stricter
environmental conditions at hydropower projects, while many in the
industry believe that there should be fewer. Perhaps that is a signal
that things are working. Whichever position one believes, Title III
would only make the relicensing process more complex and litigious and
would threaten public trust resources that already bear the brunt of
relicensing delays.
We urge the Committee to defer to the Commission's ongoing
rulemaking to truly improve the hydro licensing process. If the
Committee wishes to adopt a section on alternatives to resource agency
conditions, we urge it to agree to the negotiated compromise from last
Congress. Anything undercutting environmental protections or placing
the voice of license applicants over that of other parties invites
wholesale opposition from the broad range of interests affected by
hydropower licensing.
Those of us in the environmental community and especially in the
Pacific Northwest, understand and appreciate the value of hydroelectric
power. It is a valuable source of emissions free energy and provides
numerous other benefits including being the cheapest source available.
Unfortunately, its legacy of impacts to our region's and nation's
rivers has been neglected too long. Now is the time to bring these dams
up to modern environmental standards, not to continue the status quo.
Mr. Barton. We thank you, sir. We now will hear from our
last witness, Mr. Szeptycki. Your statement is in the record,
and you can elaborate on it.
STATEMENT OF LEON SZEPTYCKI
Mr. Szeptycki. Mr. Chairman, my name is Leon Szeptycki, and
thank you very much for giving me the opportunity to testify
today on behalf of Trout Unlimited volunteer members across the
country.
For those of you who don't know, TU is a nonprofit
organization with more than 125,000 members organized into
approximately 450 chapters. Our mission is to conserve,
protect, and restore North America's trout and salmon fisheries
and their watersheds. Over the last 10 years TU volunteers and
staff have participated in numerous hydroelectric relicensings
from California to Maine, and I assure all of you here that I
am not the usual face of Trout Unlimited participating in those
processes. The typical TU participation in the hydroelectric
relicensing is done by our volunteer members. Typically, an
angler or group of anglers in a community with a river affected
by a hydropower dam, who care enough about that river to devote
significant amounts of their free time to attempting to approve
the way the dam affects the river's biological functioning.
That gets me to two of the most important concerns of our
members with respect to the FERC relicensing process. The
licensing process has to be structured to give members of the
public, including those volunteer TU members, early and
meaningful input into the process. I would submit that this is
not just something our members want for their own selfish
fishing concerns, but something that makes the whole process
more efficient and contributes to a better overall result in
the relicensing process.
Now, in terms of fish passage, our members' second priority
is high quality fish passage because, without fish passage, the
rivers and the fisheries simply won't function. Many of our
local chapters are located on waters that are just a shadow of
their native fisheries. I do most of my work in the East and a
great deal of it in Maine, and I can't really improve on the
way Congressman Allen described the situation in Maine, but in
that State entire runs of Atlantic salmon and sturgeon are near
extinction, runs of shad and alewives are a fraction of their
historical numbers, and the single greatest cause of these
depressed fisheries, some of them potentially highly valuable
commercial and recreational fisheries, is inadequate fish
passage at dams, many of them hydroelectric dams.
Poor fish passage on hydro dams has been an unfortunate
fact on many rivers in this country, and good fish passage
should be one of the bare minimum goals of every relicensing.
Now, TU has been most effective in accomplishing its goals in
relicensing by participating in collaborative settlement
negotiations. And this is why we believe that the discussion
draft H.R. 1013 could not have come at a worse time.
Over the last several years, the trend in relicensing has
shifted strongly away from traditional adversarial relicensings
toward collaborative settlements. These collaboratives give
organizations like TU and other community members meaningful
input into the process and the result of the relicensing, and
also gives licensees better control over the final terms of the
license. As that trend continues, we are getting better at
reaching settlements more quickly and more efficiently. To
further promote efficient collaborative settlements, FERC is
working on the rule that a number of people here have already
discussed today, and that rule would increase the incentives to
settle these cases, increase the incentives to negotiate, and
make that process move much more quickly.
Trout Unlimited opposes the discussion draft before the
subcommittee today because this proposal runs absolutely
contrary to the primary concerns of TU members around the
country. The draft will reduce public participation in the
relicensing process, and it will reduce substantially
protections for fish passage.
We also have a deep concern that the discussion draft would
derail existing efforts and the existing evolution to move the
relicensing process toward collaborative processes and would
cut that evolution short.
Now, everyone has discussed, and it is in our written
testimony in great detail, all the additional procedures
required by the discussion draft, and I won't go over them
again here. But I would like to make the point that these
steps, by their very nature, will serve to cut the public out
of the relicensing process in a number of ways. The language of
the bill itself does not provide for public participation in
any of the new required procedural steps, and those procedural
steps are precisely the kinds of government processes that our
volunteer members find it most difficult to participate in,
things like a trial-type hearing or a FERC-sponsored dispute
resolution.
More importantly, however, I think, is the fact that the
procedures fundamentally alter the balance of power in
relicensing, and will substantially reduce the incentive of
applicants to enter into meaningful settlement discussions, the
type of discussions that we found most productive at achieving
the results that work for everybody.
In those collaborative processes, our Trout Unlimited
members and other member of the public can have real and early
input into things like the early studies that drive the whole
relicensing process. And among the factors that motivate
license applicants to sit down in the first place and enter
into those negotiations and enter into those collaborative
processes are the requirements of Section 4(e) and Section 18
as they are currently drafted. Changing those requirements even
procedurally will change the delicate balance that is driving
the evolution of the relicensing process toward more
collaborative settlements.
The draft Title III does more than just change the
procedures, however, it would significantly weaken the
protections that Federal prescriptions now provide for rivers
and fisheries. Currently, Federal agencies are charged with
developing license conditions that provide certain basic levels
of protection that every dam has to meet. Hydropower facilities
should not undercut the purposes of Federal land that they
impact, and they should provide for basic effective fish
passage. Agencies are not required to balance these basic
protections against the profitability of the applicant or
against other factors.
H.R. 1013 would fundamentally change the nature of Federal
conditioning authority by requiring the agency to balance
required measures against--I think the number that has been
thrown out--11 other factors. Although this balancing is
couched in terms of a procedural requirement, it changes the
substance of the statute. And I should add that in requiring
hydroelectric dams to meet certain basic measures of
environmental protection is no different than the statutes that
apply to coal-burning power plants, to facilities that dump
pollution into waters. All of these facilities, including most
other facilities that generate electricity have certain basic
minimum environmental requirements that they are required to
meet.
In conclusion, what I would like to do is assure you that
our organization's concerns are not just about fish, they are
also about people and also about money. The rivers of this
Nation provide more than 557 million days fishing for 34
million anglers who spend $41 billion a year in pursuing their
hobby. This is why a group of State fish and wildlife agencies,
sport fishing groups, and other fishing industry groups have
all signed on in opposition to H.R. 1013, continue to heed
their views and reject the proposed hydro title as currently
drafted. Thank you.
[The prepared statement of Leon Szeptycki follows:]
Prepared Statement of Leon Szeptycki, General Counsel, Trout Unlimited
My name is Leon Szeptycki, and I am the Eastern Conservation
Director and General Counsel of Trout Unlimited. I am testifying today
on behalf of TU's volunteer members around the country. Trout Unlimited
(``TU'') is a nonprofit organization with more than 125,000 members
around the country organized into approximately 450 local chapters. Our
mission is to conserve, protect, and restore North America's trout and
salmon fisheries and their watersheds. Over the last ten years TU
volunteers and staff have participated in numerous hydroelectric
relicensings from California to Maine. Numerous TU chapters have as
their home waters a river affected by one or more hydroelectric
facilities, and the impacts of those facilities are almost always the
primary focus of those chapters' volunteer activities.
TU agrees that reforms to the hydroelectric relicensing process are
needed, but we do not agree that legislative changes to the Federal
Power Act are necessary or appropriate to bring about those reforms.
The last ten years have seen a major evolution of hydroelectric
relicensing under the Federal Power Act. The trend has shifted strongly
away from traditional, adversarial relicensings, towards collaborative
settlements that serve the interests of all the participants. As that
trend continues, we are getting better at reaching settlements more
quickly and more efficiently. To further promoted efficient
collaborative settlements, FERC is currently working on rules that
would make the relicensing process more streamlined and that would
further promote collaborative settlement as the preferred mode of
relicensing. The hydropower industry and the conservation community are
both actively engaged in this rulemaking, and we are very optimistic
that the final rule will be one that improves the process and that all
sides support.
Trout Unlimited opposes H.R. 1013, which has been incorporated into
the discussion draft energy bill as Title III (I will refer to the
proposal throughout as H.R. 1013). H.R. 1013 would create more red tape
and delay and would severely reduce protections for rivers and
fisheries impacted by hydroelectric generation. We also have a deep
concern that H.R. 1013 would derail existing efforts to reform the
relicensing process and cut short the current trend towards
collaborative settlements of relicensing cases.
1) TU has used the existing process to work cooperatively with some
license applicants to improve dam operation for valuable
fisheries.
TU has been involved in some of the earliest and largest
settlements of relicensing cases. To name just two early examples, our
Idaho and Montana councils were at the center of a deal with what is
now Avista to relicense a series of dams on the Clark Fork River. In
the East, our Maine council played an active role in reaching a deal to
relicense dams then owned by Central Maine Power on the Rapid River,
one of the state's best brook trout fisheries. In these settlements,
along with others we have worked on in the last five years, the
applicant was able to work collaboratively with anglers, boaters, local
communities, state agencies, and federal resource agencies to obtain
their license promptly and cost effectively. The deals reached in those
cases preserved the profitability of the projects while at the same
time enhancing river health and the opportunities for river recreation.
The road has been bumpy at times, and not all collaborative
settlements have worked as well as others. However, everyone involved
in the process has learned a tremendous amount about how to make
collaborative relicensings work better, and are now implementing what
they have learned. This body of knowledge is improving ongoing
relicensings and influencing the current FERC rulemaking.
A common feature of successful settlements has been the willingness
of the applicant to sit down early in the process and receive input
from all interested parties, including volunteers and community
members. The willingness of the licensee to listen to the views of
these concerned citizens on preliminary issues, most notably the
studies that drive the relicensing process, ultimately paves the way
for a smoother relicensing and a faster settlement. These relicensings
can only settle if all participants understand, based on the studies
done during the process, the impact of a settlement on their particular
interest, be it fishing, recreation, or the ecological health of the
river.
TU has a particular concern about the need to facilitate the
participation of volunteer community members in the process. Most of
TU's participation in relicensings is driven by concerned volunteers
who devote extensive hours to what are for them very intimidating
proceedings.
Relicensings have generally gone badly--taken too long or gotten
stalled out entirely--when applicants have refused to listen to the
views of stakeholders and take them into consideration. People are
unwilling to settle when they do not trust the information produced by
the process or when the information simply does not give them a basis
to make a sound judgment.
2) Collaborative settlements are becoming more efficient, and are
becoming the preferred mode of hydropower relicensings.
The use of collaborative settlement is increasing, and is producing
positive results for applicants and for river health. In one of the
first significant collaborative processes, parties were able to reach a
settlement with Washington Water Power (now Avista) to resolve
licensing issues for a multiple dam project on the Clark Fork River in
Idaho. The settlement will allow the projects to function profitably
and will provide a host of benefits for watersheds affected by the
project. Most notably, over the life of the license more than $20
million will be spent to improve habitat in the basin for bull trout,
cutthroat trout, and other species.
Just last month, and at the other end of the spectrum in terms of
magnitude, Pacificorp announced a settlement in a relicensing of a
project on the American Fork River in Utah. The settlement, which
included TU, the National Park Service, and the U.S. Fish and Wildlife
Service, will allow the very small (one megawatt) American Fork project
to operate until 2006, at which time it will be decommissioned. The
agreement will restore river habitat on the American Fork for
Bonneville cutthroat trout, recreational opportunities in the American
Fork canyon, and opportunities for the public to enjoy the Timpanogos
Cave National Monument.
The collaborative licensing process is flourishing. Around the
country licensees are reaching settlements that allow them to continue
to function profitably and that bring significant benefits to the
rivers that drive their turbines. In some cases, these settlements are
reopening long closed-off spawning for habitat migratory fish such as
salmon and steelhead trout. Other examples of successful settlements
over the last several years include settlements with PGE on the Sandy
River in Oregon, with PacifiCorp on the White Salmon River in
Washington, with the City of Tacoma on the Cowlitz River in Washington,
with Florida Power and Light on the Upper Kennebec River in Maine, and
with New England Power and Gas on the upper Connecticut River in New
Hampshire.
Further evidence of the growing success of collaborative
settlements comes from California. California is currently faced with a
flood of relicensings. Over the next 15 years hydroelectric licenses
for approximately 150 dams will expire in that state. The California
relicensings are overwhelmingly being done as collaborative
settlements. Applicants are pursuing collaborative relicensings, with
the goal of settlement, on the Pit 3, 4, 5 Project (Project No. 233),
the Klamath Project (Project No. 2082), the Stanislaus-Spring Gap
Projects (Projects No. 2130, 2005, and 2067), and the Big Creek
Projects in the Upper San Joaquin Basin (extensive project numbers), to
name just four. Moreover, two California projects that were among the
most protracted relicensings on FERC's books recently reached
settlements through collaborative negotiations. Both the Rock Creek
Cresta project and the Mokelumne project recently used the
collaborative licensing process to break logjams that had made those
licenses more than ten years overdue.
3) FERC has proposed new rules to improve the relicensing process, and
H.R. 1013 would undermine that rulemaking and the trend towards
negotiated relicensings.
To further the momentum of these successful collaboratives, FERC is
currently engaged in a rulemaking to improve the relicensing process.
On February 20, FERC issued a draft rule that would create a new,
default relicensing process know as the ``Integrated Licensing
Process,'' or ILP. The ILP incorporates many of the practices that have
driven the most successful settlements, including early consultation
between FERC, the applicant, resource agencies, and other parties;
early, prefiling input from stakeholders and resource agencies on
studies; better integration of NEPA analysis, the licensing process,
and federal conditioning; and strict timetables. TU is particularly
pleased that the new rules would appear to facilitate the early
participation of citizen's groups in the relicensing process. While
comments on the rule are not due for a month, and we do not yet know
how various relicensing participants will react to all parts of the
proposed rule, the proposal has great promise to accelerate the current
momentum towards a more streamlined and collaborative process.
In this context legislation is simply not needed. The hydropower
relicensing process is being reformed by its primary participants, and
H.R. 1013 would impede the progress towards reform. Currently the
balance of interests struck by the Federal Power Act drive license
applicants, the conservation community, recreational interests, and
resource agencies to negotiate because of the risks to all parties
posed by the traditional relicensing process and the benefits of the
collaborative process. H.R. 1013 would profoundly disturb this balance,
and a would create a process so favorable to project owners, and so
unfavorable to the health of fisheries, that applicants would have far
less incentive to negotiate and to take the steps early in the
licensing process needed for meaningful settlement negotiations. H.R.
1013 as now drafted would produce relicensings that take longer, cost
more, and fail to protect our nation's rivers and their fisheries.
4) Specific Problems with H.R. 1013.
H.R. 1013 has three critical flaws. First, it creates additional
procedures that will make relicensings lengthier and more cumbersome.
Second, those additional procedures severely reduce the amount of
environmental protections currently afforded rivers under the Federal
Power Act. Third, the processes created by the bill are heavily
weighted in favor of applicants and would tend to cut the public out of
key parts of the conditioning process.
a. H.R. 1013 would create delay and unneeded red tape. H.R. 1013
would add three significant steps to the process of federal
conditioning under both section 4(e) and section 18 of the Federal
Power Act. First, any applicant who proposes an alternative condition
is entitled to a trial type hearing before the federal agency. This
type of hearing would potentially consume huge amounts of time and
resources. Second, the conditioning agency would be required to submit
to FERC a written statement explaining the basis for its decision and
demonstrating that the agency gave equal consideration to a variety of
factors, including energy supply, cost, navigation, and flood control.
This provision would create duplicative and wasteful effort, as FERC
already spends a great deal of time in each relicensing examining these
factors. Requiring the resource agencies to look at these factors also
sets them up for failure, as they simply do not have the expertise or
the resources to devote to these issues. Third, if the resource agency
fails to adopt the applicant's proposed conditions, FERC can refer the
matter to its Dispute Resolution Service, which must issue an advisory
opinion within 90 days. Again, this simply would add more time and
expense to the process, and is unnecessary in light of the strides that
are currently being made towards negotiated settlements of these
issues.
To make it clear, I do not mean to suggest that the section 4(e)
and section 18 conditioning process is not in need of improvement. For
example, TU would have no objection to requiring a better
administrative record and allowing all parties access to a streamlined
appeal process. The procedures outlined in H.R. 1013 simply go to far.
TU is particularly concerned about this aspect of the bill, because so
much of our participation in hydropower relicensings is handled by
volunteer members with limited time and, except in very rare cases, no
money. Effectively run collaborative negotiations provide a real
opportunity for input from volunteer citizens and the local community.
Trial type hearings, cumbersome appeals, and FERC-run dispute
resolutions tend to shut out these critical voices.
b. H.R. 1013 reduces the environmental protections provided by
sections 4(e) and 18. H.R. 1013 would substantially reduce the
environmental protections current law provides for rivers affected by
hydropower, and would result in a long term barrier to the health of
those rivers. Sport fisheries, recreational opportunities, and aquatic
health would all suffer.
Section 4(e) and section 18 currently function to set the basic,
minimum level of environmental protection that must be in place at
hydropower projects. Section 4(e) requires conditions that are
``necessary for the adequate protection and utilization'' of the
federal lands impacted by a project. Section 18 requires the
construction, maintenance, and operation of fishways required by the
Departments of Interior or Commerce. When it passed these provisions,
Congress made the correct judgment that federal lands, rivers, and
fisheries are public resources, and that federally licensed hydropower
dams should include a minimum level of mandatory protection for those
public resources.
The core licensing provisions of the Federal Power Act require the
balancing of power generation with other values. It is entirely
appropriate, however, that this balancing be buttressed by certain
basic levels of environmental protection. Ensuring that no dam degrade
the core purpose of federal lands and requiring that every dam include
some measure to allow fish to migrate should remain basic minimum
safeguards.
The issue of fish passage is one that is particularly important to
the more than 125,000 trout and salmon anglers that belong to TU.
Throughout the country countless fisheries have been impaired or even
extirpated because of hydroelectric dams with inadequate fish passage.
In New England, for example, power generating dams utterly destroyed
the region's runs of Atlantic salmon, shad, and sturgeon. Maine once
supported a robust commercial fishery for Atlantic salmon; now, even
sport fishing for the tiny remnant population of this fish is
forbidden. The single most significant cause of this decline are the
hundreds of dams that impede fish passage on the state's rivers.
Section 18 of the Federal Power Act is absolutely critical to restoring
depleted fisheries and preserving those migratory fisheries that
remain. The improvement of fish passage has created some of the most
exciting conservation successes we have seen in recent years. On the
Sandy River in Oregon, the Cowlitz and White Salmon rivers in
Washington, the Kennebec River in Maine, and others, improved fish
passage is making possible the restoration of entire watersheds and
their fisheries.
H.R. 1013 would alter the fundamental requirements of section 4(e)
and section 18. The current statute requires agencies to set conditions
that protect the core purposes of federal reservations and provide for
fish passage. H.R. 1013 would require those agencies to demonstrate
that they have given ``equal consideration'' to a host of other
factors. This language, included in the amendments to both sections
4(e) and 18, represents a straightforward roll back of the protections
of these important provisions. In addition, as discussed previously,
the procedural burdens imposed by H.R. 1013 would fundamentally alter
the balance of power in negotiations and the licensing process
generally.
The notion that cost, power generation, and these other factors
play no role in the current conditioning process is simply not true. In
the numerous licensings that are now being handled through multi-party
collaborative processes, the cost concerns of license applicants, as
well as the other concerns enumerated in H.R. 1013, shape the fishway
requirements and other conditions on the license that become part of
the settlement signed and supported by all the parties. This is the
best and most efficient way of dealing with these issues and balancing
the various demands place on the river. Dramatic legislative
intervention in the way this process is evolving risks placing a club
in the hands of license applicants, use of which may suddenly seem more
attractive than negotiating a settlement.
The committee should also be skeptical of the claim that fishway
requirements and section 4(e) prescriptions are dramatically reducing
available power by closing down otherwise profitable projects.
Certainly, good fish passage costs money, and can affect the operations
of a project. Although there have been cases where the need for fish
passage has contributed to making a project unprofitable, that has only
happened in cases where the projects have generated small amounts of
power and been economically marginal to begin with. The most celebrated
example of recent dam removal is an excellent illustration of this. The
Edwards dam in Maine was a small, uneconomical project that had blocked
passage upriver for more than 100 years. It was clear that fish passage
was needed at the dam, and it was equally clear that, for such an
economically questionable project it was cheaper to remove the dam than
put in fish passage and keep generating. All the parties reached a
negotiated settlement that opened up 18 miles of river to salmon, shad,
stripers, alewives, and sturgeon, effectively bringing a major stretch
of river back to life. Economical projects that generate meaningful
amounts of electricity are simply not being compromised by sections
4(e) and 18. The proposed changes to section 18 would dramatically
increase the chance that potentially major and economically valuable
fisheries would be sacrificed to keep small, marginal projects
operational.
c. H.R. 1013 would cut the public out of key parts of the licensing
process. All of the processes created by H.R. 1013 dramatically favor
the applicant, and tend to cut the public out of critical phases of the
relicensing process. H.R. 1013 would allow applicants to propose
alternative conditions, which in turn would trigger the series of
additional administrative processes discussed above. While other
parties are not prohibited from proposing alternative conditions, only
conditions proposed by the applicant are entitled to any procedural
protections. Under H.R. 1013 the federal agency would not even be
required to read conditions proposed by a citizens group or local
community. This fundamental disparity is exacerbated by the nature of
the various new procedures created by H.R. 1013. The statute does not
provide for the participation of other parties in any of the additional
procedures--the ``trial type'' hearing on the alternative conditions,
the written statement to FERC, or the participation of the FERC Dispute
Resolution Service. Even if public participation was a requirement, the
time, expense, and required expertise for these proceedings
(particularly given the demands of the existing process) would tend to
exclude nonprofessional citizens groups, local residents, and
communities. Even state agency professionals, given limited resources
available for the states, will almost certainly not be able to
participate.
5) Conclusion.
H.R. 1013 could not have been introduced at a more inopportune
time. Collaborative settlements are flourishing. FERC has just proposed
a significant new rule that will both streamline the relicensing
process and allow for more meaningful public participation. H.R. 1013
would derail these processes and produce more difficult, adversarial,
and burdensome relicensing processes.
Using rivers to generated power has had a negative impact on the
health of this nation's rivers for over one hundred years. Anglers,
boaters, and others around the country are denied countless
opportunities to recreate because of hydropower facilities. In light of
this historical and ongoing impact to public resources, sections 4(e)
and 18 of the Federal Power Act provide perfectly reasonable and wise
basic minimum protections for our nation's rivers. Congress should
reject any effort to water down these important provisions of the
Federal Power Act.
Mr. Barton. Thank you. The Chair would now recognize
himself for first question period of 5 minutes. Mr. Otter and
Mr. Issa will be recognized for 8 minutes when it is their turn
because they deferred their opening statements.
Mr. Robinson, how many Federal agencies could, if they want
to, under the current law, place a 4(e) mandatory condition on
a relicensing application before your agency?
Mr. Robinson. Well, at least the Forest Service for
forestlands, and the Department of Interior, in many instances
for Tribal reservations, and at times we also get other bureaus
of the Department of Interior doing mandatory conditions.
Mr. Barton. So at least four, and there could be more than
that.
Mr. Robinson. Yes.
Mr. Barton. And under current law, if an agency places a
mandatory restriction or condition--I shouldn't say
restriction, it doesn't necessarily have to be a restriction--
mandatory condition, FERC has no ability to request that that
be modified or reviewed.
Mr. Robinson. No.
Mr. Barton. You just have to accept it or reject it, is
that correct?
Mr. Robinson. Well, we have to accept it. We don't have a
mechanism to reject it. We can not issue the license, but for a
relicense that is not really a viable option.
Mr. Barton. Now, I note that your agency expressly declined
to tackle the issue of mandatory conditioning in this Notice of
Proposed Rulemaking that has been alluded to by some of our
witnesses, and that the staff, in its Section 603 report,
states that changes in regulations, policies and procedures
while expected to alleviate the situation, are no substitute
for legislative action--and I quote that--``no substitute for
legislative action.'' It would seem that your agency's position
seems to be pretty clear legislation is needed if we are to fix
the licensing and relicensing process, is that correct?
Mr. Robinson. As I said in my opening statement, I think
that there are two things that are going on right now that will
help to improve, one is the effort that we have in developing
the integrated licensing process, but that goes to
administrative relief. On the legislative relief, yes, I do
believe that the Title III is the only way to try to bring some
semblance of coherence to the licensing process where you have
mandatory conditions and fishway prescriptions being brought
into the license without any ability to review them at the
commission.
Mr. Barton. This subcommittee is aware of the complaints
that Section 4(e) conditions encompass geographic and species
issues that are beyond the actual Federal land area supporting
the condition. Among other problems such action places the 4(e)
agency in direct conflict with other Federal agencies or State
agencies having jurisdiction over project lands, including the
Federal Energy Regulatory Commission and State Clean Water Act
certifications. This is particularly troublesome when a small
or very small parcel of Federal land may be located within
hydroelectric project boundaries.
Would FERC favor an amendment to the proposed Barton
discussion draft that would require 4(e) conditions to be
proportional and restricted to the area of Federal land located
within a project boundary?
Mr. Robinson. Yes.
Mr. Barton. Long question, short answer. Now I want to
speak to you, Mr. Masonis. I don't want you to feel unloved
here, and we appreciate your testimony.
In your written testimony--and I think I am quoting this
correctly and, if I am not, correct me--you state, or your
group states, that fish passage in Federal lands protection are
minimum environmental requirements that every dam operator on a
public river must meet regardless of cost.
Now, I don't have a problem with the first part of your
statement, fish passage in Federal lands protection are minimum
environmental requirements, but I do have a little bit of a
problem, or a lot of a problem, which is ``regardless of
cost.'' Do you not think that there should be some
consideration of the cost?
Mr. Masonis. Mr. Chairman, I do think there should be some
consideration of the cost, and my experience working in
relicensings with respect to fish passage in particular has
been that the agencies are painfully aware of the cost of
alternative fish passage designs when they go through the
process of mandating those.
Our point in the testimony was to suggest that fish passage
is a fundamental element of a healthy river ecosystem since
these fish need to migrate. Even resident fish that do not go
out to sea, they often migrate in their life history. And there
is really no substitute for that. You can't substitute
something that is not fish passage for effective fish passage,
and that was the point we were trying to get across.
Mr. Barton. And, last, but certainly not least, Mr.
Szeptycki, where I come from TU is an Aggie term that we refer
to the University of Texas when we are trying to be derogatory.
I know your group is a very positive group, and when you said
you represent TU, my head kind of jerked up, so that's my
condition reflex.
Mr. Szeptycki. Well, as a graduate of the University of
Kansas, I apologize.
Mr. Barton. What we are trying to do in the proposed draft,
we are not trying to take groups like yours out of the loop. In
fact, I think you are a very positive influence in the
discussions. But under the current law, if a Federal agency
sets a mandatory condition, there is nothing that can be done
about it. I mean, it is just there. And what we are looking
for--and maybe the discussion draft is not the perfect way to
do it--but what we are looking for is some way to maintain
input, but put some sort of consideration of what we call cost-
benefit analysis into it so that there is some give-and-take.
And right now, unless it just happens--I think you are the one
that said there have been great discussions in a collegial
nature and the discussion draft disrupts that--there is no
process that guarantees give-and-take under the current law.
Does your group oppose the principle of changing the
current system so that there has to be some give-and-take while
maintaining your right to participate?
Mr. Szeptycki. I guess I have a couple of responses to that
question. One is that the give-and-take is occurring. Most of
these relicensings are being handled through collaborative
settlements, and there is a lot of back and forth about the
precise nature of the fish passage, the cost of different
alternatives, and the efficacy of different alternatives. And
even in relicensings that aren't being handled formally through
the collaborative process, there is a lot of back and forth
between the license applicants and the agencies setting out the
prescriptions. But I think that the thing that drives these
discussions--and, in particular, you started out, Mr. Chairman,
talking about the participation of Trout Unlimited--being
careful not to use the abbreviation--in these relicensings, and
you have got to understand, these people are not professional
fish conservationists. They know a lot about the river, they
know a lot about fish, but they are devoting their free time to
this. And if it is an adversarial, highly bureaucratic
government process, they really can't participate in it.
What happens in these collaboratives is the licensees sit
down with stakeholders, including the Trout Unlimited members,
and receive their input on how the whole licensing is going to
go, including the studies that they are going to do that are
ultimately going to drive the conditions on the license,
including the fishway prescriptions and the 4(e) conditions,
and one of the things that is motivating them to sit down and
talk is their need to have control over the process and the
balance struck under the Act, as currently drafted, including
those minimum environmental protections that are in Section
4(e) and Section 18. And what our concern is that those
prescriptions--if provisions weren't in there setting out those
basic conditions that have to be met, that licensees wouldn't
have the same motivation to sit down at the beginning in order
to start crafting a result that will work for everybody, and
sit down at the beginning and receive input from the whole
community, including our members.
Mr. Barton. Thank you. The Chair would recognize Mr. Allen
for 5 minutes.
Mr. Allen. Thank you, Mr. Chairman, and thank you all for
your testimony here today. Mr. Robinson, you have done this
integrated relicensing process, you have been through it. How
much does FERC estimate that its new rule will accelerate the
licensing process, and by how much do you estimate it will
reduce costs for applicants?
Mr. Robinson. Our objective with the ILP is to have the
licenses issued within the 2-year timeframe that extends from
the period that the application must be filed by statute, and
the expiration of the license. We are looking at about 17
months to get the ILP licenses issued so that we don't have
annual licenses being issued on these projects. That will
happen if everyone cooperates. We are hopeful that people will,
agencies will--State agencies in particular--but we will have
to see how that works out. That is the way it is designed.
Mr. Allen. What would you say is the current average?
Mr. Robinson. Currently, for the traditional licensing
process, our median processing time is about 47 months, 3\1/2\
years approximately, so it is a significant savings there.
We are a multi-shop place, you can pick your method. Our
alternative licensing process has a median timeframe of around
16 months from the application being filed. That is used on
approximately 30 percent of our relicense applications today.
Mr. Allen. And the reduction in cost that you estimate for
applicants, once you have done this integrated relicensing
process, there is a significant reduction of cost to the
applicant, is that right?
Mr. Robinson. That is correct, and I am afraid to try to do
that from memory, I will have to provide that number. But the
ILP is designed to have a significant savings to the
applicants, and everybody involved in the process for that
matter.
[The following was received for the record:]
Cost and Time Estimate for Licensing Process
Proposed Rule RM02-16-000 estimates the following time and costs to
prepare a license application:
------------------------------------------------------------------------
Time Cost
Project Size (hours) (dollars)
------------------------------------------------------------------------
Traditional Licensing Process (TLP)
Projects greater than 5-MW.................... 46,000 2,300,000
Projects smaller than 5-MW.................... 10,000 500,000
Integrated Licensing Process (ILP)
Projects Greater than 5-MW.................... 32,200 1,610,000
Projects Smaller than 5-MW.................... 7,000 350,000
------------------------------------------------------------------------
Expected reductions in time and cost for use of the ILP process are a
result of: (1) integrating application preparation with environmental
scoping; (2) early coordination among the Commission and federal and
state agencies and tribes; (3) firm schedules and deadlines for all
participants; (4) early development of a study plan and early
resolution of any study disagreements; and (5) increased involvement
of Commission staff throughout the licensing process.
Mr. Allen. Well, I want to commend you, first of all,
because that change, just by itself, that administrative change
clearly should make the process of relicensing, which has
suffered significant problems, move much more smoothly. And
clearly that is an important step.
Ms. Keil, in your testimony where you referred, I think, to
the last compromise that was hammered out last year--I am not
sure if you did, I think it was in there somewhere----
Ms. Keil. I am not sure I did, but you could ask me about
it anyway.
Mr. Allen. I can ask you about it anyway. Do you now oppose
enactment of Title IV of H.R. 4, as passed by the House during
the 107th Congress?
Ms. Keil. I think it is important, Congressman Allen, to
look at the evolution since the last Congress and the
improvements that have been made to that bill. From the
industry's perspective, the standard that has been inserted is
one that mirrors the statutorial language. If we look at the
one for 4(e), for instance, ``protect and utilize the
reservation'' is indeed the language of the statute. We believe
that mini-trial type hearings and other provisions are good
Sunshine, good government provisions, and what has been
referred to as the ``super status'' for the applicant is one
that we think is justifiable and important.
Applicants come to the table are licensees with the most
information of any party about the license that is before the
commission, and are really in the best position to propose
least cost alternatives.
I would like to point out that nothing here reduces the
amount of public participation that would occur earlier in the
process, and indeed that is vast, and we value the
participation of folks who come to our licensings. We actually
provide support to American Rivers and TU in our licensing so
that they can come to the table as equal participants, and we
would anticipate continuing to do that.
Mr. Allen. But they would have less leverage--under the
proposed legislation, they would have less leverage than they
have at the present time.
Ms. Keil. At that final step, I think that is right.
Earlier in the process, I would disagree.
Mr. Allen. Mr. Robinson, are you arguing that FERC should
be able to substitute its judgment for that of the resource
agencies? The chairman was asking you a question in which you
conceded there were at least four other agencies which could
impose mandatory conditions. And the question is does FERC--
what expertise does FERC have to judge the adequacy of license
conditions for fish passage and protection of Federal lands,
and isn't giving FERC the responsibility to make those
decisions as illogical as giving the Department of the Interior
authority to be the final arbiter of economic issues?
Mr. Robinson. Title III, of course, doesn't do that at all,
it keeps the authority with the Secretary. But if the idea was
to give the commission some review of those conditions, I would
just say this. It takes two aspects, two areas of expertise to
license a project. One involves folks--I am an aquatic
ecologist myself--people who are trained in those fields, who
spend their entire professional career dealing with hydropower
projects and how they affect natural resources. I have a staff
of probably 60 or so people that do that day in/day out. They
have the expertise and knowledge of how hydropower projects
affect fish, wildlife, and everything in between. On the other
side, what you need is the local knowledge, those folks who
deal day-to-day with those resources, maybe don't have the
expertise in hydropower impacts or hydropower mitigation or
protection measures, but do know the resource. That is why we
have to work cooperatively together to try to find solutions
for these projects, the types of mitigation measures that come
into play. So I think we do have that expertise, but so do the
agencies and so do others.
Mr. Barton. The Chair would recognize Mr. Radanovich for 5
minutes.
Mr. Radanovich. Thank you, Mr. Chairman. Mr. Robinson, I
again would like to go over the need for legislation at least
from my view of the perspective of sort of our experience on
relicensing and the court involvements and the court decisions
that lead to what I view as somewhat of a narrow view of the
regulations that govern relicensing without economic input.
The work that is being done on the collaborative remedies
within the department still belies, in my view, the need for
the legislation that corrects that. Can you give me a better
dynamic about how the courts and court judgments have kind of
skewed the process so a more balanced interpretation isn't the
result of it?
Mr. Robinson. For better or worse, I have been at the
commission long enough to see this progression of events that
go to how the commission can treat mandatory conditions and
prescriptions. When I first started at the commission, they
were inappropriately, I think, viewed as just recommendations
to be treated as you will. Over time, the courts have taken it
sort of to the other extreme where the commission is now in a
position where they have no potential to interact or discuss
the relative merits of a mandatory condition or a prescription,
and at times that puts us in a posture where we have to issue a
license where the record may not, in the commission's view,
support those conditions which we must, by the nature of the
statutes and the interpretation of the court, must include.
I would like to, if I could, just take one more second to
talk about the cost issue. It occurred to me after I finished
with Mr. Allen. There are actually two components to cost to
relicensing. One is the process itself, and the other is the
outcome, those measures that are required as the result of that
process.
One thing we did look at was to see what the costs are
associated with what are called protection, mitigation, and
enhancement measures for projects where you have 4(e) authority
and prescriptions and projects where 4(e) prescriptions were
not imposed because there are no reservations involved. Those
numbers, as I have in here, where there are no 4(e)
requirements is around $418 per kilowatt on average for
projects. For those projects that did have those conditions in
them, it was $590. I think it was 2.7 times more expensive to,
as a result of licensing where you had 4(e) in prescriptive
authority. There are projects currently before us right now
where I think we have some issues with the agencies about
whether or not very costly measures are in fact needed, but
will have no opportunity to make a modification of that or
change it. They will go in if they are prescribed or submitted
to the commission.
Mr. Radanovich. Thank you very much. Mr. Masonis, thank you
for being here, and I want to preface my question a little bit
because under the law FERC must take into account a wide range
of factors, including not only the environment of the
situation, but also energy economics, clean air, flood control,
drinking water, irrigation and transportation. And in a recent
article of Inside FERC, I think you were quoted as saying that
if there is any objection to the mandatory decisions, that they
can be challenged in court, when asked about FERC's recourse if
disputes over licensing conditions arise.
It seems to me at least--and, again, I think we all want to
kind of do what the law says, and that is seek a balance--and,
yet, it seems to me that a lot of your constituency or the
environmental community will find a sympathetic court to, at
least in my view, give an unbalanced decision, which seems to
be the history to me, which is why I feel the need for the
legislation. Is it something that we should just go to the
courts and do, and find out where we can get a sympathetic
judge and where we can't, and is that what we are up against
here, if we are really looking for balance, I think, on our
approach, which would lead to timely consideration it permits
as well.
Mr. Masonis. I appreciate the question. I think that there
are ways to find that balance in the process as it exists now.
There are clearly cases that do end up in court where issues
regarding mandatory conditions have not been resolved. I don't
want to suggest that is not the case, but what I do want to
suggest is that the process itself has plenty of opportunity
right now, and it is improving with the rulemaking that Mr.
Robinson has been discussing with members of the subcommittee
today, to identify those conditions that are necessary in order
to protect fish and wildlife and the environmental values of
rivers, taking fully into account the other issues that you
mentioned. Sometimes parties disagree about that, but that
dialog is taking place.
I think another part of my answer is that one of the
critical flaws that we see in this legislation is the fact that
groups like ours are not there at that critical final stage, as
drawn out in Mr. Allen's question. Last year I believe we had
legislation that included an opportunity for groups like
American Rivers and Trout Unlimited and Tribes and other
interested parties to also offer alternatives to a mandatory
condition and have a full airing on equal footing with the
utility. That is not the case under this current legislation.
Mr. Radanovich. Thank you. If I may ask other questions
later, if possible.
Mr. Barton. We will do a second round. Mr. Walden is
recognized for 5 minutes.
Mr. Walden. Thank you, Mr. Chairman. Ms. Keil, I welcome
you back before the Congress and appreciate your testimony, as
well as that of the other witnesses. Can you talk a little bit
about some of the relicensing that you have been engaged in,
and some of the dam removal efforts that Portland General
Electric has been involved in as well, and just the costs
associated there, what that means to the average ratepayer?
Ms. Keil. Sure. As I mentioned in my testimony, we have
five projects. One of them is going to be removed. That removal
is the result of a forecast by the utility of an unacceptable
license coming down the road, and will cost PGE's customers
upwards of $20 million by the time we are done with that
removal.
Mr. Walden. $20 million?
Ms. Keil. $20 million, not including the loss of 22
megawatts of hydropower from that project.
Mr. Walden. Will you have to go acquire that power in the
open market then?
Ms. Keil. Yes. PGE is a company that is short--that is to
say we already don't have enough native resources to serve our
load. And so we will be out buying that power in the market
from whatever resource we can get it from, which is a serious
disadvantage to PGE as a company and to its customers.
The other four projects are going forward in relicensing,
and those costs will range--probably the most expensive one of
those will be upwards of $30 million of process costs alone by
the time we are done. And for the smaller projects, my guess is
I will bring them in around $15 million worth of process costs.
That has nothing to do at all with protection mitigation and
enhancement measures that will follow on.
Mr. Walden. What is the total price tag with the process
cost and what you anticipate will be the cost put on the
projects?
Ms. Keil. A couple of the projects are a little too early
to guesstimate the eventual cost, but if I was to guess, the
one that we have farthest along is probably going to be $150
million worth of enhancements. The other ones will be somewhat
less because the projects are smaller, but I wouldn't doubt
that they will crest $50 million.
Mr. Walden. So you are looking at several hundred million
dollars then in project enhancements?
Ms. Keil. Yes. And that is just to maintain the production
we have, not to add anything to the system.
Mr. Walden. Will you be able to maintain the same level of
output, do you thin?
Ms. Keil. No. We will start to lose production, we are
going to lose flexibility. One of the projects we will lose
probably close to 20 percent of production as a result of
licensing.
Mr. Walden. Twenty percent of production.
Ms. Keil. About 20 percent.
Mr. Walden. And that is not the dam you are going to
remove.
Ms. Keil. That is not the one we are going to remove, that
is right. That is one we are keeping.
Mr. Walden. Do you think the language in the Barton bill
fully resolves the problems you face?
Ms. Keil. You know, Congressman Walden, I don't think you
could ever fully resolve this issue. There is a natural tension
here, and there will always be a natural tension here.
Mr. Walden. And there should be, frankly.
Ms. Keil. Yes, and there should be. I think it leads to
creative solutions on all parts when interests can come to the
table. I think this bill makes a significant step forward in
allowing more information to come to the table and to encourage
parties who currently have no interest in negotiating to come
to the table and try and reach a solution that solves not only
their problems, but also those of the utility's customers.
Mr. Walden. Mr. Masonis, I am just curious about your views
on the bill and your comment these requirements should take
place regardless of cost. Obviously, in the Northwest, as you
well know, the big debates of the Columbia and Snake system and
the passage along the Snake River dams especially. What is the
position of your organization relative to either breaching the
Snake River/Columbia River dams, which ones, if any, do you
think that is the solution to, and do you support removal of?
Mr. Masonis. Congressman Walden, we support--when the
Federal salmon plan was being issued in 2000, we were
supportive of removing the four lower Snake River dams, and
continue to be supportive for the reason that based upon our
assessment of the science regarding Snake River salmon
recovery, it is impossible to recover those stocks with those
dams in place.
Mr. Walden. And you don't believe there is a fish passage
or a trap-and-haul that would work?
Mr. Masonis. There is fish passage at each of the four
dams. The problem is that the cumulative mortality is so great
and we have actually spent, as a region, primarily as
ratepayers but also as taxpayers--the price tag most recently I
saw was somewhere around $3.5 billion. A lot of that cost has
been associated with----
Mr. Walden. Are there any Columbia River dams you think
should be removed, or your organization?
Mr. Masonis. No, Mr. Walden.
Mr. Walden. Just the Snake River. Okay, thank you.
Mr. Barton. The Chair thanks the gentleman. Mr. Otter is
recognized for 8 minutes.
Mr. Otter. Thank you, Mr. Chairman. I want to associate
myself with the remarks of those members before me who thanked
the panel for being here today.
Mr. Masonis, let me begin with you. In your testimony, you
mentioned a dam that had not been relicensed even though there
had been quite a few years in the process. How many years was
that?
Mr. Masonis. Since 1974 when the license expired.
Mr. Otter. And what dam was that?
Mr. Masonis. That's the Cushman Hydroelectric Project.
Mr. Otter. And what is the reason it hasn't been?
Mr. Masonis. There have been disputes regarding the natural
resource measures, among others, that should be included in the
new license issued for that project. That project is somewhat
unique in the sense that it was never properly licensed to
begin with. When it was originally built, it was built only
with, I believe, authorization for an occupation of Federal
land, but the project works were actually not authorized to be
built. And there is also a Tribe, the Cicomas Tribe, which has
Tribal lands adjacent to the project site, and there have been
a number of issues associated with the Tribe's interest as
well.
Mr. Otter. Would that be a candidate for being torn out
then?
Mr. Masonis. No, it is not.
Mr. Otter. Should it be?
Mr. Masonis. No. In the view of my organization and others
who have been participating with the conservation interests,
our primary goal is to get flows below that project that are
adequate to support the listed salmon species below the
project, as well as to maintain the river channel and have a
healthy river system.
Mr. Otter. I see. Mr. Robinson, do you agree with that
assessment?
Mr. Robinson. The commission actually issued a license for
that project for its continued operation. It was remanded by
the courts. I think that is still the position of the
commission, that it can be licensed.
Mr. Otter. So are we still in the courts then? We have been
in the courts since 1974?
Mr. Robinson. No sir, not since 1974. Uniquely, that
project had about, I think it was, 8 acres of National Park
Service land on it, and it took an Act of Congress to remove
those acres before we could go forward with licensing, and that
took a considerably long time to do that.
The issues now before the commission, that were reviewed by
the courts, went to flows below the project for migratory fish
purposes, and other environmental issues. And I believe the
status of that is that it is back in front of the commission
again.
Mr. Otter. I see.
Ms. Keil. Congressman Otter, if I might----
Mr. Otter. You certainly can.
Ms. Keil. I think what Mr. Robinson said about Cushman
points out how flawed the current system is for reaching
resolution of these things. If you send an intensely fact-based
dispute like this off to the Court of Appeals, the likely
result is it is going to come back to the commission with some
instruction to do it right. So you have the serious risk of
creating a do-loop, if you will, that just sort of goes around.
And I think one of the beauties of the legislation that is in
front of you is it has the potential to put those disputes--
more clearly focus them and to put them back into the licensing
process where they belong.
Mr. Otter. I thank you for that intervention, it is most
helpful. Mr. Robinson, if Title III was adopted in its present
form, what guarantee would we have, or is there any kind of
guarantee that we would have, that there would not be certain
interest groups that would be excluded from the process?
Mr. Robinson. Well, actually, I think that is kind of a
false path on this. The process will still be the same. The
licensing process will still be the same. All the participants
will have every opportunity. The only thing that Title III
would do would be where there was an alternative condition
proposed by the licensee, it would allow that agency, whichever
one it was, to review it, the Secretary to review it and come
back with an alternative.
Currently, there is nothing other than the FERC process to
allow people to be involved in development of those conditions,
and that would not change. So, I don't see how there is any
potential for excluding the public. It basically functions the
same way it does now with another review process factored in.
Mr. Otter. Well, under our present law, especially those
that we issued from the Federal level, your agency isn't the
only one that operates under those conditions. I mean, the
Federal Highway System, we have got $14 billion in highway
projects right now that are being held up, which would create,
I might add, 400,000 construction paying jobs. And in this
economy, Lord knows we could use it. But because of some
environmental consideration that hasn't been satisfied, or some
mitigation that hasn't been agreed to, in my State alone where
we still killed 32 people on one little stretch of highway, we
have got $58 million worth of projects being held up because
those agencies that have requested certain mitigation haven't
been satisfied. But we will continue to kill 32 people a year,
I suppose, and that is--I don't know if that is a mitigation
cost that those folks want to talk about. So why should your
agency be any different, or should we ask that all Federal
agencies that have certain oversights over other Federal
agencies, like FERC, like the Federal Highway System, like the
Forest Service, like BLM, should we ask that perhaps we have
this same consideration for every one of those agencies and not
just FERC?
Mr. Robinson. I am a firm believer that if you have
authority vested in an agency, that they have to have
accountability, and they should have a standard of review that
is imposed by a body like Congress in using that authority. I
think what Title III does is just exactly that for those two
issues, it will make those agencies more accountable and more
consistent in exercising the authority that they have been
granted by Congress.
Mr. Otter. I would certainly agree. Mr. Szeptycki, on the
Columbia/Snake River runs, we have right now I think there is
24 out of 28 steelhead or salmon species or subspecies that are
considered either threatened or endangered. We know that only
four of those species actually went over the lower four Snake
River dams.
If the four lower Snake River dams should be a candidate
for removal and those other 18 species are endangered or
threatened, shouldn't the dams on down the Columbia River then
also be candidates? Wouldn't they also be candidates?
Mr. Szeptycki. Let me preface my comments by saying that we
have got a whole group of people out in our Portland office who
are working very hard on the Columbia and Snake River issues,
and it is not my primary area of expertise. But I will say
this. The biology of each of those salmon runs is different,
and the fish passage challenges that they face, depending on
where they are going to spawn, are different. And the
downstream fish passage challenges when they are returning from
their native streams out to the ocean to grow, for each run of
salmon, depending on where they go, at what time of year they
come into the rivers, what time of year they leave the rivers,
are different.
And what I do know about those Snake River runs is that the
biologists have taken a good, long, hard look at those runs and
concluded that the only way to restore those particular runs--
and I should add they were extremely robust runs of salmon and
steelhead that used to make it all the way up into Idaho--the
only way to restore those runs is by removing those dams. And
as Mr. Masonis commented, there has just been a huge amount of
money spent on measures short of removing the dams that have
failed. And it is my understanding that with respect to the
other runs of fish that you are talking about, that that type
of conclusion has not been reached about the need to remove the
dams.
Mr. Otter. I understand. Thank you, Mr. Chairman.
Mr. Barton. Thank you. We will now start our second round,
and we will start with the gentleman from Maine, Mr. Allen, for
5 minutes.
Mr. Allen. Thank you again, Mr. Chairman. A couple of
questions, Mr. Robinson. The industry, in the past, has
testified that America is in danger of losing substantial----
Mr. Barton. Would the gentleman defer? We just--in the nick
of time, Mr. Markey has come. Could we let Mr. Markey do his
first round, then we will recognize you as the first member for
the second round.
Mr. Allen. Absolutely. Thank you.
Mr. Barton. If the gentleman is ready, we will recognize
Mr. Markey.
Mr. Markey. I am ready, and I thank the gentleman from
Maine very much for his forbearance.
Ms. Keil, hydropower is a pretty important, indeed vital,
part of your company's business, isn't it?
Ms. Keil. Yes, it is.
Mr. Markey. Now, Ms. Keil, Portland General Electric is a
wholly owned subsidiary of the now-bankrupt Enron Corporation,
is it not?
Ms. Keil. Yes, it is.
Mr. Markey. Now, isn't it true that the FERC staff has
found that Enron and Portland General Electric, amongst others,
manipulated electricity and natural gas prices in California
and the Pacific Northwest?
Ms. Keil. You sound like you are speaking from more
knowledge than I have. You know, I have not been involved in
the trading side of the company. They let me do my job and I
like the hydroelectric project, so I really couldn't comment on
what has been happening on the trading side.
Mr. Markey. Well, the answer is yes, but let me read a few
passages from an August 13, 2002 FERC press release about
Portland's involvement in Enron's manipulation. It says ``The
Federal Energy Regulatory Commission today launched following
investigations into instances of possible misconduct by Avista
Corporation and Avista Energy, Inc., El Paso Electric, and
three Enron corporate affiliates, Enron Power Marketing, Enron
Capital, and Trade Resources Corporation, and Portland General
Electric Company. The key finding is''--this is from the
Federal Energy Regulatory Commission. ``The key findings and
recommendation of the staff factfinding investigation are there
exists sufficient evidence to warrant formal investigations of
possible violations of the Federal Power Act by Portland
General Electric Company.''
Is it possible that some of Portland's hydroelectric
facilities might have been involved in these manipulations?
Ms. Keil. It is possible, but very unlikely. PGE's
hydroelectric projects are operated to the benefit of PGE's
customers in the Portland Metropolitan Area and in the
Willamette Valley. Most of the trading operation happens around
resources other than PGE's hydro projects, and the benefits of
those hydro projects were effectively walled off by the Oregon
Public Utility Commission at the time Enron acquired us. So,
from an accounting perspective and a benefit perspective, PGE
operates its own resources for the benefit of its customers and
to meet the environmental standards that they expect of us.
Mr. Markey. But since we can't tag electrons to their
source, we really can't readily determine whether Portland's
hydro and other generation facilities were utilized to carry
out the manipulations that Enron and Portland carried out,
isn't that correct?
Ms. Keil. All you can tell, Congressman Markey, is where
the money flows, and electrons flow where electrons are going
to flow, and I would tell you again that from an accounting
perspective, PGE's customers have been guaranteed the benefits
of those projects by actions of the Oregon Public Utility
Commission. And to be honest, the magnitude of our hydro
resources is small enough that I doubt that it was a key
portion of the trading philosophy that was going on at the
time.
Mr. Markey. Let me read to you a passage from the August
2002 FERC staff report, starting on page 78. ``Enron's
corporate culture which permeated all of its affiliated
companies including those affiliates such as Portland, which
are not currently in bankruptcy, fostered a callous disregard
for the American energy consumer and demonstrates the need for
more explicit prohibitions as well as aggressive market
monitoring and enforcement.'' Now, I agree with that, Ms. Keil.
Ms. Keil. I certainly wouldn't argue with the statement,
sir, because I don't have the facts to say so. But I think
everyone in this room who has worked with Portland General
Electric's hydro side of the company would tell you that they
have not seen a change in philosophy or culture as a result of
our ownership by Enron.
Mr. Markey. So the question for this committee and for the
Congress is why should Congress grant regulatory relief to an
Enron subsidiary that the FERC staff believes may have been
manipulating prices in the West and energy markets?
Ms. Keil. No disrespect, sir, but I fail to see the
connection. What we are looking for is a system that will allow
project benefits to flow to PGE's customers as they do now, and
to insert a reasonable consideration of cost in environmental
measures as we go forward. I really don't see the connection
between the two.
Mr. Markey. Well, there is. Thank you, Mr. Chairman.
Mr. Barton. Thank the gentleman from Massachusetts. Before
we recognize Mr. Allen, I would just make a comment. I think
the gentleman's questions were appropriate to the bill in
general because we have provisions on transparency and
increased civil and criminal penalty enforcement by the FERC,
and market manipulation. So those are all very relevant issues
that need to be addressed. There will be three panels tomorrow
in which any of those questions could be addressed.
This panel was supposed to talk about a more mundane topic
of just hydro relicensing.
Ms. Keil. And I am not coming back tomorrow. That was bad
enough.
Mr. Barton. If Mr. Markey wants you to come back, you may
get to come back. But, anyway, I think the questions were
appropriate, but maybe not directly on point to the purpose of
this hearing.
Recognize Mr. Allen for a second round of questions for 5
minutes.
Mr. Allen. Thank you, Mr. Chairman. Mr. Robinson, there has
been testimony that America is in danger of losing substantial
hydropower capacity and operational flexibility at a time when
it is most needed. Could you estimate how much power has been
lost through relicensing over the past 10 years?
Mr. Robinson. I don't think I can answer the 10-year
portion, but the last time we looked at it--which we looked at
relicensing I think back in 1993, so it was probably about a
10-year period--in terms of capacity, installed capacity,
relicensing actually resulted in a net positive, small but a
net positive for capacity. In terms of generation, there was a
small reduction in generation. I think the estimate was
something in the 3 to 4 percent range. What we did not try to
estimate because actually the complexity of it, looking across
the Nation, sort of boggled our minds, and so we just left it,
was operational flexibility. And what that meant in terms of
lost returns on the sale of electricity, it was too complicated
to even approach, so we did not.
Mr. Allen. Okay. In your experience, does construction of a
fishway significantly result in a significant loss, say, more
than 5 percent of electricity production?
Mr. Robinson. There is a component of attraction flows that
comes part and parcel with every fishway that is in place, but
we have not made an estimate. Five percent doesn't seem
unreasonable.
Mr. Allen. So, essentially what you are saying is that at
least so far relicensing has not made a measurable difference
in generating capacity? Operational flexibility is, you are
saying----
Mr. Robinson. Operational flexibility, it clearly, on a
case-by-case basis, has had extraordinary impacts on individual
projects in their operational flexibility. Taking plants from
peaking to run-of-river, which is a completely different kettle
of fish--excuse the pun--but in terms of generation capacity,
no real significant difference.
Mr. Allen. There was some earlier conversation about cost-
benefit analysis. As I understand it, FERC isn't required by
law to ensure the profitability of hydropower projects under
your jurisdiction, is that right?
Mr. Robinson. That is correct.
Mr. Allen. And are applicants required to submit economic
information from which you could determine that that particular
project is profitable or not?
Mr. Robinson. We don't do a profitability estimate. What we
do is a cost-to-generate-power, and what the alternative cost
of power would be, so that the commission has a perspective
when they issue this license, whether or not they are issuing a
license that would result in power that is more expensive or
less expensive than the alternatives that are out there.
Mr. Allen. Okay. Let me seek Trout Unlimited.
Mr. Szeptycki. I can go by that.
Mr. Allen. Are fish conservation measures equivalent to
fish passage, and if you could talk about the difference and
also answer the question whether FERC staff has the expertise
to review fishway conditions, in your opinion?
Mr. Szeptycki. Well, taking the first part of it, the
current Title III talks about--and let me just turn to the bill
to get the exact language right--talks about alternatives that
protect fish resources and doesn't specifically require that
the applicant come up with an alternative fishway. And this
lack of precision in the language is troubling because there
really is no substitute for both upstream and downstream fish
passage. If the fish can't get to where it normally spawns and
if it can't go from where it normally spawns to the ocean or
wherever else it goes, there is no substitute for that. And we
have spent huge amounts of money on both coasts trying to
restore fisheries with inadequate fish passage through
hatcheries, through things like trapping and trucking fish, and
they have uniformly performed very poorly. And there is just no
substitute for a decent fishway, and it is of considerable
concern to us that this imprecision in the language could lead
to proposed alternatives that involve just stocking more fish
or taking other measures short of actual fish passage because
there is no substitute for it.
And in terms of FERC's expertise, I think the people that
are in the best position to make a determination about fishway
prescriptions are the people that Congress put that decision in
charge of, and those are the resource agencies that are working
on restoring those fisheries runs. They are the ones who know
what the fisheries need. They are the ones who are familiar
with the technology and how they would apply to that specific
location, and they are really the people that should be making
that decision.
Ms. Keil. Congressman, if I might point out, the language
in the bill would allow the Secretary, in the situation that
Leon proposes, to reject the alternative if the Secretary truly
believes that a fish passage system is required for protection
of fish resources in that system.
I guess I would point out that we don't believe that a one-
size-fits-all approach to this is necessarily correct, and that
there may be situations in which alternatives other than fish
passage structures may be the best way to protect, enhance, and
mitigate for impacts on fish species.
Mr. Allen. Thank you all. Thank you, Mr. Chairman.
Mr. Radanovich [presiding]. Thank you. Ms. Keil, I want to
give you the opportunity to expand on the overall generation
loss issue, but first wanted to reiterate that this is a
hearing on hydro relicensing, it is not--which deals with many
corporations both public and private. It has nothing to do with
giving advantage to business, in my view, anyway, and I think
it is good to keep the topic on that. But when the question was
asked about overall generation loss due to the length or
problems with relicensing, it was mentioned that there was no
net loss. Would you comment on that? But, also, in addition to
that, I want to get your opinion--I mean, I have had in my
district one relicensing that took 18 years to do, and another
one that is 4 years old and nowhere near being resolved, which
dramatically increases the cost of relicensing, and I would
like to get you to comment about your experience on that, the
added cost to hydro regeneration as a result of the length of
the permit and the delays.
Ms. Keil. Sure. Let us tackle the generation loss question
first. I think the real question is more than counting up
kilowatt hours, it is counting up the loss of generational
flexibility and operational flexibility. PGE, for instance,
counts on its hydroelectric projects to be able to come up in
the morning when people get up and turn on their hair dryers
and their toasters and their television sets to watch C-SPAN
and see what you all are doing. And so hydro is a very
important factor in our ability to do that for people, and we
need to be able to do it instantaneously.
Many licenses are seeing a loss in that capability. As Mark
mentioned, converting projects from what are called peaking
resources to run-of-the-river may not result in a loss of
kilowatt hours over the length of production because you are
still dealing with the same amount of water, but it reduces
your ability to have that kilowatt hour available to you when
you need it, when your customers need it. And that peaking
resource has to be replaced somewhere, you simply can't run a
system without it.
On the cost side, I run the largest capital budget in PGE's
system, and I am not building anything. So the process costs
that I see year to year only mount up and only increase the
eventual cost of protection. So the more efficient and the more
effective we can make that process, the better off my customers
are going to be both from a cost perspective and from having us
have the ability to implement the improvements that they expect
us to implement.
Mr. Radanovich. Thank you very much. I don't have any other
questions. Mr. Otter.
Mr. Otter. Thank you. Mr. Robinson, especially during those
times of tough and high energy rates and everything that went
on a couple of years ago, there was as a result of the
California experience which they affectionately and wrongly
refer to as the results of deregulation--they weren't even
close to deregulation. I don't know how you would call setting
the retail price and turning the wholesale price as a free
market opportunity but, anyway, during that time, our bills
went up substantially. And I got letters from all kinds of
folks saying to me, ``What will you do about the power, the
cost of power,'' and obviously they are not as aware--and I
tried to explain that in my replay to my constituents--that
there is a lot of costs that go into the cost of a kilowatt of
electricity. And when you go flip on the switch, why, all of
those costs come through that wire and end up going through the
meter, and the result is in a month you are going to get a bill
for that.
And one of the things that I am astounded when I get a
second letter back, or e-mail, or whatever, is that very few
people, consumers, are aware of the fact that all these
mitigation costs on relicensing, many of which are set by the
U.S. Fish and Wildlife, who never have to answer to an
election, set by many groups, interest groups, some of them
sitting right here at this table, as a result of
``mitigation.'' What can we do along with this process of
educating the consumer so that when you hear these apple pie,
mother and environmental things that are going on and we are
not considering the cost of some of these things, we need to
start reflecting this in what is going to happen to every power
bill. And maybe 20 cents to some folks isn't a lot of money,
but to people that work in a processing plant in Idaho adding
value to potatoes and calling them Freedom Fries at the end of
the line, that means in many ways whether or not 27,000 Btus to
make a pound of french fries, that means whether or not we are
going to be competitive with Canada, we are going to be
competitive with Chile, or any other country that produces
french fries. What can we do through FERC? How can we help FERC
explain to these people that when they see these passionate
stories in the sports section or lifestyle section of their
local newspaper, if they read it--and I am not suggesting that
they should--but if they do, what can we do to convey to them
that every one of these things add up? Maybe this one was just
20 cents, and this one was just a nickel, and this was just
something else, but pretty soon, you know, that adds up to a
much higher power bill.
Mr. Robinson. Congressman, I can tell you what we do. Every
project that we license, we take all the mitigation measures
that are proposed either by the applicant, the 4(e) conditions,
the prescriptions, the 10(j) recommendations that come from the
State Fish and Wildlife Agencies, the 401 conditions from the
State--there are more conditions on these licenses than you can
shake a stick at--including the ones that we impose. But every
single condition that we know about we publish in our
environmental documents, and we make that available and make it
a part of what everybody should understand in the
decisionmaking process about which conditions should be
included in the license.
How do you get that information more generally
knowledgeable to the public? Maybe we should do more when we
have our public sessions to encourage people to come, to
listen, to understand what is actually at stake in the
relicensing of these projects, particularly in a State like
Idaho which is so clearly dependent upon hydropower generation.
Mr. Otter. Maybe I could make a suggestion here, and you
and I can talk more about this out of the confines of this
meeting room, but it would seem to me to be extremely helpful
if every customer of Idaho Power, or Portland Light--or
whatever it is, and I apologize for not remembering the Pacific
Power and Light--if every one of those customers, during that
mitigation process, that said to relicense this dam for 72
megawatts is going to cost you $482 million, or which $10
million of that is going to go for a bicycle path, of which
another $43 million is going to go for a fish passage, another
X-number of dollars--and this is what it is going to mean on an
annualized basis. You know, when we try to pass a bond issue
for a school building in my county or in my school district in
Idaho, we get from the County Commissioner, we get from the
public school sector, here is what is going to cost you on your
property taxes, here is exactly what it is going to cost you.
Now, you go down that line and you tell me which one of these
that you want to include.
Mr. Barton. The gentleman needs to give him a question and
let him have a chance to answer.
Mr. Otter. My question is that during the mitigation
process, why cannot we include making sure that when the power
bill goes up the month previous to the finalizing of the
mitigation, this is what it is going to cost, and you can
expect it because each one of these items--that bicycle path is
going to cost you so much, and right on down the line.
Mr. Robinson. That information is no doubt appropriate for
people to have. Our process and what we do currently is to
finish a larger figure out there of what the cost per year is
going to be on power production from that plant for that type
of mitigation. How you translate that to the individual
customer is something that I quite honestly haven't given any
thought to.
Mr. Barton. The gentleman's time is expired. The gentleman
from Arizona is recognized for 5 minutes. We welcome the
gentleman from Maryland. He wishes not to ask questions. If he
wished to, he would have been given the opportunity to.
Mr. Shadegg. Thank you, Mr. Chairman, and I apologize to
you and the members of the committee that I have not been able
to stay in the room. I have had constituent appointments that
have called me away, but let me ask some questions, if I might.
Ms. Keil, I want to start with you. I want to ask a couple
of two-part questions. The first two-part question: Do you
believe that we can increase America's supply of energy,
electrical energy, by adding turbines to existing dams where
they do not now exist, question one. And the second part of
that question, do you believe that can be done without negative
environmental impact?
Ms. Keil. Yes, and yes.
Mr. Shadegg. Would you like to extrapolate or expand a
little bit? If not, I will move right along.
Ms. Keil. No. There is clearly a great amount of untapped
capacity in the country, and for most of those areas, most of
the impact of the construction has already occurred. So you
could add power production with relatively little or no
additional impact.
Mr. Shadegg. Great. This one is the same kind of two-part
question. Do you believe we could also add to power production
in this country--something I think we all agree needs to be
done given the fact that we have an increasing appetite for
electricity and we have grave concerns about relying upon
foreign sources for energy in general--by replacing either
inefficient turbines or less efficient turbines in existing
dams with more efficient turbines? Question No. 1, can we do
that, can we produce more electricity in that fashion? Is there
opportunity there? And, second, can we also do that without
environmental damage?
Ms. Keil. Again, I would have to say yes and yes. On the
first half, it is clear that for older projects, and even
projects built in the 1950's and 1960's, you can gain a
tremendous amount of efficiency by replacing the turbine
components. I have seen increases as much as 10 percent more
kilowatt hours out of existing units by replacing some of the
components. Those upgrades in particular have no environmental
impact. All of the construction takes place inside of the power
house. It tends not to change the amount of water that goes
through the units or, in most cases, even the pattern of the
water flow that goes through the units. And, actually, if you
have got places where entrainment of fish into turbines is an
issue--that is, you have got fish going through the turbine
units--sometimes newer, more efficient units are actually more
fish-friendly than the other ones. So you can get a little bump
in fish protection at the same time that you are getting a bump
in efficiency.
Mr. Shadegg. Last question for you, would you then
recommend that this committee look at adding incentives to do
both of those things to any comprehensive energy package we
pass?
Ms. Keil. We would certainly be in favor of any incentives
that the committee would like to suggest.
Mr. Shadegg. I would like to ask Mr. Masonis and Mr.
Szeptycki, I consider myself, I guess, an environmentalist. I
am an outdoorsman. I love rivers, I love lakes, I like to boat.
I am a fisherman, although I am a lousy fisherman. My son is a
better fisherman. Given your legitimate concern, with which I
sympathize, and given the effort to try to--the demand for
electricity, given that you both I am sure believe that there
are some dams that ought to come down, some dams currently
producing electricity that ought to come down for environmental
reasons, are your organizations willing to look at improving
generation at other dams either by adding turbines where we are
already releasing water, we just aren't running it through a
turbine, or by replacing inefficient turbines with more
efficient turbines?
Mr. Masonis. I will take that question first. Congressman,
I appreciate the question, and the answer to the question is we
are certainly interested in looking at ways to improve
efficiency at existing hydroelectric projects and generation in
a way that does not result in significant environmental harm.
Mr. Shadegg. Do you agree with the point that in some
instances replacing an inefficient turbine with a more
efficient turbine can also result in a more fish-friendly
turbine?
Mr. Masonis. I think that is right, that there are both
environmental and economic generation benefits that can flow
from such a step.
Mr. Szeptycki. The only thing I would add to Mr. Masonis'
answer--I mean, I would agree with him 100 percent. I think
that if there is going to be a statute providing for
incentives, it would have to be completely clear that
additional generation not cause any additional environmental
impact, and there has been a concept that has been discussed
several times in this hearing about peaking generation.
I should add that I don't think the statute before the
committee, the bill before the committee today, is really going
to affect peaking generation. It is not typically the fishway
prescriptions that get rid of peaking flows, it is other
aspects of the hydroelectric relicensing process. But my only
concern would be if you put a turbine where there wasn't one,
and it was a run-of-river project, that the owner of that
project--the peaking power is so valuable that they would
become tempted to attempt to run it as a peaking project, and I
think that is something that would have considerable
environmental impacts that we would oppose.
Mr. Shadegg. My time has run out. I would be happy to take
a second round, if the chairman will give me one.
Mr. Barton. Let me recognize Mr. Wynn, and we will come
back to the gentleman from Arizona. The gentleman from Maryland
is recognized for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman. I apologize for not
being here. Unfortunately, conflicting meetings prevented me
from arriving earlier.
I do have one question, or actually a couple of questions
related to one topic, and that is pump storage. Mr. Robinson,
can you tell me what role does pump storage technique currently
play, and is there potential for growth in this area?
Mr. Robinson. There is a potential for growth, and what
pump storage does is it provides power at peak periods when the
loads are highest, by using electricity during off-peak periods
to pump water uphill, store it, and then run it back down
through the turbines during those periods when power is needed
most. So it takes cheap power and uses it to pump water up, and
it produces more valuable power during periods when it is
needed.
We had a flurry of interest in pump storage projects about
5 years ago but, unfortunately, the capital investment on a
pump storage project is extreme. It is very, very expensive to
build one of those kinds of projects. And we didn't see, after
the initial contacts, initial interest, a whole lot of follow
through on those projects.
Mr. Wynn. Is the basic research and development in place
now, or are we still at a point where we are looking at
research and development as an issue?
Mr. Robinson. No, not at all. I mean, you can always use
more research and improve products, and that is certainly true
in the hydropower industry, but it is very well understood. We
have had pump storage projects in operation for--I know there
was one that was under construction 30 years ago when I first
got involved with hydropower.
Mr. Wynn. What about the environmental impact, if this is a
better, if you will, from an environmental standpoint, approach
to hydroelectric energy?
Mr. Robinson. You have the initial investment of lands,
typically, the upper reservoir you have to do some flooding.
Lower reservoirs, in many instances, take advantage of existing
reservoirs or rivers. But after you have that initial
investment of land, you are basically pumping, in some
instances under closed systems, the same water up and down. And
for those that are in open systems--by that, I mean they are on
rivers or lakes or streams--you have all the mitigation
measures that are available for those kinds of projects, like
screens to protect fish from being impinged or coming into the
system.
Mr. Wynn. So you wouldn't define it as better or worse
relative to traditional hydro?
Mr. Robinson. I think hydro is so dependent upon the site
that you are developing, but in general I would think pump
storage has some environmental benefits, or can have some
environmental benefits.
Mr. Wynn. But is it your conclusion that it is just not
commercially viable at this point?
Mr. Robinson. Things change over the years. As the
economics change, as other fuel sources become more or less
expensive, hydropower development becomes more or less
attractive. Pump storage, because it is so capital-intensive up
front, has to have the right set of economics in place for
energy in general to move forward, and we will see how that
develops over the years.
Mr. Wynn. I don't have any further questions, Mr. Chairman.
Mr. Barton. Thank the gentleman from Maryland, and would
recognize the gentleman from Arizona for a second round of 5
minutes.
Mr. Shadegg. Thank you, Mr. Chairman. Let me follow up on
that point. We have some pump storage in Arizona on a series of
lakes, and it raises an issue for me. One of the concerns in
Arizona arises out of, for example, Lake Powell Glen Canyon
Dam. One of the issues there is we no longer use it for peak
power, or very limited amount of peak power.
My question, first for Ms. Keil, is, are you aware of any
location in America, or in the world for that matter, where
essentially a coffer dam has been built? You build an upper
dam. You build a dam close to it downstream. Albeit you are
devoting some land to environmental loss, you are changing the
nature of that. You release water out of it, you hold it at the
lower level, and then you have it available to pump right back
up for pump storage. You can then control the damage that
peaking power would do by only releasing the peaking power
water into a relatively short section of the river. If either
of you could answer that question.
Ms. Keil. Congressman, I am not aware--I am not a pump
storage person, we don't have any on our system, so that I
couldn't speak to. We do have a project that we use extensively
for peaking, that utilizes a thing called a re-regulation
reservoir, so that while the upper two parts of the project
peak, all of the fluctuation is buffered in the reservoir
behind the last dam in the system, and that allows us to hold
the flows in the lower river steady. It is actually quite an
effective system.
Mr. Robinson. One comes quickly to mind, and I am sure
there are others because the system you describe is obviously a
good concept for pump storage. The Smith Mountain Lake Project
where I live in Virginia takes advantage of a downstream
reservoir that is basically dedicated to holding that water and
putting it back up in the upper reservoir and eventually
releasing it along downstream.
Mr. Shadegg. Mr. Masonis, has American Rivers taken a
position in support of draining Lake Powell and decommissioning
Glen Canyon Dam?
Mr. Masonis. Not that I am aware of, Congressman. No is the
answer.
Mr. Shadegg. The answer is you have not. It seems to me we
ought to continue these talks. I mean, I think there are
legitimate concerns, there are very legitimate concerns about
Glen Canyon--about Grand Canyon and the effect that Glen Canyon
Dam has had on Grand Canyon. I think we could look at various
creative alternatives, and there are several environmental
groups in Arizona, including the Grand Canyon Trust, which has
been willing to look at alternatives so that the environmental
damage done by the dam can be mitigated without eliminating the
dam and the huge resource that exists.
Mr. Szeptycki, has your organization looked at the fact
that--taken a position on the draining of Lake Powell or
decommissioning of Glen Canyon Dam, question one, and question
two, is your organization aware that if you did that, one of
the world's greatest trout hatcheries and fisheries below the
dam, Lee's Ferry, would be wiped out?
Mr. Masonis. We have not take a position in favor of
removing that dam.
Mr. Shadegg. Is the concept of something like Ms. Keil
described or I described, that is, a series of a second dam,
something that either of your organizations have looked at, and
specifically in the context of saying, oaky, if there are dams
we want to eliminate currently producing energy, it is an
uphill fight to reduce the Nation's of energy, perhaps there
are places where we can get peaking power, which is extremely
valuable, or places where we can get generating capacity in
general without doing significant environmental damage by
buffering it through using a double-dam system.
Mr. Szeptycki. In terms of using multiple dams to buffer
peaking flows, I know that has been done in several instances,
and it is quite effective at restoring trout fisheries in
Tennessee and North Carolina below TVA dams where they have
installed buffering weirs that have dampened peaking power and
it has had a positive effect on those fisheries.
I am familiar with a few pump storage projects in New
England, and the one--I would agree with what Mr. Robinson
said, they are incredibly capital-intensive. These are projects
that have been around for a while, and they are not sort of
stand-alone projects, they are projects that exist in
conjunction with a series of other hydroelectric dams.
I know of one on the Connecticut River that is associated
with Holyoke Dam which generates electricity, and this pump
storage project is upstream of that, and it uses the reservoir
from the Holyoke Dam to take water upstream, and it doesn't do
anything about the fish passage concerns on the Holyoke Dam.
So, I think that there are some issues there that hold some
promise, but it is extremely expensive and very site-specific
and complicated.
Mr. Shadegg. Conceptually, it is something you are willing
to consider.
Mr. Szeptycki. Yes.
Mr. Masonis. Congressman, if I may, I wanted to respond to
the issue of peaking in particular. There has been some
discussion here today about the loss of flexibility in
operating, and the bottom line with power peaking operations
that result in drastic swings and flows is that they devastate
the river downstream. There is no way of getting around that.
And, frankly, a lot of the power peaking operations that occur
today under the terms of licenses that were issued 30, 50 years
ago, those license conditions were set at a time when we really
didn't quite have a handle on that particular issue.
We have worked on relicensings where there have been re-reg
dams, and clearly re-reg dams are a benefit. If you are going
to peak, you need some way to control that flow downstream to
protect the downstream resources. What is hugely problematic
going forward is to see the grandfathering essentially of old
license conditions that allow power peaking in new hydropower
licenses, without addressing the ecological impact of those
flows.
Mr. Shadegg. If I just understand the concept, when you say
a re-reg dam, a re-reg dam is a dam further downstream that
could deal with that.
Mr. Szeptycki. Correct.
Mr. Shadegg. And I guess I understand the concern about
grandfathering old rights. What I want to make sure is that we
have an opportunity for a dialog on, well, okay, but if the
Nation is now recognizing the environmental damage that is done
by peaking, we still need some peaking power, is the door open
to at least discuss a re-reg dam as a way of mitigating the
downstream impacts so that you could kind of have your cake and
eat it, too--that is, you mitigate the environmental damage of
peaking, which we all recognize, but at the same time you don't
eliminate the possibility for peak power.
Mr. Masonis. And we would certainly consider that on a
case-by-case basis, as my colleagues have pointed out, that
these are very fact-specific, and we are willing to do that.
Mr. Szeptycki. I have been involved in not FERC licensed
dams, but a couple of Corps of Engineers projects that involved
extreme peaking, and there were extensive discussions about how
to mitigate the effects of that. And the issue of weir or re-
reg dam came up, and those were quite valuable projects. In
each of those cases, the cost was just prohibitive, and there
was the very difficult issue of finding the land to do it, and
both of those--in the two cases I am familiar with where people
thought about that, it just wasn't feasible.
Mr. Shadegg. Thank you, Mr. Chairman, for your indulgence.
Mr. Barton. He has had his cake and eaten it, too, his time
and exceeded it, too. The Chair is going to recognize himself
for a few wrap-up questions.
Mr. Robinson, under the current Federal Power Act, FERC is
required to take into consideration a broad array of public
interest factors to produce a balanced and reasonable license.
It is my view that given the mandatory conditioning authority
that the agencies have, it is difficult to do that in a
balanced way. Do you agree or disagree with that?
Mr. Robinson. On individual projects, I would certainly
agree. I think about 12 percent of the time the commission has
recognized that conditions it received as mandatory or as
prescriptions were not conditions that the commission otherwise
would have included, given their responsibility under the
Federal Power Act to issue a balanced license.
Mr. Barton. And in your agency's view, if this section of
the draft were to become law, would it be more likely to get a
balanced review factor, or less likely?
Mr. Robinson. I think with the increased accountability and
the review standard that the law would impose, it would
significantly increase the likelihood of those conditions being
more consistent with the balancing that goes on at the
commission.
Mr. Barton. Now, Mr. Masonis and Mr. Szeptycki, I know you
all don't support the current draft, you have made that clear
and I understand that. Do you oppose any legislative change--we
had the proposal in the last Congress that made it to the
conference, so I would hope that you would support some
legislative change, you just happen to have problems with the
particular draft that is on the table, am I correct?
Mr. Masonis. From the perspective of American Rivers, that
is correct, Mr. Chairman.
Mr. Barton. So you are not opposed to any change, you just
don't like what we are proposing?
Mr. Masonis. We believe that the proposal in its current
state puts interests other than the utility at a distinct
disadvantage.
Mr. Szeptycki. We supported the compromise draft in the
last Congress, and I think we would be prepared to look at that
again.
Mr. Barton. Thank you. Well, I want to thank this panel,
you all have been very gracious with your time, and we have
been able today to let all the members who wished to
participate, participate fully, so we have had a good exchange
of views.
We will keep the record open. There may be members that
have written questions they want you to answer. We are going to
recess this hearing. We are going to reconvene it tomorrow at
9:30 a.m., where we will hear from three panels that deal with
electricity, gasoline and petroleum issues, and ethanol and MTB
issues. So we stand recessed until 9:30 tomorrow morning.
[Whereupon, at 4:40 p.m., the subcommittee recessed, to
reconvene at 9:30 a.m., Thursday, March 13, 2003.]
COMPREHENSIVE NATIONAL ENERGY POLICY
----------
THURSDAY, MARCH 13, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Burr, Whitfield,
Norwood, Shimkus, Wilson, Shadegg, Buyer, Radanovich, Walden,
Rogers, Issa, Otter, Boucher, Allen, Waxman, Hall, Pallone,
Strickland, Capps, Doyle, and Dingell (ex officio).
Also present: Representatives Blunt and Green.
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator;
Peter Kielty, legislative clerk; and Sue Sheridan, minority
counsel.
Mr. Barton. If everybody will find your seat. Today we want
to continue the hearing that we began last week and continued
yesterday. We have got three panels today, a total of 19
witnesses, so we are going to have a lot of information
presented to us.
Without objection, the subcommittee is going to proceed
pursuant to Committee Rule 4(e) which governs opening
statements by members and the opportunity to defer them for
extra questioning time. What that means is if a member wishes
to make an opening statement, they should be allowed to do so
under the rules, but if they wish to defer, they get an extra 3
minutes during their question time. So hearing no objection to
that, the Chair would recognize himself for an opening
statement.
We are going to finish our hearings on a comprehensive
energy policy today. We are focusing on electricity and
gasoline issues. It is my hope and anticipation that this
subcommittee will begin our markup next Wednesday. We are going
to send notice to the members probably tomorrow or Monday on
that issue.
The draft bill that has been released has an electricity
title. This comes at an important time for our economy, in this
sector of our economy. Today, needed investments in
transmission are not occurring, plans for new power plants are
being put on hold, not just because of a temporary glut in some
regions of generation capacity, but also, in my opinion,
because of a crisis of confidence in the utility sector.
Investors are uncertain about the future of electric industry
reform, wholesale purchasers of power continue to struggle with
a patchwork quilt of jurisdictions from State to State, region
to region and utility to utility. I am glad to have so many
witnesses here today to discuss electricity. I especially want
to bring the members' attention to the testimony from our
witness from Wall Street, because all consumers will benefit
when private capital begins to reenter this important part of
our economy.
The draft that has been released has many elements to
improve transmission capacity and its operation, also to
improve the operation of wholesale markets themselves. Open
access transmission provision in the draft bill, referred to as
FERC-lite, would take steps to harmonize the regulation of
interstate transmission. Repeal of the Public Utility Holding
Company Act, which we call PUHCA, would take steps to improve
the flow of capital into a sector that badly needs investment.
The reliability section would provide for mandatory reliability
standards developed and enforced by an electric reliability
organization under strong FERC oversight. The draft bill would
also seek to improve procedures for siting new electric
transmission lines. Just as in the last Congress, it would give
States a timeline for action on proposals to relieve interstate
congestion areas. The FERC would get the authority to act only
if the States do not take action.
More and more I have heard that there is an equal problem
in that the Federal agencies themselves sometimes refuse to
act. Therefore, in the draft bill we have a timeline for
Federal agency decisionmaking on critical lines or else a
willing State may exercise the right to approve a right-of-way
consistent with other Federal laws.
Turning to gasoline, we are working on language related to
the operation of the Reformulated Gasoline Program and other
matters regarding to the regulation of the fuels. In this
regard, I believe that the Clean Air Act current oxygen
requirement has clearly been a success at stretching fuel
supply and promoting cleaner air. Having said that, there have
been costs to replace the oxygen requirement with a renewable
fuel standard as to well as to make other changes in the Clean
Air Act. As many members know, I will only support making
changes in these areas that regard reformulated gasoline and
convention gasoline if I am assured that we are going to have
just as clean air in the future.
Witnesses on our third panel, and I want to say bless you,
because you are probably going to get on about three this
afternoon, are going to be asked to comment on the use of MTBE
and ethanol in the operation of the reformulated conventional
gasoline market. I am very interested in hearing their
testimony and views regarding what changes to our current
system of fuel regulation will provide a positive impact on the
availability, price and environmental performance of gasoline.
I want to welcome all the witnesses that are here today. I
think we have set a record. We have 19 witnesses. That is a
record for any hearing that I have chaired, and it may be a
record for the Congress. With that, I would recognize my
distinguished ranking member, Mr. Boucher, for a 5-minute
opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. The hearing
that we have today and the ones preceding it offer a valuable
opportunity for subcommittee members to hear from a range of
witnesses on the various topics addressed in energy policy
legislation and have also provided a useful forum for
evaluating the provisions of the draft legislation circulated
by the chairman.
Today's hearing will focus on two of the more contentious
issues: electricity and a renewable fuels standard. I will
focus my remarks this morning on the electricity title which is
a part of the draft legislation. The House Energy and Commerce
Committee has devoted 4 years to a so far elusive quest for
consensus on electricity reform measures. We have found no
broad agreement on proposals to amend the Public Utility
Holding Company Act or PURPA, to alter the merger review
authority of the FERC, to establish incentive pricing for new
transmission line construction, to vest the FERC with
transmission line siting authority or to legislate standards
for regional transmission organization, size, membership or
function.
While I appreciate the chairman's inclusion of provisions
relating to net metering, to time-of-use pricing and to
transmission reliability as a part of his electricity title, I
still have a number of concerns relating to the electricity
provisions. For example, I am troubled by the combination of
provisions to repeal the Public Utility Holding Company Act and
simultaneously to repeal the merger review authority of the
FERC. Repeal of the Holding Company Act would inevitably lead
to an avalanche of industry consolidations which would require,
I think, very careful scrutiny at the Federal regulatory level.
The Department of Justice currently views mergers through a
lens of antitrust protections but does not have the
capabilities possessed by the FERC to assess a proposed
merger's effects on electricity consumers. The FERC is our
expert agency about matters relating to electricity generation
and transmission, and I am persuaded that its expertise in
reviewing proposed mergers may be even more needed in the
future than at the present time.
I am also troubled by the provisions that relate to the
ability of qualified facilities under PURPA to sell excess
power into the grid after the electricity needs of their
industrial hosts have been met. The chairman's draft expands
upon the language approved in the Senate last year and sets a
number of ways in which utilities could be relieved of their
mandatory purchase obligations. The provisions included in the
chairman's draft set a very low bar for exemption from these
purchase requirements to the potential detriment of our
Nation's combined heat and power producers. Those provisions, I
think, deserve a close and critical analysis by the committee.
The provision that would give the FERC preemptive authority
over the siting of transmission lines is also of concern to me.
I have asked many witnesses before this subcommittee for
evidence that States are arbitrarily denying permission for the
construction of needed new transmission, and I have heard no
evidence that would justify removing the ultimate decision over
this new siting from the States to the Federal level.
The issues surrounding the electricity debate, including
those that I have mentioned, are complex and notwithstanding a
number of years of review, we have not been able to reach a
consensus on these contentious matters. We have, however, an
increasingly active and imaginative FERC which has taken steps
to make the wholesale market more reliable and has provoked,
shall I say, a spirited debate over the proposal for a standard
market design for the Nation's transmission grid. The pendency
of the SMD rulemaking obviously complicated even further the
process of seeking consensus on legislation relating to the
electricity market.
In view of the fact that the electricity debate bogged down
progress of a comprehensive energy bill in the last Congress,
the chairman may wish to consider moving the energy provisions
and the electricity provisions on separate tracks. That was the
chairman's choice during the last Congress, and I would not
that H.R. 4, which did not contain electricity provisions,
obtained broad bipartisan support in this committee with more
than 50 votes for passage and broad bipartisan support on the
floor of the House as well. I suggest that the chairman
consider following that same time-tested and wise path during
the course of this Congress. Pass this comprehensive energy
measure resembling H.R. 4 minus electricity, and then give the
committee the time required to assess what statutory changes to
Federal electricity rules are both needed and appropriate. And
if the chairman decides to pursue that course, I pledge to have
my close attention to the electricity provisions that he puts
before the committee.
Thank you, Mr. Chairman, and I look forward to the
testimony of our witnesses.
Mr. Barton. Thank my distinguished friend from Virginia.
The Chair is going to recognize out of order the distinguished
majority whip, Mr. Blunt, for a panel witness introduction.
Mr. Blunt. Mr. Chairman, I thank you for recognizing me and
for holding this hearing today. I also know that you will do a
great job introducing the panel later, but I want to take my
time to introduce to the subcommittee my good friend John
Twitty. John is the general manager of City Utilities in
Springfield. We have been friends for 20 years. He is here
today on behalf of the American Public Power Association, and I
am glad that this association has invited Mr. Twitty to come
and speak about energy policy. Through his management, City
Utilities in Springfield, Missouri has continued to provide
many of the residents of my district with inexpensive and
reliable power.
For more than 20 years, John has worked with Missouri
utility companies. In 1983, he began his career in Rolla,
Missouri with Rolla Municipal Utilities and came to City
Utilities in Springfield in 1991. October of last year he was
named the general manager and under his management and under
the management of his predecessor, Robert Roundtree, Cities
Utilities in Springfield has been a terrific example of how an
energy company can work with a local community to provide
reliable electricity, water and public transportation at a fair
price. John's service to Springfield extends beyond his daily
responsibilities at City Utilities to many community
activities.
I am certainly pleased he is here today, and while I may
not hear his remarks, I look forward to reading them as I read
the transcript of this hearing, which I assure you, largely
because John Twitty is here, I will do. Thank you, Mr.
Chairman.
Mr. Barton. We thank the whip for that distinguished
introduction. We look forward to the witness' testimony. And
you are welcome to stay and hear it if you wish.
Mr. Blunt. Mr. Chairman, I would actually enjoy staying
today, but for reasons you understand I can't.
Mr. Barton. I understand. We now want to recognize the
distinguished dean of the House, the ranking member of the full
committee, Mr. Dingell, for an opening statement.
Mr. Waxman. Mr. Chairman?
Mr. Barton. The gentleman from California?
Mr. Waxman. Mr. Dingell has been gracious enough to allow
me to go ahead of him as have others on the Democratic side,
and I want to thank them for that.
Mr. Barton. Does the gentleman wish to make an opening
statement?
Mr. Waxman. I do and I am going to have to go to the
Government Reform Committee. I will come back here.
Mr. Barton. The Gentleman is recognized for 3 minutes.
Mr. Waxman. On March 20, 2001, 2 years ago, we convened in
this room to examine the California energy crisis. Curt Hebert,
the President's first FERC chairman, told us that California
merely suffered from a supply and demand imbalance and that
environmental restrictions limited the full use of power
resources in the region. Chairman Hebert offered us a solution.
He said we should create financial incentives to ensure that
the transmission system is upgraded and that we needed a
regional transmission organization for the West. He told us
that buyers and sellers of electricity needed non-
discriminatory access to all transmission facilities in the
West. And early last year, the current FERC chairman, Pat Wood,
offered us a solution. He said we needed to encourage the
construction of new infrastructure, assure non-discriminatory
transmission access in the electric industry, and, yes, we
needed regional transmission organizations. We know now this
wasn't the problem.
California's markets didn't collapse because there weren't
incentives for transmission lines or because FERC didn't have
authority over public power and rural electric coops. Western
families did not get price gouged because there wasn't a west-
wide regional transmission organization. Instead the crisis was
caused by market manipulation. Abuse after abuse has come to
light in the electricity and natural gas industries. El Paso,
Dynegy, AEP, Enron, CMS Energy and Williams have all been
involved in scandals. Indeed, energy scandals have emerged from
coast to coast.
But this committee won't address the true causes. Instead
we are pursuing the same recommendations that Hebert made 2
years ago. It is as if we simply don't care what the facts are.
In fact, if we stick to the current schedule, we won't even
have a hearing on these abuses prior to marking up legislation.
The chairman noted with pride we have 19 witnesses, a record
number. That means we are churning through these hearings so
quickly that we will go right to legislation without looking at
why the industry collapsed, without trying to find out and
delving into the fundamental problems of the industry. In fact,
if we stick to the current schedule, we won't even have a
hearing on these abuses prior to marking up the legislation.
If we are serious about having energy markets at work, we
need to restore integrity to the oversight of this industry.
That is not an easy job. We need to dig in and hold hearings on
market abuses and find out what the real solutions are, not
simply recycle the ones that were proposed by people that never
understood the problem in the first place and allowed what
happened in California to go on and on and on. And I fear what
they proposed for California will be delivered to the rest of
the country as well--a dysfunctional market that hurts the
consuming public. Thank you, Mr. Chairman.
Mr. Barton. I thank the gentleman from California; and
recognize the gentleman from Kentucky, Mr. Whitfield. Does he
wish an opening statement?
Mr. Whitfield. Mr. Chairman, I am going to waive my opening
statement.
Mr. Barton. All right. The gentleman will have 3 additional
minutes. Mr. Norwood, does he wish an opening statement?
Mr. Norwood. Mr. Chairman, I waive and request the
additional 3 minutes.
Mr. Barton. Okay. Mr. Shimkus?
Mr. Shimkus. I will also defer, Mr. Chairman.
Mr. Barton. Okay. Mr. Buyer?
Mr. Shimkus. He said the same thing.
Mr. Barton. He is going to defer? We need to hear that from
him.
Mr. Buyer. I defer.
Mr. Barton. He defers. Mr. Walden?
Mr. Walden. Mr. Chairman, since I deferred last time and
stepped out of the room when I could ask questions and went to
the bottom of the list and never did get to, I am going to take
my 5 minutes this time.
Mr. Barton. All right. Three minutes, you are going to take
your 3 minutes.
Mr. Walden. I will talk fast. Thank you, Mr. Chairman, for
holding this hearing. Let me start off by thanking you for
including the bill I introduced last Congress to ban the
practice of round tripping trades, the Truth in Electricity
Trading Act. Yesterday I reintroduced this legislation for this
Congress, and I am grateful the chairman not only included it
in the House electricity offer to the Senate during last year's
energy conference on H.R. 4, but I am grateful that you have
included it in the draft proposal before us today. I think it
is an issue that has to be addressed, it is an issue that
contributed to the cost of power that was completely out of
control in the western market last year, a year ago.
Although it won't be a topic for today's hearing, I very
much want to thank you as well for including the hydro
relicensing provisions in this draft bill that will add some
balance to a process which has, quite frankly, become a
malaise. So, again, I thank you for adding those provisions.
I also look forward to working with the chairman on
renewable titles. The district I represent has benefited
greatly from continued development of renewable energy sources
like wind and geothermal, to mention just a couple. Sherman
County in my district, for example, has been able to double its
property tax base with the development of the Klondike Wind
Project. The wheat farmers there now I think are making more on
what they plant out there with blades than what they plant with
wheat. And the Oregon Institute of Technology, located in
Klamath Falls, also in my district, continues to be a leader in
the research and development of geothermal and renewable energy
technologies.
I must raise some concerns, though, that I have about
several provisions included in the electricity title of this
draft. Mr. Chairman, I have shared a letter that Congressman
Otter and I have co-signed with you and with Chairman Tauzin.
My first concern pertains to the possibility that under this
current draft the Bonneville Power Administration could be made
FERC jurisdictional. Many of the non-FERC jurisdictional
utilities in my district in Oregon, and the Northwest as a
whole, feel that giving FERC jurisdiction over BPA would upset
existing transmission rights and could possibly force BPA into
a standard market design. My colleagues and I in the Northwest
delegation have met with FERC Chairman Pat Wood on several
occasions and raised our concerns about SMD and the
ramifications its implementation would have on the Northwest.
This concern originates from our understanding that SMD was
based upon a traditional thermal system where hydropower is not
an integral component of a region's load needs. As you know,
Mr. Chairman, almost 60 percent of the Northwest power
generation comes from the hydro-based sources compared to 6
percent nationwide.
Another concern that is causing heartbreak back home is
language included in the draft proposal regarding the
participation of BPA in an RTO. Bonneville understanding its
role as the largest provider of transmission in the Northwest
is actively engaged in regional discussions on the formation of
an RTO. Those discussions are attempting to introduce a RTO
proposal that meets the needs of many different stakeholders in
the region and consider the hydro environment in the Northwest.
Mr. Chairman, in the absence of enough time, I am going to
submit the rest of this for the record, but those are the two
concerns I have with this bill that I hope we are able to
continue to work to resolve.
[The prepared statement of Hon. Greg Walden follows:]
Prepared Statement of Hon. Greg Walden, a Representative in Congress
from the State of Oregon
Thank you Mr. Chairman for holding this hearing today on the
electricity, ethanol and renewable energy provisions included in your
draft energy proposal.
Let me start off my remarks by thanking the chairman for including
a bill I introduced last Congress to ban the practice of ``Round-Trip''
trades called ``The Truth in Electricity Trading Act.'' Yesterday I
reintroduced this legislation for the 108th Congress and I'm grateful
that the chairman not only included it in the House electricity offer
to the Senate during last year's energy conference on H.R. 4., but I'm
grateful that he also included it in the draft proposal before us
today.
Although it won't be a topic for today's hearing, I'm also very
pleased that the Chairman included hydro relicensing provisions in his
draft that will add some balance to a process, which has quite frankly,
become a malaise. So, again, I thank the chairman for including these
helpful provisions in his draft.
I also look forward to working with the Chairman on a renewables
title. The district I represent has benefited from the continued
development of renewable energy sources like Wind and Geothermal.
Sherman County in my district, for instance, has been able to double
its property tax base with the development of the Klondike (?) project,
and the Oregon Institute of Technology, located in Klamath Falls and
also in my district, continues to be a leader in the research and
development of geothermal technologies.
As grateful as I am to the subcommittee and full committee chairmen
for including these provisions in the draft proposal that is before us
today, I must raise some concerns I have about several provisions
included in the electricity title of this draft. My first concern
pertains to the possibility that under this current draft the
Bonneville Power Administration (BPA) could be made FERC
jurisdictional. Many of the non-FERC jurisdictional utilities in my
district, Oregon and the Northwest as a whole feel that giving FERC
jurisdiction over BPA would upset existing transmission rights and
could possibly force BPA into a Standard Market Design (SMD) situation.
My colleagues and I in the Northwest delegation have met with FERC
Chairman Pat Wood on several occasions and raised our concerns about
SMD and the ramifications its implementation would have on the
Northwest. This concern originates from our understanding that SMD was
based upon a traditional thermal system where hydropower is not an
integral component of a region's load needs. As you know, Mr. Chairman,
almost 60% of the Northwest's power generation comes from hydro-based
sources compared to 6% nationwide.
Another concern that is producing a lot of heartburn back home
concerns the language included in the draft proposal regarding the
participation of BPA in a Regional Transmission Organization (RTO).
Bonneville, understanding its role as the largest provider of
transmission in the Northwest, is actively engaged in regional
discussions on the formation of a RTO. Those discussions are attempting
to produce an RTO proposal that meets the needs of the many different
stakeholders in the region and considers the unique hydro environment
of the Northwest.
It is my understanding that the language included in Section
7022(d) would preclude the implementation of the results achieved in
these negotiations. Moreover, the language brings into question whether
or not it would ``suspend'' BPA's statutory authority concerning its
current obligations and duties. There is some uncertainty as to whether
this language could, for example, allow a RTO to override BPA's
statutory obligations to recover endangered salmon under the Endangered
Species Act or preclude BPA from making its annual Treasury payment to
pay for the cost of the Federal Columbia River Power System. At this
stage, my inclination is to ask that this language be removed from the
bill, as there's too much uncertainty to what its implementation would
mean for the Pacific Northwest, particularly in light of the rate
increases the region has suffered through over the last two years.
With that said, Mr. Chairman, I want to work with your and the
chairman of the full committee to see if we can hash out language which
would achieve the goals your striving for in this legislation while
considering the unique hydropower environment of the Northwest.
Thank you, Mr. Chairman. I yield back the balance of my time.
Mr. Barton. I thank the gentleman, and we appreciate his
introduction yesterday of the bill that has many of the
provisions or some of the provisions that are in our draft
discussion bill. The Chair would recognize again the dean of
the House and the ranking member of he full committee, Mr.
Dingell, for a 5-minute opening statement.
Mr. Dingell. Mr. Chairman, as always, you are very
gracious, and I thank you for your courtesy this morning.
Today, we resume this committee's research for consensus on the
difficult issue of electricity legislation. Again, Mr.
Chairman, you have done the committee and the members a service
by putting forth a draft to focus the discussion, and I
appreciate your willingness to solicit the views from a variety
of witnesses. This will be very helpful.
Over the years, the search for the holy grail of an
electricity bill has taken a number of forms. Initially, the
goal was a Federal mandate to require the States to adopt
retail competition. That did not pass. The focus then became a
matter of clarifying the line between State and Federal
jurisdiction. That did not pass. Then came the efforts to
describe how the Commission should consider regional
transmission organizations, or RTOs. That idea met the same
fate. During the last Congress, members from both sides of the
aisle widely decided that in the absence of consensus,
including an electrical title would only jeopardize the rest of
the bill. The wisdom of that approach was again confirmed last
year when electricity proved to be one of the most difficult
issues in conference.
Nevertheless, we find ourselves on the brink of tackling
the issue in a markup, perhaps as early as next week. The
outlook for enacting sound electricity legislation is, I
believe, dim, and the pressure to act quickly is almost certain
to preclude thoughtful consideration of the issue. FERC has not
yet released the results of the staff investigation it ordered
13 months ago into the manipulation of electricity and natural
gas markets in California and other western States, which had a
calamitous effect upon those States, the economy and upon the
citizens thereof. I am hard pressed now to understand how the
members can decide and why they would want to decide what to do
without the benefit of this most basic information.
Turning to the particulars of the draft, Mr. Chairman, I
remain skeptical of the wisdom of repealing significant
consumer protections in current law. Last month, the Securities
Exchange Commission, the SEC revoked Enron's exemption under
the Public Utility Holding Company Act of 1935, PUHCA. Had the
SEC attended to this matter earlier, Enron would not have been
able to erect the complex OPEC corporate structure that it did
to the detriment of shareholders and consumers alike. While
there are arguments for modernizing PUHCA, I do not think that
it is responsible for the Congress to repeal the act outright
or to make changes in matters of the kind I have just
discussed.
Similarly, I am baffled by proposals to repeal FERC's
authority to oversee utility mergers. At last week's hearing,
the DOE witness testified that the administration supports
strengthening, not weakening, FERC's merger authority. Chairman
Wood of FERC expressed reservations about repealing the
Commission's merger authority. Chairman Massey flatly opposed
the idea.
I have other doubts about the electricity draft. I am
concerned that the provisions on incentive transmission rates
could unjustifiably enrich industry at the expense of
consumers. I am concerned that the siting provisions will strip
States of their legitimate authority over siting transmission
lines and transfer to them responsibilities for Federal land
management that they cannot properly administer. I am concerned
that market reform provisions, though a step in the right
direction, barely scratch the surface of what is needed. If we
are to treat electricity as commodity, we must ensure that we
have a properly regulated market as we do for other
commodities, many of which are less vital to consumers and to
the state of our economy.
Mr. Chairman, it might be possible for us to agree on an
electrical title that protects consumers and discourages market
manipulation. I would certainly be happy to support such. I
plan to introduce legislation which I sponsored in the last
Congress along with Mr. Markey, Waxman and Boucher, that
proposes a number of the reforms you might want to consider. If
you, however, continue to press for a controversial electricity
title, we may lose yet another opportunity to enact useful
energy legislation that could benefit consumers. I hope that
you will avoid this course and return to the bipartisan
approach that characterized the energy bill in the committee
report during the 107th Congress.
Finally, Mr. Chairman, as you know, any debate of the
comprehensive national energy policy will have to include a
discussion of ethanol and MTBE-related issues. Although the
final set of panelists will address those issues, I commend to
the majority working with us to select a balanced panel of
witnesses on this important issue. We have no draft or outline
of the majority's plans in this area. But before we act on this
important and complex area, there should be sufficient
opportunity for all interested parties to review language
relating to these matters.
Mr. Chairman, I hope that you will make progress on this
issue, but I hope also that you will urge members contemplating
such a major amendment to make careful consideration of a draft
which I hope you will make available to us as far in advance of
the markup as possible. Thank you, Mr. Chairman.
Mr. Barton. I thank the distinguished dean of the House for
that opening statement. Mr. Issa defers. Mr. Burr?
Mr. Burr. Mr. Chairman, I would like to take my 3 minutes,
not for the purposes of an opening statement, because I have
had the opportunity over a number of years where we have
discussed an energy plan and electricity. I think most people
on this committee know where I stand. I want to take this
opportunity, and I would ask my colleagues to pay special
attention to a witness we have from North Carolina today. I
think many times we judge people based upon the stock that they
come from, and we certainly have an individual with us today
that being the grandson of the great Sam Ervin comes from the
stock that we would all like to associate with.
But the fact is that Commissioner Jimmy Ervin is a native
of Morrington, North Carolina, and he has established his
identity on his own. He is a graduate of Davidson College where
he received an AB magna cum laude. In 1991, he was a graduate
of law school from Harvard School of Law. After practicing--
become practicing lawyer in North Carolina in 1981,
Commissioner Ervin entered private practice in Morrington, his
hometown. While in private practice from 1981 to 1999,
Commissioner Ervin represented clients in a variety of areas.
He left his practice of law to take an office as a member of
the commission in North Carolina on July 2, 1999. His term ends
in 2007.
My hope today, Mr. Chairman, is that we will have this
legislation finished by then. There are days that I have
questioned it, but I plead with my colleagues that the time for
debate in this institution is over. Let us move a product, let
us do it with the help and the aid and the support of people
like Commissioner Ervin across the country, and let us not
delay what we have already delayed for so long. I thank the
Chair for his indulgence, I thank my colleagues, and I welcome
the Honorable Jimmy Ervin.
Mr. Barton. It is my hope that you and I, and all members
of this subcommittee, will stand in the Rose Garden sometime
this year behind the President as he signs the bill and gives
each one of us a pen. We have Mr. Allen from Maine. Does he
wish to make an opening statement?
Mr. Allen. I will defer, Mr. Chairman.
Mr. Barton. He gets an additional 3 minutes in his
questions. Mr. Hall of Texas, does he wish to make an opening
statement?
Mr. Hall. Just a brief one, Mr. Chairman----
Mr. Barton. The gentleman is recognized 3 minutes.
Mr. Hall. [continuing] to recognize two of our former
colleagues, of course, Glenn English and with him, I think, is
Mr. Wynn, who does most of the real work. Glenn just sits up at
the table there.
And I wasn't going to ask about Sam Ervin, I was just going
to presume that he was his son or his grandson and enjoy it. We
have Henson Moore who was a great member here, and one that is
of interest to me represents the American Chemistry Council,
and that is very important to my State, your State and the
State of Mississippi, because we have gone through a lot of
legislation together.
I think it is great that you are having this meeting. We
have an unusual group here to testify. By my reckoning, we are
in about year 9 of work on electric restructuring in this
committee, and, as you know, most of us know that those folks
who are out here have been before us before and have testified
before this committee. I suspect if we examine the record, we
would find that many of you have shifted your position, some of
you substantially. To me that characterizes the difficulty of
this issue, and it is one of the main reasons it is so
difficult to get the Congress to find common ground and send
electricity to the President. But I am willing to continue to
search for ways to amend current law to bring it more into
conformance with the reality of the times today. Your testimony
here will be very good. And as for the other two, I have Bill
Douglass from the State of Texas that will be on the second
panel, I think, who is a major leader in our area and a man
that people listen to.
Mr. Chairman, you and those who have advised you have
selected well. You have great witnesses here, and their
testimony is going to be helpful, and I appreciate it. I yield
back my time.
Mr. Barton. We thank my good friend from Texas. Mr. Otter
of Idaho? Defers. Seeing no other members present, the Chair
will state that all members have unanimous consent to put their
written statements in the record.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Vito Fossella, a Representative in Congress
from the State of New York
Mr. Chairman, I am honored to be here as the Committee continues
examining various provisions of your proposed energy legislation. As I
mentioned at last week's hearing, few topics are as important as
defining and passing into law a comprehensive national energy policy.
Today's witnesses represent segments of the energy industry whose input
is crucial to obtaining such a goal. Testimony from members of the
electricity sector will provide valuable information on how to promote
growth, while supplying consumers with reliable electricity from a
market in which they can trust. Reliable energy is an issue of great
importance for my constituents. I am pleased to have the North American
Electric Reliability Council here to explain how provisions in this
bill will affect New York City's strict reliability standards. I am
also interested in hearing thoughts on FERC's proposed Standard Market
Design.
Furthermore, today's hearing will address a topic on the top of
everyone's mind: America's fuel supply. The Energy Information
Administration's This Week in Petroleum states the U.S. average price
for regular grade gas is over $1.70 per gallon, ``only a tenth of a
cent below the highest national . . . average price on record.'' The
publication's future outlook isn't much better, predicting ``strong
gasoline demand ahead of the normal seasonal increase, extensive
refinery maintenance, and still tight crude oil supply, may be pointing
to added price pressure in the months ahead.'' In such an environment,
changes to the national gas pool could cause even greater price hikes
that unnecessarily squeeze the wallets of American citizens. These
pressing circumstances call on us to reduce our reliance on foreign oil
while encouraging efficiency and alternate energy sources. Advancing
such initiatives should be our highest priority, rather than discussing
burdensome mandates Americans will be forced to pay for at the pump.
Some of the panelists in front of us will discuss a proposed renewable
fuels standard. I have many questions about the how this proposition
will affect refiners and consumers in New York.
Once again, thank you for holding this hearing Mr. Chairman. I
yield back the balance of my time.
______
Prepared Statement of Hon. Mike Rogers, a Representative in Congress
from the State of Michigan
Mr. Chairman, thank you for holding this important hearing as we
begin to move forward on how best to provide for our nation's energy
needs.
The goal of better, more efficient markets will not be achieved
without substantial new investment in the transmission grid.
Electricity providers in my home state of Michigan, working closely
with the Michigan Public Service Commission and the Federal Energy
Regulatory Commission (FERC), have led the way in seeking innovative
solutions for attracting new investment in transmission facilities.
I want to particularly call the subcommittee's attention to the
recent sale by DTE Energy of its transmission subsidiary, the
International Transmission Company (ITC), to a group of investors led
by the investment bank Kohlberg Kravis Roberts (KKR), for $610 million.
This transaction, which will provide immediate benefits to electricity
consumers in Michigan, is a model for how innovative regulatory
initiatives can spur new investment in the transmission grid.
Wall Street's verdict on the ITC sale was immediate. On February
26, 2003, the day the transaction closed, Standard & Poor's assigned
its A- rating to the senior secured bank loan of ITC that financed the
transaction. Investors increasingly see that, given the proper
regulatory structure, independent transmission companies are a
profitable, stable investment option.
Chairman Wood and the other FERC commissioners are to be
congratulated for putting in place the regulatory structure that made
the ITC sale possible. I wholeheartedly support the provisions in the
draft bill that encourage FERC policy in this area.
Mr. Chairman, thank you again for your continued leadership. I look
forward to working with you as we proceed.
______
Prepared Statement of Hon. Mike Doyle, a Representative in Congress
from the State of Pennsylvania
I want to thank you Chairman Barton for convening this hearing
today and I will keep my comments brief this morning.
As I've said before, I think it is vital that we move forward with
this effort to write a bill establishing a comprehensive national
energy policy. I also think that it is important that as a part of that
effort, we do strive to include provisions dealing with electricity and
those markets as they obviously play an integral role in our overall
energy picture.
I realize there are those that suggest it is premature to address
electricity while we are continuing the process of understanding all
the factors that contributed to the crisis we saw in recent years in
California and other western states and I respect that opinion. But at
the same time, I think its important to note that there are many
consumers throughout the nation that could benefit from our efforts on
electricity, and to me it seems a little unfair to hold back the
potential for progress because of the these ongoing investigations.
In fact, while I realize that California has filed and continues to
pursue claims of market manipulation against a large number of
companies, it is also true that not every company that was doing
business in California is subject to these charges. There are companies
that had long-term electricity contracts with California that, as I
understand it, actually did save the state and its residents money. so
I think its important that we not automatically lump all companies
involved with California together as the causes for their crisis are
considered.
Its also important to note that there are states and regions that
are benefiting from a deregulated environment with regard to
electricity. In my home state of Pennsylvania for instance, my
constituents have seen substantial reductions in rates, increased
competition, and more choices including green power. Based on my
experience with Pennsylvania, I think that moving toward establishing
RTO's and encouraging the FERC to work toward their ideas for
implementing Standard Market Design (SMD) has shown great promise and
can benefit customers and consumers everywhere.
So I am generally encouraged by the direction we are taking with
regard to electricity to date. At the same time, I do have some
questions and concerns with the draft bill; for instance with the
section regarding siting of transmission facilities. Some additional
clarification or work also seems needed on the process DOE would use to
designate 'congestion areas', in maintaining or increasing access to
the grid for all types of generation, and to insure market
transparency. I hope that we can address these and other areas of
concern in a manner that achieves some true bipartisan and regional
consensus.
Mr. Chairman, thank you for the time and I look forward to
continuing to work with you and other members of the Subcommittee on
these important issues.
Mr. Barton. We will now begin to hear testimony from our
first panel. Several of them have been introduce, but we will
go down and introduce each one of them in their own right.
We are going to start with Mr. David K. Owens, who is the
executive vice president, Edison Electric Institute. We will
then hear from Mrs. Jan Schori, who is the general manager and
CEO of the Sacramento Utility District who is testifying on
behalf of the Large Public Power Council. She is from
California. We have Mr. John Twitty, general manager of the
City Utilities of Springfield, Missouri. He is testifying on
behalf of the American Public Power Association, and he was
introduced by our distinguished whip, Mr. Blunt. We have Mr.
Glenn English, former distinguished member from Oklahoma, who
is the CEO of the National Rural Electric Cooperative
Association, and he has been before us numerous times, as Mr.
Hall pointed out. We have Mr. Ron Walter, who is the executive
vice president of Calpine Corporation. He is testifying on
behalf of the Electric Power Supply Association, or EPSA. Mr.
Walter is from San Jose, California. We have Mr. Henson Moore,
who is the president and CEO of the American Forest and Paper
Association. He is testifying on behalf of the Electricity
Consumers Resource Council and the American Chemistry Council.
As Mr. Hall pointed out, he is a former member from the great
State of Louisiana. Last but not least, we have the Honorable
Sam J. Ervin, the commissioner from the North Carolina Public
Utility Commission, and he has been formally introduced by Mr.
Burr of North Carolina.
Gentlemen and lady, welcome. Your testimony is in the
record. We are going to ask that you summarize it in 5 or 6
minutes, and we are going to start with Mr. Owens. Welcome to
the subcommittee.
STATEMENTS OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT,
BUSINESS OPERATIONS GROUP, EDISON ELECTRIC INSTITUTE; JAN
SCHORI, GENERAL MANAGER AND CEO, SACRAMENTO UTILITY DISTRICT,
ON BEHALF OF LARGE PUBLIC POWER COUNCIL; JOHN TWITTY, GENERAL
MANAGER, CITY UTILITIES OF SPRINGFIELD, MISSOURI, ON BEHALF OF
AMERICAN PUBLIC POWER ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL
RURAL ELECTRIC COOPERATIVE ASSOCIATION; RON WALTER, EXECUTIVE
VICE PRESIDENT, CALPINE CORPORATION, ON BEHALF OF ELECTRIC
POWER SUPPLY ASSOCIATION; W. HENSON MOORE, PRESIDENT AND CEO,
AMERICAN FOREST & PAPER ASSOCIATION, ON BEHALF OF ELECTRICITY
CONSUMERS RESOURCE COUNCIL AND AMERICAN CHEMISTRY COUNCIL; AND
SAM J. ERVIN, COMMISSIONER, NORTH CAROLINA PUBLIC UTILITY
COMMISSION
Mr. Owens. Thank you, Mr. Chairman. Good morning, Mr.
Chairman and members of the subcommittee. I am David K. Owens,
executive vice president of the Edison Electric Institute. We
certainly appreciate this opportunity to testify this morning.
As you know, the electricity industry is facing its worst
financial challenge in decades. As we have been painfully
reminded by recent events, electricity is not just another
commodity, it is an essential service. We are committed to
ensuring the integrity of electricity markets to consumers,
investors and the public. As you consider an energy bill
against this backdrop, EEI strongly believes that Congress
should focus on those electricity issues that only Federal
legislation can resolve. We believe electricity legislation
should provide the right incentives to increase needed
investment in our overall energy infrastructure. We believe it
must set a clear policy direction for the future but at the
same time be flexible enough to adjust to changes in our
industry.
Let me comment on provisions of the Barton draft
electricity title. My written testimony provides more detail
about the issues that I will raise this morning. There were
references about our transmission system, it certainly was not
built with the idea of creating a robustly competitive
wholesale market. Needed transmission investments are not being
made today. There is a need in fact to enhance our transmission
system in order to promote more competition. State transmission
siting processes will probably prove adequate for most new
transmission line construction, but regional electricity
markets require a siting process that has the ability to
consider regional and even national needs. We support the very
limited FERC backstop siting authority authorized in the draft.
We also support the goal of the Barton draft to reduce
delays in Federal permitting of transmission lines. We support
the interstate compac provision in the draft, but we have some
suggestions to improve the provisions for streamlining the
Federal permitting process for siting new transmission lines.
We also support the transmission pricing provisions to
encourage FERC to promote capital investment in needed
transmission infrastructure. FERC currently lacks jurisdiction
over government-owned and cooperatively owned transmission,
which constitute about 30 percent of the Nation's interstate
transmission system. Now this swiss cheese regulation of
interstate transmission is ultimately unsustainable as the
industry evolves. We believe the goal of protecting consumers
requires putting all utilities participating in interstate
wholesale electricity markets under FERC's full, just and
reasonable requirements. At a minimum, EEI member companies
strongly support inclusion of an effective FERC-lite provision,
such as the one in the Barton draft, in any electricity bill.
We support eliminating any legal uncertainty about whether
Federal utilities can participate in RTOs, although we are
concerned the draft may not meet this important goal. We also
support the reliability provisions with one minor modification
addressing the governance of regional entities. We support the
Barton draft PUHCA repeal provisions. PUHCA is a barrier to
capital investment, the creation of independent regional
transmission companies and the entry of additional players in
electricity markets.
While we appreciate the draft's recognition that PURPA is
not compatible with today's electricity markets, we believe
that a compelling case exists for repealing PURPA prospectively
on the date of enactment. We urge you to adopt this proposal as
a PURPA provision. We support eliminating duplicative review of
utility mergers and bringing the FERC regulatory process more
in line with the process used for other industries.
EEI's member companies support a growing role for
economically affordable, renewable energy resources and meeting
our Nation's energy needs. Utilities are engaged in a wide
array of renewable programs in the States. However, we believe
that States and consumers should determine whether and what
type of renewable resource makes sense. Now, because net
metering is a retail electric service issue, we are pleased
that the Barton draft does not preempt State net metering
decisions or programs. We do have a number of suggestions on
those provisions, however.
Finally, we wholeheartedly agree that the integrity of
wholesale electric markets must be restored and maintained. Our
biggest with the market integrity provisions in the Barton
draft is they do not effectively apply to our participants in
interstate wholesale electricity markets. California and other
parties have submitted a massive filing to FERC, according to
news stories, alleging that California's government-owned
utilities engage in Enron-type manipulative strategies that
hurt western consumers. All of these market participants, in my
opinion, should be subject to FERC authority to make their case
and to be judged just as EEI member companies are going to be
judged.
Mr. Chairman and members of the subcommittee, we strongly
support the movement toward electricity legislation. I would be
happy to answer any questions. Thank you.
[The prepared statement of David K. Owens follows:]
Prepared Statement of David K. Owens on Behalf of The Edison Electric
Institute
Mr. Chairman and Members of the Subcommittee: My name is David K.
Owens, and I am Executive Vice President of the Edison Electric
Institute (EEI). EEI is the association of U.S. shareholder-owned
electric utilities and industry affiliates and associates worldwide. We
are pleased to have the opportunity to testify today on the electricity
title of the February 28, 2003, energy bill discussion draft circulated
by Subcommittee Chairman Barton (``Barton draft'').
I plan to discuss EEI's priorities in an electricity bill and
comment on specific provisions in the Barton draft electricity title,
but first I would like to provide a brief overview of the current
financial crisis affecting our industry, which serves as a critical
backdrop against which you are considering legislation.
FINANCIAL CHALLENGES FACING THE ELECTRICITY INDUSTRY
The electricity industry is facing its worst financial crisis in
decades, as the aftermath of the Enron implosion, a boom and bust cycle
in generation in some areas and the economic slowdown have combined to
erode investor confidence. This has had a devastating impact on
utilities' access to capital on reasonable terms. As the most capital-
intensive industry in the country, the higher cost of capital makes it
more difficult to finance infrastructure projects to maintain reliable
electric service.
The shareholder-owned electric utility sector lost $78.3 billion in
market capitalization between December 2000 and December 2002, a 23.9
percent drop over two years. The EEI Index, a measure of the overall
stock performance of shareholder-owned electric utilities, was down by
14.7 percent in just 2002 alone. If the coverage is expanded to include
merchant generators, the drop in market capitalization is even steeper.
Throughout 2002, credit rating changes in the utility sector were
overwhelmingly negative, as downgrades outnumbered upgrades by a
whopping 182 to 15, according to Standard & Poor's. This 12:1 ratio of
downgrades-to-upgrades compares to a 3:1 ratio in 1999, 2000 and 2001.
Currently, 18 percent of all utilities are non-investment grade; as
recently as 2000, this percentage was only 5 percent.
In addition, it is estimated that the electricity industry must
refinance $100 billion in short and long-term loans during 2003.
Critical questions facing the industry are where and at what cost will
the industry find this capital.
Utility stocks used to be the safe haven for ``widows and
orphans,'' who relied on steady utility dividends to help meet their
income needs. Now, however, the capital markets view the electricity
sector as high risk. Consolidation in the banking industry and federal
barriers to investment in the electricity industry increase the
difficulty of finding willing investors who are able to provide the
needed capital infusions to the electricity industry.
The last year has also seen a ``return to basics'' movement in the
industry. Utilities and their customers have been painfully reminded by
the upheaval in electricity markets that electricity is not just
another commodity, but is instead an essential service for all
consumers. And, we have all recognized the importance of assuring the
integrity of electricity markets to investors, customers and the public
at large.
During the past several years, FERC has moved more aggressively to
advance regulatory policies to promote more liquid and transparent
wholesale electric markets. While there have been many criticisms of
FERC's original standard market design (SMD) proposal, FERC appears to
be responding by giving different regions greater flexibility to
establish more liquid markets which best serve regional needs.
EEI supports those aspects of FERC's market design proposals that
lead to liquid, transparent and fair regional markets, recognizing that
FERC must work much more closely with the states to accommodate
regional needs, state authority and other relevant concerns. We look
forward to FERC addressing these issues in the ``white paper'' that
FERC expects to release in April.
OVERVIEW OF ELECTRICITY LEGISLATION AND EEI'S PRIORITIES
According to the Department of Energy, competition in wholesale
electricity markets reduces consumers' electricity bills by nearly $13
billion annually. While experience with retail competition clearly has
been mixed, wholesale competition can benefit consumers. Congress
should focus its legislative efforts on promoting the benefits of
wholesale competition.
Congress can promote a more efficient competitive wholesale
electricity market by addressing those electricity issues that only
federal legislation can resolve in a way that provides the right
incentives to increase capital investment in the nation's energy
infrastructure and sets a clear direction for the future.
While Congress should establish the appropriate framework in which
electricity competition can evolve, past experiences demonstrate that
it should not try to legislate in response to the problem of the day.
Electricity markets have evolved rapidly since Congress began debating
electricity legislation in 1995 and the Federal Energy Regulatory
Commission (FERC) approved open-access transmission rules in 1996. Our
markets will continue to change dramatically in the foreseeable future.
Any legislation that is passed must be flexible enough to adjust to the
changes in business cycles, regulatory approaches and business
activities that will inevitably occur.
However, many in our industry are concerned that federal
electricity legislation could add to the industry's challenges in these
financially turbulent times if legislation decreases regulatory
flexibility or increases the uncertainty and costs of providing
affordable electric service to our consumers. To put it in engineering
terms, the margin for error in our industry is significantly reduced
right now.
Improving the Transmission Infrastructure
Healthy competitive wholesale markets depend on robust transmission
systems to move power to where it is needed. Unfortunately,
transmission growth has not kept pace with electricity demand. Our
current transmission infrastructure was never built for the purpose of
moving large quantities of power across long distances. It is not a
superhighway. It simply cannot perform this function in an efficient
manner.
According to the North American Electric Reliability Council
(NERC), the volume of actual transmission transactions has increased by
400 percent in the last four years. Increased congestion on
transmission lines not only increases costs to consumers when not all
transactions can be completed, but it also threatens the system's
reliability.
At the same time that congestion is increasing, investments in
transmission have actually been declining. Over the past 25 years,
investments in transmission have fallen at a rate of $103 million per
year compared to the investment needed just to maintain the current
level of transmission adequacy. Difficulties in siting new transmission
lines, on both private and public lands, and in raising capital are
significant obstacles that have contributed to this decline in
transmission investment.
In addition, most new transmission currently is being built to
serve local load and to connect new generation to the grid, instead of
the high-voltage wires needed to strengthen regional electricity
markets. The relative annual growth rates in lower voltage lines and
higher voltage lines have changed significantly since the early 1970s.
In the early 1970s, the annual growth rate in lower voltage line-miles
(69 kV and below) that support localized grid operations and
interconnections was 1.9 percent, while the annual growth rate for
high-voltage line-miles (115 kV and higher) was 3.2 percent. By the
latter half of the 1990s, this relationship had reversed: the higher
voltage line-miles were growing at only 0.3 percent, while lower
voltage line-miles were growing at 3.5 percent.
We were very disappointed that the electricity title being
negotiated as part of last year's energy bill appeared unlikely to
include any provisions designed to improve our transmission
infrastructure. Therefore, we are encouraged that the Barton draft
electricity title includes a number of provisions to enhance
transmission infrastructure. We strongly believe that these issues
should be addressed in any final electricity title approved by
Congress.
FERC Backstop Siting Authority--The Barton draft would grant FERC
backstop transmission siting authority for only those transmission
lines being proposed in DOE-designated ``interstate congestion areas''
if certain findings are made. These findings include that the proposed
transmission line is consistent with the public interest and that a
state lacks the authority to site the line or is unwilling to site the
line within a certain time period.
We believe that state siting processes will continue to be adequate
for the construction of most new transmission and that, with the
conditions imposed in the bill, this new FERC backstop authority will
be used only as a last resort in very limited instances. However, we
believe that the authority could be critically important in those
instances.
Wholesale electricity markets are becoming increasingly regional as
power flows across multiple states and as multi-state RTOs gain
operational control of utility transmission lines. Most state siting
laws do not recognize the role new entities such as RTOs will play in
transmission planning nor do they specifically allow for the
consideration of regional, not just state, benefits of new transmission
lines. If states consider only intrastate benefits and not regional
benefits, they may have little choice under state law but to reject the
proposed line, even if the benefits to the region are significant.
Regional electricity markets require a siting process that has the
ability to consider regional and even national needs. FERC has
jurisdiction over wholesale electricity markets, but it currently does
not have the authority over transmission siting to help ensure that
there is sufficient transmission capacity to support those markets. In
comparison, FERC has the authority to site interstate natural gas
pipelines. We believe the Commission should have at least limited
backstop siting authority.
We are concerned about a limitation in FERC's eminent domain
authority restricting use of transmission rights-of-way for parks or
trails without consent of the property owner involved. Transmission
rights-of-way are often likely candidates for multiple uses for trails,
parks, bike paths and other recreational uses. Indeed, the Washington
and Old Dominion bike trail in Northern Virginia runs partly along a
transmission corridor. The additional recreational uses in a
transmission right-of-way may well increase the public's acceptance of
the right-of-way. As long as public recreational uses are merely
incidental to transmission corridors, we see no reason why FERC's
eminent domain authority should not apply to such incidental uses as
well.
Federal Permitting of Transmission Lines--We appreciate the
recognition embodied in the Barton draft that the length and
complicated nature of the federal permitting process makes it difficult
to address transmission infrastructure issues adequately and in a
timely fashion. Indeed, we are finding that our member companies are
going to extraordinary lengths to avoid siting on federal land if at
all possible because of that process. This places a greater burden on
private lands and, in some cases, state lands to meet the nation's
needs for grid infrastructure enhancement. The byproduct is the
potential for more conflict with private landowners and an
underutilization of federal lands, even where those lands may be best
suited to help fulfill the nation's infrastructure needs.
Rights of Way Across Federal Land: The Barton draft would allow
states to assume permitting authority for rights-of-way across federal
lands subject to Title 5 of the Federal Land Policy and Management Act
(FLPMA) under certain conditions. It appears that the goal of this
provision is to reduce delays in the federal permitting of transmission
lines. We concur with the goal.
The provision, however, does not really address the core concerns
of our member companies: that is, the fragmented federal permitting
process for rights-of-way when multiple federal jurisdictions are
involved, working under their own deadlines and without any
coordination with the state process. It also does nothing to reduce or
eliminate multiple and duplicative environmental reviews and the
frequent refusal of federal agencies to engage until the state process
is done.
We are concerned that, depending on how the language is construed,
the provision could provide a powerful incentive for federal agencies
to deny right-of-way applications and that it may not shorten the time
or reduce the cost associated with getting a right-of-way special use
authorizations. Irrespective of the potential benefit of this
provision, we would encourage the Subcommittee to consider modifying
and adding to this language.
Interstate Compacts: The Barton draft would authorize states to
enter into interstate compacts to establish regional siting agencies.
We support this provision. The western governors and other regions are
working on the formation of multi-state entities to coordinate siting
decisions on interstate transmission lines. Because of the differences
between the states, these multi-state entities may only be able to
serve an advisory function unless authority can be delegated through
mechanisms such as interstate compacts.
Corridors Across Federal Lands: The Barton draft would require
certain Secretaries and the Council on Environmental Quality (CEQ) to
complete a study and report to Congress on transmission corridors. We
strongly support the designation and development of corridors for
transmission across federal lands under Section 503 of the Federal Land
Policy and Management Act. To date, few of these corridors have been
designated, despite substantial work by EEI member companies, the
Bureau of Land Management, and the U.S. Forest Service to identify the
potential for corridors.
A focused study could be helpful in encouraging the development of
appropriate corridors, but we have significant concerns with how the
provision is drafted. We also have a major concern that preparation of
such a study and report to Congress could very well divert resources
from the Administration's effort to move forward with corridor
designations and thereby slow a process that has already been delayed
by a decade.
Interagency Task Force and Memorandum of Understanding: The Barton
draft would require the establishment of an interagency task force
chaired by CEQ to develop a Memorandum of Understanding on federal
coordination of transmission permitting.
We believe that the establishment of an interagency task force to
develop such an MOU would be a positive step forward and would provide
a modest benefit. We also believe it would be useful for Congress to be
more specific and pro-active in addressing certain problems in the
federal permitting process for transmission lines. These problems,
while shared by other linear facilities, have a greater impact on
transmission facilities because they have been traditionally
certificated at the state level, hence there is no traditional lead
federal agency. Each federal agency with potential jurisdiction over a
project has its own set of rules, timelines for action, and processes
for permitting. There are other concerns: (1) a tendency to require
multiple and duplicative environmental reviews; (2) not only a failure
to coordinate with any state process, but a refusal to become involved
until the state process is completely finished; and (3) a lack of
harmonized permit terms from one agency to the next, and an increasing
tendency to shorten permit periods, making it difficult to build and
maintain a reliable national grid infrastructure or to attract the
necessary capital investment.
We encourage the Subcommittee to consider creating an opportunity
for an applicant to have the Department of Energy serve as a lead
agency for transmission and distribution facility permitting, including
special use authorizations for rights-of-way. Furthermore, giving that
lead agency clear responsibility to set deadlines, coordinate with
states and tribes, and prepare a consolidated environmental record of
review on which the other federal agencies must rely would
significantly improve the federal permitting process for transmission
without jeopardizing the ultimate authority of each federal agency to
make their permit decision.
Transmission Pricing--The Barton draft would direct FERC to
establish by rule incentive-based and performance-based rate treatments
to promote capital investment in the transmission infrastructure. While
FERC has existing authority to address transmission pricing issues,
this has not been a high priority of the Commission's. In addition,
while FERC's recent pricing initiatives include some positive
incentives, they also demonstrate a clear bias toward utility
divestiture of transmission assets, thereby penalizing vertically
integrated utilities that are turning operational control, but not
ownership, of their transmission lines over to regional transmission
organizations (RTOs). Congressional encouragement to FERC on
transmission pricing would be helpful.
Consistent Oversight of the Operation of the Transmission Grid
As we've already stated, transmission is the backbone that enables
competitive wholesale electricity markets to work efficiently for the
benefit of consumers. However, these benefits are threatened not only
by insufficient investment in transmission infrastructure, but also by
the lack of FERC jurisdiction over government-owned and cooperatively
owned transmission facilities, which constitute almost 30 percent of
the nation's interstate transmission system. In the Pacific Northwest,
the federal Bonneville Power Administration (BPA) alone owns and
controls nearly three-quarters of the region's high-voltage
transmission capacity. The entire state of Nebraska and most of
Tennessee are served by non-jurisdictional utilities, creating huge
geographical gaps in FERC's authority.
According to a December 2002 GAO report, ``Lessons Learned From
Electricity Restructuring,'' because of this lack of jurisdiction
FERC has not been able to prescribe the same standards of open
access to the transmission system. This situation, by limiting
the degree to which market participants can make electricity
transactions across these jurisdictions, will limit the ability
of restructuring efforts to achieve a truly national
competitive electricity system and, ultimately will reduce the
potential benefits expected from restructuring.
We believe that this bifurcated regulation of interstate
transmission lines is ultimately unsustainable as the industry's
structure continues to evolve. The nation's transmission grid is
physically integrated. Electrons do not recognize boundaries between
public and private transmission ownership.
In addition, the continued reliable operation of the grid is
threatened by the lack of mandatory, enforceable reliability rules for
all transmission system users.
FERC Open Access (``FERC Lite'')--The Barton draft would grant FERC
limited jurisdiction over the portion of the interstate transmission
grid owned and operated by non-jurisdictional utilities, such as
government-owned utilities and electric cooperatives. This authority
would enable FERC to require those utilities to provide
nondiscriminatory open access to their transmission facilities at rates
comparable to those they charge themselves and on terms and conditions
comparable to those shareholder-owned utilities are required to offer.
We believe sound public policy to protect consumers would mean
putting all utilities participating in interstate wholesale electricity
markets under FERC's full ``just and reasonable'' requirements. At a
minimum, EEI's member companies strongly support inclusion of an
effective ``FERC lite'' provision in any electricity bill.
The ability of government-owned utilities to finance transmission
facilities with tax-free ``private use'' financing no longer provides a
barrier or excuse for their failure to participate in RTOs or to offer
open access upon terms comparable to that required by FERC. Last year
the Treasury Department promulgated regulations that permit ``private
use''-financed transmission facilities to participate in FERC-approved
RTOs. As a result, the provisions of proposed Section 211A(f) are no
longer necessary.
Regional Transmission Organizations--We commend the Chairman for
not including mandatory RTO participation provisions in this draft.
EEI's member companies are moving aggressively to comply with FERC
Order Number 2000 on RTOs.
The Barton draft also would authorize the federal electric
utilities to participate in RTOs. We believe it is essential to
eliminate any legal uncertainty about whether federal utilities can
delegate authority over their transmission systems to a RTO. However,
we are concerned that this provision, as drafted, may not meet this
goal.
Reliability--Increasingly competitive wholesale electricity markets
and traditional voluntary reliability standards are no longer
compatible. We need a new reliability regime capable of developing
mandatory reliability rules that are enforceable on all users of the
transmission system. We support the reliability provisions in the
Barton draft with one minor modification addressing the governance for
regional entities with delegated enforcement authority.
Removing Federal Barriers to Wholesale Competition and Investment
Among the electricity issues that only Congress can address are
repeal of the Public Utility Holding Company Act (PUHCA) and reform of
the mandatory purchase obligation under the Public Utility Regulatory
Policies Act (PURPA). The structure and regulation of electricity
markets have changed dramatically since these federal statutes were
enacted, and they are in desperate need of reform. PUHCA was enacted in
1935 during the New Deal; PURPA represents the only part of the Carter
Administration's 1978 energy plan still in effect.
PUHCA Repeal--The Barton draft would repeal PUHCA twelve months
after enactment, while giving FERC and state utility commissions broad
access to books and records of a utility holding company and its
subsidiaries. Such access, together with state and federal jurisdiction
over utility activities, provides regulators the ability to protect
utilities and their consumers from improper cross-subsidization,
including the use of utility debt to finance non-utility activities.
We strongly support PUHCA repeal, which has been part of every
major electricity bill and has long been recommended by the Securities
and Exchange Commission and other federal agencies. PUHCA is a long-
standing barrier to capital investment in the utility industry, the
creation of independent regional transmission companies and the entry
of additional players in wholesale and retail electricity markets.
PURPA Reform--We commend the Chairman for including provisions in
the draft bill that recognize that PURPA is incompatible with
competitive wholesale electricity markets. PURPA requires electric
utilities to purchase power from certain legislatively-favored
generators at government-determined prices.
These prices were supposed to ensure that consumers would pay no
more for PURPA power than for other power. Unfortunately, due to a
confluence of factors not foreseen by the authors of PURPA, FERC or
state regulators, this has not been the result. Instead, long-term
PURPA contracts generally have proven to be at rates far above
competitive market prices of electricity.
Competition in electricity generation has been unleashed by the
enactment of the Energy Policy Act of 1992 and the issuance of FERC
open-access rules in 1996 (Orders No. 888 and 889). Consequently,
electricity generators and wholesale customers have access to each
other under the same terms and conditions applicable to the utility
owning the transmission wires. QFs favored by PURPA have the right to
request transmission service and to sell power to any wholesale
customer, just like any other generator. They do not need the special
privilege of being able to sell to a purchasing utility at the
utility's ``avoided cost'' rate.
While we appreciate the draft's recognition that PURPA is not
compatible with today's electricity markets, we believe that a
compelling case exists for repealing PURPA prospectively upon the date
of enactment, along the lines of legislation that has been authored by
Representative Stearns. We urge your consideration of this legislation
and inclusion of it into the electricity title as the PURPA provision.
Rather than repealing PURPA's power purchase mandate as of the date
of enactment, the Barton draft would continue the power purchase
mandate indefinitely, unless FERC makes a finding that one of three
statutory tests is met. The first test is derived directly from FERC's
proposed Standard Market Design (SMD) rulemaking. Memorializing in
legislation the specific market attributes proposed by FERC in the SMD
would codify a rigid view of what constitutes a workably competitive
electricity market. FERC, itself, subsequently has indicated that there
should be greater regional flexibility in structuring markets than this
first test envisions and has already approved an RTO with a real-time
but no day-ahead market.
Second, we agree that a utility participating in a FERC-approved
RTO should not be subject to PURPA's power purchase mandate; however,
it takes more than one utility to make an approved RTO. It is unfair to
hold a utility responsible for the decisions of others in its region
over which it has no control. In addition, in Michigan and elsewhere in
the country, utilities have divested their transmission. The new
transmission owner may be participating in an approved RTO, but the
utility remains subject to PURPA and can never meet this test. In these
circumstances, the use of this test actually punishes utilities for
doing something that FERC is encouraging as pro-competitive: the
divestiture of transmission to an independent third party.
Third, we agree that if FERC finds that a utility operates in a
competitive wholesale market, that utility should not be subject to
PURPA's mandatory purchase obligation. However, there is nothing to
constrain FERC's discretion with respect to making this finding, or
even how quickly FERC must act. Without any standards, FERC can hold
utilities ``hostage'' to PURPA for as long as it sees fit. Given the
enormous costs in above-market power prices that PURPA has imposed, and
continues to impose, on electricity consumers, there is no basis for
this indefinite continuation of PURPA.
PURPA's requirement that utilities purchase power from certain,
legislatively-favored generators at government-dictated prices has no
place in the competitive wholesale electricity market this Subcommittee
is seeking to foster. We urge its prospective repeal on the date of
enactment.
FERC Merger Authority--Utility mergers are among the most heavily
scrutinized of any industry, even though all of the monopoly functions
of a utility obviously remain thoroughly regulated after a merger.
A wide range of government regulators, including the Department of
Justice (DOJ) or the Federal Trade Commission (FTC), FERC, and, in most
cases, the interested state utility commissions must examine proposed
utility mergers. In addition, the Nuclear Regulatory Commission must
review mergers involving nuclear plants. State attorneys general and
consumer advocates also often participate in utility merger proceedings
at the state and federal levels. During their merger analysis, the FTC
and DOJ determine whether the merger will adversely affect competition.
In addition, state commissions examine the impact of the proposed
merger on utility rates. FERC duplicates these reviews.
In addition, the DOJ and FTC merger review processes are
streamlined and have deadlines the agencies must meet. While we
acknowledge that FERC has made progress in improving its merger review
process, other changes are needed, so that utility mergers do not drag
on for years. The redundant, duplicative review of utility mergers
should be eliminated to bring it into line with the merger review
process applied to most other industries.
Promoting Renewable Energy Resources
EEI's member companies support a growing role for economically
affordable renewable energy resources in meeting our energy needs. We
support extending and expanding the Section 45 production tax credit,
as well as increased funding for renewable energy research and
development. However, because of the significant regional differences
in availability, amount and types of renewable energy resources, we
believe it is important for the states to determine whether requiring a
certain percentage of electricity to be generated from renewable energy
resources makes sense for their consumers.
States already are encouraging the development of renewable energy
resources through a variety of programs that best fit their own
circumstances. More than 90 utilities in 30 states have implemented or
announced green pricing programs to support investment in renewable
energy technologies. Forty-three states support programs that offer
incentives, grants, loans or rebates to consumers using renewable
energy resources.
And, 13 states have adopted renewable portfolio standards. Electric
suppliers in nine states with competitive retail markets are offering
green power products to consumers.
Net Metering--Because net metering is a retail electric service
issue, we are pleased that the net metering program in the Barton draft
is a PURPA Section 111(d) requirement that the states consider such a
program, instead of a mandate that would preempt state decisions or
existing programs.
We do have a number of concerns with the provision. The net
metering provisions that would prohibit any standby, capacity or
interconnection charge create an uneconomic subsidy when such charges
are economically justified. In addition, the provisions that would
measure net metering ``in accordance with normal metering practices''
are confusing because net metering is not the norm at this time. The
better approach is to require simultaneous metering of energy sold to
and sold by an on-site generating facility.
In addition, the Barton proposal goes beyond encouraging renewable
energy resources when it endorses net metering for combined heat and
power facilities up to 500 kilowatts in size at commercial facilities.
As we have learned from PURPA, cogeneration in and of itself does not
always mean a facility that is more energy efficient or desirable.
Maintaining Market Integrity
The integrity of wholesale electric markets must be restored and
maintained. The public, our investors and our customers must have
confidence in our markets. That is why EEI supports FERC's efforts to
foster transparent, liquid regional wholesale electric markets. We
believe such markets will provide the basis for price transparency and
an effective platform for market monitoring and oversight.
Given current market concerns, the Barton draft's market
transparency provision would make sure that FERC develops appropriate
price and market information. Round trip trading, which we agree is
improper, would be prohibited by the draft.
Our biggest concern with both the market transparency and round-
trip trading provisions is that these provisions do not extend to all
participants in interstate wholesale electricity markets. The current
language, referring to ``any person, including any entity described in
Section 201(f),'' inadvertently excludes various non-jurisdictional
electricity sellers in interstate commerce that do not qualify as
``persons'' under the FPA. This problem can be fixed by extending FERC
authority to ``any person and (emphasis added) any entity described in
Section 201(f)'' of the Federal Power Act.
An even bigger problem occurs in the Barton draft provision
amending FERC's remedial authority under Section 206 of the Federal
Power Act, because the provision extending FERC's remedial authority to
government-owned utilities and electric cooperatives has so many
qualifications as to be virtually ineffective. The provision applies
only to a ``spot market sale of electric energy'' that is for 24 hours
or less, but not to longer term sales or to transactions involving
transmission, congestion or related services.
It also excludes all transactions by non-jurisdictional entities
that sell less that 4 million MWh of electricity per year. We urge that
the qualifications in these provisions be removed so that FERC has
remedial jurisdictional over all interstate wholesale electric
transactions.
No market participant in interstate wholesale electric markets
should be immune from FERC's investigative and remedial authority.
Recent news accounts make it clear that alleged improper activities in
electricity markets are not limited to jurisdictional utilities. The
state of California and other parties last week submitted a massive
filing to FERC that, according to news stories, alleges that California
municipal utilities engaged in a number of Enron-type manipulative
market strategies. These alleged market schemes include municipal
utilities engaging in ``Ricochet'' trades, involving selling power out
of state and then back into the state to avoid price caps, and ``Death
Star,'' in which companies created false congestion on the transmission
system and then were paid a premium to remedy the problem. We note that
the alleged ``Death Star'' activities were facilitated because the
California Independent System Operator does not operationally control
government-owned utilities' transmission systems.
We firmly believe that all participants in competitive interstate
wholesale markets, including government-owned utilities, should be
subject to the same rules and requirements and to FERC's full rate
refund authority. As California's electricity crisis painfully
demonstrated, retail consumers of shareholder-owned utilities
desperately need the consumer protections offered by FERC's ``just and
reasonable'' rate standard and refund authority applied to all
electricity suppliers.
CONCLUSION
As we have stated, only Congress can address a number of critically
important electricity issues. We hope our comments on the Barton draft
are useful to you and the other Subcommittee Members as you prepare to
mark up a comprehensive energy bill. We look forward to working with
you to produce the first comprehensive energy bill since the passage of
the Energy Policy Act of 1992.
Mr. Barton. Thank you, Mr. Owens. We would now like to hear
from Ms. Jan Schori.
STATEMENT OF JAN SCHORI
Ms. Schori. Thank you, Mr. Chairman, good morning. And good
morning to the members of the committee. My name is Jan Schori,
I am the general manager of the Sacramento Municipal Utility
District in California, and today I am testifying on behalf of
the Large Public Power Council, which, as the committee knows,
is an association of the 24 largest public power systems in the
United States. We collectively serve over 22 million customers,
we own about 33,000 miles of transmission lines and have
control over about 61,000 megawatts of generation. We are
located in virtually all States and territories and all regions
of the country.
I am going to defer to John Twitty, who is testifying on
behalf of APPA, for broader comments on the overall energy
title on behalf of Public Power. I wanted to make very brief
comments on two key sections of interest to the LPPC members in
the draft electricity title: The expansion of FERC jurisdiction
contemplated by the FERC-lite provision, as well as the uniform
refund authority provision.
First, on FERC-lite, I want to emphasize that the LPPC
members have always supported and continue to support open
access transmission. We have support Order 888 and the
comparability standard as it was defined in 888; meaning, that
we support--that we will make service available to others
comparable to what we are providing to ourselves and our own
customers. However, with respect to the language that is now in
the draft that the committee is considering, we would like the
opportunity to work with the committee to amend the language to
assure that we will be able to continue to meet our obligation
to serve our customers and meet all of our load obligations. We
oppose full FERC jurisdiction. There have been certain FERC
decisions as well as court decisions which potentially
broadened the original understanding that was reached in the
language of FERC-lite and which potentially changed the intent
of the compromise that was reached. So we look forward to
working with the committee to amend that language to restore
the original agreement and intent.
Second, on uniform refund authority, the LPPC members have
only just received a copy of the draft. We have not yet had an
opportunity to meet and discuss and take a formal position on
behalf of the LPPC. However, I will note that we appreciate
that the language has been significantly narrowed. It is now
addressing spot market sales only, and it also is making clear
that sales will be permissible if they are undertaken under the
market rules that are in effect at the time that sale is made.
And those are significant improvements over the original
language.
That concludes my comments for this morning. I will be
happy to answer any questions.
[The prepared statement of Jan Schori follows:]
Prepared Statement of Jan Schori on Behalf of The Large Public Power
Council
My name is Jan Schori and I am the General Manager of Sacramento
Municipal Power District, located in Sacramento, California. I am
testifying today on behalf of the Large Public Power Council (LPPC), an
association of 24 of the largest public power systems in the United
States. LPPC members directly or indirectly provide reliable,
affordably priced electricity to almost 22 million customers. Our
members own almost 33,000 miles of transmission and control over 61,500
MW of generation. LPPC members are located in states and territories
representing every region of the country, including several states
represented by members of this Subcommittee--such as Georgia, Florida,
Texas, California, New York, and Arizona.
LPPC has testified before the Subcommittee on numerous occasions
throughout the consideration of energy policy and electric
restructuring. Over the years, we have worked with members of the
Subcommittee and full Committee and their staff in a cooperative
fashion. We appreciate the opportunity to continue our involvement. We
also appreciate the continued support of the Chairman on private use.
In addition, on behalf of our members from the Tennessee Valley, I want
to thank the Chairman and the Subcommittee for your years of support
for the consensus process in that region--support we sincerely hope
will continue to be demonstrated by the inclusion of a TVA title in
this bill when introduced. Finally, thank you for this opportunity to
express the views of LPPC on your draft energy legislation. I will not
be commenting on all provisions of interest or concern to LPPC members
today but will, instead, focus on several issues of primary concern to
our members--FERC transmission jurisdiction, service obligation, and
``Uniform Refund Authority.'' I commend to you as well the list of
specific concerns that another witness on this panel, John Twitty,
outlines in his testimony.
PUBLIC POWER IS UNIQUE
Public power systems are owned by the communities we serve, not by
investors. We are not-for-profit entities, which makes us different.
Public power systems have been a part of the nation's electric system
since the late 1800s, with many created as a part of the city
government. Many LPPC member systems continue to provide numerous
services to their communities in addition to electricity, such as flood
control and natural gas, water and wastewater services.
Electricity is a vital component of our lives now and, as has been
recently demonstrated in my home state of California, a cornerstone of
the economy. There are dire consequences if electricity is not reliable
and affordable.
As the electric supply of the country has been ``deregulated,''
many providers of electricity have sold off their generation or
transmission assets or have severed their direct relationship with
electric customers. But public power systems still have an obligation
to serve the customers for which the systems are built. This service
obligation is generally imposed by state law or local ordinance,
sometimes by the statute creating the public entity. As a result, all
available resources go first to serving those customers. Power is sold
and surplus transmission made available only if it is surplus to those
needs.
Our rates reflect the fact that we are not-for-profit entities. Our
rates include only the costs of producing and delivering power to our
customers and, in some cases, payments to our governing boards or
municipal entities as a component of the local budget. Since public
power systems are locally controlled, decisions about policies such as
rates are made by people who are in touch with local concerns. The city
council sets policies for many LPPC members, while other public power
systems have a separately elected or appointed utility board that
governs their policies. Local control helps ensure that we respond to
community needs. In addition, since public power systems are community
based, our revenues stay close to home. This helps keep the local
economy strong.
THE NEED FOR MARKET REFORMS
As the Chairman noted last week, this Subcommittee has held over 30
hearings in the last five years on the issues of energy policy and
electric restructuring. LPPC has been involved in many of these
efforts.
This Subcommittee has undertaken tremendous efforts to become well
educated on the electricity industry and market. However, this industry
has undergone tremendous change and no substantive hearings have been
held by the Subcommittee or full Committee since December 2001. Once
robust investor-owned utilities are now in serious financial shape with
180 rating downgrades in the past year. Some significant players in the
market have filed for bankruptcy. There is an unstable market for all
participants and for consumers. The capitol market for utility
infrastructure has basically collapsed. Many LPPC members and our
customers have serious concerns about legislating major changes to
electric power markets at this time, concerns which are shared by our
cities and states. Any legislative action must be cautious and
carefully considered.
Standard & Poor's recently issued a credit analysis report on the
public power sector that noted that the credit rating stability of
public power ``is a testament to the sector's ability to withstand
periodic shocks as well as respond to new challenges.'' More than 80%
of the public power sector has an ``A'' rating or better at this time
and public power systems are functioning well in competitive wholesale
markets. A strength of public power systems is our focus on providing
the lowest-cost power to our customers.
EXPANSION OF FERC JURISDICTION
Our issue of primary concern today before this Subcommittee, one
that affects our willingness to continue to support legislative action
and our ability to exhibit the strength and resilience market watchers
see in our sector, is the issue of expanded FERC jurisdiction. LPPC and
its member companies support open access transmission. In 1999, LPPC
worked with the Chairman of this Subcommittee to guarantee open access
transmission service by non-jurisdictional entities. Public power
agreed that limited FERC jurisdiction could be extended to public power
systems and cooperatives in order to ensure that open access
transmission service would be provided to all market participants. That
is the provision that is known as ``FERC-lite.'' LPPC continues to
support this limited expansion of FERC transmission jurisdiction--for
the purpose of open access transmission. A recent Supreme Court
Decision and the subsequent issuance of FERC's proposed Standard Market
Design rule have raised concerns that the current language of the FERC-
lite provision could be read to allow expansion beyond its original
intent, possibly to impose full FERC jurisdiction over public power
systems and cooperatives.
LPPC looks forward to working with the Subcommittee to craft
language that would preserve the original intent of FERC-lite and
respect the compromise that was made three years ago. The modification
we seek to ``FERC-lite'' would make it clear that FERC may require
public power, coops, TVA and PMAs to provide open access transmission
services--that is, service to others that is comparable to the service
they provide themselves. This is completely consistent with FERC's
reciprocity requirements.
FERC itself is not seeking to expand its jurisdiction over public
power systems. FERC Chairman Pat Wood has not asked Congress to expand
federal authority over public power systems, preferring a ``voluntary
approach to entice such utilities into the marketplace.'' The
Administration and Commission have generally supported the concept of
open access transmission but have not sought additional jurisdiction
over the transmission assets of public power. We hope that the Chairman
and this Subcommittee recognize this issue and correctly return FERC-
lite to a limited extension of FERC jurisdiction to ensure open access
to the transmission system.
I know that LPPC is not alone in raising the issue of service
obligation. We hope that you will address this issue because, for us,
it is about protection our customers.
On the issue of ``Uniform Refund Authority,'' LPPC is reviewing
your new draft. LPPC has no official position on the language but we
appreciate the fact that you have narrowed the focus to the spot market
and limited the grant of authority to violations of market rules in
place at the time of the sale in question. Before legislating further,
it would be my advice that Congress should take a hard look at how FERC
is exercising its current refund authority prior to granting additional
authority.
Mr. Barton. We thank you, and it is always good to end on a
positive note, so we appreciate that. Now I would like to hear
from Mr. Twitty. You are recognized for 5 minutes.
STATEMENT OF JOHN TWITTY
Mr. Twitty. Thank you very much, sir. Good morning, Mr.
Chairman.
Mr. Barton. Microphone on. You actually have to push a
button there. Glenn English is a high tech guy, he can help you
with that.
Mr. English. I was fumbling.
Mr. Barton. Yes.
Mr. Twitty. He was most helpful, and we appreciate that.
Thank you, Mr. Chairman, members of the committee. Let me thank
Congressman Blunt even though he is not here for that nice
introduction earlier. I am here today on behalf of City
Utilities of Springfield, Missouri and the American Public
Power Association to talk about issues facing the electric
industry and your energy bill discussion draft. I have
submitted a comprehensive written statement for the hearing
record and would like to summarize that for you this morning.
APPA appreciates and supports the chairman's effort to
enact comprehensive energy legislation. We support a number of
the key provisions in the draft, including clean coal
technology, energy efficiency improvements, Price-Anderson
reauthorization, hydro licensing reform, the natural gas
pipeline in Alaska and low-income energy assistance. At the
same time, we have some serious concerns regarding the electric
restructuring provisions in Title VII. Much of our industry is
still reeling from the effects of the western crisis 2 years
ago, and much of what went wrong is still the subject of
ongoing investigation and analysis by Federal and State
agencies, including the FERC. We believe it makes sense for
Congress to have the final results of those investigations
before proceeding with any additional electric restructuring.
It may also help to achieve some consensus among Members of
Congress, regulators and stakeholders on how to proceed since,
as you know and has been mentioned several times, consensus has
thus far proven elusive.
In addition, Congress would have an opportunity to see how
the FERC may further refine or alter their plan for a standard
market design and have an opportunity to address that issue
sometime in the future. Finally, in his recent testimony, the
FERC chairman asked for only two new authorities: authority to
require market information or market transparency and an
increase in civil and criminal penalties for violations of the
Federal Power Act and the Natural Gas Act.
Mr. Chairman, our economy has had about all the
experimentation with electric restructuring it can stand right
now. However, if the committee and Congress are determined to
legislate in this area, we cannot support most of Title VII as
currently drafted. We do support the electric reliability
provisions but believe this to be more a matter of
infrastructure security than industry restructuring. We also
support reauthorization of the Renewable Energy Production
Incentive Program, which is addressed in Title VII but prefer
the version introduced this session as H.R. 671 by
Representatives Bono, Markey, Blunt and others.
While my crystal ball is no clearer than any of yours
regarding the results of the ongoing investigations and what
they might reveal, it seems to me that some elements of Title
VII are not helpful and other elements that could be helpful
have been omitted. For example, repeal of both the Public
Utility Holding Company Act and FERC's merger authority leaves
consumers vulnerable and invites market manipulation. PUHCA
repeal will not spur increased investments in new facilities,
it simply spurs investments in acquisitions of existing
facilities by existing companies.
Moreover, a recent report by APPA shows how partial repeal
of PUHCA in the Energy Policy Act of 1992 has led, in part, to
a number of failed diversifications that have harmed consumers,
electricity markets and investors. We believe that PUHCA, while
not aggressively enforced by the SEC, still provides some level
of consumer protection through passive features, such as the
contiguous integration requirement. Imagine how many utilities
Enron could have acquired and the impact on consumers and
investors if not for that requirement. Thus, if PUHCA is to be
repealed, it should be replaced with other consumer
protections, such as strengthening FERC's merger review
authority.
In addition, Title VII leaves out important elements, such
as direction to FERC on use and revocation of market-based
rates and language to ensure that load serving entities, such
as City Utilities, can continue to use its own transmission
lines or firm contractual rights to meet its legally required
service obligation. With its directed rulemaking for incentive
transmission rates, lack of adequate safeguards against market
manipulation and loss of Federal oversight on utility mergers
and acquisitions, we are concerned that Title VII, as drafted,
has the potential to raise the cost of providing electricity in
public power communities like Springfield. While not all
utilities are enjoying the same positive outlook, public power
systems are financially stable, able to raise capital and have
received very favorable ratings from Wall Street. Obviously, we
would not like to see changes in Federal law that could dim
that outlook.
There are issues that need to be addressed, though not
necessarily through legislation. One of these is the increasing
congestion on the transmission system. Clearly, new lines are
needed, but as the chairman has acknowledged in the draft's
bill, it is the difficulty in siting new lines that is the
problem. Furthermore, FERC already has the authority it needs
to address these issues. The bottom line, we believe, is that
there is no need for incentive rates to attract capital. This
congested situation is forcing some of us to pursue local
generation that is not necessarily the most efficient for our
region. City Utilities, for example, has experienced cuts in
firm transmission rights on lines that we own, even on off-peak
days and times. This has caused us to seek approvals to
construct a new 275 megawatt coal fired plant inside our
service territory in order to assure that we can meet our
obligations to serve customers without relying on the external
transmission system. Without those constraints, others in our
areas could have participated and benefited from this new
plant, but we are the folks who must provide services behind
the switch on the wall and must do whatever is necessary to
maintain service. That means we need physical resources and a
physical path or the lights go out.
Mr. Chairman, APPA and I stand ready to work with you on
comprehensive energy legislation, and I thank you for the
opportunity this morning.
[The prepared statement of John Twitty follows:]
Prepared Statement of John Twitty, General Manager, City Utilities,
Springfield, Missouri, on Behalf of the American Public Power
Association
Thank you Chairman Barton, Ranking Member Boucher, and Members of
the Subcommittee for this opportunity to testify. I am pleased to
appear today on behalf of the American Public Power Association (APPA)
to discuss Chairman Barton's draft energy bill.
My name is John Twitty, and I am the General Manager of City
Utilities of Springfield, Missouri, a municipal electric, gas, water
and transit utility established in 1945, and serving approximately
100,000 customers. I am also a member of APPA's Board of Directors and
Executive Committee. APPA represents the interests of more than 2,000
publicly owned electric utility systems across the country serving
approximately 40 million customers. APPA member utilities include state
public power agencies and municipal electric utilities that provide
electricity and other services to some of the nation's largest cities.
However, the vast majority of these publicly owned electric utilities
serve small and medium-sized communities in 49 states, all but Hawaii.
In fact, 75 percent of our members are located in cities with
populations of 10,000 people or less.
The first and only purpose of public power systems is to provide
reliable, efficient service to their customers at the lowest possible
cost. Like hospitals, public schools, police and fire departments, and
publicly owned water and waste water utilities, public power systems
are locally created governmental institutions that address a basic
community need: they operate on a not-for-profit basis to reliably
provide an essential public service at a reasonable price. Publicly
owned utilities also have a legal obligation to serve the electricity
needs of their customers and they have maintained that obligation, even
in states that have introduced retail competition. Furthermore, because
they are governed democratically through their state and local
government structures, public power systems operate in the sunshine,
subject to open meeting laws, public record laws and conflict of
interest rules. Most, especially the smaller systems, are governed by
an elected city council, while an elected or appointed board
independently governs others. Democratically governed, not-for-profit,
obligated to serve all customers--understanding the underlying
structure and mission of public power is essential in promoting
policies that will maintain industry diversity and protect all
consumers' interests.
NON-ELECTRICITY PROVISIONS
Although the majority of my testimony will focus on the electricity
provisions in Title VII of the draft bill, I will briefly highlight
several other areas of importance to APPA. As has been the case since
President Bush introduced his national energy policy plan in 2001, APPA
believes that there are a number of areas where the Administration and
Congress should act to maintain or enhance the viability of traditional
fuels used to generate electricity, promote the commercialization of
new, alternative sources of electricity, increase energy conservation,
provide adequate energy assistance to low-income households, and
maintain infrastructure security. APPA supports the following
provisions in the bill that will achieve these goals:
Title I--Energy Conservation. This title authorizes greater
funding for energy efficiency and conservation efforts and
implements specific conservation measures at federal
facilities. Specifically, APPA supports Title I, Subtitle B,
Section 1021 to increase the authorization for the Low Income
Home Energy Assistance Program (LIHEAP) and weatherization
assistance. Current weather and economic conditions underscore
the need for an increase in this federal program that helps
thousands of families pay their home energy costs.
Title IV, Subtitle A--Price Anderson Act Reauthorization. This
provision would reauthorize the Price-Anderson Act, a law that
indemnifies Department of Energy (DOE) contractors and Nuclear
Regulatory Commission (NRC) licensees for damages resulting
from nuclear incidents.
Title VII, Subtitle C--Reliability. This subtitle would ensure
the reliability of the interstate transmission grid by creating
a national industry self-regulating organization to develop and
enforce mandatory reliability standards, subject to FERC
oversight. We agree with the testimony submitted by the North
American Electric Reliability Council (NERC) that this section
is acceptable with one change--ensuring that stakeholders
govern the regional entities designated by the electric
reliability organization to promulgate reliability standards
(please see NERC's testimony for the legislative language
necessary to effect this change). Although this provision is
included in the electricity title, we believe that electric
reliability represents a fundamental part of our nation's
infrastructure security, and should be considered separately
from electricity restructuring provisions.
Title VIII--Coal. This title would authorize funding and
specify criteria for the development of a program at the
Department of Energy to deploy clean coal technologies. APPA
supports clean coal technology research and development, as
well as incentives when linked to a tradable tax credit
available for public power and rural electric cooperatives.
Title II, Subtitle A--Alaska Natural Gas Pipeline. This title
would facilitate the construction of a natural gas pipeline
from Alaska to the lower 48 states. APPA members in June 2001
approved a resolution urging the federal government to support
construction of the Alaska Natural Gas Pipeline, particularly
with the assurance of open access. Increasing supplies of
natural gas should help to mitigate price spikes like those we
are presently seeing in the market.
Title V, Subtitle A--Vehicles and Fuels, Energy Policy Act
Amendments. This subtitle provides fleet owners--including
electric utilities--and others with additional flexibility and
opportunity to meet alternative fuel vehicle goals established
in the Energy Policy Act of 1992. We would also encourage the
Subcommittee to add provisions to this title allowing for the
banking or trading of biodiesel credits, as well as ensuring
that credit is given for hybrid or neighborhood electric
vehicles under EPAct.
Title III--Hydroelectric Relicensing. This title will improve
the Federal Energy Regulatory Commission hydroelectric
licensing and relicensing processes. APPA supports the language
in the bill that will allow current licensees, for the first
time, to offer alternative conditions to those mandated by the
federal resource agencies under Sections 18 and 4E of the
Federal Power Act as long as those alternatives accomplish the
same level of environmental protection.
Title VII, Subtitle F, Section 7072--Renewable Energy
Production Incentive. This section would reauthorize and reform
the Renewable Energy Production Incentive (REPI) program at the
Department of Energy. We look forward to working with the
Subcommittee to make changes to the language in Section 7072 to
conform to the stand-alone REPI reauthorization and reform
bill, H.R. 671, recently introduced by Representatives Bono (R-
CA), Markey (D-MA), Blunt (R-MO) and others. REPI was
established by the Energy Policy Act of 1992, and authorizes
DOE to make direct payments to publicly- and cooperatively-
owned electric utilities for electricity generated from solar,
wind, landfill-gas, and certain geothermal and biomass
projects. Since 1995, REPI has funded more than 36 renewable
energy projects in 17 states. REPI's authorization is set to
expire in September of this year.
City Utilities plans in the near future to install a wind turbine
and solar array as demonstration projects for renewable energy
production. Future plans for acquiring or installing additional
renewable capacity will in large part be dependent on the
continued availability of REPI funds to help offset the
additional cost to our customers. As the only incentive
available to locally-owned, not-for-profit utilities to make
new investments in renewable energy projects, REPI delivers
important and significant air quality benefits to the
communities served by project owners and operators. The REPI
program merits extension, requires reform, and deserves
congressional attention.
EVALUATING LESSONS LEARNED FROM DEREGULATION IN THE WEST BEFORE MOVING
FORWARD WITH LEGISLATION
``The [electricity] markets are not developing for many complex
technical and financial reasons. Yet although Enron
demonstrated the potential for abuse of energy deregulation,
the issue is not so much fear of crooks as respect for the
complexity of restructuring properly--if the objective is even
possible with a commodity like electricity.''
From article appearing in the February 19, 2003, Roanoke Times and
World News, referencing a report by the State Corporation
Commission of Virginia.
At its most recent policy meeting in February, APPA members voted
to urge that Congress review the results of various ongoing
investigations into consumer abuses and market manipulation in western
electricity markets and then develop consensus for further action based
on those results before imposing any new requirements on electric
industry participants, or experimenting with further industry
restructuring. Although market abuses in the West continue to be
uncovered, these recent events have not been fully aired by Congress,
nor will the provisions in the draft bill ensure that market
manipulation will be curtailed. As recently as February 25, 2003, the
U.S. Attorney's office in San Francisco subpoenaed the California
Independent System Operator to obtain documents and recordings between
grid operators and the agency's trading floor from May 1, 2000, and
July 31, 2001. This action suggests that federal prosecutors are
broadening their investigation of market manipulation.
We recognize that restructuring legislation as proposed by Chairman
Barton and others has been debated, revised and--once--voted on in
subcommittee over the past several years. However, significant
deregulation activities at the Federal Energy Regulatory Commission
(FERC) and at the state level have progressed during this same time-
frame. Revelations in recent months have made it more clear that the
results of these deregulation efforts have been disastrous in the West
and questionable elsewhere. Rather than proceed with legislation
modeled on the failed Enron vision of the electricity industry, we
believe that Congress should take a fresh look at the electricity
industry and examine the characteristics that are fundamentally
different from those of other industries. These characteristics
include, among others, the fact that electricity is a real-time product
produced and consumed simultaneously, cannot be stored, is a necessity
of modern life, and has no reasonable substitute. Delivery of
electricity requires hard-wire connections, making this function a
natural monopoly that must be regulated in some manner. Further, it is
a complex network industry and all parts--generation, transmission and
distribution--must work together. This situation necessitates planning
to ensure optimum use of individual facilities and the network, as well
as concomitant infrastructure investments. All of these unique
characteristics make it very difficult to displace regulation with a
purely competitive market in the electricity industry.
Despite promises that the deregulation of both wholesale and retail
markets would be beneficial to consumers by reducing electricity
prices, the western experiment caused power costs to skyrocket and had
a detrimental impact on consumers and investors. APPA believes that the
proposals in Title VII would do little if anything to reduce and
stabilize electricity costs throughout the industry because they fail
to ensure competitive wholesale markets--and the lower costs, improved
service and innovation which should be the ultimate goals of federal
policy. By imposing unnecessary jurisdictional and regulatory burdens
on public power systems and at the same time neglecting to mitigate
wholesale market manipulation, the legislation has a significant
potential to raise costs for many electric consumers, including those
served by public power systems. Given this outcome, we urge the
Subcommittee to reevaluate the merits of moving forward with
legislation until there is a greater understanding of what can be done
by FERC under existing law to ensure effective competition, including
how FERC may proceed on proposals to institute a standard market
design. Only then it will become more clear whether or not Congress
should continue along the same restructuring path, find new ways to
restructure, or impose a different regulatory structure.
CREATING EFFECTIVE WHOLESALE MARKETS SHOULD BE THE GOAL OF FEDERAL
POLICY
APPA continues to evaluate the information we receive from ongoing
investigations into the western electricity crisis as well as the
results of retail competition in states that have deregulated. We still
do not have all of the information we need to determine the remedies
that will be the most effective. Given what we do know, however, we
believe that, at a minimum, the following issues still need to be
addressed before competitive electricity markets will become viable:
ensuring sufficient transmission infrastructure; restoring financial
viability to the industry; mitigating market power abuse; ensuring FERC
maintains its ability to review mergers; safeguarding the ability to
meet service obligations; and creating effective wholesale markets.
APPA does not believe that the draft legislation adequately addresses
these issues.
I. Transmission Infrastructure
Competition will not work, much less benefit consumers, without a
solid and well-developed transmission infrastructure. In many places,
our nation's transmission infrastructure is clearly inadequate to
support competitive markets. The grid has been neglected by many
utilities because a weak transmission system protects their local
generation investments. Transmission congestion is increasing, and with
congestion, opportunities to manipulate markets and exercise market
power grow exponentially.
Accelerating development of the transmission infrastructure
required to support competitive markets seems to be the most
intractable of all of the obstacles to achieving competitive markets.
The problem is not that capital is unavailable because returns on
investment are inadequate. To the contrary, Wall Street values the
virtually guaranteed regulated return produced by these natural
monopoly facilities. Rather, even where the transmission owner is
ready, willing and able to expand the system, it is very difficult to
site new facilities.
APPA appreciates that the draft bill has acknowledged this problem
in Section 7012 by giving the federal government limited authority to
ensure the siting of interstate transmission lines. We also appreciate
the emphasis in Section 6231 on the development of new transmission
technologies by directing the Secretary of Energy to create a program
to promote the improved reliability and efficiency of electrical
transmission systems.
It has previously been suggested in statements by members of this
Subcommittee and in testimony by other stakeholders that because public
power systems come under limited direct FERC jurisdiction, we are in
some way hindering the creation of a ``seamless'' transmission system.
Some argue that without more FERC jurisdiction, there will continue to
be large gaps in the system, thereby hindering the flow of electricity.
These supporters of increased FERC jurisdiction over public power
systems argue further that if public power were subject to increased
FERC jurisdiction, the interstate transmission grid would suddenly
function like the interstate highway system.
First, the comparison between the interstate highway system and the
interstate transmission grid is tenuous at best. The only similarity
between the interstate highway system and the transmission grid is that
both were originally created for non-commercial uses--the highway
system for national security and the transmission system for
reliability. Second, the interstate highway system was planned and
built by the federal government, and the use of eminent domain
authority was employed where necessary. Contrastingly, the electric
transmission grid was created on an ad hoc basis to facilitate
reliability, and the use of eminent domain had to be approved by state
siting authorities. Therefore, seams issues and other hindrances to
creating a competitive wholesale market will exist regardless of
regulatory jurisdiction.
APPA members own only approximately 8% of the nation's bulk
transmission lines. Bringing those lines under increased FERC
jurisdiction will not solve the major problems of siting and technology
development and will not result in a more robust competitive wholesale
market. Furthermore, Sections 211 and 212 of the Federal Power Act
allow entities seeking access to transmission lines owned by public
power systems to petition the FERC if access is denied based on undue
discrimination. Nevertheless, APPA agreed several years ago to the
language known as FERC-lite which gives FERC an additional tool to
ensure that public power systems provide comparable treatment to other
entities that wish to access our transmission lines. However, the
language in Section 7021 of the bill needs to be updated in order to
clearly limit FERC-lite to review and approval of transmission service
tariffs.
II. Financial Stability in the Industry
The electric utility industry has experienced a tremendous upheaval
in the last two years. The stock of many merchant generators and power
marketers has plummeted and the credit ratings of a substantial number
of traditional vertically integrated investor-owned utilities have
suffered significant downgrades.
Unlike regulators, the markets have not been slow to punish
corporate malfeasance. Enron is in bankruptcy-court proceedings and the
stock price of Dynegy, another large trader, which in May 2001 had
stocks being traded at a high of $57, now has stocks being traded at
approximately $2. Other energy trading companies, such as the Williams
Companies and El Paso Corporation, have also suffered dramatic
decreases in the value of their stock. Even Duke Energy, consistently
rated among the top investor-owned utilities, had its credit rating
reduced and its rating outlook revised to negative. The weakened
financial condition of energy companies clearly hurts both investors,
who have lost billions of dollars, and consumers, who will pay higher
rates as the result of utility companies' lower credit ratings and
higher costs of debt.
At the same time, public power systems for the most part have
remained financially stable, and the outlook from Wall Street for
public power is positive in 2003. Last year, 182 private energy
companies received credit downgrades according to Standard & Poor's,
and only 15 have been upgraded. Contrastingly, of the 197 consumer-
owned utilities (including rural electric cooperatives) rated by
Standard and Poor's, 12 received upgrades and 14 received downgrades
with the remainder undergoing no change in their credit ratings. APPA
is concerned that further legislation to restructure the industry,
including repeal of the Public Utility Holding Company Act (PUHCA) and
loss of local control, will have consequences that could damage public
power's stable and positive financial outlook.
While APPA members in most parts of the country are weathering the
storm of financial uncertainty, their lack of confidence in being able
to obtain reasonably priced wholesale power in recent years, coupled
with the lack of confidence in being able to obtain firm, reasonably-
priced transmission service (without significant risk of curtailments
or hefty congestion charges), has led some to build their own localized
generation. Indeed, my utility is currently in the process of securing
approval to construct a 275 MW coal-fired unit within our service
territory. While borne of necessity, this trend is not optimum in terms
of APPA's members being able to leverage the economies of scale that
drive costs down in a functionally competitive wholesale market. Unless
confidence in the market is restored through the mitigation of market
manipulation, however, this trend will continue.
III. Mitigating Market Power Abuse
Unless behavior is carefully constrained (or better yet, as has
been recommended by the Federal Trade Commission in a number of FERC
filings, structural safeguards are put in place), the market can easily
be manipulated by those who exert market power. Determining who has
market power is difficult since there are many sub-markets within the
electric wholesale power market with both geographic and time
constraints that do not exist in most other markets.
Although Section 7082 of the proposed bill prohibits round-trip
trades of electric power, legislation should not try to identify each
and every way market participants can manipulate the market, and
attempt to separately legislate against it. Rather, Congress should
give FERC broad authority to identify the type of practices that are
prohibited (in general terms, just as the antitrust laws define in
general terms what is prohibited), and impose a duty on FERC to take
all steps necessary to ensure that wholesale markets are vigorously
competitive and free from manipulation, the exercise of market power,
and other wholesale market abuses. A clear directive in this area is
important in light of the abuses that have occurred in the western
electricity market, the gas industry and elsewhere. Otherwise, as
experience has shown, consumers will suffer significant harm.
IV. Maintain and Strengthen FERC's Merger Review Authority
With the collapse of the merchant sector of our industry,
consolidation is likely to occur at an increasing pace, with the
ability to undermine the competitive forces Congress and FERC are
seeking to foster (and increasingly depending upon to produce just and
reasonable rates for consumers). FERC review of mergers is an essential
tool for ensuring that markets are workably competitive and is
particularly important at this time of transition for the electric
utility industry. APPA has consistently urged adoption of a higher
standard that would condition merger approval on an affirmative finding
that the proposed merger will promote the public interest, as opposed
to the current standard that only requires the merger to be consistent
with the public interest.
In addition, FERC's merger authority needs to be clarified and
expanded to cover mergers of utility holding companies as well as the
disposition of generation assets by jurisdictional utilities and
``convergence'' mergers of electric and gas utilities.
FERC lacks the clear authority to review the former. While APPA
believes FERC has the authority and responsibility to review the
latter, it has declined to do so.
The draft bill not only fails to improve upon FERC's ability to
review mergers, it eliminates their authority altogether. Deletion of
FERC's merger review authority is neither supported by FERC itself nor
by the Department of Energy. Section 7101 of the proposed legislation
would repeal Section 203 of the Federal Power Act to eliminate FERC's
authority to review, approve and condition utility mergers and asset
disposition. Inclusion of this provision makes it more likely that
large generation companies will increase in size and in their ability
to exercise market power.
V. Safeguarding Ability to Meet Service Obligations
In the transition to competitive wholesale markets, it is essential
that the ability of all utilities to meet their ``obligation to serve''
wholesale and retail customers under federal, state and local laws and
contracts not be impaired. Congress should include a provision that
requires FERC, in whatever market structure it adopts, to preserve such
utilities' existing transmission rights--whether they arise from
transmission ownership, service agreements under FERC's Open Access
Transmission Tariffs, or other firm transmission contracts. Including
such a provision would enable these utilities to continue to meet their
obligations to serve with existing resources at reasonable cost and
without any degradation of reliability. This protection must encompass
both transmission-owning utilities and those that depend on
transmission facilities owned by others to meet their service
obligations, and must include municipal joint action agencies and
generation and transmission cooperatives that serve member distribution
systems at wholesale, as well as utilities that directly serve retail
customers. The language should also require FERC to exercise its
jurisdiction to facilitate the planning and expansion of transmission
to meet the reasonable needs of load-serving entities to serve current
and future loads.
VI. Creating Effective Wholesale Markets
Before wholesale electricity markets can work effectively, the
proper market structure, market rules, market monitors and market data
must be in place. Also, as mentioned above, market power must be
identified and mitigated. APPA believes that these issues can be
addressed through the following:
Specifying criteria for market-based rate approval and
revocation. APPA believes market based rates for jurisdictional
utilities should only be approved on a finding that the
applicant will not possess market power and that effective and
sustainable competition will exist in that market. The analysis
must include an examination not only of the resources available
to individual applicants and whether such assets could be used
to set the market-clearing price, but also of the effect of
transmission constraints and how those assets fit into the
broader market structure. Location-specific constraints must be
taken into account, as should requirements for grid
reliability. Further, and frequently ignored in traditional
market analysis, is the time-sensitive nature of electricity.
Enhancing FERC's merger review authority. As opposed to
repealing that authority, FERC's merger review process should
be revised as discussed above. Further, FERC should be able to
preserve the integrity of the market through preliminary relief
in order to prevent irreparable harm pending issuance of a
final order.
FERC on November 20, 2002, approved the merger of Ameren Corp.
and Central Illinois Light Company. As part of FERC's merger
conditions, Ameren agreed to several transmission system
upgrades which will increase the import and export capability
of Ameren's service area, and serve to mitigate market
concentration concerns. Therefore, if FERC's merger review
authority were to be repealed, as envisioned in the draft
legislation, the benefits of the transmission upgrades
incorporated in the conditions for approval of this merger
would never be achieved.
Market transparency. Market transparency is an essential
requirement for fully competitive markets. Today, many
electricity markets are opaque, and disparities in market
knowledge vary widely from one stakeholder to another. APPA
believes that legislation should ensure transparent information
on market transactions and should grant clear authority to the
Energy Information Administration (EIA) and the FERC to collect
and publish appropriate data while protecting proprietary
information. Transparency of market information is a
fundamental prerequisite of competitive markets and necessary
to protect consumers. We believe the directed rulemaking in
Section 7081 of the draft bill is a step forward toward
assuring market transparency, but that the language needs to
clarify to FERC that close calls should be resolved in favor of
transparency, not secrecy.
IF ELECTRICITY LEGISLATION MOVES FORWARD, THE FOLLOWING PROVISIONS
SHOULD BE REVISED
Eventually, the structural issues listed above must be addressed
before wholesale markets can become truly competitive. Other issues may
also be uncovered when we more fully understand the causes and effects
of the western electricity crisis. In the interim, FERC--particularly
under the auspices of its new Office of Market Oversight and
Investigations--has tools at its disposal that it can use to influence
the behavior of market participants to mitigate market power and
restore consumer and investor confidence. APPA does not agree with all
of FERC's actions--in particular, we believe that FERC should slow down
and more fully acknowledge regional differences in implementing its
standard market design rulemaking. However, we are confident that FERC
will continue to utilize the tools at its disposal to ``calm the
waters'' in the energy markets until we are more informed about how to
proceed.
Nevertheless, if the Subcommittee insists on pursuing the draft
electricity legislation, the provisions delineated below should be
revised. The legislation should also include provisions addressing
market transparency, criteria for the approval and revocation of
market-based rate authority, and enhanced FERC merger review authority
as outlined above.
Section 7011--Transmission Infrastructure Improvement Rulemaking.
This section would require FERC to adopt ``incentive transmission
pricing'' rules and would unnecessarily codify the ``participant
funding'' model for pricing transmission expansion. FERC already has
authority under existing law to create incentives for transmission
improvements and to impose ``participant funding'' where appropriate.
Therefore, reiterating in legislation this ability is unnecessary and
would in fact create a preference for participant funding. Furthermore,
``participant funding'' is an untested concept and, in most parts of
the country, is likely to delay and limit transmission construction at
a time when congestion and curtailments are increasing, to the
detriment of consumers. Competitive markets will fail without
construction of substantial new transmission in many areas.
Transmission pricing is a complex subject currently being debated
by FERC. FERC has ample authority under the Federal Power Act to
experiment with incentive pricing alternatives and modify pricing
models over time as experience is gained. For example, the Commission
on January 15, 2003, issued a proposed policy on incentive transmission
rates and already has approved incentive rates based on the facts in
individual proceedings. Congress should allow the Commission to
continue to assess the facts on a case-by-case basis and not codify an
untested funding mechanism that could be detrimental in many regions of
the country.
Section 7021--Open Access Transmission By Certain Utilities. Known
as ``FERC-lite,'' this provision would require public power systems and
rural electric cooperatives that own transmission to provide non-
discriminatory access to other entities. Open, non-discriminatory
access to the interstate transmission system has been a longstanding
principle of public power. Although APPA can continue to support the
FERC-lite concept, the language in this section must be revised to
clarify that FERC-lite is limited to the review and approval of
transmission service tariffs for consistency with the comparability
standard.
Section 7022--Regional Transmission Organizations. This language
would force federal transmission-owning entities to forego their
existing statutory authorities and obligations if they contractually
enter into an RTO, in the event that the existing authority and
obligations conflict with the contract. The scope of the language moves
well beyond the ability of an RTO to oversee and operate the federally-
owned portions of the transmission system.
Section 7043--Repeal of the Public Utility Holding Company Act
(PUHCA) of 1935. Rather than enhancing competitive wholesale markets,
the repeal of PUHCA would increase the uncertainty and instability in
the wholesale electricity market. As mentioned above, utilities and
utility holding companies have placed operating utilities in jeopardy
by engaging in unregulated activities and using profits from operating
utilities to prop up those activities. As delineated in the attached
analysis compiled by APPA staff entitled ``The Public Utility Holding
Company Act: Its Protections Are Needed Today More Than Ever,'' these
activities were permitted by partial repeal of PUHCA in the 1992 Energy
Policy Act. The 1992 Act exempted developers of independent power
generation facilities, called Exempt Wholesale Generators, whether they
were owned by operating utilities, utility holding companies, or
parties not involved in the electric utility business. This exemption
resulted in a substantial number of electric utilities and utility
holding companies taking advantage of the new freedom from Securities
and Exchange Commission scrutiny to create unregulated power production
subsidiaries--the very subsidiaries placing many operating utilities in
jeopardy today.
PUHCA was originally enacted in 1935 to protect investors and
consumers by establishing effective regulation over multi-state utility
holding companies. Exemptions to many of the Act's provisions were
provided to utility holding companies that operated substantially in
one state, as state regulators were presumed to have adequate authority
and access to the necessary information to effectively oversee these
companies. In the Act, Congress identified several classes of problems
it sought to remedy, including: lack of investor information; incorrect
valuation of assets and earnings; improper pricing of inter-affiliate
transactions; no relationship between a company's expansion and
operational efficiencies; and subsidiaries and affiliates in different
states, making effective regulation difficult. Not coincidentally, this
same list of problems characterizes the current energy industry.
Sections 7044 and 7045--Federal and State Access to Books and
Records. A Wall Street Journal article from December 26, 2002, stated
that ``As [energy] deregulation swept the nation in the late 1990s,
state legislatures often clipped the wings of regulatory commissions to
save money and give emerging markets more breathing room . . . With
little or no authority to review the books and records of the
unregulated businesses, they now only see part of the picture.''
Although a step in the right direction, the provisions included in the
draft to give FERC and the states greater access to books and records
for the limited purpose of reviewing electric utility rates are not
adequate to protect customers and investors. While such expanded
authority is appropriate, it is by no means an adequate substitute for
the protections afforded by PUHCA. Before PUHCA is repealed, there must
be strong market power protections in place, regulatory gaps must be
filled, and opportunities must be provided to ensure that transactions
across the entire utility holding company and all of its subsidiaries
can be carefully examined.
Section 7081--Market Transparency Rules. Although a step in the
right direction toward assuring market transparency, the language in
this section needs to clarify to FERC that close calls should be
resolved in favor of transparency, not secrecy.
Section 7082--Prohibition on Round Trip Trading. This provision is
too narrow in its scope to effectively mitigate market manipulation.
Rather than try to identify each and every way bad actors can
manipulate the market, the language should give FERC broad authority to
identify the type of practices that are prohibited (in general terms,
just as the antitrust laws define in general terms what is prohibited).
FERC should also be given the authority to punish manipulative behavior
through fines and by withdrawing authority to sell power at market
based rates.
Section 7092--Jurisdiction over Interstate Sales. This provision
would unnecessarily extend FERC jurisdiction over public power systems
by imposing FERC's refund authority over the spot market sales made by
public power systems. This language is an encroachment on local
authority that is neither prudent nor warranted. Public power systems
have been regulated differently under federal law for more than 66
years. This is neither an accident nor an oversight, but rather good
public policy that recognizes the differences between not-for-profit
public power systems operating in the public interest and regulated at
the local level, and multi-state, investor-owned private utilities.
Public power systems do not represent a significant presence as sellers
in the wholesale markets, and public power systems are, and will
continue to be, net purchasers of electricity. The limited volume of
surplus energy from public power systems precludes their ability to set
a market-clearing price--public power systems are price takers, not
price makers.
There is no policy justification for reversing decades of
effective, local authority. Uniform refund authority would negate any
notion of the FERC-lite agreement, and makes jurisdiction over public
power systems FERC-heavy, including the ability to set wholesale rates
after the fact. This is, in fact, a back door to extensive new FERC
regulation over public power.
Section 7101--Repeal of Certain Provisions of Federal Power Act
Regarding Disposition of Property, Consolidation and Purchase of
Securities. This provision would repeal Section 203 of the Federal
Power Act, eliminating the ability for FERC to review mergers. APPA
opposes this provision, as discussed extensively above.
In conclusion, APPA encourages the Subcommittee to move forward
with energy policy legislation as envisioned in the draft bill with the
important distinction that the electricity restructuring provisions
should be deleted and addressed at a time when we more fully understand
the appropriate remedies to prevent a repeat of the western electricity
crisis. Thank you again for this opportunity to testify.
Mr. Barton. Thank you, sir. We now welcome, Mr. English,
who is representing the National Rural Electric Coop
Association.
STATEMENT OF GLENN ENGLISH
Mr. English. Thank you very much, Mr. Chairman; I
appreciate that. I am Glenn English, the chief executive
officer of the National Rural Electric Cooperative Association.
I am representing nearly 1,000 electric cooperatives in 47
States that is owned and, I am proud to say, regulated by some
35 million consumers. And I am pleased to be here.
I, first of all, Mr. Chairman, want to apologize to Sergio
Leoni and Clint Eastwood, because I think the description of
this legislation can be the good, the bad and the ugly. First
of all, I would like to focus on the good. The reliability
provisions in this legislation we feel are good, the enhanced
penalties we feel are good, the market transparency efforts we
feel are steps in the right direction, the voluntary RTO
provisions are good, and we agree that moving and dealing with
the siting provisions is a step in the right direction.
Now I would like to focus a little bit, Mr. Chairman, on
what we find to be bad. The repeal of PUHCA removes any kind of
consumer protections whatsoever. We would like to see PUHCA
updated and modernized. And, failing that, we would like to see
a replacement of consumer protection legislation if PUHCA in
fact is going to be repealed. There is nothing in this
legislation that does that.
The so-called FERC-lite provisions that are contained
within the legislation while they might have been workable
under Rule 888 by FERC, when we look at the standard market
design proposal by FERC, it simply does not work. Also, we have
already had many public statements by the chairman of FERC
stating that he finds it unnecessary to even have provisions of
the FERC-lite nature contained in any legislation. I can
understand and appreciate why many would like to see Rural
Electric Cooperative, even though we are the smallest of the
entire electric utility industry and a lot of very small
electric cooperatives, included in the provisions of
regulations. That means FERC has to divert its resources from
those who have proven to have committed egregious mistakes--
those who have mismanaged, those who have abused the system--
and require those resources to be focused on dealing with those
who have not been shown to have been guilty of any problems.
We also have great difficulty with the repeal of the merger
review. That, to us, is an anti-competitive provision, one that
attempts to provide the opportunity for those with the deepest
pockets to be in a position to squeeze out those who may be
interested in competing within this marketplace. And I would
also say that we have great difficulty with the provisions
dealing with the PMAs. These PMAs have contractual obligations
that this legislation would void or at least provide the
opportunity to void, and we think that is wrong.
But there is the ugly, and it is the ugly that we really
find to be not only anti-consumer, but we also find it to be
anti-competitive. When you look at the situation with regard to
incentive rights, the Federal Energy Regulatory Commission
today has the ability to use incentive rates, and they apply it
on a case-by-case basis. The only reason we can see for this
provision being included in the legislation is to require FERC
to go beyond what they have found to be a just and reasonable
application of incentives. It also seems to push FERC in the
direction of using incentive rates only when in fact a task
force comprised of all industry representatives, as well as
those from the financial markets that provided a study of the
Transmission Task Force to the Secretary of Energy, pointed out
this is only one of several options. For instance, reducing
risk is another way of dealing with problems that increased
investment in the transmission system.
And also we are puzzled by the fact that this legislation
does not require that any of these additional funds that might
come about as a result of incentive rates be used to build
transmission. It can be used for virtually anything. But
participant funding, another feature within this legislation,
another one that can only be categorized as ugly is another one
that we find troubling. Certainly, the Federal Energy
Regulatory Commission today has the ability to be able to make
judgments and decisions on a case-by-case basis on the case of
just and reasonable as to what the compensation should be. But
this particular feature, while it has been hailed as bringing
about equity between regions, actually it is anti-competitive
within the regions. It discourages the building of transmission
within the regions, makes it more difficult for competition to
take place within a region, and certainly we think that it
would discourage improved transmissions within regions of the
country. And we don't really think that is the aim of the
authors.
Mr. Chairman, what we would suggest is that for many of
these provisions, those that fit into the category of being bad
and ugly, that we should simply take a time out, see what FERC
does through the standard market designs, give them the
opportunity to apply the lessons of California and Enron, to
give us an opportunity to get it right. But certainly trying to
pass legislation to codify into law based on regulations that
have not even been finalized yet we think would be a very
serious mistake. Thank you very much, Mr. Chairman, for giving
us this opportunity to testify.
[The prepared statement of Glenn English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National
Rural Electric Cooperative Association
INTRODUCTION
Chairman Barton and Members of the Subcommittee, I appreciate this
opportunity to continue our dialogue on the restructuring of the
electric utility industry. For the record, I am Glenn English, CEO of
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for
profit electric cooperatives.
These cooperatives are locally governed by boards elected by their
consumer owners, are based in the communities they serve and provide
electric service in 47 states. The more than 35 million consumers
served by these community-based systems continue to have a strong
interest in the Committee's activities with regard to restructuring of
the industry.
Electric cooperatives comprise a unique component of the industry.
Consumer-owned, consumer-directed electric cooperatives provide their
member-consumers the opportunity to exercise control over their own
energy destiny. As the electric utility industry restructures, the
electric cooperative will be an increasingly important option for
consumers seeking to protect themselves from the uncertainties and
risks of the market. I would like to thank you, Mr. Chairman, and
Members of the Committee for your receptiveness to the concerns and
viewpoints of electric cooperatives.
TIME OUT ON ELECTRICITY
Congress should take a time-out on electricity. It should take time
to review the failed deregulation schemes of recent years before it
acts. It should avoid undermining the Federal Energy Regulatory
Commission's (FERC) ability to respond flexibly to changing conditions
in the electric utility industry. And, it should avoid bogging down
energy legislation with a controversial electricity title.
The electricity industry is in a state of turmoil and rapid change.
In some parts of the country, the competitive wholesale power
marketplace is rapidly developing. In other regions, wholesale
competition is developing at a more deliberate pace. Retail competition
continues forward in a few states, has stalled in many, and is in full
retreat in some others. Wall Street, FERC, and the industry are all
still trying to determine what lessons we should take from the disaster
in California's market, Enron's bankruptcy, and the rapid decline of
many power marketers, independent power producers, and investor-owned
utilities. Investors, the Commission, and the industry are still
working to piece together the causes of this turmoil.
Now is not the time for Congress to act. If Congress moves now, and
enacts electricity legislation before the causes of the turmoil have
been thoroughly analyzed, Congress risks codifying the very problems
that it seeks to solve and possibly breaking those aspects of the
industry that are actually working.
By acting now, Congress would also risk denying FERC the resources
and flexibility it needs during this time of change. It will take all
the resources and flexibility available at the FERC to protect
consumers from market failures and abuses during the transition to
competitive markets and to ensure that consumers benefit from the new
market structures that ultimately develop.
Congress must not enact any law at this critical time that would
undermine FERC's ability to respond to changing circumstances. While
the Commission has the flexibility today to respond quickly to evolving
conditions and the expertise to anticipate the consequences of its
actions, the same cannot be said of any rigid congressional mandate.
Given the rapid pace of change and the existence of enormous regional
differences in power markets, a policy that might make sense today in
one part of the country may not make sense tomorrow or in another part
of the country. Congress must not, therefore, force FERC to adopt rules
that the Commission could conclude today, or in the future, are
unnecessary, unjust, or unreasonable given the developing state of the
market in any part of the country.
Congress should also recognize that electricity legislation is
controversial. Congress should focus instead on issues--such as LIHEAP
reauthorization, Price-Anderson Act reauthorization, and support for
clean-coal technologies--that are vital for the nation's long-term
energy security. It would be better to call a time-out on electricity
and to concentrate on the country's real energy needs.
THE FEBRUARY 28 DRAFT ELECTRICITY TITLE
As noted above, NRECA believes Congress should take a time-out on
electricity. For many reasons, now is not the time for Congress to
address the electricity industry. To the extent Congress does act,
however, it should be certain that it does not restrict FERC's existing
ability to respond flexibly to changes in the industry, regional
differences in electricity markets, and the needs of consumers.
NRECA is disturbed, therefore, that the February 28 draft includes
provisions that will distract FERC from its core mission by expanding
its jurisdiction over consumer-owned utilities even though FERC
Chairman Wood has himself said that such additional jurisdiction is
unnecessary.
NRECA also opposes provisions in the February 28 draft that permit
the Secretary of Energy to undermine the critical role of the Power
Marketing Administrations and TVA in serving the energy, flood control,
irrigation, and other needs of rural America; require FERC to adopt
incentive transmission rates that could increase the cost of
electricity to consumers without improving service; codify an
inflexible approach to funding needed new transmission infrastructure
that discourages critical investment and reinforce existing market
power; deprive FERC of its existing authority to ensure utility mergers
are in the public interest; and repeal PUHCA without adopting effective
market power protections in its place. These provisions threaten to
increase instability on both Wall Street and Main Street, undermining
important consumer protections, developing wholesale markets and
investor confidence.
On the other hand, NRECA is pleased that the February 28 draft is
narrower in many ways than was H.R. 3406. For example, NRECA was
pleased to see that the February 28 draft lacked any proscriptive
language with respect to Regional Transmission Organizations. FERC
needs to retain the flexibility it has today to define the kinds of
transmission institutions that can best serve consumers in light of
evolving market conditions and regional differences.
Similarly, NRECA was pleased to see that the net metering
requirements in H.R. 3406 have been moved to title I of PURPA.
Cooperatives do not object to considering the role that net metering,
advanced metering, and real-time pricing can play on their systems.
Some cooperatives have already adopted these concepts where and to the
extent it serves the best interests of their consumers. Others are in
the process of doing so. Nevertheless, were the language in
Sec. Sec. 7061 and 7071 made mandatory, those provisions would impose a
significant burden on many electric cooperatives and their consumers:
shifting costs from some classes of consumers to others and
inappropriately subsidizing consumers with their own generation.
NRECA supports elements of the February 28 draft that would tend to
increase stability for consumers and investors in the electric utility
industry. Electric reliability provisions, enhanced civil penalties and
an adjustment of the refund effective date for violations of the
Federal Power Act, prohibitions on wash trades, and new limited federal
siting authority could all enhance the FERC's ability to protect
consumers without limiting its existing authority or flexibility.
SPECIFIC PROVISIONS OF THE FEBRUARY 28 DRAFT
Section 7011 Incentive Rates
For several reasons, NRECA opposes Sec. 7011 of the February 28
draft, which requires FERC to adopt a transmission pricing policy that
includes incentive rates. First, this provision is unnecessary. FERC
has already begun work on a new transmission pricing policy that
includes incentives, including higher rates of return for new
transmission construction, participation in an RTO, and transfer of
transmission facilities to an independent transmission company that is
participating in an RTO. Congress does not have to force FERC to do
something it is already doing.
Second, NRECA believes it is wrong for Congress in this bill to
restrict FERC's discretion to adopt those approaches that it believes
will best encourage the construction of needed transmission facilities
and otherwise serve the public interest. As discussed above, with the
market in the beginning of an evolutionary process, a good approach to
transmission pricing today in one part of the country may not be a good
approach tomorrow or in a different region. FERC already has authority
today to adopt a transmission policy with incentives--and is doing so.
It also has the authority to rescind or alter that policy if, at a
later date, it considers incentives to be unnecessary or contrary to
the public interest. The draft bill would deprive the FERC of that
critical authority. FERC would have to include incentives in its
transmission pricing policy no matter how unnecessary, unjust, or
unreasonable, it later considers them to be.
Finally, NRECA believes that arbitrary increases in rates of return
are already an unnecessary and unwise approach to encouraging
investment in needed transmission facilities. As explained by the
Department of Energy's National Transmission Grid Study, ``authorizing
higher rates of return is not the only approach to stimulating needed
investments in transmission facilities over the long term. Reducing
regulatory uncertainty should also be a focus of efforts to stimulate
needed investments'' (NTGS at 31) As the NTGS notes, the rate of return
required by investors varies with the level of risk. The lower the
risk, the lower the return required to attract capital.
Similarly, the Department of Energy's Energy Advisory Board looked
at how best to encourage the construction of needed new infrastructure,
given that ``there is a clear reluctance from the financial community
to finance transmission projects.'' (Report at 22.) The Board
determined that ``[i]nvestment in the grid will only occur when
regulatory policy provides (a) reasonably certain cost recovery, (b)
regulatory certainty, in terms of who can operate the system and under
what rules and (c) provides a return that makes investment in
transmission a reasonable option, considering other available
investment options.'' (Id).
That conclusion is significant. As NRECA has been saying for
several years, FERC can best encourage the construction of new
transmission facilities by providing investors with certainty that they
will recover their costs. While the rate of return may be important,
the level of return required to attract capital investment is a product
of the level of risk faced by investors: the lower the regulatory risk,
the lower the rate of return required to attract investment.
NRECA believes it is far better to increase regulatory certainty
than to simply throw more money at the transmission shortage. By
increasing regulatory certainty, Congress and the Administration can
attract greater investment in transmission infrastructure without
raising rates of return. That approach keeps costs down for consumers
and strengthens electric markets by permitting more generation from
across a region to compete economically. Higher rates of return should
be a last resort, not a first resort.
The competing approach, granting transmission owners higher
``incentive rates'' would raise costs for consumers and narrow electric
markets by building toll gates between generators and consumers.
Interestingly, recent Moody's reports indicate that the regulated
(i.e., transmission) component of the industry may now provide a more
attractive investment vehicle than the unregulated (i.e., generation
and trading) component of the industry. Similarly, Fitch recently rated
the newly formed American Transmission Company's senior unsecured debt
``A'' because:
Cash flow is expected to be stable and healthy. ATC is a
monopoly provider whose transmission franchise is supported by
state regulation and [FERC] approved tariff. Its costs are
recovered through an annual revenue requirement allocated as
fixed demand charges to regional electric utilities using the
transmission network.1
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\1\ Yahoo! Finance Press Release, ``Fitch Rates American
Transmission Company LLC `A/F-1,' '' March 16, 2002.
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In other words, ATC has an excellent debt rating (and associated
low cost of capital) because it faces low risk.
Section 7011 Participant Funding
For similar reasons, NRECA also opposes Sec. 7011's requirement
that FERC permit RTO's to require that all ``new transmission
facilities that increase the transfer capability of the transmission
system'' to be participant funded.
First, FERC is already considering adopting participant funding for
certain transmission facilities as part of its standard market design
(SMD) rulemaking. Congress need not order FERC to do something it
already intends to do.
Second, as I have already stated several times, NRECA believes it
is wrong for Congress in this bill to restrict FERC's discretion to
adopt those approaches that it believes will best encourage the
construction of needed transmission facilities and otherwise serve the
public interest. The draft bill would deprive the FERC of that critical
authority. FERC would have to permit participant funding even if it
later considers participant funding to be unnecessary, unjust, or
unreasonable.
Third, NRECA believes that the broad participant funding mandate in
the bill will discourage the construction of much needed transmission
facilities, raise costs to consumers, and entrench existing market
power.
NRECA does not oppose participant funding in all circumstances.
Like many others, NRECA supports participant funding for those
transmission facilities that would not be required but for the
interconnection of new generating facilities that plan to export power
outside of the region where they are sited. That approach protects
native load consumers in one region from paying for transmission
facilities that provide them no benefit. If the new transmission
facilities benefit a generator, or consumers in another region, the
generator or the consumers in the other region should pay the costs of
the transmission facilities.
On the other hand, NRECA believes that the cost of any new
transmission facilities required in a region to serve consumers in that
region reliably or economically should be rolled into the cost of
transmission in that region. NRECA and many others, including the
Louisiana Public Service Commission, believe that this is the equitable
approach. If consumers in a region benefit from a particular
transmission upgrade, those consumers should all pay the cost of the
facilities.
NRECA also believes that this is the best approach to encourage
investment in needed transmission facilities. Rolling the costs of new
transmission facilities determined by a regional plan to provide
benefits to consumers in the region into the regional revenue
requirement gives investors precisely the assurance they need that they
will recover the costs of their investment as well as a reasonable rate
of return. Participant funding, on the other hand, makes cost recovery
extremely uncertain. Under a participant funding approach, investors
receive no direct income from the use of their facilities. Instead,
they receive ``congestion revenue rights,'' or CRRs. CRRs, however,
only entitle their holders to revenue in the event of congestion, which
may be substantially reduced or even eliminated due to the construction
of the expansion. An allocation of CRRs alone thus discourages
investment in new facilities, or at the least creates a perverse
incentive to undersize upgrades to maintain congestion on the system,
since that is the only way they get paid.
Section 7012 Limited Federal Siting Authority
NRECA understands that limited federal siting authority may be
necessary to permit the construction of some regional transmission
facilities and upgrades that are critical to the continued reliable and
economic service of consumers. Nevertheless, NRECA believes the rights
of permitting, siting and eminent domain authority come with the
responsibility for serving the public interest. That means that any
provision providing for federal permitting, siting, or grant of eminent
domain must meet the following criteria:
Federal permitting, siting, and eminent domain must be used
solely to create an interstate high voltage transmission grid
that will help utility systems meet their obligations to the
states and their consumers;
The facility for which federal permitting, siting, or eminent
domain authority is sought must have been specifically reviewed
and determined by an RTO-led or other appropriate multi-state
regional planning process to be necessary for the reliable and/
or economic operation of the regional transmission grid, and
thus provide benefits to the consumers within the region; and
Federal permitting, siting, or eminent domain must be used
only as a backstop to state permitting, siting, or eminent
domain authorities.
Section 7012 of the February 28 draft is a good start in that
direction. The limited federal authority it provides is restricted to
interstate transmission and may only be used as a backstop where state
authority fails.
The section's requirement, however, that facilities receiving
federal siting and eminent domain authority be within federally
determined interstate congestion areas is both too broad and too
narrow. On one hand, not all transmission upgrades within a congested
area may be properly located or designed to address the congestion.
Thus, some facilities built within ``interstate congestion areas''
might receive federal siting authority under the February 28 draft
without providing significant benefit to the consumers within a region.
On the other hand, the process for designating interstate congestion
areas appears ill suited to identifying the most serious problems in
regional transmission grids. Conducted in Washington, D.C. only once
every three years, the process seems rather too distant both physically
and temporally from the problems to be addressed.
NRECA believes it would be more effective to trust the regional
planning processes conducted by FERC-approved Regional Transmission
Organizations or other multi-state entities to make good, timely,
decisions about the transmission requirements of their regions.
Section 7021 ``FERC-lite''
NRECA opposes any expansion of FERC jurisdiction over cooperatives.
Such expansion is unnecessary as cooperatives have not denied third
parties access to their transmission systems. Provisions subjecting
cooperatives with RUS financing to additional FERC jurisdiction are
simply a solution in search of a problem.
Even had cooperatives not provided open access to their systems,
FERC already has adequate authority to protect other market
participants. Under Sections 211 and 212 of the Federal Power Act, as
amended and expanded by the Energy Policy Act of 1992, FERC has the
direct and explicit authority to require transmission-owning
cooperatives to provide transmission service to third parties at just
and reasonable rates. Under the principle of reciprocity, FERC has also
required cooperatives to provide transmission service to public
utilities pursuant to terms and conditions comparable to those FERC
imposes on those public utilities.
Even the Chairman of the FERC has stated that the Commission does
not require any additional jurisdiction over cooperatives. Speaking to
reporters in January, Chairman Wood stated that ``FERC would not seek
congressional authority over municipals and co-ops, preferring
voluntary approach to entice such utilities into the marketplace.''
``Wood Says He Wants Munis, Co-ops To Want To Be Part Of SMD, But Won't
Force Them,'' Platts, Electric Power Daily, Thursday, January 30, 2003.
NRECA recognizes that it supported the movement of H.R. 2944 from
this subcommittee to the full Commerce Committee in the 106th Congress,
even though H.R. 2944 included a ``FERC-lite'' provision similar to the
one in Sec. 7021 of the February 28 draft. That was because when the
idea of ``FERC-lite'' first appeared, the ``Commission rules''
referenced and applied to cooperatives by the provision were Order 888
and its progeny. Since Order 888's reciprocity provisions already
required to some degree that cooperatives provide service comparable to
that imposed on public utilities by Order 888, ``FERC-lite'' did little
more than codify an existing regulation with which cooperatives were
already complying.
Today, however, the ``Commission rules'' that would be incorporated
into the statute are in FERC's standard market design. Thus, even
cooperatives with outstanding RUS financing could have to:
Transfer to an Independent Transmission Provider (ITP)
operational control over the transmission facilities that they
built to serve their own member owners.
Incur the substantial transaction costs required to establish
an ITP that operates their transmission facilities, a day-ahead
energy market, a real-time energy market, and any other
mandates that are part of a final SMD rule.
Incur costs required to schedule service for member-owners in
the SMD markets.
Pay congestion charges for use of their own facilities, built
to serve their own member-owners.
Participate in auctions to obtain congestion revenue rights
for use of the transmission facilities that they built to serve
their own member owners.
Permit third parties to take transmission service out of, or
across their transmission facilities without making any
contribution to the fixed costs of the system.
Be subjected to market monitoring and mitigation procedures
and the associated costs.
These obligations go far beyond the requirements to which
cooperatives are currently subject, and far beyond what could possibly
be necessary to ensure third parties fair open access to the limited
transmission facilities owned by rural electric cooperatives with RUS
financing. These obligations could deny cooperatives control over and
reasonable access to the very facilities that their members own, paid
for, and built to serve their own needs. Such a broad expansion of FERC
authority over these facilities threatens cooperatives' ability to meet
their core purpose: to bring reliable, affordable electric service to
their member-owners.
NRECA is also concerned that ``FERC-lite'' could now have an even
more dramatic impact on small distribution cooperatives than it would
have in prior years. First, FERC decided for the first time in its SMD
NOPR to take jurisdiction over and regulate bundled retail
transmission. That means that ``FERC-lite'' would now apply not only to
those cooperatives providing wholesale transmission service, and to
those very few cooperatives providing unbundled retail transmission,
but also potentially to hundreds of distribution cooperatives that use
a small amount of radial, high voltage transmission line to serve
bundled retail consumers. These distribution only entities whose
facilities could not possibly have any use to the competitive wholesale
market could be subjected by ``FERC-lite'' to all of the expensive and
complicated burdens imposed by SMD.
Second, in several cases FERC has asserted that any facility that
carries a wholesale electron is transmission subject to its
jurisdiction, even if the facility would otherwise be considered a
local distribution line. That means that any distribution-only
cooperative that serves only bundled retail consumers could also be
subjected by ``FERC-lite'' to all of the expensive and complicated
burdens imposed by SMD if a single retail consumer installs their own
generator--no matter how small, no matter how little role the generator
could play in the wholesale market.
For these reasons, it is more important than ever that, if Congress
enacts some version of ``FERC-lite,'' it include an explicit, bright-
line test that exempts all small electric cooperatives from the
obligations of ``FERC-lite.'' It is not adequate to exempt those
cooperatives that own no ``transmission facilities that are necessary
for operating an interconnected transmission system.'' The Commission's
definition of transmission is growing so quickly, soon no distribution
cooperative would qualify for an exemption no matter how little
transmission the cooperative might have or how burdensome it would be
for the cooperative to comply. Just the cost of proving that it
qualifies for an exemption could impose undue economic burdens on some
small distribution cooperatives, some of which have only a few thousand
meters.
Given the tendency of regulators to expand their roles over time,
it is also critical that if Congress does enact some form of ``FERC-
lite'' that Congress also state clearly that it does not intend the
Commission's authority over cooperatives with RUS financing to ever
expand beyond the limits enunciated in the ``FERC-lite'' provision.
Future Commissions should not be permitted to consider the ``FERC-
lite'' provision to be an invitation for further expansion of their
jurisdiction over rural electric cooperatives. ``FERC-lite'' cannot be
just the camel's nose under the tent.
Section 7022 Regional Transmission Organizations
NRECA opposes the subsection of Sec. 7022 of the February 28 draft
that gives the Secretary of Energy the authority to require the Power
Marketing Administrations and TVA to join an RTO and overrides all of
the PMAs' and TVA's existing legal authorities, duties, and
obligations, to the extent they conflict with the requirements of the
RTO. This language goes far beyond what would be necessary to authorize
the PMAs and TVA to join RTOs. The language in this section raises
serious issues about the federal government's mission to market and
reliably deliver hydroelectric power to public bodies and electric
cooperatives. Millions of consumers depend on power generated from
multi-purpose federal projects. The federal power program is affected
by numerous statutes that relate to the preference in the sale of
electricity. NRECA believes the consequences of suspending the federal
power program's myriad of statutory obligations requires additional
examination before it is implemented.
Section 7031 Reliability
NRECA supports the North American Electric Reliability Council's
legislative proposal to create the North American Electric Reliability
Organization as a single national self-regulating reliability
organization with the authority to set mandatory reliability standards
applicable to all users of the bulk transmission system. That proposal
is critical to the continued reliability of the interstate transmission
grid in a competitive environment. For that reason, NRECA supports
Section 7031 of the bill with a few minor amendments to which the
broad-based coalition in favor of the NERC legislation has recently
agreed.
Sections 7041, 7081, 7082, 7084, 7091, 7101 PUHCA, FERC Merger Review,
and Market Abuse
NRECA opposes the repeal of PUHCA in Sec. 7041 of the bill. Now is
the wrong time to repeal PUHCA. While it has not been adequately
enforced, PUHCA is more critical today than ever to protect consumers
from abuses in the utility industry. It was PUHCA that prevented Enron
from owning, and abusing, more than one electric utility. It was PUHCA
that should have prevented Enron and many other companies in the
industry from shifting the risks of their unregulated and off-shore
activities to retail consumers in the United States.
If repealed, NRECA believes it should be replaced with modern
legislation that takes a practical approach to controlling market
power, focusing on the substance of consumer protection and market
power abuses, as well as the acquisition of undue market power through
ownership and affiliation. Such legislation should give federal
regulators an array of tools that they can use to protect consumers and
enhance competition in electric markets. If circumstances require it,
regulators should have the authority to impose structural solutions
that will prevent investor-owned utilities from accumulating undue
market power, or remedy already existing market power that threatens
competitive markets.
For these reasons, NRECA also opposes Sec. 7101 of the February 28
draft, which repeals FERC's authority to review dispositions of
jurisdictional property, including utility mergers. Section 7101 moves
far in the wrong direction. Without PUHCA it is more important than
ever that FERC not only exercise its existing authority to review
utility mergers but also new authority. As the Senate version of H.R. 4
provided in the 107th Congress, FERC needs new authority to review
transfers of generating facilities and clearer authority to review
mergers between electric utility holding companies. The standard of
review for large utility mergers should also be strengthened to ensure
that such mergers enhance competition. At a time when competition is
just beginning to develop in the nascent wholesale electric market,
Congress and FERC should not allow it to be choked through the rapid
consolidation of generation assets in the hands of a few large
companies.
NRECA also believes that Congress should encourage FERC to
reconsider the standards FERC uses to grant utilities and others the
right to sell power at market-based rates. As FERC has conceded,
inadequately competitive wholesale markets have often led to exorbitant
rates for consumers. Thin markets, inadequate transmission, market
power and market manipulation have singly or together caused rates to
rise far above just and reasonable levels. Under such conditions, only
traditional rate regulation can ensure that rates are consistent with
the law and that consumers are protected from abuse.
For the same reasons, NRECA supports the goal of Sec. 7081 of the
February 28 draft, which authorizes FERC to collect data from sellers
of electric energy about the availability and market price of wholesale
electric energy. To prevent manipulation of market prices, market price
information must be transparent to buyers and sellers. NRECA believes,
however, that this section should include language that ensures that
data collection is implemented in a manner that minimizes the cost and
burden to those that must provide the information and requires all
relevant agencies to coordinate with one another to prevent duplicative
requirements.
NRECA also supports Sec. 7082 of the February 28 draft prohibiting
round trip trading; Sec. 7084 of the February 28 draft enhancing
criminal and civil penalties for violations of FERC rules; and,
Sec. 7091 of the February 28 draft, moving up the refund effective date
to the day that a complaint is filed with FERC. Each of these
provisions enhances FERC's existing ability to protect consumers
without limiting its discretion and flexibility or distracting it from
its core mission of ensuring just and reasonable rates, terms, and
conditions for interstate transmission and wholesale electric sales.
Section 7092 FERC Refund Authority
NRECA opposes Sec. 7092 of the February 28 draft. That provision
would, for the first time, subject RUS borrowers' wholesale rates to
FERC review and regulation. At a time when Congress and FERC are
seeking to move towards a competitive wholesale market for electric
energy, Sec. 7092 would move in the opposite direction, increasing the
regulatory burden on electric cooperatives that seek to sell power in
the wholesale market. Yet, electric cooperatives have not been part of
the problem. Not-for-profit electric cooperatives have not gamed
markets, they have not abused consumers, and they have not exercised
market power. It would be impossible for them to have done so.
Cooperatives do not own enough generation and are not large enough
players in electric markets to exercise market power. All together,
electric cooperatives generate only about 5% of the electric power in
the country, which is less than half of the power they need to serve
their own consumers. All combined, electric cooperatives' sales to
public utilities represent less than 1% of all sales in the wholesale
market.
Instead of solving a problem, Sec. 7092 would distract FERC from
its core responsibilities and increase uncertainty for electric
cooperatives, their member-owners, and their creditors. To date,
cooperatives have been one of the most financially stable sectors of
the electric utility industry. While other sectors have seen their
credit ratings decline precipitously, cooperatives have experienced
more credit upgrades than downgrades. Because cooperatives stuck to
their knitting and did not engage in speculative generation
construction or speculative trading, they have continued to have access
to the credit they need to serve their consumers' electricity needs at
a reasonable rate. Section 7092 threatens that stability.
Mr. Barton. We thank you, Mr. English. I do wish that
myself and all the bills that I introduce could be beautiful
like all the beautiful people that you associate with.
Unfortunately, for me, I am not a beautiful person, and
sometimes I have to do ugly things, but that is what makes the
world go around.
Mr. English. We think you have the potential to be
beautiful, Mr. Chairman, and we would like to help you get
there.
I would be delighted to provide you with the provisions
that make this a beautiful bill.
Mr. Barton. We are going to give you a chance to----
Mr. English. Thank you very much, Mr. Chairman.
Mr. Barton. [continuing] make me beautiful. It is probably
impossible, but hope springs eternal. We would now like to hear
from Mr. Walter, and your testimony is in the record, and you
are recognized for 5 minutes.
STATEMENT OF RON WALTER
Mr. Walter. Good morning. My name is Ron Walter. I am
executive vice president of Calpine Corporation and one its
founders. Thank you for the opportunity to testify today before
this subcommittee on behalf of the Electric Power Supply
Association, or EPSA. Calpine is a leading independent power
producer in this country. With the completion of several power
plant projects that are now under construction, by the end of
this year we will be the seventh largest generator of
electricity in the country. We are proud to have power plants
that are either in operation or under construction in 13 of the
States represented here on this subcommittee.
EPSA is the national trade association representing
competitive power suppliers and have about one-third of the
installed generation here in the United States. Our Nation
tends to take for granted that an adequate, affordable and
reliable supply of electricity will always be available.
Electricity is the most fundamental commodity which powers our
personal and commercial lives. All too often the country does
not pay sufficient attention to electricity until a crisis
occurs. We must attend to these issues before a new crisis
happens, and we appreciate this committee's efforts to do so.
From an historical perspective, the Energy Policy Act of
1992 was successful in that it fostered a growing private
sector investment in modern, efficient and environmentally
beneficial gas-fired power plants. Since 1992, Calpine has
invested over $15 billion to build new power plants--our money.
We have 20,000 megawatts in operation and 10,000 megawatts of
construction--enough for 30 million households here.
Unfortunately, the installation of new generation alone doesn't
complete the vision of reaping the benefits of a fully
competitive market. Until fair and open access to transmission
is available, until fair access to power procurement is
available to consumers, we will not see the positive impact of
more affordable costs and greater reliability that should
accrue to the consumers. EPSA and Calpine urge Congress to take
a fresh perspective on what legislation might best address the
needs of consumers.
The key issues today, and it was referred to earlier,
revolve around the availability of capital and the evolution of
open and fair competition to deliver affordable power. With
open competition, regulatory certainty, the sanctity of power
contracts and fair long-term procurement practices, capital
will once again flow to this industry. A second key issue is
the ability for the most efficient power plants to operate
regardless of who owns them. This is not happening today in far
too many markets. As a result, consumers are paying a higher
price where markets are restricted.
I would like to make a few remarks on standard market
design and FERC's proposal. We need FERC to act in a timely
manner to implement the key proposals of SMD and RTOs, which
include an independent transmission grid operations, a single
transmission tariff, a long-term bilateral contract market and
a transparent short-term market. These actions will open
markets up, create regulatory certainty and benefit consumers
and producers. Legislation that would put SMD or RTOs in limbo
would increase uncertainty, would be costly to consumers and,
we believe, to the environment.
EPSA and Calpine commend Chairman Barton for introducing
his draft legislation. We generally support its provisions.
Specifically, all transmission providers should operate under
the same set of rules, so we support the FERC-lite section
applying to municipal and cooperative entities, and the
authorization for Federal utilities like BPA and TVA to enter
into RTOs. We support the draft's efforts to increase the
investments in transmission systems. EPSA supports the repeal
of PUHCA to facilitate further investment in this electric
industry. We also support your compromise position on
transmission siting.
Our one serious concern with the draft is in respect to
PURPA. PURPA plants, including both cogeneration facilities and
renewables, provide a valuable resource to industrial customers
as well as consumers, in general. PURPA should not be repealed
except and until a truly competitive market is sustained with
free access to multiple buyers and seller of electricity, and
that is certainly not the case today.
In conclusion, Calpine and EPSA believe that the Congress
wisely introduced competition to the electric sector in 1992.
If we now complete the steps necessary for a fully competitive
wholesale market, consumers will benefit from more reliable,
more affordable and more environmentally beneficial power
plants. Thank you, and I will take questions, of course, as
they come.
[The prepared statement of Ron Walter follows:]
Prepared Statement of Ron Walter, Executive Vice President, Calpine
Corporation
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to testify today. I am Ron Walter, Executive Vice President
of Calpine Corporation. I am pleased to be here representing both
Calpine and the Electric Power Supply Association (EPSA).
Based in San Jose, CA, Calpine is a leading independent power
company that is dedicated to providing wholesale and industrial
customers with clean, efficient power generation. Calpine has nearly
20,000 megawatts of operating assets in 23 states and nearly 10,000
megawatts under construction in 11 states. By the end of 2003, Calpine
will be the nation's seventh largest power generator. We have energy
centers in most of the states represented on the Subcommittee,
including California (where we built the first new power plant in
almost a decade and continue to be the principal source of new in-state
generation), Texas (where we will be 10 percent of the generation in
ERCOT), as well as Illinois, Louisiana, Maine, Massachusetts, Missouri,
New Jersey, New York, Ohio, Oregon, Pennsylvania and Virginia.
EPSA is the national trade association representing competitive
power suppliers, including independent power producers, merchant
generators and power marketers. These suppliers, which account for more
than a third of the nation's installed generating capacity, provide
reliable and competitively priced electricity from environmentally
responsible facilities. EPSA seeks to bring the benefits of competition
to all power customers.
On behalf of the competitive power industry, I appreciate this
opportunity to comment on electricity policy as Congress resumes work
on omnibus energy legislation.
At the risk of stating the obvious, the nation tends to take for
granted that an adequate, affordable and reliable supply of electric
power will be available to provide for our physical and economic well-
being. All too often, though, the country does not pay sufficient
attention to policy and market issues that impact the price and supply
of electricity until a crisis occurs. From Calpine's perspective, we
must attend to these issues and continue to build on our track record
of using the latest technologies to create a truly modern U.S. electric
power industry.
While competitive suppliers have succeeded in bringing new
generation on-line, we want to work with you to extend what Congress
under this Committee's leadership advanced with enactment of the Energy
Policy Act of 1992. That statute ushered in a new approach in which the
costs of building power generation no longer fell on ratepayers--a
broken system in which the incentives were to put more and more money
into a regulated rate base with a generous, guaranteed rate of return.
In 1992, Congress introduced competition from generators like Calpine
and other EPSA members. The Act has succeeded in that Calpine alone has
installed 20,000 megawatts of new generating capacity using modern,
efficient and environmentally responsible natural gas-fired technology.
Since 1999, almost 80 percent (or 92,000 MW) of new U.S. power supplies
came from the competitive power sector. While much has been
accomplished since the 1992 law was enacted, more remains to be done.
While the 1992 law promoted competition in the generation of power,
the benefits of that competitive generation will not be fully realized
until competitive power suppliers have non-discriminatory access to a
more seamless transmission system and achieve greater participation in
fair and open mechanisms for the procurement of power. Unfortunately,
many regions of the country do not yet have fully competitive
conditions with respect to transmission and power procurement.
Against this backdrop, EPSA urges you and your colleagues to look
with a fresh perspective on what type of legislation best meets the
needs of electricity consumers. EPSA believes that many of the issues
raised in the past are less relevant today, while new issues have
emerged that we respectfully suggest should command the attention of
Congress.
We ask you to always keep in mind three basic principles:
First, any structural or procedural change brought about by
legislation must be aimed at providing consumers with the
lowest-cost reliable power available;
Second, maximum consumer benefits will flow from competition
built around seamless regional markets in which power is
generated at the least expensive and most efficient facilities
regardless of who owns them; and
Third, the basic concept of ``first do no harm'' should
apply--the collateral effects from incomplete or poorly thought
out policy changes could have a negative impact on all
electricity users.
THE LANDSCAPE HAS CHANGED
Much has transpired in the years since the House Commerce Committee
began consideration of comprehensive electricity restructuring
legislation several years ago. While some issues have increased in
relevance, like the need to remove barriers to new capital investment,
others no longer require legislative attention.
The landscape has changed in significant respects: for example, the
statutory authority of the Federal Energy Regulatory Commission (FERC)
to police wholesale power markets and respond to issues of market power
abuse has been upheld; steady progress has been made towards
independent regional transmission organizations (RTOs); and Public
Utility Regulatory Policies Act (PURPA) facilities are recognized as
integral sources of cost-effective power with proven efficiency and
environmental benefits.
Today, the issues confronting the power sector revolve around the
availability of adequate capital to build needed generation and
transmission and the continuing evolution of open and fair competition
in a manner that will lead to the delivery of the most affordable power
to consumers. The two are inextricably linked. Industry participants,
investors and lenders need regulatory certainty regarding power markets
and assurance that contracts that were signed in good faith will not be
overturned. This, in turn, should improve access to capital.
While a few power markets presently have excess capacity, none are
over-supplied from a long-term perspective. We know all too well from
recent history that even a relatively small shortage of power can
result in significant price volatility. Furthermore, when the economy
picks up and as various regions of the country continue to grow, there
will be an inevitable need for construction of additional, clean
generating capacity. However, in today's market these new plants are
more likely to be financed when competitive generators can enter into
long-term power purchase agreements. Above all else, national and state
electricity policies should send positive signals to the investment
community about competitive wholesale markets and focus on policies
that contribute to achieving that goal, including a regulatory
environment conducive to long-term power contracts.
THE GOAL SHOULD BE TO BENEFIT CONSUMERS
The introduction of wholesale competition has been good for
consumers. With wholesale and some retail competition, inflation-
adjusted electricity prices decreased from 1985 to 2001 on average by
31 percent for residential customers and by 35 percent for industrial/
commercial customers.1 The Department of Energy has
estimated that, even in today's partially competitive market, wholesale
competition reduces consumers' bills by $13 billion annually and that
the savings from increased competition would exceed $20 billion
annually.2 Moreover, studies have shown that fully
establishing RTOs could save consumers as much as $60 billion by
2021.3
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\1\ The ``2003 Data Update: Assessing the ``Good Old Days' of Cost-
Plus Regulation'' prepared for EPSA by the Boston Pacific Company.
\2\ U.S. Department of Energy National Transmission Grid Study, May
2002.
\3\ E.g., the ``Economic Assessment of RTO Policy'' prepared for
FERC by ICF Consulting, Feb. 26, 2002.
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Congress can foster these additional savings by encouraging the
purchase of the most economically efficient generation and opening up
access to the transmission system on a non-discriminatory basis.
Consumers in areas of the country that do not have robust wholesale
markets, are not reaping the full benefits of competition--if markets
were established in which the least expensive and most efficient
generation was deployed first, all electricity customers would save and
the competitiveness of energy-dependent industries in these regions
would be improved.
THE FRAMEWORK FOR ELECTRICITY POLICY
Any electricity legislation should build on the successes of
competitive generation and wholesale markets that have already been
achieved. Legislative and regulatory policies should recognize the
opportunities that a competitive and dynamic industry can pursue on
behalf of consumers of all kinds. Policymakers should complete the job
of establishing competitive markets with tangible economic and
environmental benefits that began with the Public Utility Regulatory
Policies Act in 1978 and was accelerated with passage of the Energy
Policy Act in 1992.
Timely action by FERC to consider, improve and bring to a final
resolution the many issues addressed by the Standard Market Design
(SMD) proposal and other initiatives is an important way to help
develop the power resources the nation needs in the most cost efficient
and environmentally sound manner possible. Congressional intervention
to halt or delay the SMD process has the potential to increase market
uncertainty and thus harm consumers. EPSA respectfully suggests that,
while vigorous congressional oversight is useful, statutory
intervention to block SMD would not be prudent. Doing so would unduly
tie the hands of regulators charged with implementing the Federal Power
Act, leaving pressing electricity regulatory issues unresolved. The
alternative of detailed congressional legislation runs the risk of not
being able to anticipate future market conditions and is inherently too
inflexible to deal properly with a business as dynamic as power
generation, transmission and procurement.
EPSA believes that there are several ``myths'' about SMD and
wholesale competition that should be dispelled. For example, far from
raising power prices, SMD will more likely have a downward impact on
overall prices by recognizing the practical reality of regional power
markets and by removing artificial barriers in order to make them
function more efficiently. When robust regional markets are in
operation, we know from real world experience that excess power in a
given location flows to where it is needed, rather than remaining
stranded. Both the customers where the excess power exists and those
where it is needed benefit; those selling power generate revenues to
help keep their overall prices lower, while those purchasing power
avoid the higher prices that even a modest shortfall can produce.
While EPSA members, including Calpine, filed comments on how to
improve SMD, it is important to point out that its fundamental
principles are based on what has already worked to benefit consumers in
major power markets. The tens of millions of ``native load'' customers
in areas that already have vibrant regional markets have been helped,
not harmed. Furthermore, making the maximum efficient use of generating
assets reduces some of the need for transmission lines and power
generation projects.
Far from SMD creating a California-like crisis in other states, as
some suggest, just the opposite is true. By encouraging new investment
and efficient use of existing resources, SMD and other policies that
promote competition will prevent what we in California painfully
experienced a few years ago, the costly effects of which continue to be
felt. The bottom line is that a state or a regional power market with
access to ample power supplies from multiple sources will not
experience shortages, which will deter those who might otherwise try to
take advantage of tight supply and demand conditions.
Perhaps the perpetuation of these and other SMD ``myths'' is
explained by the Schwab Capital Markets Washington Research Group
report which stated that ``The only losers under SMD are vertically-
integrated utilities that have been using grid congestion and
manipulating grid access to keep their owned, but less competitive
generation assets on line.''
COMMENTS ON DRAFT ELECTRICITY LEGISLATION
EPSA supports the passage of a comprehensive energy bill, including
electricity provisions that are carefully crafted and relevant to
today's market realities. Mr. Chairman, we commend you for tackling a
difficult subject in a generally balanced and judicious manner in your
draft legislation.
Many of the draft's electricity provisions are important to EPSA
members. For example, the draft extends limited FERC jurisdiction to
the transmission systems of large municipal utilities and electric
cooperatives. The competitive wholesale market Congress envisioned with
passage of the Energy Policy Act of 1992 will not come about and cannot
function properly unless all market participants in a clearly
interstate transmission system operate under the same set of basic
rules. Also in the category of removing barriers, EPSA believes that
PUHCA repeal is one of the steps that Congress could take to help
encourage additional investment in the industry by removing artificial
limits to a range of potential transactions.
The draft legislation explicitly authorizes federal utilities such
as TVA and BPA to participate in RTOs; this will facilitate the flow of
electricity and allow customers in affected regions to reap the
benefits of wholesale competition. A picture is always worth at least a
thousand words; one look at the U.S. transmission map demonstrates that
a national or even regional transmission system will not exist in major
parts of the country if TVA and BPA are excluded. Furthermore, it is
incongruous for one federal agency, FERC, to require or encourage non-
federal entities to join a transmission regime that does not apply to
federally-run transmission systems.
The draft legislation addresses transmission siting, a thorny issue
that will not be solved merely by avoiding the complexities of this
subject. The Department of Energy's ``National Transmission Grid
Study'' documented the importance of correcting the under-investment in
transmission assets that has occurred in recent decades. The draft
suggests a compromise by establishing a federal back-stop for
``interstate congestion areas'' after states have failed to act;
authorizing interstate transmission compacts; and permitting states to
step in when there are undue delays with federal rights-of-way.
The one serious concern suppliers of power from cogeneration and
renewable sources have about the draft legislation--and it is a major
one--is with the provisions to amend the Public Utility Regulatory
Policies Act of 1978 (PURPA). Calpine has nearly 9,000 megawatts of
cogeneration and geothermal power in operation or under construction in
13 states, including California, Texas, Illinois, Louisiana, Maine, New
Jersey, New York and Virginia, from facilities that qualify under
PURPA. In considering PURPA issues, it should be noted that the
president's National Energy Policy calls for doubling the use of
combined heat and power (or cogeneration) by 2010 and encouraging the
growth in renewable sources of power, concluding that they will
increase reliability and improve the environment. A comprehensive
energy bill should encourage, not discourage, the deployment of these
technologies.
While we recognize that, unlike some proposals from years past, the
draft's intent is to remove PURPA's purchase and sale obligations only
where there are alternative purchasers and suppliers, the specific
conditions set out in the draft legislative language are insufficient
to ensure that PURPA facilities will be able to continue selling their
efficient, environmentally friendly power on a predictable and
sustainable basis where there remains only one potential buyer of PURPA
power and seller of back-up power.
It was one thing to reconsider PURPA as part of broader legislation
that would have mandated across-the-board wholesale and retail
competition, which would have created multiple buyers of PURPA power
and sellers of back-up power across the country. Given that such is no
longer the case, it is inappropriate to repeal PURPA's long-standing
mechanisms that bring beneficial sources of power to market. EPSA and
Calpine are members of a broad-based coalition on the PURPA issue. Our
view is that if current law is to be amended, the competitive
conditions under which PURPA would no longer apply should be carefully
defined, relevant to the operational and financial needs of PURPA
facilities (including recognition of their capacity value as well as
electric energy), and periodically reviewed if competitive conditions
change.
Finally, several issues to be taken up in other bills are worth
mentioning for the record. For example, EPSA supports the netting
provisions of the bankruptcy legislation and the allowance of
accelerated depreciation for new power plants because they could be
helpful to the energy industry and other sectors of the economy.
Mr. Chairman, we appreciate your knowledge of and dedication to
competitive electricity markets, and look forward to continuing to work
with you and your colleagues as you consider these policy issues. Thank
you, again, for the opportunity to testify.
Mr. Barton. Thank you, Mr. Walter. We now want to hear from
Mr. Henson Moore. Your testimony is in the record, and you are
recognized for 5 or 6 minutes.
STATEMENT OF W. HENSON MOORE
Mr. Moore. Thank you, Mr. Chairman. I am here today
representing major industrial consumers of energy. Our
industries are all in the business of making products that
require energy for production; in some cases, substantial
amounts of energy. An abundant and affordable supply of energy
is absolutely critical to our ability to stay in business, to
be able to make paper, chemicals, steel, plastics and other
goods that are the mainstays of our economy.
I want to compliment you on the efforts to increase the
supply of affordable energy in your bill. We never met a form
of energy we don't like. The international competitiveness of
our products are being severely tested by recent energy
shortages and increases in prices. In our case, in the forest
products industry, energy is our third highest cost--or the
third largest cost in our production. And so we basically
support what you are doing to increase the amount of energy
that we will have available to us.
In the interest of time, though, I would like to focus my
remarks on the electricity title of the bill and specifically
how it impacts combined heat and power of cogeneration
facilities. Many of your large industrial consumers of energy
also produce energy--the chemical industry, the refining
industry and the forest products industry in particular.
Currently, combined heat and power, or CHP, accounts for 9
percent of the electricity generation in this country. The
President's national energy plan calls for a doubling of that
by the year 2010. It won't happen unless we have access to the
grid and a guarantee of backup and standby power.
CHP plays a dual role in helping expand the supply of
affordable electricity, but it does so in an environmentally
friendly way. Cogeneration facilities can be more than twice as
efficient as a traditional power plant in generating
electricity with efficiencies up to 80 percent where the
average in the industry of generation of power is somewhere
around 35 to 40. In the forest products industry, in addition,
almost 60 percent of the energy we cogenerate comes from
biomass fuels, which is recognized as climate friendly.
To maintain and expand CHP, we have got to have the market
to sell the power we cannot use in our normal operations. Many
States continue to have monopoly electric utilities that own
both the generation and transmission systems. In States where
monopolies still control the market, CHP cannot get meaningful
access to the grid or backup or standby power at
nondiscriminatory rates without the Federal requirements under
PURPA. Even with PURPA in those kinds of States, our paper
mills often find it difficult and expensive to satisfy all the
local utilities' demands for entering into a contract under
PURPA. While some regions of the country have moved to a more
competitive environment, many have not. And even in those where
they have, a few large players can dominate that market which
really doesn't make it competitive.
Mr. Chairman, I want to compliment you for recognizing your
draft bill that the purchase and sale requirements of PURPA
should not be immediately repealed, there ought to be a truly
competitive market in place before that happens. We think you
have the concept right, but we are concerned about some of the
provisions and how they actually read. Specifically, under
Section 7062 of your bill, there are three things that can
trigger the elimination of the current PURPA obligations: A
FERC finding of competition according to a statutory
definition, a utility joining an RTO or by FERC otherwise
finding competition.
I recognize that legislating the definition of competitive
market is difficult, but there has got to be more there to be
able to point out that competitive markets have got to include
willing buyers and sellers, that QFs can reasonably expect to
have a market for their power and be able to get backup and
standby power when they need it. Such markets must offer a wide
range of products, and the transmission of electricity must be
completely separated from generation. We strongly support the
formulation of independent RTOs, but there is no guarantee you
are really going to have a competitive market for QFs to both
buy and sell power just because an RTO exists. You could have
only two companies in it, and those two companies not be
interested in real competition.
We also recommend that your legislation includes some
legislation that is not in it now, something we call a look-
back provision. You have got to recognize that while you may
have market conditions today, those conditions may change. You
may have a competitive market today and an uncompetitive one in
the future. The legislation ought to include a provision
authorizing FERC to reinstate the purchase and sale obligations
if it finds at any time that conditions of a fully functioning
market no longer exist.
There are many other issues worthy of comment in this
legislation relating to transmission, as others have testified
to, and market power issues. I have included those in my
written remarks. But let me say publicly that we agree fully
that transmission capacity is needed in some areas of the
country and believe it should not be held up local
obstructionism. Your language on transmission siting can make a
real difference in that regard. Thank you.
[The prepared statement of W. Henson Moore follows:]
Prepared Statement of W. Henson Moore, President & CEO, American Forest
& Paper Association, Also on Behalf of the American Chemistry Council
and Electricity Consumers Resource Council
My name is Henson Moore. I am President and CEO of the American
Forest & Paper Association. AF&PA represents more than 240 member
companies and related associations that engage in or represent the
manufacturers of pulp, paper, paperboard and wood products. America's
forest and paper industry ranges from state-of-the-art paper mills to
small, family-owned sawmills and some 9 million individual woodlot
owners.
I am here today also representing the Electricity Consumers
Resource Council (``ELCON''), and the American Chemistry Council
(``ACC.'') ELCON is the national association of large industrial users
of electricity. Its membership includes companies from nearly every
manufacturing industry. ACC is the national association of companies
engaged in the business of chemistry.
As the former Deputy Secretary of Energy involved in developing the
last National Energy Strategy in 1991 and the Energy Policy Act of
1992, and as a former member of this subcommittee, I know the severe
challenges that confront you. I appreciate the opportunity to share my
views, as well as the concerns of industrial energy users and
producers, as they relate to decisions you will have to make.
Mr. Chairman and Members of the Committee, our respective
industries are all in the business of making products that require
energy for production. An abundant and affordable supply of energy is
critical to our ability to make paper, chemicals, steel, plastics and
other goods that are mainstays of the U.S. economy. We haven't seen a
form of energy we didn't like yet--I compliment you on efforts to
increase the supply of affordable energy. Our businesses and the
international competitiveness of our products are being severely tested
by recent energy shortages and rising prices.
The U.S. forest products industry is vital to the nation's economy.
We employ 1.5 million people and rank among the top ten manufacturing
employers in 42 states with an estimated payroll of $50 billion. We are
the world's largest producer of forest products. Sales of the paper and
forest products industry top $230 billion annually in the U.S. and
export markets.
Energy is the third largest cost for the forest products industry,
making up more than 8 percent of total operating costs. Paper mills,
for example, run their paper machines using electricity largely
supplied by mill-operated, on-site cogeneration or Combined Heat and
Power (CHP) facilities. Although the industry is nearly 60 percent
self-sufficient (using biomass), we also use natural gas, coal, fuel
oil and purchased electricity to meet the balance of our energy needs.
Forest products companies spent over $2.1 billion on purchased
electricity in 2000. Importantly, the industry also sells more than 12
million megawatt-hours annually of electricity to the transmission
grid--the equivalent of a mid-sized utility.
Since 1997, employment at U.S. paper and paperboard mills has gone
from 222,400 to 178,000--a decrease of almost 20 percent. While these
losses have been caused by a variety of factors, the additional
pressure of the current energy crisis could result in further mill
closures and job losses. This situation would be far worse, had it not
been for the forest product industry's commitment to fuel efficiency
and independence over the past three decades. Since 1972, this industry
has reduced its average total energy usage by 17 percent, reduced its
fossil fuel and purchased energy consumption by 38 percent, and
increased its energy self-sufficiency by 46 percent.
The chemical industry is also a major consumer of virtually all
types of energy--fuel, power, steam and feedstocks (raw materials) for
its processes. The $460 billion business of chemistry is a key element
of the nation's economy. It is the country's largest exporter,
accounting for ten cents out of every dollar in U.S. exports. The
industry is also one of the largest and most efficient users of energy
in the U.S. economy with energy efficiency improvements of more than 44
percent over the past 30 years. Like the paper industry, the business
of chemistry has utilized CHP technologies to become more energy
efficient and to significantly reduce emissions.
ENERGY POLICY LEGISLATION AND COMBINED HEAT AND POWER
Any change in energy policy clearly must take into account the
needs of consumers and producers. It also needs to address the needs of
those who have already taken positive steps to make energy consumption
more efficient. The President's National Energy Plan calls for a
doubling of energy output from CHP units by 2010. CHP is the
cornerstone of the Administration's plan to improve energy efficiency
and expand sources of electricity generation in an environmentally-
friendly way. This goal of expanded CHP power, increased efficiency and
environmentally-friendly power will not be met without the assured
access to the grid that is afforded by the Public Utility Regulatory
Policies Act of 1978 (PURPA).
The primary function of a CHP unit is to support manufacturing
operations that require both electric power and steam or other useful
thermal energy. Nonetheless, this electricity represents a critical
component of the nation's electricity supply portfolio. Currently, CHP
represents 9 percent of total electricity generated nationwide. Forest
products, chemicals and oil refining represent 90 percent of the total
CHP generation in the manufacturing sector. Almost 60 percent of CHP
generation in the forest products industry is from biomass and, thus,
is climate friendly. CHP power is also highly efficient power, reaching
efficiency levels of 80 percent, which is at least twice as efficient
as conventional power generation. This high level of efficiency occurs
because our manufacturing processes use both the heat and the steam,
while traditional generation units vent steam into the atmosphere.
These efficiencies have also led to significant reductions in air
emissions.
Successful development and full implementation of black liquor and
biomass gasification programs would make the forest products industry a
net exporter of renewable electricity--removing some 18 million tons of
carbon emissions from the air and generating nearly 30 gigawatts of
CHP-based electricity. Mr. Chairman, this represents enough energy to
power two-thirds of California's summertime peak. These initiatives
entail substantial risk for an already capital-intensive industry. Much
R&D remains to be done to prove the technologies can work without
adversely impacting mill operations. Continued cooperation with the
federal government is crucial to reducing risk to a level that will
allow significant industry participation.
Similar initiatives are underway in the area of coal gasification.
These technology development programs are essential to creating new and
diverse sources of clean energy. Importantly, without guaranteed access
to the grid, these new power sources will not be developed and
implemented.
WHY PURPA IS IMPORTANT
PURPA was enacted to help reduce U.S. dependence on foreign oil and
encourage fuel diversity. It is one of the most successful federal
policies in promoting energy efficient generation and renewable energy.
CHP technologies make use of diverse fuel resources, including
renewables, thus lessening the nation's dependence on foreign oil.
Additionally, CHP units typically are diverse in size and
geographically dispersed. Their dispersal throughout the grid means
greater efficiency through reduced line losses, and improved system
reliability through less dependence upon central generation units.
Their smaller size also allows for continual adaptation to, and
adoption of, improving technologies. For these reasons, CHP has been a
successful addition to the nation's power supply portfolio.
In order to maintain existing CHP, and expand it in the future,
facilities must have a market to sell the power they cannot use in
their operations. Since many states continue to have monopoly electric
utilities that own and control both the transmission and generation of
electricity, CHP power would not get meaningful access to the grid
without the federal requirement under PURPA. In addition, CHP units
must be able to purchase back-up power at non-discriminatory rates.
Many industries, such as those I am representing today, responded to
PURPA by investing billions of dollars in new on-site CHP generation to
provide electricity primarily for their manufacturing processes and,
occasionally, to the electrical grid.
Under PURPA, electric utilities are required to interconnect and
purchase power from ``Qualifying Facilities,'' or QFs, and they are
obligated to sell standby, back-up and maintenance power to such
facilities on a non-discriminatory basis. This dual guarantee of a
place to sell excess power and to purchase backup power has made it
possible for more industries to install the necessary equipment and
develop the ability to generate electricity for their own needs, in
spite of monopoly utility markets.
The power production facilities of a manufacturing operation are
generally sized to meet the optimal demand. When the facility
experiences a technical problem it must either divert the excess energy
to the grid or shut down the power plant. When the manufacturing
production process requires more energy than can be produced on site,
then electricity is purchased from the local utility. The seamless
integration of these QFs benefits not only the manufacturer, but also
the local utility by giving them access to additional power to meet
unusually high demand for power. If Congress restricts the current
access to the grid that PURPA provides, many of these facilities will
be economically harmed.
PURPA'S ROLE IN A TRANSITIONING MARKET
While some regions of the country have moved to a more competitive
environment, many have not. Even in those regions where competition has
been introduced, it is often limited to a few players that dominate the
market, thus depriving small generators of meaningful access to willing
buyers and sellers. In the face of monopoly and transitioning markets,
there must be an assurance of access to the grid. Without such a
requirement, utilities could simply refuse to provide access or make
the cost of access either so expensive or so difficult that connection
to the grid would be impossible. Thus, the opportunity to fully utilize
CHP assets would disappear, and the monopoly utility will dominate the
market.
Even with PURPA in place, many QFs, including CHP plants, are still
having problems selling power into the electric grid. For example, in
the Northwest and California, utilities have put up roadblocks to power
being sold to the grid or to transmit power to third parties. In the
Southeast, where monopolies control vast transmission and distribution
systems stretching over several states, utilities regularly exercise
their market power through unreasonable surcharges, interconnection
standards and fees, and ``shell game'' pricing for backup power sales.
QFs frequently face obstacles, such as overly burdensome requirements
for interconnection studies and long delays, resulting in projects
being cancelled or abandoned because the cost of access is too high.
OBLIGATION FOR PURCHASE AND SALE OF QF POWER
FERC has correctly recognized that even in a state that is
scheduled to be open to retail competition, there is no guarantee that
a fully functioning competitive market for QFs to sell power into will
develop. Congressional energy policy legislation should approach PURPA
from a similar perspective. Care must be taken to ensure that CHP power
is not blocked from the grid as an unintended consequence of reforms to
PURPA. The PURPA obligation to purchase is the critical factor that
allows manufacturers to contribute to a more diverse energy supply for
this nation. If the purchase requirement is eliminated in advance of a
truly competitive market place, then many existing CHP assets will
become uneconomic, and future CHP development will stall because
financing for CHP units is highly dependent on access to the grid.
Similarly, the importance of a federal guarantee for back-up power
at just and reasonable rates cannot be over-emphasized in states that
remain dominated by monopoly utilities. Without it, QFs would be
captive to unregulated monopolies that could charge what they wish.
Even in states that have implemented some form of electric
restructuring, tariffs and regulations often continue to favor
incumbent utilities, and viable options for back-up power often are not
offered by competitive suppliers. The QF must be assured of receiving
back-up power on a non-discriminatory basis and at just and reasonable
rates, especially if the utility is the ``provider of last resort''
serving retail load. To the extent that utilities have an obligation to
serve retail loads, they also should continue to have the obligation to
provide back-up power to QFs on a non-discriminatory basis. Once there
is a truly competitive retail market, and QFs can buy back-up power in
the open market, then, and only then, will the back-up power guarantee
no longer be essential to existing and future CHP power generators.
ASSESSMENT OF CHAIRMAN BARTON'S DRAFT PURPA PROVISIONS
Mr. Chairman, I want to compliment you for recognizing in your
draft bill that the purchase and sale requirements of PURPA should not
be repealed without regard to the conditions in the market where the QF
is located. This is a major change from your bill in the last Congress.
It appears to be intended to ensure that competitive markets must exist
before the purchase and sale requirements of PURPA are repealed. This
is a goal we support. We are concerned, however, that the language of
this new draft does not adequately guarantee that CHP plants will have
meaningful and continuing access to willing buyers and sellers of power
before current PURPA provisions are eliminated.
I recognize that legislating the definition of a competitive market
is extremely difficult; however, it is essential if CHP power is to
survive in this country, and it is essential for meeting this
Administration's objectives on CHP and new power plant construction.
Specifically what do we mean by a ``fully functioning competitive
market?'' We mean markets that are comprised of enough willing buyers
and sellers that QFs can reasonably expect to have a market for their
power and be able to get backup and standby power when they need it.
Such markets would include both spot and bilateral transactions
offering a wide range of products, not only in terms of duration
(short-term, mid-term and long-term,) but also types of power (capacity
and energy; peaking, intermediate and baseload) and allow development
of other products and services. Title VII, Subtitle E, Section 7062 of
the draft bill encompasses some, but not all of these criteria for FERC
to use in determining whether the market is truly competitive.
While paragraph (a)(1)(A) sets out indicia of competition upon
which FERC can make a finding, paragraph (a)(1)(B) does not. We
strongly support the formation of large, independently managed Regional
Transmission Organizations (RTOs) that require separate independent
ownership of transmission and generation assets. We believe this is the
linchpin of a competitive market for electricity. Those with financial
interests in both transmission and generation will always have an
economic incentive to favor their own generation over other generators.
However, there is no assurance that this will be the outcome of the RTO
debate. Legislating in advance of the determination of these rules
leaves open the very real possibility that the intent behind your
provision (the assurance of competitive markets for QFs to sell and buy
power) will not be accomplished. Formation of an RTO in name only could
satisfy paragraph (a)(1)(B). Similarly, paragraph (a)(1)(c) provides
FERC with unfettered authority to determine a competitive market exists
and thus end the purchase and sale obligations. While we may not be
concerned about the use of this provision under the philosophy of the
current FERC, there is no guarantee that future Commissions will be as
committed to bringing about competition in electricity as this one.
Therefore, it would be helpful to give FERC guidance as to the criteria
they may use in determining a competitive market.
As currently written, a FERC finding that competition exists in a
market will end the utility's obligation to purchase from--and sell
power to--a QF. The legislation must also recognize that market
conditions can change over time, and that a competitive market today
may become uncompetitive in the future. For example, a key player may
go out of business, or acquire sufficient market share to dominate, or
they may control key inputs to the production of electric generation
such as natural gas. In these circumstances, FERC should have the
authority to reinstate the utility's obligation to purchase and sale
requirements of PURPA. We recommend that this legislation include a
provision authorizing FERC to reinstate the purchase and sale
obligation if it finds that the conditions of a fully functioning
competitive market no longer exist.
Finally, with respect to back-up and standby power, the draft
language should be clarified to ensure that if the local utility is
required by State law to be the provider of last resort, or still has
an obligation to serve any and all customers, that obligation should
not be affected by a FERC finding that triggers elimination of a
requirement to provide back-up and standby power.
OTHER ISSUES
There are many other issues worthy of comment in this legislation
such as those dealing with the transmission grid, transmission siting,
participant funding and market power issues including the repeal of the
Public Utilities Holding Company Act (PUHCA).
A transmission grid operated in a fair and non-discriminatory
manner is essential to industrial consumers whether they produce their
own power, or whether they are simply a purchaser of electricity. Our
goal is a transmission system that allows buyers of electricity as much
access to sellers of electricity as possible. Industrial customers
recognize that until we achieve the open transmission system, the
utilities who own monopoly transmission and distribution facilities
will still possess and exercise market power. These utilities have
often used their government-granted monopoly power to the detriment of
industrial users by favoring their own power generation over other--
often lower priced power--produced by others.
We agree with your assessment that new transmission capacity is
needed in some areas of the country. Mr. Chairman, I want to commend
you for including the language on transmission siting. We support the
language you offer and, in fact, we would support stronger language.
New transmission, where needed, will produce benefits to many
consumers, and it should not be held up by local obstructionism. This
is a serious, problem and you have proposed a fair way to deal with the
problem.
Your draft also includes a directive for FERC to implement and
utilize incentive rates for the construction of new transmission. While
your goal is a noble one--to bring more investment to transmission--
this directive is unnecessary. FERC currently has the authority to
order incentive rates on a case-by-case basis under present law. There
are many areas where new transmission is not needed. Incentive rates
would be pointless in these areas and would, in fact, do little more
than increase costs to consumers. Thus, we believe this provision in
the draft has the potential to increase costs to consumers in certain
areas without really encouraging additional transmission to be built.
If incentive rates were effective, FERC would order those more
frequently to help relieve the congestion where it exists on the grid.
In my view resolution of the endless delays in transmission siting will
do a lot more to bring needed investment than will this provision.
Another transmission issue that we believe is best left to a FERC
rulemaking is the issue of participant funding. FERC has--and
frequently uses--the authority to order such funding on a case-by-case
basis. While the draft bill's language on participant funding is an
improvement over versions that were considered in the Senate last year,
we continue to believe this issue is best settled in a regulatory
arena, perhaps on a case-by-case basis, rather than legislative arena
where it is difficult to craft a one-size-fits-all-rule when each
region has a different fact pattern. I would also note that all
consumer groups and all non-utility generators believe that mandatory
participant funding will hinder, rather than help, the construction of
new transmission capacity.
Finally, while my instincts tell me that PUHCA is an outdated and
ineffective statute that is no longer useful, energy managers in the
forest products industry and elsewhere in the manufacturing community
tell me otherwise. There are almost daily stories in the press about
utilities allegedly manipulating energy markets. There have been
countless instances where utilities have shifted debt from unregulated
affiliates to those affiliates subject to state regulations, thus
forcing costs to be borne by consumers. While, I support removing those
restrictions in PUHCA that limit needed investment by American
companies, I believe that reporting and other requirements in PUHCA
that protect consumers and investors should remain in place to prevent
market abuse and manipulation. Rules are needed to address the
operational unbundling of generation, transmission, system control,
marketing, and local distribution functions. The need for federal
authority to address market power and anti-competitive activities is as
essential today for avoiding such abuses as it was 70 years ago.
CONCLUSION
Industrial users and congenerators recognize and fully support the
need for more electricity generation and transmission. PURPA has been--
and will continue to--be an essential law. It encourages the adoption
of new technologies. It has produced a broader, more efficient, more
environmentally favorable base of electricity generation. Due to PURPA,
electricity capacity was added in smaller increments, thus not
burdening users with paying for generation that proved to be much
larger than necessary. And the cost of building that generation was
funded by private capital. The National Energy Plan, including the goal
of doubling CHP units by 2010, will be seriously undermined by efforts
to repeal PURPA where open markets are not in force and no independent
party determines access to the grid.
Any changes to PURPA must be made with a full recognition of their
potential impact on existing CHP assets as well as plans for future
expansion of CHP. The access to the grid afforded by PURPA and the
rights for back-up and standby power, are essential in markets and
regions of the country where competitive markets are not yet
functioning effectively. In the spirit of moving toward more
competitive markets in the future, the Congress should, at a minimum,
ensure that this power generation is not disadvantaged by monopolistic
markets by making the changes we have suggested.
Mr. Barton. Thank you, Mr. Moore. We now want to hear from
the Honorable Ervin, and I have been asked by Mr. Burr's staff
to suck up to you a little bit.
He is thinking about running for a Senate seat that your
grandfather held down in North Carolina for so many years, and
his staff just wants me to let you know that he is honored that
you are here and he thinks you are a great American, and he
wants to follow in the footsteps of your grandfather. And any
advice you have on how to help him to do that or any people you
know that could help him to do that, he would be more than
willing to listen to.
Mr. Ervin. Mr. Chairman, I have been over introduced
sufficiently today already, so I----
Mr. Barton. You are recognized for at least 5 minutes. In
all seriousness, we are very pleased to have you here.
STATEMENT OF SAM J. ERVIN
Mr. Ervin. My grandfather used to advise anybody that spoke
in public not to trespass on eternity. You have got a clock up
here which I appreciate, and I am well known for my verbosity
and I will try not to violate my grandfather's admonition.
I do appreciate the opportunity to come before you this
morning. I am here representing the other six members of the
North Carolina Utilities Commission, although most of what I am
going to say is generally consistent with the views that are
shared by most of the other State regulators in the southeast.
Like Mr. Walter, I am going to generally speak about the FERC's
standard market design initiative, although not surprisingly, I
suspect that what I am going to say is going to be about 180
degrees different than what he said.
Like the others who had spoken this morning, I do very much
appreciate the opportunity to address the issues that are the
subject of today's hearing. As the other speakers have
indicated, the subjects that you are addressing this morning
are among the most important issues that this Congress will
confront. As you consider them, I urge you in the strongest
possible terms to keep in mind that electric service is not
provided in a uniform manner across the United States and that
any electricity-related legislation that you ultimately choose
to enact should take these regional differences into account.
Electric service in the Southeast continues to be provided
in large part by vertically integrated utilities. With the
exception of Virginia, no southeastern State has embraced
retail competition at the present time. In addition, none of
these States are likely to abandon the existing industry
structure in the near future. As a general proposition,
southeastern regulators tend to believe that rates in our
region are favorable, that our service is reliable and that our
infrastructure is in reasonably good condition. For that
reason, there appears to be little demand for abrupt change in
southeastern electric markets.
This general level of satisfaction with the industry
structure does not, however, mean that the North Carolina
Utilities Commission is indifferent to the benefits of a
properly functioning wholesale market. On the contrary, we
recognize that such a wholesale market can benefit the retail
customers of our vertically integrate utilities, and I talk
about some of the ways that that can occur in my written
statement.
Despite this fact, the benefits of wholesale market
improvements are not unlimited given our current industry
structure. For that reason, any attempt to reform the wholesale
market should be based upon a careful analysis of the impact of
any proposed wholesale market changes upon the retail market
and a recognition that the purpose of the wholesale market is
to support the retail market rather than the other way around.
As you know, the FERC standard market design proposal has
produced considerable controversy in many parts of the country,
particularly including the Southeast. Although FERC claims that
standard market design is intended to rectify a perceived
residual discrimination in wholesale markets, much of what FERC
views as undue discrimination is something that we at the North
Carolina Utility Commission see as conduct inherent in the
operation of a vertically integrated utility of the type that
is contemplated by North Carolina law. It causes us to wonder
whether something that for 75 years has been supported by our
statutes has suddenly somehow become illegal.
The other justifications that have been offered in support
of standard market design by FERC don't look to us to have much
validity when applied to a fully regulated market like that
which exists in North Carolina. At least as far as North
Carolina is concerned, standard market design, seems to be, as
one of my colleagues is fond of saying, a solution in search of
a problem. The specific components of standard market design
don't appear to us to fit our existing industry structure very
well for reasons that I have detailed in my written testimony.
They seem to us to be much better suited to the restructured
markets that appear in other parts of the country.
At bottom, we are just simply concerned that the changes in
the existing industry structure that have been proposed in the
standard market design Notice of Proposed Rulemaking, as
applied to the Southeast, will increase our customers' rates
while reducing their quality of service. The standard market
design Notice of Proposed Rulemaking proposes nothing less than
a fundamental sweeping nationwide restructuring of the way that
both wholesale and retail service is provided in the United
States, including significant Federal intrusions into areas
once thought to be exclusive State domains. As a matter of
basic constitutional theory, it seems to us that such
fundamental changes are matters for elected rather than
appointed officials. As a result, any energy legislation that
you all choose to adopt should address, at least from our point
of view, or preferably stop or curtail standard market design.
[The prepared statement of Sam J. Ervin follows:]
Prepared Statement of Hon. Sam J. Ervin, IV, Commissioner, North
Carolina Utilities Commission
My name is Sam J. Ervin, IV. I am a member of the North Carolina
Utilities Commission, having served on that body for approximately
three and a half years. I very much appreciate the opportunity to
appear before the subcommittee this morning to discuss the current
status of the electricity sector and the role of Congress in addressing
the issues faced by that sector. The subjects you have asked me to
address--the development of well-functioning competitive wholesale
electricity markets, Federal statutory and regulatory barriers to
wholesale competition, the adequacy of the capacity and operation of
the interstate transmission grid, the climate for investment in
critical infrastructure, electric reliability, and identifying any
statutory or regulatory changes that need to be made concerning these
issues--are among the most important domestic questions that this
Congress will be called upon to consider. As you consider the
appropriate way address these matters, I encourage you to carefully
consider the impact of any legislation that you choose to enact on each
region of the country, including the Southeast, because of the
significantly different manner in which electric power is delivered to
retail customers in each part of the country.
The North Carolina Utilities Commission, like other similar bodies
across the country, is an agency of state government responsible for
regulating the rates charged and terms and conditions of service
provided by the entities defined by our General Assembly as ``public
utilities.'' Under North Carolina law, our electric jurisdiction
extends to ``persons'' owning and operating equipment and facilities
for the production, generation, transmission, distribution, and
furnishing of electricity. Our statutory authority does not, however,
extend to rural electric cooperatives and municipal distribution
systems, subject to certain limited exceptions. Put in simple English,
our electric jurisdiction is focused on the activities of the investor-
owned utilities providing retail service in North Carolina.
As many of you are aware, electric service in the Southeast
continues to be provided, in large part, by vertically-integrated
utilities. These utilities generate much of the power that they sell to
their retail customers in facilities that they own and operate,
transmit that power over lines that they own to their own distribution
facilities, and then deliver that power to individual factories,
stores, churches, and homes using those same utility-owned
.distribution facilities. Although I have not made a careful study of
the statutes enacted in other Southeastern states, North Carolina law
clearly contemplates the continued existence of such vertical
integration. The only common exception to this model in most of the
Southeast exists when retail service is provided by a rural cooperative
or municipal distribution system. Although the situation varies from
state to state within the region, some of the rural cooperatives and
municipal systems in the region own their own transmission and
generation assets. Others, particularly in North Carolina, are
completely transmission dependent. With the exception of Virginia,
retail competition is not authorized anywhere in the Southeast at the
present time. Arkansas has recently repealed the retail competition
statute that it enacted a number of years ago. Although I do not claim
to be omniscient, it is my impression from talking with colleagues
throughout the region that none of the other Southeastern states are
likely to move to retail competition in the near future. As a result, I
believe that the existing industry structure is likely to remain in
place for the foreseeable future.
At this point, the general perception among Southeastern regulators
is that the regional system for providing electric service is, on
balance, working reasonably well. Our rates are among the lowest in the
country. We have not experienced any significant reliability problems
in recent years. Our reserve margins are generally adequate. A study of
the regional transmission infrastructure performed by the staffs of the
Southeastern state commissions found no material transmission
bottlenecks. At bottom, while our electric system is not perfect, the
available evidence has not led our state legislatures to support
radical reform of the type adopted in certain other parts of the
country. Unquestionably, the decision of whether, when, or how to
restructure retail markets is a decision for each state to make instead
of a matter to be decided at the federal level.
The persistence of the traditional industry structure throughout
most of the Southeast does not, however, mean that we are indifferent
to the potential benefits of a properly-functioning wholesale market.
On the contrary, the North Carolina Utilities Commission recognizes
that a properly-functioning wholesale market can benefit the retail
customers of our vertically-integrated utilities in a number of ways.
First, the wholesale market can provide enhanced opportunities for our
utilities to procure competitive generation from independent power
producers as an alternative to utility-built options. Secondly, the
wholesale market can provide opportunities for additional short-term
economy purchases, allowing our utilities to reduce their costs by
purchasing power instead of operating more expensive units on their own
systems. Finally, the wholesale market can allow vertically-integrated
utilities to share reserves, effectively reducing the costs of
maintaining system reliability. As a result, I do not believe that any
of my colleagues disputes the benefits of a properly-functioning
wholesale market to the operation of a retail market despite the
continued presence of traditional, vertically-integrated utilities.
North Carolina pays more than mere lip service to the development
of a properly functioning wholesale market. Instead, the North Carolina
Utilities Commission and the utilities we regulate have taken steps to
facilitate appropriate reliance on the wholesale market in recent
years. Our jurisdictional utilities have engaged in joint planning
efforts and reserve sharing through the Southeastern Electric
Reliability Council. All three of our major electric utilities provide
retail electric service in more than one State, so they are accustomed
to performing multi-jurisdictional planning. At the time that our
utilities procure additional capacity to meet anticipated future load,
they typically issue a request for proposals for the purpose of
soliciting wholesale offers that are compared with the cost of self-
build options prior to making a final resource procurement decision.
The North Carolina Utilities Commission will entertain a complaint from
a competitor that feels that its proposal was not fairly considered
during the evaluation process. As a result of such an RFP, Duke entered
into a purchased power contract with a Dynegy subsidiary several years
ago. An examination of the records in our fuel adjustment cases since
1996 indicates that our jurisdictional utilities have purchased power
from marketers and brokers in lieu of generating power in their own
facilities. The North Carolina Utilities Commission has adopted
procedures to facilitate the recovery of the costs associated with such
purchases in order to avoid deterring our utilities from purchasing
such less expensive power. A number of years ago, at the request of our
General Assembly, the North Carolina Utilities Commission revised our
generating plant certification rules to make it easier to site and
construct merchant generating facilities. To date, we have not rejected
any application for the issuance of a merchant plant certificate. As a
result, it would be completely inaccurate to say that the North
Carolina Utilities Commission has refused to embrace the opportunities
for cost savings and reliability improvements available on the
wholesale market.
Acknowledging that a properly-functioning, wholesale power market
can be beneficial to North Carolina electric customers does not,
however, end the inquiry. The potential benefits of wholesale market
improvements in a retail market such as that found in North Carolina
and most other Southeastern states are not unlimited. The ultimate
purpose of the wholesale electric market is the same as most wholesale
markets--supporting the retail market. The large majority of the power
sold at retail by North Carolina's investor-owned utilities is
generated in utility-owned facilities. The same is generally true of
the other vertically integrated utilities that provide service
throughout the Southeast. Although the municipal distribution and rural
cooperatives appear to place greater reliance on the wholesale market
than is the case with Southeastern investor-owned utilities, the simple
fact of the matter is that, for the foreseeable future, the impact of
wholesale market improvements in the Southeast is likely to be
relatively limited. While the importance of the wholesale market in the
Southeast may increase over time, the potential benefits of an improved
regional wholesale market in the near term should not be oversold. As a
result, any attempt to reform the wholesale electric market should
include a careful analysis of the impact of the proposed reform on the
retail market and should avoid subordinating the retail market to the
wholesale market.
At this point, the legal structure governing the operation of the
wholesale market is generally set out in FERC Order 888, which provides
for open access transmission service at the wholesale level and for
unbundled retail transmission, and by Order 2000, which provides for
the voluntary formation of regional transmission organizations. As you
aware from your hearings last week and from your work on energy
legislation in the last Congress, a recent FERC proposal intended to
implement a standard market design has produced considerable
controversy in many parts of the country. Along with many of our
colleagues throughout the country, the members of the North Carolina
Utilities Commission have vigorously protested the FERC's proposed SMD
as contrary to existing law and as potentially harmful to the interests
of the retail ratepayers of the vertically-integrated utilities that
provide service in our jurisdictions. Our objections to the proposed
SMD are fundamental, and are shared in whole or in part by many people
besides Southeastern state regulators.
According to the FERC, the principal purpose of SMD is to remedy
what it perceives to be remaining undue discrimination in wholesale
electric markets. An analysis of the relevant portion of the SMD Notice
of Proposed Rulemaking indicates that much of the basis for the FERC's
claim of undue discrimination rests upon conduct that we believe to be
inherent in the operation of a vertically-integrated utility. When one
examines the language of the undue discrimination section of the SMD
NOPR in conjunction with the FERC's pending proposal in the standards
of conduct NOPR to prohibit individuals performing the generation
function in a vertically-integrated utility from communicating with the
individuals performing the transmission function in the same
vertically-integrated company except through the OASIS system, one
cannot help but conclude that the FERC is fundamentally hostile to
vertical integration of the type required by the law of North Carolina
and most other Southeastern states. Putting it bluntly, the FERC's
legal analysis appears to assume that the industry structure
contemplated by North Carolina law and common throughout the United
States ever since the enactment of the Federal Power Act has somehow
become illegal. That proposition strikes me and my colleagues as
exceedingly dubious.
A number of other justifications for SMD have been advanced at
various times during the debate over the merits of this proposal. For
example, Chairman Wood stated in his testimony before you last week
that SMD would ``provide certainty to all market participants,
encourage new infrastructure investment, promote fair competition and
prevent a repeat of the mistakes made previously in California.'' In
our view, none of these additional justifications has any merit as
applied to North Carolina and the Southeast. For the reasons that I
will discuss in a few minutes, we are not convinced that SMD will lead
to fair competition and are concerned that it will actually harm our
citizens if implemented as currently proposed. Instead of providing
certainty for market participants, SMD is an open invitation to years
of additional litigation over the validity of the FERC's attempt to
control matters traditionally handled at the state level, such as its
assertion of jurisdiction over bundled retail transmission, generation
issues, and resource adequacy matters. If the FERC proceeds with SMD in
its current form, such litigation is virtually inevitable. In my
opinion, the resulting uncertainty will deter, rather than encourage
additional infrastructure investment. I might add, parenthetically,
that North Carolina law gives the North Carolina Utilities Commission
the power to compel the construction of needed generation,
transmission, and distribution facilities, so that SMD will do little
to assure adequate infrastructure in our State. Finally, North Carolina
and the other states that have retained the traditional industry model
are not at risk of a California-type debacle because our rates remain
regulated and are not significantly exposed to wholesale price
volatility. As a result, none of the remaining justifications for SMD
offered by Chairman Wood in his testimony before you last week have any
real application to North Carolina and the Southeast.
As I indicated a moment ago, a number of the components of the
FERC's SMD proposal are potentially harmful when considered in the
context of the facts on the ground in the Southeast. Although I won't
subject you to a detailed analysis of the entire SMD proposal, please
keep in mind that the ``best practices'' on which SMD is based were
primarily developed in markets that developed voluntary from tight
power pools in the Northeast over a period of many years. We are not at
all sure that experiences there are directly and immediately
transferable to the situation in the Southeast. At any absolute
minimum, the transferability of that experience is not intuitably
obvious, at least to those of us with experience in the current
Southeastern markets.
First and foremost among our concerns with SMD is the FERC's
attempt to assert jurisdiction over the transmission component of
bundled retail service and its related decision to abolish the existing
native load priority. I recognize that there is an inevitable tendency
to think that arguments among state and federal regulators about
jurisdiction are mere turf protection battles. In some instances, that
may be exactly what they are. In this instance, however, I do not
believe that to be the case. After all, jurisdiction is a means to an
end. At bottom, the issue of jurisdiction is the issue of who decides.
In this area, that issue is of ultimate importance, as can be seen from
the question of the treatment of the native load priority. Under
existing FERC precedent and under North Carolina law, our vertically-
integrated utilities are required to give priority service to the
native load customers who have paid for the construction and operation
of the existing transmission systems in their retail rates. As we use
the term, the retail customers of the municipal distribution systems
and rural cooperatives as well as the retail customers of the
vertically-integrated utilities are entitled to be treated as ``native
load.'' FERC proposes to eliminate the existing native load priority in
the interests of facilitating the development of more competitive
wholesale markets. We believe that that implementation of this proposal
will result in a diminished quality of service for North Carolina
electric consumers. In the event that FERC is unable to assert
jurisdiction over bundled retail transmission, this inequity will not
occur. In the event that FERC is able to assert jurisdiction over
bundled retail transmission, native load customers will be deprived of
their right of priority access to the transmission system. As a result,
resolution of this jurisdictional issue is more than deciding who wins
a turf battle between two sets of bureaucrats; it is, at least in this
instance, a choice between competing visions of the manner in which
electric service should be provided in each region of the country.
As a corollary to the abolition of the native load priority, the
FERC proposes in the SMD NOPR that all transmission service, including
that included in bundled retail service, be provided under the same
open access tariff. Although FERC clearly states that this means that
all transmission service should be provided in accordance with the same
terms and conditions, it is not clear whether this will ultimately
result in FERC determination of the cost of all transmission service
nationwide. Although this proposal may seem, at first blush, eminently
equitable, it suffers from the same defect as the proposed abolition of
the native load priority. Contrary to the FERC's assumption, all
transmission load is not created equal. The effect of the FERC's
proposal would be to subject the bundled retail load of a vertically-
integrated utility to an increased risk of curtailment or bearing new
congestion costs as a result of additional uses of the transmission
system made by new market participants. Although we certainly favor the
most efficient use of the transmission system reasonably possible, we
believe, at bottom, that the native load customers of the transmission
owning utility have paid for the existing transmission system and ought
to retain their existing priority right to the use of that system. The
FERC's proposal would eliminate that existing right without any
offsetting benefit.
An integral part of FERC's SMD proposal is its requirement that
each transmission-owning public utility surrender control of its
transmission assets to an independent transmission provider or ITP. An
ITP can be anything from an RTO of the type with which we are all
familiar to a single-utility transmission provider. Although each of us
understands the arguments in favor of independent operation of the
transmission system and understands their potential merit, we also
understand that those benefits come at a cost. The simple fact of the
matter is that setting up and operating an ITP is not an inexpensive
proposition. The problem with the mandatory independent operation
provisions of the SMD NOPR is that the FERC's proposal totally
overlooks the possibility that, in at least some circumstances, a
particular ITP proposal may not be cost-effective. As a result, the
mandatory independent operation provisions of the SMD NOPR, unlike the
voluntary RTO provisions of Order 2000 construed in conjunction with
Order 888, creates a real risk that the costs associated with an
inefficient ITP will be imposed on native load customers.
The SMD NOPR proposes to manage congestion through the use of
locational marginal pricing, or LMP. Under FERC's proposal, LMP would
replace the existing system of physical transmission rights.
Transmission customers entitled to firm service under the existing
system have both price and deliverability certainty. The implementation
of LMP requires the ITP to operate certain bid-based markets through
which load serving entities may procure power, must resolve congestion
problems, and are required to procure certain ancillary services.
Although I have many concerns about those portions of the SMD NOPR that
require the use of LMP and define the operation of these bid based
markets, let me focus on just two of them. First, the principal method
available to load serving entities for protecting themselves from
additional costs associated with this new congestion management system
is the procurement of financial instruments known as congestion revenue
rights. The FERC indicates a preference for auctioning congestion
revenue rights to the highest bidder, with the revenues going to the
load serving entities responsible for paying the fixed costs of the
system. The problem with this approach is, of course, that there is no
assurance that these load serving entities will be able to win the
auction or that the auction revenues will match actual congestion
costs, thus exposing the load serving entity to the payment of
congestion costs which that entity does not currently have to pay. As
an alternative, the FERC proposes an allocation formula that deprives
the load serving entity (and its customers) of existing capacity for
growth and existing capacity that fails to pass a simultaneous
feasibility test. For all of these reasons, the FERC's proposal risks
depriving bundled retail customers of currently-available price and
deliverability certainty. Secondly, the ITP-operated markets are bid-
based, which means that the prices charged for power purchased from
these markets, will be based on bids submitted by participating
generators. Given that the bulk of the generation in North Carolina is
owned by the vertically-integrated utilities subject to our regulatory
jurisdiction, it seems to me that there is a risk of market power in
these bid-based markets solely because of the design of the markets
mandated by the SMD NOPR. As a result, the SMD NOPR creates a
congestion management system and various bid-based markets that could
raise costs for Southeastern electric customers. This is a prime
example of the way in which the new market structure envisioned by the
FERC conflicts with the regulated retail structure that persists in the
Southeast.
A final matter of great concern to many in the Southeast is the
issue of cost-causer or participant funding. The concept of cost-causer
funding arises from the notion that transmission expansion projects
should be financed by those who benefit from such projects. Although
virtually everyone agrees that the cost of transmission enhancements
that serve regional reliability purposes should be borne by all
customers taking service from the system, there is considerable concern
that those same ratepayers will be forced to bear the costs of other
transmission improvements that provide them with little or no benefit.
Although the SMD NOPR provides rhetorical support for participant
funding, there is considerable concern among Southeastern state
commissions that the preconditions for implementing this change in the
FERC's existing transmission pricing policy as stated in the NOPR will
not occur until significant additional costs have been imposed upon
naive load customers. As a result, many Southeastern regulators remain
concerned about the treatment of participant funding in the SMD NOPR.
The concerns felt by Southeastern regulators about the policies
espoused in the FERC's SMD NOPR and related pronouncements were so
significant that the Southeastern Association of Regulatory Utility
Commissioners commissioned a study of the potential impact of those
policies on our region. I served on the steering committee responsible
for overseeing the performance of this cost-benefit study along with a
number of my colleagues from other SEARUC states. After reviewing
several outstanding proposals and interviewing a group of well-
qualified consulting firms, we ultimately retained Charles River
Associates to perform the study, which was intended to examine the
impact of RTO formation and the implementation of SMD on the Southeast.
I am satisfied from my own work on the steering committee and my
conversations with others familiar with CRA's credentials that there is
no consulting firm in the United States with greater integrity or more
impressive qualifications. After performing an enormous amount of work
in an attempt to fully understand Southeastern electric markets and
modeling a number of different scenarios, CRA released the results of
its work last fall. The principal conclusion of the SEARUC study was
that ``[t]here is considerable uncertainty as to whether RTOs and SMD
would provide greater benefits to the southeast than the implementation
costs.'' As a result, the general thrust of the concerns that I have
expressed in my testimony have support in the SEARUC cost study, which
is available for review on the SEARUC website.
I understand that the Chairman Wood attempted to utilize this study
to claim that SMD would result in net benefits for the Southeast during
his testimony last week. Despite my great personal respect for Chairman
Wood, I disagree with his description of the results of the SEARUC
study. I did not hear Chairman Wood testify, and am not for that reason
able to comment directly on what he said. In looking at the most
optimistic scenario shown in the study, CRA found the existence of
approximately $1.3 million in total regional benefits out of total
regional production costs of approximately $114 billion. In other
words, the total benefits were approximately one percent of total
production costs, which strikes me as a relatively small number. As if
that were not enough, a significant portion of this benefit stems from
the study's assumption that a certain level of merchant generation will
come into operation and that participant funding will come be
implemented by 2004; these assumptions are almost certainly optimistic
at this point. Furthermore, the SEARUC study makes the further
optimistic assumption that Southeastern load serving entities will be
perfectly hedged against congestion costs and that there will be no
market power in regional wholesale markets. In the event that either of
these assumptions turns out to be erroneous, the benefits shown in this
scenario are overstated even further. In other words, under this
scenario, the FERC's SMD proposal might produce quite minor benefits
for the Southeast assuming everything works perfectly. As a result, I
submit that CRA rather than Chairman Wood has correctly summarized the
implications of FERC's proposal for our region as revealed in the
SEARUC study.
The North Carolina Utilities Commission has filed comments in the
FERC's SMD proceeding in which we have advanced many of the arguments
that have I have presented here this morning. On the other hand, we
have also tried to hard to play a constructive role in this process. We
do not have any desire to prevent the implementation of reforms that
would benefit other regions of the United States so long as no legal
precedent is established that would allow the imposition of policies
that would harm the Southeast. We do not, by any stretch of the
imagination, contend that absolute nirvana has been achieved in our own
regional wholesale electric power markets. We do not countenance
violations of the open access rules adopted by the FERC in Order 888,
and are willing to join with our federal colleagues in working to
remedy existing market defects. We are willing to seriously consider
cost-effective RTO proposals and other market design changes so long as
those ideas do not result in potentially harmful structural alterations
in Southeastern regional markets or unduly hamper our ability to
protect the interests of the retail ratepayers in our region. About
three weeks ago, all seven members of the North Carolina Utilities
Commission joined 36 of the 48 Southeastern state commissioners in
sending a letter to Chairman Wood setting out the preconditions under
which we would work with the FERC to identify problems in wholesale
markets and implement appropriate solutions to such problems as exist.
We look forward to receiving a response from him in either the form of
a reply to our letter or a substantial modification to the existing SMD
proposal in the white paper that the FERC has indicated will be
released sometime in April.
At the time that I examined the draft legislation that the Chairman
circulated approximately two weeks ago, I did not see anything that
directly addressed the Standard Market Design issue. I was, however,
concerned by a number of provisions that I discovered in reviewing that
draft in preparation for appearing here today. The transmission
infrastructure improvement rulemaking provisions of proposed FPA
Section 215(a) seem to be limited to transmission assets used for
wholesale transactions and to new transmission facilities. If I am
correctly interpreting this language, then I do not believe that I have
any objection to it. On the other hand, if this language is intended to
allow FERC to provide a higher return for existing transmission assets
or to provide an incentive for the transfer of existing transmission
assets to RTOs or other novel entities regardless of the impact of such
transfers on end-users, then I would question the wisdom of such a
proposal. Similarly, while the North Carolina Utilities Commission has
expressed support for cost-causer funding as I have already indicated,
proposed FPA Section 215(b) could be construed to limit cost-causer
funding to situations involving an RTO or some similar institution.
Given our belief that the principles embodied in participant or cost-
causer funding represent the correct policy regardless of whether
operational control of transmission assets has been transferred to an
RTO, an ITP, or some similar entity, I would suggest that proposed FPA
Section 215(b) be revised to ensure that those who cause costs to be
incurred are the ones who pay those costs whether an RTO exists or not,
since the ultimate goal should be imposing costs based on principles of
cost causation. The subject of FERC transmission siting authority has
been widely discussed in recent years, and I do not intend to debate
the issue at length here today. Consistently with the position adopted
by many other state commissions, the North Carolina Utilities
Commission does not believe that the case has been made for federal
transmission siting authority and would oppose the enactment of
proposed FPA Section 216. As I have already indicated, the absence of
any recognition that RTOs may be beneficial in some regions and not in
others suggests that the sense of the Congress findings in proposed
Sections 7022(a) and 7022(b) would not be appropriate. I will be happy
to discuss any of these comments in more detail if that would be
helpful to members of the Subcommittee.
The ultimate issue that I respectfully suggest that the
Subcommittee confront in drafting any energy legislation that it deems
appropriate in this Congress is what should be done about SMD. Although
the issues addressed in the Chairman's draft legislation are important,
those issues pale in importance compared to those raised by the SMD
NOPR. The SMD proposal represents nothing less than a fundamental
restructuring of the electric industry in the United States. As a
matter of basic constitutional law, I believe that fundamental policy
decisions should be made by the elected representatives of the people
rather than appointed officials like the members of the FERC. In
addition to addressing the other issues that are to be discussed by the
various witnesses that testified last week and today, I would urge you
to give serious consideration to addressing the SMD issues as well in
any legislation you choose to mark up and report to the full Committee.
While the North Carolina Utilities Commission would obviously prefer
that any legislation that you approve preclude the FERC from moving
forward with SMD in its current form, compel the FERC to recognize
current state-federal jurisdictional boundaries, and require the FERC
to give serious consideration to the significant differences in
regional electric markets that exist across the country in a way not
reflected in the current SMD proposal, we also believe that the issues
raised by the SMD NOPR are so important that they call for a decision
by the Congress regardless of the substantive outcome. I certainly
appreciate your taking these thoughts into consideration as you
undertake the important work that lies ahead.
Mr. Barton. We thank you, Mr. Ervin. The Chair is going to
recognize himself for the first 5-minute question rounds. We
are only going to have one round of questions because we do
have two other panels. We are also going to take a 15 to 20
minute recess beginning at 11 a.m.
Mr. Walter, I am told that your company has a number of
high efficiency plants that are currently idle that if we had a
law similar to what is in my draft bill, those plants could be
providing power at much cheaper prices to certain high-cost
regions of the country. Is that true?
Mr. Walter. That is correct. The power plants that we are
constructing are modern natural gas plants that are combined
cycle and generally have an efficiency that is 40 percent
greater than older technologies that currently exist in a lot
of regions of the country. In some regions where we have built
these power plants, economic dispatch does not exist, and there
is not a regional transmission organization that independently
operates the system. And utilities that are in a situation like
this where they own the transmission systems as well as their
own generation they are obviously going to look out for their
own best interests. And so some of these older power plants are
operating where some of ours are not operating, and if we were
to operate, the obvious cost/benefits would be there of less
fuel consumption.
Mr. Barton. Mr. Moore, you mentioned some improvements that
your association would like to see on PURPA in a competitive
market. Do you have legislative language that your group would
be prepared to present to us so we could try to improve our
draft?
Mr. Moore. Yes, Mr. Chairman, we do. I will have that by
the end of the day.
Mr. Barton. Okay. Because we are going to put out a bill--
we hope to put out a bill on Monday so that we have a markup
vehicle, so I would encourage you to do that.
Mr. Moore. Thank you.
Mr. Barton. Ms. Schori, you indicated in your testimony
that there are some changes to the FERC-lite language that is
in the current draft, that if those changes were made, if I
understood you correctly, your association could support. Just
so that I am clear on what this would mean, can you describe
the service that your group, the people you represent, do
provide to yourselves and what service you could then be able
to provide to others if we made the language change that you at
least alluded to? And turn the microphone on.
Ms. Schori. Sorry. Yes. We hope to have possible language
to the committee by the end of today, if not today, very
quickly for your consideration. The issue that we are seeking
to address is to have express recognition of our service
obligation to our existing customers and load and the need to
reflect that in the draft language to assure that with respect
to assets that we own or control that we will be allowed to
continue to make use of those to serve our own load. And that
is the language that we need to have clarified.
We are proposing that with respect to surpluses, as we have
been doing voluntarily, to make that surplus available to
market participants on the same terms and conditions that we
serve our own customers. In the language that was originally
negotiated over probably 3 or 4 years ago now, the concern that
we have had is that we do have--obviously, we are in support of
local control. Our own elected officials at the local level set
our rates. There is concern about both that rate setting
authority, impacts on our bonds that we use to finance
facilities, and we want to assure that we are talking about
surplus transmission, transmission that is not already
dedicated to the service of our own----
Mr. Barton. You are going to have some specific language
that your group provides us.
Ms. Schori. Yes. Thank you.
Mr. Barton. Okay.
Mr. English, if my little ugly bill had feelings, they
would be hurt.
But, fortunately, my ugly little bill has got armadillo
skin, and it is pretty hard to get through it. But I just want
to try to make sure I understand where your group is coming
from. Congressman Dingell and I went to a Kyoto global warming
conference in Japan several years ago, and we met with the
communist Chinese leaders, and the communist Chinese leadership
at that conference was saying they supported the concept of the
Global Warming Treaty and at some point in time they would want
to be supportive. So Mr. Dingell said, ``Well, do you think
that is going to be in 10 years?'' And they said, ``No.'' He
said, ``Well, how about 20 years?'' And they said, ``No.'' And
he said, ``How about 100 years.'' And they said, ``No.'' And he
said, ``How about 1,000 years?'' And they said, ``No.'' So I
want to ask you on behalf of your coops, will there ever be a
time that you think your coops might be supportive of a
comprehensive electricity title that created a national grid
that everybody had open access to?
Mr. English. What about this year? I would support it this
year, Mr. Chairman, and so would the electric cooperatives.
Here is the issue that we are dealing with, and I pointed out
don't look at all what we described as the bad and ugly because
we also had some good, if you want to call it the beautiful,
and there are several--quite a number of features in your bill
that we would describe along that line.
The difficulty that we see is this: Standard market design
is a real problem with regard to legislating this legislation
in a number of those items that I pointed out. The reason being
this: That the standard market design is not in final form, and
as I mentioned, with the so-called FERC-lite provisions, as we
had talked abut with an earlier piece of legislation, which we
in fact felt we could live with, works under 888, but when you
get to the standard market design we have got a whole new set
of rules and suddenly it doesn't work under that, and it
presents difficulties. We have got 200 distribution
cooperatives as a result of standard market design with these
provisions that are going to be drawn in. Now, I don't think
that is the intention of this committee. I don't think the
distribution systems, the small electric cooperatives, are
really what you are getting at. I don't think you want to see
those resources used in that area.
Mr. Barton. You are right.
Mr. English. So the problem comes in this legislation
coming before we know what the final outcome with the standard
market design is is a real problem. Now, unless this committee
wants to, and can, legislate and prohibit the FERC from
implementing the standard market design, which I think in all
reality they can get around anyway because all they have to do
is change the rules a little bit and they get around the
legislative aspect of it, and I know the frustrations of that
as a legislator. But the other side of this is the fact that we
are hopeful that we are going to see some major changes in the
standard market design proposal that FERC is advancing. We
won't know that till April at the earliest. There are over 600
pages of that standard market design, we filed over 200 pages
of changes, and we are hopeful that will come about. But we
can't say that whatever they end up with is in fact going to
exempt those 200 electric cooperatives or not.
The additional issue is this question of incentive rates.
It doesn't make any sense to us, because FERC already has the
authority to provide incentive rates, and FERC is in some cases
doing incentive rates, and one of the frustrations that every
legislator has is you can't pass a law specific enough to apply
justice to each and every situation as it is going to happen
around this country. But, basically, that is what this is an
attempt to do. It completely disregards the fact in testimony
from the investment community that you can reach the same
conclusion of getting more investment what you say that you are
after, Mr. Chairman, by reducing risk. This completely ignores
that aspect of it. And as I said, the industry itself through
its own task force with, I should say, the Department of
Energy's task force, came to that very conclusion. There are
different options we can do, and why we would want to force
FERC to take only one option, ignore anything else doesn't make
any sense to us.
The participant funding thing, I know, Mr. Chairman, you
are in favor of competition and you would like to see that.
Well, why within a given region would we discourage the
building of transmission? Why would we discourage the
improvement of transmission? Why would it make it more
difficult? But just as we have in North Carolina and we have in
a lot of other States, you do have a vertically integrated
utility that in fact is benefiting by the lack of transmission,
and we know that this exists. This is something that is
building that into law. We don't understand why that is the
case. We don't think that is the intent, we don't think that is
the aim, certainly, of the chairman, but----
Mr. Barton. We need to let Mr. Boucher ask his questions.
You are in the process of giving us about a 6-minute beautiful
answer.
Mr. English. We can do it this year, Mr. Chairman.
Mr. Barton. We are going to put you down as undecided with
hope.
Mr. Boucher is recognized for 5 minutes.
Mr. Boucher. Well, thank you very much, Mr. Chairman.
Actually, I was enjoying Mr. English's presentation. I thought
he was doing quite well.
Let me say thank you to all of the witnesses for your
informative testimony this morning and for spending some time
with us. Mr. Walter and Mr. Moore, I was very pleased to hear
both of you underscore in your testimony the value to the
country of combined heat and power operations, both in terms of
the addition to overall energy efficiency that CHP offers to
the generation base and also to the environmental benefits that
arise from that increased level of efficiency.
Last year, the subject of PURPA was considered in the
Senate, and the Senate in its wisdom decided, as it was
addressing electricity legislation, to craft an alternative to
the rather draconian repeal of PURPA which had arisen in the
House. And that approach was fostered by Senators Carper and
Collins. And I have two questions to you. First, I would like
to hear your view of the Carper/Collins provisions with regard
to PURPA, which offer an opportunity for PURPA to sunset market
by market as the market becomes full competitive and offers an
opportunity for the qualified facilities and their industrial
hosts to be able to sell electricity into a competitive market
when they have excess power to sell and also to be able to buy
it from the general market whenever they have those needs. That
was the essence of the Carper/Collins provision. And I would
like to have your comments on that.
The second thing I would like to have your comment
concerning is the provision that is contained in Chairman
Barton's draft that moves beyond Carper/Collins and offers
other opportunities for PURPA to sunset market by market, and I
would focus attention specifically on the provision that says
that if the investor-owned utility locally joins an RTO and
places its transmission in the RTO, that that would be deemed
sufficient to enable to PURPA to sunset in that market. Explain
to us if you would why the mere fact of joining an RTO does not
guarantee the kind of competitive market in that community that
gives the QFs the assurances that the QF would have to have in
order to continue operation. Which one of you would like to
begin? Mr. Walter.
Mr. Walter. Let me just make a couple of comments about
Carper/Collins. We generally supported the intent, I believe,
of what happened last year in that, but I wanted to point out
one thing that is very important for cogeneration facilities.
In many cases, these facilities need to operate 24 hours a day,
7 days a week in order to supply the necessary thermal needs
and electric needs of industrial hosts. So I think the focus
last year was much more on real-time, short-term markets. What
we really need here is a focus on the access to the ability to
enter into long-term agreements, ones that are baseload, around
the clock and with that sort of an aspect I think that would be
an improvement on what happened last year.
With respect to the question in regards to RTOs, I think
you stated it very well, in order for a PURPA facility to be
able to operate to sell its electricity to a customer and to
buy backup power, one needs a customer. Just having a regional
transmission organization with access to the transmission grid
does not give you a customer. It doesn't provide for multiple
customers, it simply gives you a pathway. And so the RTO aspect
of this would not be I think a test at all with respect to
whether PURPA facilities are entering into a fair and open and
sustainable competitive market.
Mr. Boucher. Mr. Moore, would you like to add to that?
Mr. Moore. Yes, Mr. Chairman, thank you. Yes, certainly, we
supported Carper/Collins last year, and a great effort was made
in a short heat of battle timeframe to craft that language and
it probably could be improved upon, but we certainly supported
it. The problems--and we think that Chairman Barton has moved a
long way from where he once was in prior legislative drafts
into where we think the spirit he is trying to get to now,
which would be basically a Carper/Collins kind of an
arrangement. We are worried for the same reasons Mr. Walter is
about subparts B and C of Section 7062. This looks like it
could be an RTO in name only, and so you really don't have the
ability to really get into that and figure out if you really
have competition or have you gotten a couple of people who
control the market to get together and call themselves an RTO?
I don't think that is what the chairman intends.
And then, third, the Commission, the last part C, we have
no problems with this Commission and its understanding of
competition, but we worry about a future one, and we think
since it is not defined some language here indicating what the
chairman has in mind about a competitive market would probably
be very helpful.
Mr. Boucher. Yes. Well, thank you both. I have some other
questions regarding the Public Utility Holding Company Act and
the FERC's merger review authority, but time will not permit
those to be asked at this point. I may submit some questions to
members of this panel in writing, and, Mr. Chairman, I would
ask unanimous consent that the record remain open for a
reasonable period in order to accommodate any answers they
might provide.
Mr. Barton. Without objection.
Mr. Boucher. Thank you.
Mr. Barton. And if you want to ask one more question
certainly on your PUHCA, I think it would be helpful for you to
do that before we recess.
Mr. Boucher. All right. Well, thank you. Let me, instead of
asking about PUHCA, just ask a brief question about the FERC's
merger review authority. I appreciate the time.
We had a very interesting hearing last week in which Mr.
McSlarrow, representing the administration, strongly opposed
the repeal of the FERC's merger review authority and in fact
recommended that that authority be enhanced. And when the
repeal of that merger review authority is teamed with the
perspective repeal of PURPA--I am sorry, PUHcA, which is also
contained in the draft bill, I think some major problems arise,
because repealing PUHCA will necessarily increase industry
consolidation and mean that somebody is going to have to be at
the gate in order to look out for the consumer interest. That
is what the FERC typically does.
The provision that is in the draft that I have heard the
most objection to, if any, is the repeal of the FERC's merger
review authority, and let me just ask if there is anybody on
this panel that would like to speak out in favor of repealing
the FERC's merger review authority? Does anybody want to speak
out in favor of that? Somebody? Anybody?
Mr. Owens. I do.
Mr. Boucher. Mr. Owens, you actually want to speak in
favor.
Mr. Owens. I will speak up, not because I am the minority
on the panel but because I think I have some persuasive
elements here.
Mr. Boucher. Thank you.
Mr. Owens. We believe that it is important to remove
duplicative regulatory functions. As you may recall, when the
Federal Energy Regulatory Commission considers a merger they
look at three factors: The effect on competition, the effect on
rates and the effect on regulation. When the Department of
Justice and the Federal Trade Commission consider mergers they
look at the effect on competition. And we are simply saying
that it makes no sense to have two agencies, two Federal
agencies, look at the same set of issues in separate records.
It makes more sense to consolidate a review on the impact on
competition.
I make the same argument with respect to the impact on
rates. Any merger, State commissions have the responsibility of
looking at the impact on utility rates as a result of a merger.
We would not suggest that that authority be weakened in any
way; in fact, we would encourage it to be strengthened. And in
particularly, as we were arguing for the repeal of the Public
Utility Holding Company Act, the States would have greater
access to books and records. And so there again we think it
makes no sense to have two reviewing entities. The FERC would
continue after a merger, however, to have rate-making authority
and oversight.
Mr. Boucher. So, Mr. Owens, your view is that the
Department of Justice is fully as capable as the FERC in order
to evaluate the effects of a merger on the market itself and
also on the consumer interest? Is that your view?
Mr. Owens. That is my view.
Mr. Boucher. Yes. I think a lot of people differ with that,
but I respect your expression of it. Would anybody briefly like
to counter that? Mr. English, I saw you seeking the microphone.
Mr. Barton. And be very brief because I was a good guy.
Mr. Boucher. He was a good guy.
Mr. Barton. No good deed goes unpunished.
He asked a totally different question than I thought he was
going to ask, so let us have a brief answer so we can take----
Mr. Boucher. Bait and switch.
Mr. Barton. [continuing] a little time out here.
Mr. English. Mr. Boucher, I think bottom line is it is
anti-competitive. It allows those with deep pockets to in fact
dominate markets. We have seen this in industry after industry,
and so if we are not going to apply any kind of review to these
mergers, then you are going to wipe out competition.
Mr. Boucher. Okay. Thank you, Mr. English. Thank you, Mr.
Chairman.
Mr. Barton. All right. We are going to take a brief recess.
If there are no votes on the floor, we should reconvene around
11:30. If there is a vote on the floor, we will reconvene
within 10 minutes after the bell expires, the time expires on
the floor vote. So we are in recess, subject to the call of the
Chair, which should be between 11:30 and 11:45. Yes, I
definitely want this panel back, especially you, Mr. English.
[Whereupon, at 11:07 a.m., the subcommittee recessed, to
reconvene at 12:18 p.m., subject to the call of the Chair.]
Mr. Barton. When we had recessed at 11 o'clock, Mr. Boucher
had had his questions. We are now ready to resume the question
period and in order of appearance it appears that Mr. Whitfield
was here before Mr. Norwood. It really does. Yes. And Mr.
Whitfield deferred, so Mr. Whitfield is recognized for 8
minutes for questions.
Mr. Whitfield. Thank you very much, Mr. Chairman. I
probably won't take up my entire 8 minutes, but I just wanted
to clarify a few things. Of course, I represent a State that
has some of the lowest electrical rates in the country, and any
time we have discussions about significant changes, we are very
much concerned about the impact that would have on our rates.
And I have a lot of small municipal systems and electric coops,
and certainly we want to explore to see how many of those would
be exempt under some of the changes that have been made in this
legislation. But most of these coops in my area and municipal
systems receive their electricity supply from TVA, and as a
result of that, they distribute that electricity, of course, to
their customers. But under the TVA Act, these distributors are
guaranteed preferential transmission service.
It is my understanding that just looking at Section 702 of
the draft that DOE would be given the authority to determine
whether or not TVA's transmission assets would be turned over
to an RTO. That is my understanding. Now, if DOE makes the
determination that TVA's transmission should be turned over to
an RTO, I am assuming that the munis and the coops that buy
from them would possibly lose their preferential treatment, and
I would like to ask Mr. English, for example, do you know
whether or not that is true? Is that your understanding or do
you have an opinion on that?
Mr. English. It is my understanding. There is one other
point that I would add to that, though. It even goes beyond
that. As you know, when the PMAs, the dams, were built, when it
was constructed in the first place, there were a number of
different functions that it had. Some of it had to do with
obviously flood protection, it had to do with recreation, it
had to do with environment. There is a whole list of things.
And as we understand the way this legislation is set up it
would abrogate those contracts that have been set to perform
all these other functions. So it certainly would be very broad
sweeping as far as what the potential is, and I am not sure
that is the intent of the authors to go that far, but that is
what it would do.
Mr. Whitfield. Okay. Would anyone else care to comment on
that at all? Okay.
Also, I have some coops in my district that have higher
voltage distribution lines that allows them to move this
electricity over longer distances but certainly not across
State lines. Under Section 7021 of this draft, it is my
understanding that FERC would be allowed to reclassify those
distribution lines because of their high voltage and that they
would be able to require those coops to transfer operational
control over their distribution lines to an independent
transmission provider, or mini-RTO. Is that your understanding
as well, Mr. English?
Mr. English. It is indeed, and that is, again--I don't want
to put words in the chairman's mouth, but I notice he was
nodding his head when he said he didn't want to regulate
distribution coops. And in these cases, we are talking about
cooperatives, distribution cooperatives, and that line is just
to feed the power to them, to get the power to them and to no
one else.
Mr. Whitfield. Yes.
Mr. English. Now, if the objective is to use up a lot of
FERC assets trying to regulate folks that this has no impact--
that this would have no benefit as far as the country concerned
or any kind of interstate system, then this might be a good
device to do that, but I don't--again, I don't think that that
is probably what the objective is. And we would hope that the
committee would take a very hard look at that and make sure
that you are using those resources to the maximum benefit to
protect the system and make sure the system works well. This
does absolutely nothing to it with those distribution systems.
Mr. Whitfield. Right. Thank you, Mr. English. I was trying
to find my list of witnesses here. Is it Ms. Schori from
Sacramento? I think during your testimony you had talked about
trying to protect your particular customers. That was one big
concern that you had. And would you elaborate on that for me
just a little bit?
Ms. Schori. Yes. The concern that we have right now is that
public power systems are non-profit, they are customer-owned,
we don't have shareholders, we don't build assets as merchant
generation or merchant transmission or to earn a rate of return
in the traditional private sector sense. Instead we are owned
by our customers, the assets that we do have--and in my case in
Sacramento we have both generation assets and transmission
assets--have been built to serve our load, our customers, they
are the ones paying for it, it is all embedded in our rates.
The concern that we have, and I am kind of narrowly focused
recognizing this bill is much broader and covers many topics,
is in reviewing the compromise language on the new FERC
jurisdiction that is being proposed over public power systems,
such as the members of the Large Public Power Council.
The concern that we have is that right now, in light of
some recent court decisions as well as some of the rulings that
are coming out of FERC, the old--what I will call the old Order
888, open access language relating to comparability, meaning if
you have surpluses on your system, make them available to other
participants in the market on the same terms and conditions
that you serve your own load, what I still think of as the
golden rule of Order 888. That appears to be changing, moving
in the direction of full FERC regulation and potentially even
going so far as potentially impacting--the language could
potentially open the door to full standard market design type
regulations. So what we want to do is work with the committee
to attempt to shape the language back to the original
compromise wording that we had all agreed to.
Mr. Whitfield. Okay. And you all are going to bring forth
language to address that issue; is that correct?
Ms. Schori. Yes. We do not have any language ready right
now that I can present the committee with. We are working very
hard to try and put that together and come in with something
that hopefully could be supported on a consensus basis. But we
have a number of different drafts, and we are trying to put
something together, and we will try and work very quickly to do
that.
Mr. Whitfield. And so you would expect that to be here
maybe in the next couple of days or so?
Ms. Schori. That is my hope. Let us see, it is Thursday, so
it might not be until early next week. We hope to have--we are
floating different drafts and trying to put things together.
Mr. Whitfield. Okay. Okay. Thank you very much. I waive
back the 10 seconds I have remaining.
Mr. Norwood [presiding]. Thank you, Mr. Whitfield. Mr.
Allen, you are now recognized for 8 minutes.
Mr. Allen. Thank you, Mr. Chairman. I want to thank you all
for your testimony today. It has been very helpful to old
members and new members like me, in particular. Mr. Moore, as
you know, the Maine pulp and paper industry uses a fair bit of
biomass in generating electricity, both for the plants
themselves and for sale back into the grid. And what I would
like to know from you is how do you--I don't know how familiar
you are with those particular plants, but I am interested in
knowing whether the biomass power facilities like them will
survive if this bill is enacted into law. And I am also curious
about what other options there might be to protect those kinds
of plants from continuing.
Mr. Moore. We are very concerned that if--and the
chairman's bill is not talking about outright appeal now of
PURPA as was the thought in the last Congress, and that is good
news. But we are still worried that there are some loopholes
here you can drive somebody's big trucks through. And in the
wrong hands those trucks could greatly jeopardize the future of
cogeneration. And as you pointed out, 60 percent of our
cogeneration is from biomass, and we think it is going to grow.
But we have to have access to the grid, and where you don't
have real competition in the marketplace that access will not
exist without a PURPA protection.
We are working now, Congressman, on a--have been working
with the Department on Energy now for about a dozen years on a
new technology to gasify all of our liquid waste in a paper
mill. That gasification, if all the plants that are doing that
throughout the country that have that liquid waste, would
amount to 30 gigawatts of new power, all of which are favored
under Kyoto, all of which are not using gas, not using oil, all
of which are reducing the cost of the operation of our plants
so that we are competitive and we can keep those jobs, but then
totally is a byproduct, putting as much as 30 gigawatts of new
electricity on the market. We can't see that happening unless
changes are made in the legislated language we have now. That
is not going to happen. We can't get the money from the
financial markets if we can't get that kind of power to the
market.
Mr. Allen. And can you talk a little bit about how ISO New
England operates with respect to your interest as compared to
another RTO or another type of RTO?
Mr. Moore. I have to do some checking into that and get
back to you on that, see if we are having any complaints. I am
not aware of that being a problem are for us.
Mr. Allen. Okay. Good. Thank you. Mr. Walter, in your
testimony you talk about--you say that many regions do not yet
have fully competitive conditions with respect to transmission
and power procurement and that in those areas residential,
commercial and industrial consumers have suffered. And you also
talk about the key issues today revolving around the
availability of adequate capital and the evolution of open and
fair competition. Could you talk to us a little bit about which
regions you think are competitive and which regions are not
doing so well? That is question No. 1.
And question No. 2 is with respect to these different
regions around the country, you also said at one point that
everyone wants a reliable source of energy, and they want it to
be affordable. And I would like you to comment on the question
of one piece of the affordability component, which is not just
the price at a particular moment but the stability of prices
over time. So if you are talking about different regions, I
would be very interesting in knowing which ones seem to be
successful at maintaining the stability of price over time.
Mr. Walter. I would be happy to address both of those. We
are also happy to have the Westbrook Power Plant in the great
State of Maine, along with a couple of other facilities.
Mr. Allen. I fly over it every time I come into the
airport.
Mr. Walter. That is good. As far as good and bad, if you
want to characterize it that way in respect to markets that are
operating well from our perspective and have a good sense of
open competition, I think there are a couple of very good
examples. I think Pennsylvania, Texas are operating quite
nicely. In fact, I think any efforts to forestall SMD or RTOs
might be damaging to markets that have sort of evolved in this
fashion before we ever started this language on standard market
design. Those are good examples, and I think we can look to
learn a lot from them as we go forward here.
As to markets where they aren't yet operating, operating
well, in my view, I think I would focus on the general region,
say the Southeast part of the country where RTO does not exist,
where there is a dominance in the marketplace of vertically
integrated utilities that not only own transmission and
distribution but also generation. And it is difficult for
companies like Calpine and others who are building new
generation units to break into that market, if you will, to get
access to customers and offer a product that we think is a very
desirable product. And so that would be my answer to your first
question.
Second, how do you create stable pricing for electricity? I
think----
Mr. Allen. In a deregulated market.
Mr. Walter. In a deregulated market. I think there is a
very simple answer to that: Willing buyers and willing sellers
ought to be able to enter into bilateral, long-term agreements
for the provision for and the taking of power. And we have
encouraged this all along and are willing and able and
motivated to do that in any area of the country where a
wholesale entity that has end-use customers wants to enter into
a long-term agreement to stabilize that cost of electricity. We
have entered into many agreements where it is simply a fixed
price for a period of time. We have entered into agreements
where the electricity prices index to the local cost of fuel.
But long-term agreements are the way to stabilize the
volatility of electricity costs.
In California, one of the first things that we did before
this whole crisis really got out of control was to encourage
the State to enter into long-term power purchase agreements,
either the State themselves or the utilities. It just turned
out it was the States that ended up doing that. We think that
is a good way to stabilize prices.
Mr. Allen. And you can do that both for the residential
market with a State as well as industrial customers?
Mr. Walter. No, not particularly. In retail----
Mr. Allen. Retail is different.
Mr. Walter. [continuing] it is not a common thing in the
country yet. We do have about 9,000 megawatts of cogeneration
facilities. In a sense, that is going directly to the end user
in the sense that these industrials we have a direct
relationship. But retail, in general, it is not widely applied.
We focus on the wholesale markets, as I think most of this
discussion here is based on.
Mr. Allen. Thank you very much. Thank you, Mr. Chairman.
Mr. Norwood. Thank you, Mr. Allen. I recognize myself now
for 8 minutes, and I would like to take just a second to
commend Chairman Barton. There is not total agreement on the
bill, but I would like for everybody to know that Mr. Barton
and his staff, I think, have run this process probably as well
as any committee I have ever been associated with in my years
in Congress, and I have some good feeling that we will perhaps
be able to come to agreement next week.
Just a quick follow-up on Mr. Whitfield's question to you,
Mr. English, because he basically--or you basically said that
it is your opinion this legislation is going to abrogate the
contracts between power marketing and rural electric coops and
therefore interfere with the contracts that you have that I am
aware of about furnishing of electricity, flood control,
recreation, et cetera. And what I presume by that is that your
attorneys are telling you that the wording in this bill will do
this, and the problem for people like us is our attorneys are
saying, no, that is wrong, that isn't going to do that. And, of
course, the difficulty is then a judge gets to decide. But I
would invite you not to answer a question but to simply put in
writing exactly why you think this language will do that,
because I am hearing from other lawyers who say that it won't.
Mr. Ervin, thank you for being here today. I wasn't sure
from--other than your name, I wasn't sure if you were from
Georgia or Louisiana or Tennessee. I wasn't certain what public
service commission you might have served on, because all of
them sound alike. But, obviously, with your name, we know----
Mr. Ervin. I think only North Carolina would claim me, Mr.
Chairman.
Mr. Norwood. Well, we know by Ervin where it must be. And
the reason we all sound alike is that we all enjoy low-cost
electricity and reliable services, and all of us want it to
continue, and that is typically where those of us in the
Southeast come from and apparently the public service
commissioners as well.
Last week, the FERC commissioners were before this very
subcommittee and Chairman Wood and I were having, if you would
like to call it, a discussion discussing my concerns and those
of many, frankly, in the Southeast, as outlined by the
Southeastern Association of Regulatory Utility Commissioners in
the letter that was sent to the chairman February 21. You are
aware of the letter of which I speak.
Mr. Ervin. Yes, sir; I signed it.
Mr. Norwood. Well, I appreciated that letter, and I believe
it did lay out our concerns about our region very accurately
and in a fair fashion and simple enough for even chairman to
understand. But I ran out of time last week, and I would like
to get right at the meat of this.
Has Chairman Wood responded to this letter to you
officially?
Mr. Ervin. I have not received any indication that he has
to date; no, sir.
Mr. Norwood. If and when he responds, particularly in
writing, I would be very grateful if you would furnish a
response to this committee.
Mr. Ervin. Yes, sir.
Mr. Norwood. You have seen no actual response by his
actions either, so actually he has been silent on this subject?
Mr. Ervin. To date, yes, sir. It appears to us that there
are two ways that he could respond to it. One would be by
return post, the other way would be through the white paper
that I think has been alluded to at least once in our hearing
this morning. Presumably, one way that a response could be made
would be through a modification to the standard market design
proposal that is laid out in the white paper. It is my
understanding that that document is supposed to be released
sometime in April.
Mr. Norwood. Well, that document is nice. I am glad they
are going to release it. But it has no force of law behind it
at all, and therefore it is a little bit meaningless to
people----
Mr. Ervin. One thing that we have suggested in some of our
comments was that one thing that the FERC might want to
seriously consider, given some of the vagueness of the NOPR as
originally issued was instead of issuing a white paper the one
thing that might legally preferable would be to issue a second
NOPR if they decided to persist and to eliminate some of the
vagueness and lack of clarity in the original proposal. I don't
know that anybody has suggested that they actually will do
that, but that would be preferable from my point of view to a
white paper, but a white paper is better than nothing.
Mr. Norwood. Well, from my point of view, I would like to
see it spelled out in the language, then there can't be any
confusion on anybody's part. What is your view, Mr. Ervin,
regarding what constitutes discrimination with respect to
transmission reserve capacity?
Mr. Ervin. It is our belief, Mr. Chairman, that
discrimination with respect to transmission reserve capacity
would be something which constitutes a direct violation of
existing law. The NOPR, as I read it at least, would tend to
indicate that somehow that reserving capacity for native load,
which has paid for the system that exists, is somehow
discriminatory, that treating native load as if it has--that it
does not have a right to first call on that capacity is somehow
discriminatory. I think one of the fundamental differences
between the commissions, of which the North Carolina Commission
is one, and FERC is, that FERC somehow seems to think that
existing native load priority that gives retail customers--and
we consider the IOU customers to be in this group, the mini
customers to be in this group and the coop customers to be in
this group--priority call on those assets, preferential access
to them somehow to be discriminatory. We just don't understand
that concept, but FERC somehow seems to think there is
something wrong with that idea. We just don't agree with that.
Mr. Norwood. Sort of an obligation to serve.
Mr. Ervin. Yes.
Mr. Norwood. And it is a real stretch to use that word. He
and I discussed that last week.
Mr. Ervin. And we just fundamentally don't agree with that.
Mr. Norwood. Very quickly, in your view, what should the
role of State commissions be in all of this? How will this role
change if FERC is successful in implementing the standard
market design?
Mr. Ervin. We believe that if FERC is successful in
implementing the standard market design as it is proposed in
NOPR, it will be very difficult for the State commissions to
implement State law as it exists now, because FERC will
effectively have taken total control over the transmission
system, which is currently subject to Sate regulation.
Under the existing regulatory model, FERC controls the
wholesale market, the States control the retail market. If the
States lose control over the transmission component of bundle
retail rates, FERC will have the authority to interfere with
things that are traditionally subject to State jurisdiction,
will be able to mandate changes in the existing retail rate
structure, including the terms and conditions of service. We do
not think that is a good idea because it will allow FERC to
invade areas that are traditionally subject to State regulation
and will enable them to do things that may or may not be
consistent with existing State retail policies. We do not agree
that they ought to be able to do that and would hope that this
committee would not adopt measures that would allow them to do
that.
Mr. Norwood. Well, you implied that in your statement about
it being a constitutional issue. I can't remember exactly what
you said in there, but it--what did you say? It was in the last
paragraph?
Mr. Ervin. What I said, in essence, was the following: That
it seems to me under constitutional structure that fundamental
policy decisions are matters for Congress. And I recognize that
the Constitution allows the delegation of some administrative
functions to agencies. But fundamental policy decisions are
matters for our elected officials. This NOPR goes to such
fundamental matters that it appears to me at least that
Congress should take an interest in this issue and that
Congress should be the one to acts, if anybody acts, in this
area.
Mr. Norwood. Rather than the regulatory body.
Mr. Ervin. Rather than a regulatory body, yes.
Mr. Norwood. Well, my time is up, Mr. Ervin, but I could
not agree with that statement more, not just electricity but
the entire running of the Federal Government, and I appreciate
you bringing that up.
Mr. Hall, are you ready? You are now recognized for 5
minutes.
Mr. Hall. Mr. Chairman, I am ready, but I have not been
here. I have been in another committee, and I don't know what
questions have been asked. I will submit with your permission
letters to these gentlemen for the things that I want to ask of
them. I yield back whatever time I have not used.
Mr. Norwood. Mr. Hall yields back. Mr. Shimkus, I believe
you are now recognized for----
Mr. Shimkus. Should be 8 minutes, Mr. Chairman.
Mr. Norwood. [continuing] 8 minutes. That will work.
Mr. Shimkus. Yes. And I can wait.
Mr. Norwood. My word, did I skip my buddy down there? Mr.
Doyle, you are recognized for 5 minutes. Sorry about that.
Mr. Doyle. Thank you, Mr. Chairman. I thought maybe you
couldn't see me hiding behind Ralph here. Mr. Chairman, I have
a very interesting and informative opening statement that I
didn't get a chance to deliver, so if I could have that entered
into the record, I would appreciate it.
Mr. Norwood. So ordered.
Mr. Doyle. Thank you. Mr. Walter, how are you? And welcome
to all the panelists. Mr. Walter, we have been hearing for
quite some time and repeatedly throughout this morning that
FERC's efforts to move toward RTOs and create competitive
regional electricity markets will lead to less control of the
transmission grid or an increase in speculation in higher
prices. But in the area where I am from, I represent
Pennsylvania where we are several years into a deregulated
market and I have heard quite different reports in recent
years. And I believe your company is involved in the
Pennsylvania market, and I was wondering if you could just take
some time to discuss the record of PGM where many of these
policies are in place today and whether they have been good or
bad. How is that for a softball?
Mr. Walter. Thank you. I do have a few statistics that we
gathered up on PJM, because, as I said earlier, I think it is a
good place and a good model for other regions in the country.
Average prices in PJM were 13 percent lower in 2002 than 2001,
despite three new all-time peak use records in 2002. The PJM's
regional planning process currently has in its budget $726
million of transmission upgrades, so even though independent
companies like ourselves often have to pay for upgrades in PJM,
it is actually going on in the planning sort of process.
Hourly average systemwide locational measure pricing in PJM
in 2002 was approximately the same as in 1999 and 2000. Rising
fuel prices are the most significant contributor to those
increases, not the implementation of SMD-like features in PJM.
And, finally, since 1999, PJM has connected over 7,000
megawatts of new generation. I might add, Ontowannee is a
facility that we own near Reading in Pennsylvania. We are proud
to have that in operation as of late last year. And 4,000
megawatts are presently under construction. So I think from a
transmission perspective, from a pricing perspective and from a
generation perspective, it is a good model.
Mr. Doyle. Thank you. Mr. Moore, I appreciate many of the
comments in your testimony today and share your interest in
expanding utilization of the CHP systems. I have seen how these
systems, I think, can be effective in increasing the diversity
of our portfolio, which is a core goal of mine in our efforts
to formulate a comprehensive national energy policy. Now, in
your testimony, you mention that you support the formation of
RTOs but you have concern with PURPA reform provisions in the
draft bill we are examining. But as I understand the bill's
provisions, it would terminate the mandatory purchase
obligation only in certain cases, such as the qualifying
facility as a member of an RTO, which you say you favor. And I
know you have already expanded on your concerns with PURPA in
response to Mr. Boucher's question but you also suggested that
you would like to see us give FERC guidance on how to determine
a competitive market. And I guess I am not sure if that is a
proper or frankly achievable legislative goal, so I wonder if
maybe you could expand a bit on why you see that as appropriate
and how we would achieve it if you think it is appropriate?
Mr. Moore. Legislative language explaining what a
competitive market is we recognize the difficulty of that, and
the chairman has challenged me to get language back to the
committee staff and try to do that, which we will do by the end
of the day. We just simply think when you put in legislative
language that FERC can do that, FERC would probably appreciate
some guidance as to what constitutes a competitive market. That
is what we are pointing at. The current FERC I don't think we
would have a problem with them being able to figure that out.
We don't know what a future FERC would think like. And so we
think that some legislative language might be helpful to
further flesh out what the chairman means when he says that.
Mr. Doyle. Thank you. Mr. Chairman, that is all the
questions I have. I yield back.
Mr. Barton. We thank the gentleman from Pennsylvania. We do
now recognize the gentleman from Illinois for 8 minutes, Mr.
Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. This is a great
hearing, and I have been--I am on my seventh year of being in
the committee, and I think I have sat through about 40 hearings
on energy, not only here in Washington but I know I attended
one in Chicago a long time ago. So for those who have said that
we haven't fully vetted out energy issues, I don't know where
they have been. But is has been fun, and I have made a lot of
friends along the way and learned a lot of stuff.
Let me ask a first question. Mr. Owens, you represent the
IOUs. Do they generate power that is sold across State lines?
Mr. Owens. Yes, they do.
Mr. Shimkus. Ms. Schori, Sacramento Utility District, do
you generate your own electricity?
Ms. Schori. Yes. We own about enough generation at this
point to serve close to half of our load. We also have long-
term contracts that take us up to about 70 percent of our load.
Mr. Shimkus. Those long-term contracts are with who?
Ms. Schori. We have some in the Pacific Northwest, and we
are also----
Mr. Shimkus. They are outside the State of California?
Ms. Schori. Yes.
Mr. Shimkus. Okay. Thank you. How about you, Mr. Twitty? Do
you fulfill all your baseload by internal generation?
Mr. Twitty. We are capable of doing so; however, we do also
have outside contracts as well.
Mr. Shimkus. And are they across State lines?
Mr. Twitty. In some cases, yes, sir.
Mr. Shimkus. Thank you. Mr. English, good friend, we have
seen you traveling all around the country. Do the Rural
Electric Cooperatives rely on other generation other than
baseload to fulfill the needs of the members?
Mr. English. We do.
Mr. Shimkus. Are they in other States?
Mr. English. In some cases, yes.
Mr. Shimkus. Thank you. Mr. Walter, obviously I don't need
to ask you this question. Mr. Ervin, also, is any utility
within the State of North Carolina do they have contracts that
go outside the State to provide basic electricity generation?
Mr. Ervin. Absolutely.
Mr. Shimkus. Great. This is my problem with this whole
debate: Transmission--and I am glad we talked about the
Constitution, because obviously we know the interstate commerce
clause.
Mr. Ervin. Certainly.
Mr. Shimkus. And it addresses the issue, and I would say
that electrons that are being used across State lines easily
falls into interstate commerce. Would anyone disagree with
that?
Mr. Ervin. If I can maybe anticipate where you are going,
Mr. Shimkus. The question, it seems to me, on the table is not
necessarily what is the constitutional power of the Congress,
because----
Mr. Shimkus. It is who designs that? And let me interrupt
here because even though I have got 8 minutes it goes pretty
quick.
Mr. Ervin. Right.
Mr. Shimkus. But I was interested in the exchange that you
had with my friend Charlie Norwood, because he was pretty
revved up about your constitutional quote, as he should be. And
I think the point is we ought to make those decisions on
interstate commerce as elected officials----
Mr. Ervin. Right.
Mr. Shimkus. [continuing] which I concur. But I would also
say that what we are addressing here is interstate commerce
issues and there is a role for us. As much as I have friends
across the board to say that this is not a role of the Federal
Government, I don't think would be correct with the intent of
the founding fathers or as how we have evolved.
Let me tell you why the concern is here. I have a hard time
understanding for the individual consumers how expansion of the
grids for any of you is not helpful.
Mr. Ervin. All right. May I say a couple of things?
Mr. Shimkus. It depends on how quickly you can say it.
Mr. Ervin. All right. I will try to say it very quickly.
There are two questions, it seems to me. One is the issue of
what is the constitutional power of the Congress, and you
talked about the commerce clause, and I am not going to discuss
with you what is the extent of Congress' power if you choose to
exercise it. The second question is given what the extent of
the Congress' power is, you have the prudential issue of given
the extent of Congress' power, what should be the manner in
which Congress chooses to exercise it? Our argument then
becomes, and I am not going to make it because it is in my
written argument----
Mr. Shimkus. Okay. Let me ask this question----
Mr. Ervin. [continuing] there are significant regional
differences and they should be recognized----
Mr. Shimkus. Yes. Well, you made that statement--you made a
statement in your opening comments, ``Electricity is not
performed in a uniform manner.''
Mr. Ervin. Yes, sir.
Mr. Shimkus. Now, if it is interstate commerce on
transmission, my question is why shouldn't it be?
Mr. Ervin. Because to go back to the----
Mr. Shimkus. Okay. Go ahead, I am sorry.
Mr. Ervin. Because we have different models in different
parts of the country. We have the PJM model in Pennsylvania, we
have the vertically integrated model in the South.
Mr. Shimkus. Okay. Let me cut in there, and let me tell you
why I have a concern on this. I think--and, again, I have
friends there--I don't see how any consumer is harmed when they
are given more choices and there is more access to the grid. I
don't see how any coop is harmed when they don't have the
ability to buy more power from multiple choices. I see the
country as more protective the more we expand the grid. There
is less of an ability to exercise market power over the grid
when you have an expanded grid. In Illinois, we got hit 2 or 3
years ago because a transmission grid--a line went down here,
power generation fell down, and because of the inability to get
power from point A to point B, that hurt an escalation of
prices. I think the best way that we address market power
concerns, which are credible market power concerns out there,
is to expand the grid.
Mr. Ervin. All right. And I guess the answer that my region
would give you to that argument would be that we believe that
is a question that is appropriately determined by our State
legislatures because retail electric service has traditionally
been a State matter. And our State general assemblies have, to
date, looked at the question of whether they prefer to have
retail competition or----
Mr. Shimkus. Yes. But with all due respect, for you to have
competitive retail competition, you need to have competitive
wholesale purchasing ability.
Mr. Ervin. And my point, I guess----
Mr. Shimkus. And when we don't expand the grid we don't
have that.
Mr. Ervin. And to finish up what I was going to say, and we
may just have a fundamental disagreement and that is, I
believe, okay, our general assemblies have concluded that they
believe they are better off with the existing system, and our
argument is that we ought to be allowed----
Mr. Shimkus. Isn't the bigger concern by the constituents
of areas is that they don't feel there is going to be any
increased competition, they don't think there is going to be
more generation, and they feel that the low-cost power will
shift outside of the regional boundaries, thus causing
increased prices for your individual consumers?
Mr. Ervin. I think--to put it differently, I think our
argument would be that we believe that our existing system
works for us, and we are not persuaded that it needs to change.
Mr. Shimkus. And with that, I would like to----
Mr. Ervin. And that is fine.
Mr. Shimkus. [continuing] Mr. English and give you a
chance, but my time has run out. I have taken full----
Mr. Barton. No. We want a full hearing record. If Mr.
English wishes to comment on that, just try to be as brief as
possible.
Mr. Shimkus. As you prefer, Mr. Chairman.
Mr. English. I will be very, very quick. If that is what
you are after, you have got two provisions in this bill that
are giving you real problems. One is incentivary provision
because it completely ignores the fact by reducing risk you in
fact can encourage the building of transmission. The second one
is the participant funding provision, which within a region
discourages the building and improvement of transmission. So
you have got some real problems if that is what your aim and
objective is, and I think you need to go through the bill and
look at that.
Mr. Shimkus. Thank you. Since Mr. Walter is shaking his
head, no, in reference our ability to make sure everything is
on the record, I think it would be appropriate to have Mr.
Walter respond.
Mr. Barton. Well, before I recognize Mr. Strickland, just a
follow-up to Mr. Shimkus' question. Mr. Ervin, what if we
mandated--no, let me back away from that. What if we allowed a
provision for economic dispatch that if a market provider, a
generator, could guarantee lower-cost power to your State, is
that a good thing or a bad thing?
Mr. Ervin. I guess, Mr. Chairman, it is my belief that if a
lower-cost producer can sell power to a utility in North
Carolina now, it is my belief that our utility is obligated to
buy it under----
Mr. Barton. Not if you have closed State and don't allow a
merchant plant to have access to the transmission grid.
Mr. Ervin. We allow merchant--we have certificated a number
of merchant plants in North Carolina within the last 2 years.
Mr. Barton. Mr. Walter says Calpine has got plants that are
idle that are the most effective and efficient generation of
electricity plants in the country. I bet his company would love
to send some power into your State if they were given the
opportunity to do so.
Mr. Ervin. Calpine would be welcome to come file an
application to site a plant in North Carolina.
Mr. Barton. No, no. We didn't say site a plant in North
Carolina. We said have power that is available to be shipped to
North Carolina so that Mr. Moore's consumers that use it could
buy from Mr. Walter's generators and use the transmission lines
that your State public utility commission controls. Economic
dispatch. We are not taking away anything from the State, we
are just saying if somebody can give your consumers a better
deal, maybe that is okay.
Mr. Ervin. And we may be quibbling over economic dispatch,
and I don't mean to do that, Mr. Chairman, if I am, I
apologize.
Mr. Barton. You learned a lot from your grandfather.
I watched those hearings when he was chairman.
Mr. Ervin. And I don't mean to be quibbling over economic
dispatch, but in the event that power from one of Mr. Walter's
plants can be economically delivered to North Carolina under--
and wholesale transmission rates are set by FERC, we don't
control those. The terms and conditions of wholesale
transmission are controlled by FERC now, we don't control that.
Mr. Barton. Well, my understanding is----
Mr. Ervin. If they can be delivered to North Carolina at an
economic rate and at a price more economical than our utilities
can dispatch them now under our existing rules, our utilities
would be obligated to buy from Mr. Walter's plants and not----
Mr. Barton. But apparently only if they are sited within
your State boundaries.
Mr. Ervin. No, no. And I don't mean to be under--if you
interpret me as having said that, that would be inaccurate. Our
utilities are obligated to use the least cost resource, be it
their own plant or----
Mr. Barton. But they have to have access to it.
Mr. Ervin. Correct.
Mr. Barton. If they don't have access to it, there is no
obligation for them to use it.
Mr. Ervin. That is correct. But if the access--if there
is--and the only problem that would prevent them form having
access to our utility system would be the lack of transmission
capacity. That is not a problem that results, in our view at
least, from the existence of the native load priority, which is
the thing that I have defended here today, because we do not
believe that the existence of the native load priority is any
kind of impropriety.
Mr. Barton. Well, I think there are a lot of people that
are classified as native loadees who would love the opportunity
to lighten the load on their pocketbook if we could find a way
within the various constraints to make it happen. We are going
to recognize Mr. Strickland for 5 minutes. Eight? Five minutes?
Okay, 5 minutes.
Mr. Strickland. Five minutes, and Mr. Chairman, I will not
take the 5 minutes; I only have one question for Mr. English.
As you are aware, FERC has issued a standard market design
proposed rule, and I am just interested in your opinion as to
what impact this would have on the rural cooperatives?
Mr. English. Well, as written, it could have significant
impacts on electric cooperatives. We are all across the Nation,
we are in 47 States in different regions that would impact far
more than it would others. We are very hopeful that FERC is
going to amend that. We have got 200 pages of specific
amendments we are requesting, and we are hopeful that is going
to change. What we are very concerned about is that there are
some provisions, not all, some provisions in this legislation
that will become intertwined with this standard market design
and as it is ultimately written. And until we know the final
outcome of that standard market design, these provision
complicate the situation. We would hope that this committee
would consider targeting those provisions that would be
affected by the standard market design and set those aside for
the time being until this whole matter has been resolved.
Mr. Strickland. Thank you. I yield back my time, Mr.
Chairman.
Mr. Barton. Gentleman from Oregon for 5 minutes.
Mr. Walden. Thank you, Mr. Chairman. I have a question for
all of you, I guess, on this issue. I know one of the things
that is going on in the Northwest are merchant power plants
being sited, and one of the issues that comes up in that
process is there is a limited supply of air shed, there is a
limited supply in some cases of water, there are limits to how
much gas is available, and certainly to the distribution grid.
We have a real capacity issue in the Northwest; in fact, this
Congress just this year in the 1903 omnibus approved $700
million bonding authority for Bonneville to be able to try and
keep pace with building out the grid, because we don't want to
be like California and have a lack of capacity.
So I guess my question gets to this issue of the native
load. How do you see the provisions in this bill affecting the
local ratepayers, because I can envision a situation where you
have merchant power plants that seek out areas where there may
be easy and cheap access to a gas pipeline, which happens in my
district. But as they such up that gas, that means heating
prices are going up because of the competition for that same
gas. The water rights, the air shed rights, how does this
affect that? How do the proposals of this legislation affect
that? And if you can keep your answers fairly short, because I
have another one after that. Let us start with Mr. Owens and
then work across if you would.
Mr. Owens. Let me take a crack at it, Congressman. I
compliment the bill from the standpoint of recognizing that
there is a need for infrastructure expansion.
Mr. Walden. Right.
Mr. Owens. One of the areas that you elaborated on, and
other witnesses and many of the members of this fine
subcommittee have elaborated on, is the need to expand our
transmission system. At the heart of this bill is the
desirability and the need to do that. We have a transmission
system that substantially congested, as other witnesses have
indicated today, and as I understand and read the electricity
title very carefully, it suggests way, to enhance the
construction of transmission through proper pricing incentives,
through expediting the construction of transmission in
congested areas that have been identified by the Department of
Energy as representing the public interests and eventually
lowering rates. It facilitates the siting of transmission
across Federal lands. So it does a lot to deal with a resource
constraint that we have.
Mr. Walden. Well, I hate to cut you off, but we are under
2\1/2\ minutes, so if we could be just quick and maybe we can
follow-up after the hearing. Push your microphone button in if
you would, please.
Ms. Schori. Sorry, thought it was on. Yes. Thank you. Just
very quickly, I would say that there are many parts of the
overall energy bill that I think will be beneficial, but there
are a number of questions about how do we figure out if
ultimately the cost/benefit analysis in good things happening
for consumers? If you look at the industry right now, the key
issue, nobody is credit worthy, simply increasing the rate of
return is not going to cause Wall Street to want to loan money
to PG&E and Edison in California. We need to get to the
fundamentals, reestablish a market where long-term contracts
are valid and valuable, recognize that we have very scarce
resources, as you mentioned--air, water. Simply creating a
Federal decisionmaking process, if I--and I am involved in
hydro relicensing. That does not necessarily mean you get a
speedy decision.
Mr. Walden. Okay.
Mr. Twitty. I think our concern would be, as I mentioned
earlier, if you repeal PUHCA, if you take away FERC's merger
authority, you do limit the opportunities for customers to
benefit. And as community-owned utilities, we are interested
only in customer benefits. And if you don't have more
competition, that is going to be negative for customers.
Mr. Walden. All right. Mr. English?
Mr. English. The chairman referred to a national grid
earlier today, and I think that he is on the right track with
regard to an issue of a national grid. We desperately think
that there needs to be some kind of addressing of this fact,
and our membership is very dependent on that. But in addition
to that, you also have got to determine how are you going to go
about doing that. And we need to use all of the options, not
just limit ourselves to one or two.
Mr. Walden. Okay.
Mr. Walter. As one of the few companies that actually built
merchant generation in the Northwest, we would say this: There
aren't going to be anymore hydroplants built. I don't believe
that Washington and Oregon want to have more coal generation.
There is growth that is going on in the Northwest, they need
natural gas-fired power plants. Now, as to emissions and water,
as you know, the power plants we are building have 99 percent
less SO2 than coal, they have 95 percent less
NOX, they have 60 percent less CO2. As to
water, we are prepared, and we have in many areas of the
country, built air-cooled plants if municipal waste water or
other water supplies are not available. So that to us is not an
issue in the Northwest.
Mr. Walden. Okay. Mr. Moore?
Mr. Moore. Congressman, basically, the protection of the
consumer is a national grid, as the chairman was trying to get
to, so you can move power where it is needed and do it
efficiently and cheaply. And, second, it is increased
generation of all forms of power and all forms of power, which
the bill tries to get to. You need more alternative forms of
energy, more forms of energy and be able to get it to the
consumer.
Mr. Walden. Mr. Ervin?
Mr. Ervin. I feel like I have talked enough today already,
but one protection that we have at least in our structure is
that under the regulated markets that we have, we have the
authority, assuming that we provide an appropriate return on
the investment, to compel the construction of appropriate
facilities. And our companies have been perfectly willing to
make the necessary investment----
Mr. Walden. Right.
Mr. Ervin. [continuing] in needed generation and in
transmission and in distribution infrastructure without the
necessity for that power to be even be invoked. So that we have
had a good cooperative working relationship with our utilities,
and the studies that we have done have indicated that that
system has worked pretty well.
Mr. Walden. Thank you. My time has expired. Thank you.
Mr. Barton. The gentleman from New Jersey, Mr. Pallone, is
recognized for 5 minutes.
Mr. Pallone. Thank you, Mr. Chairman. I don't think I will
use it all, but I know that Mr. Walter previously gave an
overview of the PJM system, and, Mr. Walter, you mentioned in
your testimony that timely action by FERC to bring to a final
resolution the issues addressed by standard market design is an
important way to help develop power resources. I represent New
Jersey, which is within the PJM interconnection, and this
electricity market works well for us in my State, frankly. We
have adequate generation supply today, and companies are
willing to invest in the future, because we have clear rules
and a stable regulatory environment.
I understand, though, that not everyone likes everything
about FERC's standard market design, and I too have some
concerns. I also understand that some members of the House may
wish to see Congress step in and block FERC from moving forward
on its proposed rule. So my question, Mr. Walter, if Congress
acts in a way that prevents FERC from continuing its work to
ensure electricity markets function well across the country,
what kind of harm do you think would come or come to
electricity consumers in my State within the PJM? If you could
respond to that?
Mr. Walter. Well, my response would be that it would be a
negative impact. We are in favor of open markets throughout the
country, and so we have been supportive of the principles, not
necessarily SMD and the 600-page form that has been sent out
but something that supports those key principles. So it would
be negative for markets that aren't yet having open
competition. But as you point out, in Texas and in Pennsylvania
and in New Jersey and Maryland, if they were to start to
unravel the good works that have already been done and created
and functioning now, that would definitely be negative, and it
would not only hurt consumers there, it would create insecurity
and instability that is now not there.
Mr. Pallone. Okay. I see Mr. Ervin wants to answer the
question too or comment.
Mr. Ervin. And I think that that is an extremely valid
point, which goes to something I said earlier. The PJM market,
according to a lot of my colleagues that I have talked to up
there, has worked well for the citizens of those States. The
markets that we have in the Southeast most of us feel have
worked reasonably well for our citizens. And so when I call
upon this committee to take action to deal with this, indeed
one of the things that I think that I would ask you to consider
is how do we take action, how do I ask you to take action in
such a way that we accomplish what you suggest at the same time
that we accomplish what I suggest.
PJM works well for the citizens of the region that you
represent. However, we are concerned that because we don't have
the history of tight power pools in the Southeast, that what
works well in PJM would not work well in the Southeast, just
like what works well in the Southeast might work well for PJM.
These regional differences are important and we need to
recognize them and move forward in working on these problems in
such a way that your interests are protected and our interests
are protected. And so I think we need to work cooperatively so
that these differences are recognized.
Mr. Pallone. Thank you. Thank you, Mr. Chairman.
Mr. Barton. The gentleman from North Carolina, Mr. Burr, is
recognized for 5 minutes.
Mr. Burr. Thank the Chair. Commissioner Ervin, in your
testimony, you cited an exchange that I had with Pat Wood at
our last hearing, which he claimed that the study, I think it
was the Southeastern Regulators commissioned by Charles River
Associates, actually proved that the Southeast would see
savings from the standard market design if implemented as
currently written. I asked him if this was one of many
scenarios that was in fact brought up in that study. Can you
shed some light on what the conclusions were of that study and
how it affected the Southeast?
Mr. Ervin. The ultimate conclusion of the study was that it
was not clear that the assertion that Chairman Wood made before
you is in fact the case. The actual statement by the consultant
was, ``There is considerable uncertainty as to whether RTOs in
the SMD would provide greater benefits to the Southeast in the
implementation costs.''
Mr. Burr. They modeled this under several different
scenarios, didn't they?
Mr. Ervin. I don't have--didn't bother to count up exactly
how many scenarios they ran, but there were at least 10
discussed in the body of the report.
Mr. Burr. One assumed that if everything were perfect, you
might, and I stress the word, ``might.''
Mr. Ervin. I think that is a fair conclusion.
Mr. Burr. Ms. Tezak will testify in the next panel, and----
Mr. Ervin. That is my understanding.
Mr. Burr. [continuing] in her testimony, she says that New
York v. FERC in the spring court case is a crystal clear, and I
quote, ``ruling from the court that FERC has ultimate
jurisdiction over the transmission but has the authority to
delegate it when it chooses.'' Let me ask you if that is your
opinion?
Mr. Ervin. No, it is not.
Mr. Burr. What is your opinion on whether that----
Mr. Ervin. My opinion after having read that case a number
of times is that it leaves the ultimate issue raised by
standard market design undecided. The court held that FERC did
not err by failing to exercise as a matter of policy decision
jurisdiction over an unbundled retail transmission. FERC, in
essence, in Order 2000 said that it had jurisdiction over
unbundled retail transmission but that it did not choose assert
jurisdiction over bundled retail transmission. The court held
that FERC did not err in choosing to proceed to exercise
jurisdiction over bundled retail transmission. One of the
reasons that the court said that FERC did not err in making
that choice was because to do so would raise serious
jurisdictional questions or something to that effect and
pointed out that the issues raised by the State of New York,
which challenged the FERC's exercise of jurisdiction over
unbundled retail transmission itself raised serous
jurisdictional issues. So that I think there are serious legal
issues raised by the FERC's decision in this and the NOPR to
assert jurisdiction over bundled retail transmission.
Mr. Burr. So the term, ``crystal clear,'' would not be
something that you would----
Mr. Ervin. That would not be the way I would choose to
characterize it. I made the mistake perhaps going to law school
a number of years ago, and I would not choose to characterize
the New York decision as crystal clear in FERC's favor.
Mr. Burr. Mr. Chairman, let me also exercise the fact that
in my opening comments, I missed the opportunity to acknowledge
our former colleague who is on the panel and certainly want to
welcome him. I would also ask for unanimous consent to enter
into the record additional questions for these witnesses.
Mr. Barton. Without objection.
Mr. Burr. I yield back.
Mr. Barton. The Chair recognizes the gentleman from
California, Mr. Waxman, for 5 minutes.
Mr. Waxman. Thank you, Mr. Chairman. Unprecedented market
abuses have come to light over the past year, and I want to
give the panel two examples that cost consumers millions of
dollars. In May 2002, internal Enron documents were revealed
that described how the company manipulated the California
electricity market to increase prices artificially. Through
market manipulation strategies that Enron called fanciful
names, like Get Shorty and Death Star, Enron gouged western
families and businesses. Earlier this year, transcripts from
Reliant Energy revealed a coordinated strategy to shut down
power plants in order to drive up electricity prices in June
2000. Cynically, Reliant decided to wage a campaign to blame
the Clean Air Act for the power plant shutdowns. I am concerned
that the legislation that the chairman is proposing does
nothing meaningful to address these problems. To stop market
abuses, energy companies need to believe that there is a
credible possibility of enforcement, and to have a credible
possibility of enforcement you need clear prohibitions with
sufficient penalties. Do any of the witnesses believe that
fraudulent or manipulative behavior of Enron and Reliant should
be condoned? None of you responded that you do. Would everyone
agree that fraudulent behavior should be prohibited? All the
members of the panel seem to be nodding in the affirmative.
Would everyone agree that FERC should be able to issue
regulations to prohibit fraudulent or deceptive ads? Anybody
disagree with that?
Mr. Owens. I would add, Congressman, FERC should be able to
do it and it should be able to apply to all participants of the
marketplace.
Mr. Waxman. Okay. Now, let me ask about penalties. Section
7084 of the discussion draft increases the amount of penalties
that FERC can assess under Section 316 of the Federal Power
Act. However, it does not provide for discouragement of
profits. Without fear of having discouraged profits, bad actors
can continue their bad behavior, confident that market abuses
remain profitable as long as they generate more income than the
penalties that could be assessed under Section 316 of the
Federal Power Act. I want to ask each witness should a bad
actor be permitted to keep the profits it makes from
fraudulent, manipulative or deceptive behavior? Starting with
you, Mr. Owens. Do you agree that there ought to be
discouragement of profits?
Mr. Owens. That is a tricky question. No, I don't believe
that a bad actor should be able to keep profits that have been
determined to be unjust and unreasonably achieved. I think that
the Power Act deals with that.
Mr. Waxman. Well, let me put it this way: We have a
proposal that Mr. Dingell, Mr. Markey and Mr. Boucher and I are
making that penalties be no greater than $1 million or three
times the profits made. Would you support such a proposal?
Mr. Owens. I would have to see it in context.
Mr. Waxman. Okay. Let us go down the list.
Ms. Schori. Actually, today I am here on behalf of the
Large Public Power Council, so I don't have a position on
behalf of LPPC----
Mr. Waxman. Okay.
Ms. Schori. [continuing] on the bill that you have
proposed. I do think that the characterization of the
marketplace is accurate that you have described, and obviously
being from California, having been hammered, having taken a 22
percent rate increase in Sacramento ourselves in terms of what
we went through, I personally lived through what you are
talking about and experienced it.
Mr. Waxman. But is it fair to say--I appreciate that, but I
want to get everybody in.
Ms. Schori. Excuse me, all I----
Mr. Waxman. Is it fair to say do you think a bad actor
should not be permitted to keep profits it makes from
fraudulent, manipulative or deceptive behavior?
Ms. Schori. I think that is a fair statement. I think it is
critical that we define what a bad actor is. We need to get the
structure right, set the rules and not be still trying to
figure it out 2 years after we did the contract, though.
Mr. Waxman. Mr. Twitty?
Mr. Twitty. I think it is certainly something that should
be seriously considered. However, I do think that it is
difficult to legislate all the specific kinds of bad actions
that can go on. I think you do have to give some broad idea
about the things that ought to not occur and then let whoever,
the regulator or the courts, have some say in that.
Mr. Waxman. Should we let FERC do that?
Mr. Twitty. I think FERC is as good a remedy as any.
Mr. Waxman. Mr. English?
Mr. English. On behalf of the consumer on not-for-profit, I
say right on.
Mr. Waxman. Okay. Thank you. Mr. Walter?
Mr. Walter. Mr. Waxman, I am not familiar with the draft of
your bill. Wrongdoing should be punished and punished,
according to others, that I can't judge exactly what the rules
ought to be, and it has got to be defined, but I think the
punishment should be appropriate to the wrongdoing. I would
like to take this opportunity to point out that Calpine as a
company has performed very much differently than I think a lot
of the accusations that have been made. We were not mentioned
in the California report that was issued to FERC last week. We
decided early on that we would continue to operate our power
plants, and we have a number of them in the State of
California. If there was a ever a possibility of an emergency,
we operated our power plants. And I should remind----
Mr. Waxman. Mr. Walter----
Mr. Walter. [continuing] you that that was in light of the
fact that in many cases we weren't even getting paid and we
continued to operate. And so I just want to make the record
clear that Calpine is a very much different company in how they
approach this whole situation in California.
Mr. Waxman. Thank you very much. Mr. Moore, Mr. Ervin, do
you want to answer the question that I have asked all the other
members: Should a bad actor be permitted to keep their profit
it makes from fraudulent, manipulative or deceptive behavior?
And whether you have any sense of whether you would support a
penalty that is no greater than $1 million or three times the
profits made?
Mr. Moore. Mr. Chairman, our members were badly hurt in
California by what went on out there, and certainly we are with
everybody else, that nobody ought to profit from it. The
specifics we haven't looked at, we don't know anything about.
Mr. Waxman. Thank you.
Mr. Ervin. Congressman, I think I would echo what Mr. Moore
said. Without endorsing the specifics, the general sense of
what you say makes sense to me.
Mr. Waxman. Thank you very much. I thank the panel for
responses to the questions.
Mr. Barton. Before I recognize Mr. Otter, Mr. Walter, if
the State of California at the time Mr. Waxman was asking his
questions had allowed bilateral contracts outside of the power
exchange and the required market transparency provisions such
as are in the current bill, in your opinion, would you have had
the problem that you had in California?
Mr. Walter. If the utilities were encouraged and not
actually not allowed to enter into long-term power agreements,
it would have mitigated a lot of the difficulties that we
experienced that year.
Mr. Barton. And the reason they couldn't do that was
because of the California law; isn't that correct?
Mr. Walter. My understanding, and I am not a lawyer, my
understanding is that its utilities were discouraged from
entering into long-term agreements and in certain cases by the
PUC not allowed to.
Mr. Barton. Okay. Mr. Otter is recognized for 8 minutes.
Mr. Otter. Thank you, Mr. Chairman. I would kind of like to
follow-up on that, because the last term I served on the
Government Reform Committee, and in our subcommittee we had
considerable hearings relative to that. We were told by the
witnesses that they were not only discouraged from it but they
were specifically told that they could not. In fact, the city
of San Diego had an opportunity just several months prior to
the crisis hitting of optioning a long-term contract for $25
and they ended up paying $300 because they were told that they
could not engage in the--because, ``This was the Governor's
idea of deregulation.'' Do any of you--and just yes or no is
fine--do any of you believe that what California went through
was the result of deregulation?
Mr. Walter. I think it was----
Mr. Otter. Yes.
Ms. Schori. We ended up with a dysfunctional market
structure, and there is 100 percent agreement in California on
that point.
Mr. Otter. I don't doubt that, but did you think that that
was a result of the free market working?
Ms. Schori. It was a result of a defective structure that
then was compounded by a number of additional mistakes
including, to be frank, the failure of FERC to act promptly to
address the problem.
Mr. Otter. Do any of you believe that there wouldn't have
been considerable conservation had the retail price floated
with the cost of the market?
Mr. Walter. There would have been a response on the demand
side if they were able to respond, and in many cases they were
not. I want to focus on one thing if I might.
Mr. Otter. Okay.
Mr. Walter. One of the biggest issues that we have in
California then, today and tomorrow is the fact that there is
not enough generation in California to supply the consumers
there. That is one of the fundamental issues that we continue
to talk about manipulation, we continue to talk about
dysfunctional market structures. The fact of the matter is
there is not enough electricity in California to supply the
demand.
Mr. Otter. Thank you. Have any of you ever shut down an
operation in order to qualify or in order to make sure that you
were obeying some of the--or had to take actions within those
operations in order to obey the Clean Air Act?
Ms. Schori. Virtually all power plants in California, if
not across the country, have operating hours restrictions
related to how many pounds of pollution you are entitled to
emit, and you are in violation of the Clean Air Act if you
operate in excess of those limitations. So SMUD does own
cogeneration plants in our service area that are subject to
those kinds of limitations. We cannot operate in excess of
that, and we try to plan to make sure the hours will be
available when we most need the plants.
Mr. Otter. Well, my point was----
Ms. Schori. We haven't been ordered to shut down.
Mr. Otter. My point is is that there are--operating plants
shut down all the time in order to qualify for some Federal
regulation, and it just doesn't have to be power plants. But
the Clean Air Act is pretty broad. It gives you certain
windows, and once you reach a certain level of pollution, to
use your term, well, you have to shut it down. Otherwise you
are in violation of the law; isn't that true?
Ms. Schori. Yes.
Mr. Otter. Okay. I would like to go to Mr. Moore now if I
might briefly. Many of your comments were made relative to
PURPA. Under PURPA, I think we still use the avoided cost in
trying to establish a term for power; am I not right?
Mr. Moore. That is still the law. I don't think that
happens in the marketplace.
Mr. Otter. What does happen in the marketplace?
Mr. Moore. Most all the contracts go into market prices,
and that is the way it ought to be. The voided cost thing was
created 20 years ago or whatever when nobody knew how to get
into this. It is still in the law. There may be some examples
of that still going on around the country, but I had a
conversation with Mr. Wood of FERC and we looked over recent
transactions in many parts of the country and they were all
market priced, and that is the way they ought to be.
Mr. Otter. Are you aware of any operations that had a cogen
contract that was selling substantially higher than the market
so they sold all their power at that price and then bought back
power at a much cheaper price?
Mr. Moore. No, I am not. There were some rumors of that
during the California crisis where it was cheaper to shut a
mill down and sell the power at outrageous rates, but that was
a special----
Mr. Otter. Most of that was under take or pay, though,
wasn't it?
Mr. Moore. Right.
Mr. Otter. And take or pay is much different than what we
operate under PURPA in cogeneration.
Mr. Moore. Right.
Mr. Otter. I guess I see my time is running out, and I
would like to get a response from everybody on the panel. In
Idaho, we have what we call the Administrative Procedures Act.
The Administrative Procedures Act says that whenever the
legislature passes its duty or its responsibility to legislate,
to make rules and regulations under the power to enforce clause
of a particular act, to carry out a particular function, and
that generally reads, ``and the director shall promulgate such
rules and regulations which are necessary in order to carry out
the provisions of this act.'' But under our Administrative
Procedures Act in Idaho, before those rules and regulations can
continue more than a year, they must be brought back to the
oversight, the germane, committee, to make sure that the
committee agrees with all the rules and regulations that were
provided. And I see, however, we don't have that oversight--
that kind of oversight in Congress for not only FERC but I
suspect many other Federal agencies. Do you think that that
would be a good idea for us to adopt that process in Congress?
Yes, Mr. English?
Mr. English. Having been a member of this body and
attempted that back in the 1970's, the Supreme Court told us
that that violated separation of powers.
Mr. Otter. So then should we write the rules and
regulations and not then grant our legislative power to the
bureaucracy?
Mr. English. I certainly had a great deal of sympathy with
that when I was a member of this body, there is no question
about that, but I think the thing you get down to, bottom line,
is that there is no way that the Congress can legislate for
each individual situation in different regions of the country.
The problem is someone is going to have to be in a position to
make sure that intent--and this is where we get into another
issue--the intent of the law is carried out, and that is where
I think as legislators, certainly I used to and I suspect that
you all do, have a great deal of frustration as making certain
the intent behind the law is carried out.
Mr. Otter. At the cost of taking up all my time to continue
in this vein, Mr. English, then I would ask you don't we do
that all the time, legislate for the entire country? Does the
Clean Air Act mean one thing in the Northeast and something
else in Idaho?
Mr. English. I believe about every law that we have got
that works, though, has some flexibility for regulators to make
judgments with regard to situations. So if it is drawn so
narrow that it is so tight that it allows no room for any kind
of regulation anywhere, then we find ourselves in a situation
where it doesn't apply to most of the people.
Mr. Otter. Right. But what do we do about the laws, as you
qualified, that work? What do we do about the laws that don't
work?
Mr. English. That is where I think Congress has an
oversight responsibility. That is the reason I think you have
hearings before the Congress. You bring regulators before this
Congress, and you make the determinations whether they are
carrying out the intent of the law. Unfortunately, the Supreme
Court told us that those regulations have the same force as the
law, so you are going to have to change the law to do that.
Mr. Otter. Right. Very quickly then, in light of the 10th
Amendment, the States' Rights Amendment, how do you feel about
the eminent domain portion of the electricity title?
Mr. English. I think the issue we are not in opposition to
what the chairman has done as far as the siting provisions of
this legislation. We think it is a good start.
Mr. Barton. That is a good answer.
Mr. English. Mr. Chairman, I have been searching all day
to----
Mr. Barton. And it is about time.
The gentleman from Arizona is recognized for 5 minutes.
Mr. Shadegg. Thank you, Mr. Chairman. I want to focus my
questions on the issue of transmission line siting. Eighty-
seven percent of Arizona is owned by the Federal Government at
one level or another, whether it is outright ownership of
Federal land or military bases or Indian lands or otherwise,
BLM, Forest Service, you name it. That creates a serious
problem for us. For example, recently, in a line siting case
involving a 345-kilovolt line for Tucson Electric Power Company
last year, our corporation commissions met almost a year
reaching a decision to site a particular power line, held
extensive public hearings, and the U.S. Forest Service waited
until the entire process was finished and didn't appear at any
proceeding whatsoever, and then it simply dropped a letter
saying, ``Oh, by the way, we object.'' They had never made
their objections known before that in any way, shape or form.
Mr. Owens, I would like to begin with you, though. I would
be happy if other witnesses want to comment. How do you think
we should approach the problem of coordinating line siting with
Federal agencies when they have the ability to sit back and do
what the Forest Service did in that circumstance?
Mr. Owens. The approach or the goal that the Barton draft
seeks to achieve and say that I think there are some gaps that
could be readily addressed. I think it is appropriate to have a
lead agency that would seek to coordinate with the input from
all Federal agencies that you have to consult with when you are
seeking to get across Federal lands and to, at the same time,
in consultation with those agencies, to set deadlines and at
the same time develop an environmental record that would be
required for them to all use as they sought to expedite their
decisionmaking on access across Federal lands. Right now there
is no lead agency.
As you have correctly pointed out, the process is
frustrating, it leads to an inappropriate decision process. In
addition, I would have this lead agency also coordinate with
independent agencies, the State commission, the tribal units.
If you do it in that context, what you would do is you would
have a clear and compelling record that would suggest more
forcefully that there are issues that are dealt with a
coordinated way, that there are environmental issues that are
coordinated in an appropriate way, and that deadlines would be
achieved so Federal siting would be expedited.
Mr. Shadegg. Does anybody on the panel strongly disagree
with that or want to comment? The Barton draft proposes to use
a Memorandum of Understanding process. Do you think that is
going to be adequate to deal with this kind of situation, and
do you think it is expeditious enough?
Mr. Owens. I think Memorandums of Understanding are
approaches, and they really--I think it is a step in the right
direction, but, quite candidly, it really relies on the good
faith of the participants. It also suggests to some degree that
there will be--that the participants in a Memorandum of
Understanding have decisional authority. So it really is not a
binding outcome that you would have through a Memorandum of
Understanding.
Mr. Shadegg. Can you give us--or give the panel some idea
of how long it takes, how long in your experience or in your
member company's experience it takes to get siting decisions
out of the Federal Government?
Mr. Owens. Yes. There have been--I can cite several
examples where it has taken as long as 10 years. There are some
examples where it has taken as long as 18 months and some
examples where we are talking about very small transmission
corridors where it has taken 4 months. Ten months isn't
extreme, but it seems to be moving toward the norm where it
takes substantially longer than 2 years.
Mr. Shadegg. You suggest that there be a lead agency. Is
there a particular agency you think that should be vested in?
Mr. Owens. Yes. I think the Department of Energy, as an
example, because they have an experience in dealing with access
across land such as Canada and Mexico. They certainly have the
expertise, they have created an Office of Transmission that I
believe is very much up to speed on the need to expand the
grid. So I think they would be an appropriate agency.
Mr. Shadegg. As you envision a lead agency, would it have
the ability to say to other Federal departments, ``You must
meet these deadlines?''
Mr. Owens. I think it would have the responsibility of
working with those other departments, coordinating its
decisionmaking, setting the deadlines, making sure that there
is a complete environmental record for review that can be
relied on and proceeding appropriately.
Mr. Shadegg. Mr. English?
Mr. English. I think that there is an issue here that needs
to be recognized. Again, I want to refer to what the chairman
was talking about as far as a national grid. If we truly are
attempting to make a national grid and if we are attempting to
focus what the Federal Government is doing on that national
grid and that is where our attention is, then we are talking
about selecting out certain portions of the transmission system
that meets that. And if we establish that truly as a national
goal, then obviously the Federal Government should be expected
to be very cooperative, the agencies of the Federal Government.
And it may very well require more.
I think the Department of Energy, without question, is a
good one to call attention as to what has to be done, where the
bottlenecks are, where the difficulties and the restrictions
are. And I think that it is a question of how much the Congress
is willing to do. But even if the Congress is only willing to
say--go along with 20 or 25 sites a year and then providing
FERC with the authority to deal with those, I think that would
be a huge step forward. But I think you are on the right track.
The Federal Government has to be a part of this, all of it.
Mr. Shadegg. My time is expired but I certainly want to
make a comment. I agree with you, the Federal Government, if we
are going to create a national grid, should be a cooperative
participant in that process. I have no confidence that without
doing something in this legislation to assure that that it
will.
Mr. Barton. We want to thank the gentleman from Arizona for
his questions. Believe it or not, over 4 hours after we
started, there are no other members present to ask questions,
so we are going to release this panel. We want to thank you. I
want to make an apology to Mr. English. I used an analogy in
asking you a question where I referred to Chinese communists. I
in no shape, form or fashion think that coops are anywhere
close to Chinese--the best people I know are coopers, and I
have had the pleasure of meeting your State chairman in Texas,
almost all the coop regional presidents. They are the very best
people and patriotic Americans.
Mr. English. Mr. Chairman, if I might respond.
Mr. Barton. Sure.
Mr. English. My daughter is a constituent of yours.
Mr. Barton. And I am blessed to have her.
Mr. English. And I knew you would be thrilled.
Mr. Barton. I am.
Mr. English. But I want to make another point that you
misspoke. You are stating would we ever; we have already done
it. We supported the Senate legislation last year and----
Mr. Barton. We didn't have anything to do with the Senate
legislation.
Mr. English. That is correct. But you did have something to
do with 2944. And if you remember correctly, I delivered you a
letter pertaining to----
Mr. Barton. You all supported a bill either one or two
Congresses ago, and that is why I hold out hope that you will
yet come into the fold.
Mr. English. And I am sure that if we sit down and reason
together, in the words of a Texan who rose to some stature in
this town, that we could reach some kind of understanding, Mr.
Chairman.
Mr. Barton. We are going to try.
Mr. English. Reasonable people. Thank you very much.
Mr. Barton. Reasonable people. This panel is released, and
we want to welcome our second panel as soon as they vacate the
premises. We need to expedite the transfer here.
All right. If our audience would resituate themselves. If
we could shut the outer doors. Okay. The subcommittee will come
to order. We want to welcome our second panel. We have Mr.
Michehl Gent, who is the president and chief executive officer
of the North American Electric Reliability Council, which we
call the NERC. We have Mr. Gerald Norlander, who is the
executive director of the Public Utility Law Project of New
York, and he is the chairman of the National Association of
State Utility Consumer Advocates. We have Ms. Christine Tezak,
is that correct, who is an electricity analyst for the
Washington Research Group. We have Mr. Marty Kanner, who has
testified before this subcommittee before. He is the
coordinator for Consumers for Fair Competition. We have Ms.
Sharon Buccino, is that correct, who is a senior attorney for
the Natural Resources Defense Council.
Ladies and gentlemen, your testimony is in the record in
its entirety. We are going to start with Mr. Gent, ask each of
you to try to summarize it verbally in around 5 minutes, and
then we will have some questions. Welcome to the subcommittee,
Mr. Gent.
STATEMENTS OF MICHEHL R. GENT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; GERALD A.
NORLANDER, EXECUTIVE DIRECTOR, PUBLIC LAW PROJECT OF NEW YORK,
CHAIRMAN, NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER
ADVOCATES; CHRISTINE L. TEZAK, ELECTRICITY ANALYST, WASHINGTON
RESEARCH GROUP, SCHWAB CAPITAL MARKETS, LP; MARTY KANNER,
COORDINATOR, CONSUMERS FOR FAIR COMPETITION; AND SHARON
BUCCINO, SENIOR ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL
Mr. Gent. Thank you, Mr. Chairman.
Mr. Barton. You have got to push that button, make sure it
is on.
Mr. Gent. Thank you, Mr. Chairman. Good afternoon,
committee members and staff. I appreciate the invitation to
testify this afternoon. I am going to address the reliability
portions of your discussion draft, as distributed by Chairman
Barton.
A cascading outage on the bulk power system in 1965 in the
Northeast left 33 million people in the dark, and there are
probably people in this audience today that can even remember
that. Thirty years later, a similar cascading outage in 1996 in
the West left over 15 million without electricity. It happened
in the daytime so they weren't in the dark. The North America
Electric Reliability Council's mission is to avoid such as
cascading outages, and we have been extremely successful in the
past, as witnessed by that basic 30-year gap. However, that
mission to keep the lights on is becoming more difficult,
mainly because of our reliability rules have no enforcement
mechanism. NERC and a very broad coalition support the
reliability provisions in Chairman Barton's draft legislation
and strongly urge this subcommittee to approve legislation as
soon as possible.
With or without congressional guidance, the electricity
industry is changing and changing in very fundamental ways.
These changes are disrupting the mechanisms that ensure that
the reliability of the North America electric grids remain
reliable. In order to prevent these changes from jeopardizing
the reliability of our systems in the future, we must establish
a mandatory system of rules and rules that are enforceable. We
believe that the best way to do this is through an independent,
industry-based, self-regulatory organization with oversight in
the United States by the Federal Energy Regulatory Commission
and in Canada by similar regulators. This is exactly what is
proposed in your legislation.
NERC has been successful in ensuring the reliability and
the security of North America's three interconnections because
we have been able to marshal the industry's very best experts
to design and operate the electric transmission systems in
North America. And we have been successful because we have
served as the industry's point of contact with agencies in the
United States such as FERC, DOE, the FBI and the new Department
of Homeland Security. Yet our continuing ability to serve this
function cannot be taken for granted. We need this legislation
to continue to be successful. We believe an industry self-
regulatory system with its inherent stakeholder expertise is
far superior to a system of direct government regulation for
setting and enforcing compliance with greater reliability
rules. The language of your bill presents a sound approach for
ensuring the continued reliability of North America's electric
interconnections.
Everyone would like to have an abundant supply of
electricity at reasonable prices. What is often overlooked,
however, is the value of reliability of that supply. If someone
is operating outside the NERC reliability rules, because the
rules are only voluntary and there is no sanction for not
following those rules, an upset of the system could very easily
cause you to lose a supply of electricity unexpectedly during a
critical stage of your manufacturing process, it could spoil
your food and your tropical fish could die. And I say that with
knowledge that my son runs a pet store, and in the western
outage they nearly lost all their fish.
Then if this happens, then the price you pay for
electricity or the choices you have for electricity supplier
will be irrelevant. The reliability provisions of your draft
legislation go a long way toward ensuring whatever
restructuring occurs in the electric supply infrastructure in
North America, whatever you do as Congress in addition to
passing these reliability rules will allow us to keep the
lights on by enforcing the reliability rules. I thank you for
this opportunity to support this reliability part of your
legislation.
[The prepared statement of Michehl R. Gent follows:]
Prepared Statement of Michehl R. Gent, President and Chief Executive
Officer, North American Electric Reliability Council
Good morning, Mr. Chairman and members of the Subcommittee. My name
is Michehl Gent and I am President and Chief Executive Officer of the
North American Electric Reliability Council (NERC).
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. NERC 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 and planning 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.
NERC supports the reliability provisions (Title VII, Subtitle C,
Section 7031) of the draft legislation that Chairman Barton released on
February 28 and strongly urges the Subcommittee to approve this
legislation as soon as possible. With or without Congressional
guidance, the electricity industry is changing in fundamental ways.
These changes are disrupting the mechanisms that ensured the
reliability of the North American electricity grid. In order to prevent
these changes from jeopardizing the reliability of our electric
transmission system, we must shift how we deal with reliability of the
bulk power system. NERC and a substantial majority of other industry
participants believe that the best way to do this is through an
independent, industry self-regulatory organization to set and enforce
mandatory reliability rules, subject to oversight within the United
States by the Federal Energy Regulatory Commission.
Section 7031 of the draft legislation embraces this concept and
contains the same language that we understand the House and Senate
conferees agreed to during the conference on H.R. 4 in the last
Congress. NERC requests that you make one minor change to the language
in Section 7031, to clarify that a regional entity with delegated
enforcement authority may be governed by either an independent board,
or a balanced stakeholder board, or a combination independent and
balanced stakeholder board. This change will allow flexibility from
region to region as to how such regional entities are governed. I have
attached specific suggested language for the revision to this
testimony.
NERC will be pleased to work with Committee members and Committee
staff on the language (Attachment 1).
NERC has appeared before this Subcommittee on a number of
occasions, testifying in support of reliability legislation. Today I
will focus on two questions: (1) why reliability legislation is needed
now; and (2) how Section 7031 meets this need.
Why Is Reliability Legislation Needed Now?
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 reliably. 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 system must be able to meet
to ensure that it is capable of reliable operation, regardless of what
is built.
Bad things happen on the interconnected bulk power system as a
matter of course. Severe weather may knock down transmission lines,
lightning strikes may cause short circuits, mechanical equipment may
fail due to fatigue or overloading, generating plants may have
breakdowns, or we may inadvertently operate in an unstudied state. To
that list of everyday occurrences, we now have added the threat of
terrorist activity directed at the bulk electric system. The bulk
electric system is designed and operated generally in what we refer to
as a ``first contingency'' status, that is, the system must be able to
withstand the loss of any large element and remain stable and secure.
Otherwise we risk cascading outages with severe economic and public
safety consequences that can occur in a matter of seconds.
I have attached to my testimony a table describing five notable
occasions when we did have such a cascading outage: November 9, 1965 in
the Northeast; July 13, 1977 in New York City; July 2, 1996 in the
West; August 10, 1996 in the West; and June 25, 1998 in Northern Mid-
Continent Area Power Pool. (Attachment 2) The scope and duration of
these outages underscore why we must take all reasonable steps to
assure that we do not have more such outages, and why we must have
solid restoration plans against the possibility that we will in fact
have more. Mandatory, enforceable reliability rules are one major
component of those reasonable steps.
NERC's rules, which are not now enforceable, have generally been
followed, but that is starting to change. As economic and political
pressures on electricity suppliers increase and as the vertically
integrated companies are being disaggregated, NERC is seeing an
increase in the number and severity of rules violations. Moreover, new
issues are arising that demand an institution focused on reliability
that can act fairly, but decisively, and in a timely manner.
Let me give you an example. Traditionally, integrated utilities
operated their generators to supply both the ``real'' (MW) and
``reactive'' (MVar) power necessary to maintain reliable operation of
the transmission system, and charged for these services as part of the
regulated cost of service. (It's worth noting here that control of
flows on an electric system is not accomplished by valves and switches,
as in gas or telecommunications systems, but by controlling the outputs
of generators.) These ``services'' provided by generators included such
things as spinning and non-spinning reserves and system voltage
support. Now, with the generation function separated from the
transmission function in many cases, these ``services'' are no longer
provided by a single, integrated entity, but must be arranged and paid
for separately through tariffs and contracts with generators. To assure
that this is done, we need enforceable standards that require
transmission operators (including RTOs) to make adequate provision in
their tariffs and contracts for these essential reliability services.
How these arrangements are made can be the subject of filings with FERC
or other regulators, but they must be made. Absent such enforceable
standards, the reliability of our interconnected grids will be at
serious risk.
As a result of these changes in the industry, NERC is rewriting all
of its reliability standards according to a new ``functional''
reliability model that sets out measurable and, under Chairman Barton's
proposed legislation, enforceable requirements for entities that are
responsible for performing critical reliability functions. These new
standards will place uniform requirements on those that have the
responsibility for maintaining the minute-to-minute balance between
supply and demand, for seeing that power flows remain within the
physical limits of the system, and that grid voltages stay within
tolerance.
Let me give you another, very different example of why this
legislation is needed. NERC plays a critical role in protecting the
security, as well as the reliability, of the North American grid. Since
the early 1980s, NERC has been involved with the electromagnetic pulse
phenomenon, vulnerability of electric systems to state-sponsored,
multi-site sabotage and terrorism, Year 2000 rollover impacts, and most
recently the threat of cyber terrorism. At the heart of NERC's efforts
has been its ability to marshall the industry's best experts on the
design and operation of electricity transmission systems in North
America, and serve as the industry's point of contact with various
federal government agencies, including the National Security Council,
the Department of Energy, the Nuclear Regulatory Commission, the
Federal Bureau of Investigation, and now the new Department of Homeland
Security, to reduce the vulnerability of interconnected electric
systems to such threats.
I know that this subcommittee understands how vitally important
this function is. Yet NERC's continuing ability to serve this function
cannot be taken for granted. NERC traditionally has been funded by
contributions from its Regional Councils. New entrants and the pressure
of competitive markets have made this funding mechanism increasingly
unsatisfactory. A new funding mechanism is needed that properly and
fairly supports NERC's activities, including its activities related to
security. Section 7031 would address this issue by authorizing FERC to
certify an electric reliability organization that, among other things,
has established rules that ``allocate equitably reasonable dues, fees
and other charges among end users for all activities under this
section.'' See proposed new Federal Power Act section 217(c)(2)(B).
Section 7031 Would Provide for an Organization Capable of Protecting
the Reliability and the Security of the North American
Electricity Grid
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 and by the appropriate regulators in Canada and
Mexico. Section 7031 would do this. Under its provisions:
Reliability rules would be mandatory and enforceable.
Rules would apply to all owners, operators and users of the
bulk power system.
Rules would be fairly developed and fairly applied by an
independent, industry self-regulatory organization drawing on
the technical expertise of industry stakeholders.
FERC would oversee that process within the United States.
This approach would respect the international character of the
interconnected North American electric transmission system.
Regional entities would have a significant role in
implementing and enforcing compliance with these reliability
standards, with delegated authority to propose appropriate
regional reliability standards.
A broad coalition joins NERC in supporting this approach to
legislation, including the Western Governors Association, the National
Association of Regulatory Utility Commissioners, the National
Association of State Utility Consumer Advocates, the American Public
Power Association, the Canadian Electricity Association, the Edison
Electric Institute, the National Rural Electric Cooperative
Association, the Institute of Electrical and Electronics Engineers, and
the Western Electricity Coordinating Council.
Right now a hole exists in the Federal Power Act, because FERC does
not have direct authority over reliability matters and does not have
jurisdiction over the entities that own almost one-third of the bulk
power system. Having an industry self-regulatory organization develop
and enforce reliability rules applicable to all owners, operators and
users of the bulk power system under government oversight, as Section
7031 would do, takes advantage of the huge pool of technical expertise
that the industry has been able to bring to bear on this subject over
the last 30 plus years. Having FERC itself set the reliability
standards through its rulemaking proceedings, even if based on advice
from outside organizations, would require FERC to develop or acquire
technical expertise that it does not now have, and would dramatically
expand FERC's workload at perhaps the worst possible time.
The electric industry is in a great state of flux, as regional
transmission organizations are forming and reforming, and vertically
integrated companies are separating and selling off various portions of
their business. Change is happening at different paces in different
places. With all the uncertainty as to who will ultimately operate and
plan the interconnected transmission system, 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, and
regardless of whether it is being used for the new markets that are
emerging or in more traditional ways. Both are likely to exist side by
side for a considerable period of time. The self-regulatory reliability
organization authorized in Section 7031 can help assure that grid
reliability is maintained, even while new market structures and new
RTOs are being formed. Because FERC will provide oversight of the
electric reliability organization in the U.S., FERC can ensure that the
organization's actions and FERC's evolving market policies are closely
coordinated.
The industry self-regulatory organization authorized in Section
7031 also addresses the international character of the interconnected
grid. There is strong Canadian participation within NERC now. 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 equivalent activity by provincial
regulators in Canada, is a practical and effective way to develop the
common set of rules needed for the international grid. Otherwise, U.S.
regulators would be dictating the rules that Canadian interests must
follow--a prospect that would be unacceptable to Canadian industry and
government alike. Or, regulators on either side of the border might
decide to set their own rules, which would be a recipe for chaos. 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. With that increased trade,
the international nature of the North American electricity market will
take on even more importance, further underscoring the necessity of
having an industry self-regulatory organization, rather than FERC
itself, set and enforce compliance with grid reliability standards.
CONCLUSION
NERC commends the drafters of Section 7031 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 consumers whose electricity supplies depend on that
grid, 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. The language of Section 7031,
with the clarification of the regional governance issue, presents a
sound approach for ensuring the continued reliability of the North
American electricity grid. It is also an approach that has widespread
support among industry, state, and consumer interests. 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.
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Mr. Barton. And we thank you for your testimony and for
your group's support. Mr. Norlander, you are recognized for 5
minutes.
STATEMENT OF GERALD A. NORLANDER
Mr. Norlander. Thank you, Mr. Chairman and committee
members. First, I would like to clarify that I am speaking as
chairman of the Electricity Committee of NASUCA. The actual
chairman of NASUCA is from the State of Ohio, named Robert
Congren. I am the director of the Public Utility Law Project in
New York, and we represent residential consumers in matters
affecting energy and utility policy. And we have been in
existence for approximately 25 years.
NASUCA is a national association of members from 42 States,
mainly consisting of members who are appointed as State
officials to look out for the interests of small consumers on
energy policy issues. Numerous NASUCA members are from States
that have restructured their electric industries, and a number
of other NASUCA members are from States that have put it on
hold, and still other members are from States that, like North
Carolina, remain vertically integrated and do not have current
plans to restructure in accordance with the retail competition
model that was in vogue for a few years.
And I want to make clear that today we are speaking--I am
speaking on behalf of all of NASUCA's members in opposition to
the electricity title that is in this bill. This unified
opposition represents a national consensus of consumer
advocates that the bill would be detrimental to the public
interest and to the interest of small consumers. What I think I
would like to focus on in my remaining time here is NASUCA's
opposition to the transmission incentives provision in the
bill. Section 7011 of the proposed bill would add a new section
of the Federal Power Act that would authorize FERC within 1
year to establish new years for incentive-based and
performance-based rate treatments to promote capital investment
by transmission utilities in order to support economically
efficient markets for the sale of electricity at wholesale.
This language would authorize a pending FERC proposal that
has been floated and comments just came in this week. The FERC
proposal was made without the benefit of any enabling
legislation. And that proposal would allow automatic increases
in the return on equity for transmission investments well
beyond the normal level allowed and allowable under the Federal
Power Act in the development of just and reasonable rates.
These ROE adders are intended to reward utilities for divesting
control over transmission assets to RTOs, for outright
divestiture of transmission assets to new independent
transmission providers and for building new transmission
facilities. And these FERC bonuses would be--if cumulative,
could be up to 300 basis points in added return on equity.
NASUCA commissioned an examination of that particular
proposal, and we filed comments this week. Calculating that the
cost of the pending FERC proposal, and, again, I note it was
made before there was any enabling legislation for it, the cost
of that would be approximately $13 billion. And this was a
conservative estimate of the potential cost of these investment
incentives, and it would virtually offset the punitive $725
million per year benefit of forming RTOs, which is a fairly
optimistic assessment that FERC had commissioned.
NASUCA believes that the $13 billion incentive is
unnecessary and really provides no incremental benefit in many
areas where transmission owners already have agreed to turn
over control of their system. PJM, New York ISO, New England
ISO and other areas the ISOs and RTOs already have control of
the transmission system. And so we are therefore compensating
people, giving extra returns for people for something they have
already done. On the other hand, if Congress is seeking to
encourage a voluntary migration of systems into a national grid
such as has been mentioned, States that haven't approved a
divestiture may be less likely to do so as these incentives
will clearly raise the cost of the transmission component of
the retail service.
NASUCA also opposes repeal of the PUHCA and the merger
review authority. I would just note that one of the functions
of creating this larger grid is so that buyers can reach more
sellers. And these markets are not well understood by FERC that
have been created, and it is conceivable that all the expense
of creating a large geographic market could be merged away
unless FERC has its independent review to determine whether the
mergers would interfere with the proper functioning of the
markets it has created. Thank you, and I would be happy to
answer questions.
[The prepared statement of Gerald A. Norlander follows:]
Prepared Statement of Gerald Norlander on Behalf of the National
Association of State Utility Consumer Advocates
Chairman Barton And Members Of The United States House of
Representatives Subcommittee on Energy And Air Quality: Thank you for
inviting me to testify today for the National Association of State
Utility Consumer Advocates (NASUCA) regarding the proposed Energy
Policy Act of 2003. My name is Gerald Norlander. I am the Chairman of
the Electricity Committee of NASUCA, and I am the Executive Director of
the Public Utility Law Project of New York, Inc. (PULP).1
NASUCA is a national association of consumer advocate offices with
members in 42 states and the District of Columbia. NASUCA members are
charged by their respective state laws with the responsibility to
represent consumers in utility proceedings before state and federal
regulatory commissions and courts.
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\1\ PULP, a non profit organization representing the interests of
low income utility consumers, is an Associate Member of NASUCA , with
offices at 90 State Street, Suite 601, Albany, New York 12207.
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Numerous NASUCA members are from states that restructured their
wholesale and retail electricity industries, others are from states
that have halted or slowed industry restructuring, and still others are
from states with traditional vertically integrated utility industry
structures. Today, I am speaking on behalf of all NASUCA members in
opposition to Title VII of the proposed Energy Policy Act of 2003, the
electricity title of the bill. This unified opposition reflects a
national consensus of state consumer advocates that the bill, if
enacted, would be detrimental to the public interest and interests of
retail consumers.
1. Rate Incentives to Promote Capital Investment in New Transmission
Facilities are Unnecessary and the Costs are Not Justified.
Section 7011 of the proposed Energy Policy Act of 2003 bill would
add a new Section 215 of the Federal Power Act requiring the Federal
Energy Regulatory Commission (FERC) within one year to establish new
rules for ``incentive-based and performance-based rate treatments to
promote capital investment'' by electricity transmission utilities,
``to support economically efficient markets for the sale of electricity
at wholesale.'' This language would authorize a pending FERC proposal
to increase interstate electricity transmission rate
allowances.2 The bill allows FERC to set the amount of the
financial incentives. The pending FERC proposal, made without the
benefit of any enabling legislation to change the way electricity
transmission rates are set under the Federal Power Act, is to allow
automatic increases in the return on equity (ROE) for transmission
investments, well beyond the level normally allowed in the development
of just and reasonable rates. These ROE ``adders'' are intended to
reward utilities for divesting control over their transmission assets
to regional transmission organizztions (RTOs), for outright divestiture
of these assets to newly created ``Independent Transmission Provider
(ITP)'' utilities, and for construction of new transmission facilities.
Control and ownership of the facilities would shift to regional
transmission organizations and the new transmission service utilities
which would operate new and expanded transmission service spot markets.
Cooperating utilities will receive ROE bonuses, well above the normally
calculated reasonable rate of return on equity invested, of 200 basis
points--2%--for existing transmission facilities, and 300 basis
points--3%--for new investments in transmission. Nothing in the
proposed FERC rule requires any showing that these bonus-conferring
actions are cost effective, and nothing in the proposed bill places any
upper limit on the rate making incentives.
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\2\ Proposed Pricing Policy for Efficient Operation and Expansion
of the Transmission Grid, FERC Docket No. PL03-1-000.
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In response to the FERC proposals for ROE ``adders,'' NASUCA
commissioned an examination of the cost and policy implications, and is
filing comments this week in the pending FERC proceeding. I would like
to highlight several conclusions of those comments, which are attached
to my testimony as an exhibit:
NASUCA calculates the cost of the current FERC initiative, if
fully utilized by transmission owners, will cost consumers over
$13 billion, or approximately $711 million per year for the 19
year time horizon in the FERC proposal. This is a conservative
estimate of the potential cost of these investment incentives,
and it virtually offsets the putative $725 million per year
benefit of forming Regional Transmission Organizations, a
benefit estimate that is controversial for its optimism.
The $13 billion incentive is unnecessary and will provide no
incremental benefit in many areas where transmission owners
already have agreed to turn over control of their systems to
regional transmission organizations (RTOs) or independent
system operators (ISOs).
If Congress seeks to encourage national adoption of the system
proposed by FERC, such ROE incentives may only impede that
result. States that have not approved divestiture of
transmission facilities owned by state-regulated utilities may
be more reluctant to do so if automatic cost increases are the
result, without any clear, offsetting benefits.
PUHCA Should Not be Repealed
Section 7043 of the bill would repeal the Public Utility Holding
Company Act (PUHCA). PUHCA is a statutory bulwark against reassembly of
vast utility holding company empires, abuse of captive ratepayers to
subsidize failing unregulated ventures, and inappropriate transactions
between regulated utilities and unregulated affiliates. NASUCA has
adopted the following resolution on this subject:
``in considering action affecting regulation or the structure
of the electric industry, including PUHCA repeal or reform,
Congress should require federal regulatory agencies to: 1)
prevent abusive or preferential affiliate transactions, 2)
continue oversight and protection over corporate and market
structure to prevent abuses to consumers and competition, 3)
disallow costs which are not prudent and reasonable from
wholesale rates, 4) exercise sufficient regulatory authority to
prevent ratepayers from bearing any risk of utility
diversification and to prohibit cross-subsidies between
regulated and nonregulated subsidiaries . . .'' NASUCA
Resolution 1996-04, Urging the Congress and Federal Agencies to
Address Market Power as a Component of Any Federal
Restructuring Action.
The Enron debacle and its aftermath reveals the recurring tendency
of holding companies in financial trouble to look to regulated
affiliates as a source of credit, cash, or other resources, all at the
expense of captive utility consumers. The bill would eliminate current
PUHCA ownership restrictions on non geographically contiguous
utilities, would limit state and federal regulatory agency access to
books and records of the holding company to the costs of regulated
entities, would require a showing of necessity for regulators to
examine holding company books, and could make much information
regarding holding company affiliate transactions, obtained in
regulatory proceedings, confidential. PUHCA remains an essential
consumer protection which should be vigilantly enforced, not repealed.
A copy of NASUCA's resolution on PUHCA is attached.
FERC Merger Review Authority Should Not be Repealed.
Section 7101 of the bill would repeal Section 203 of the Federal
Power Act, which includes FERC review of proposed utility mergers. The
rationale for the repeal is that review of a merger of electricity
utilities is performed by other agencies and that any further review by
FERC would be redundant. FERC review of mergers of electricity
utilities under its jurisdiction should be preserved. There is a
growing understanding that the nature of electricity and evolving
electricity markets may permit the subtle exercise of market power,
without overt collusion, even by entities with market shares typically
allowed by regulators in other industries. Many of the benefits
projected by FERC in its efforts to create broader geographic markets
for electricity, at significant expense, rest upon the assumption that
flaws in existing markets will be mitigated if buyers can find more
sellers in the expanded trading areas. If, however, industry
consolidation is allowed to occur simultaneously with costly expansions
to marketing areas, that goal may be frustrated if mergers result in a
concentration and reappearance of market power. FERC should have
continued authority to scrutinize and reject proposed electric industry
mergers, under evolving standards for measuring market power in
electricity markets, and Section 203 of the FPA should not be repealed.
Reliability
Subtitle C of the bill addresses the issue of system reliability by
allowing FERC to recognize a standards-setting Electric Reliability
Organization. At the present time, reliability standards for the bulk
electric grid system are set by a voluntary organization, the North
American Electric Reliability Council. Placing the development and
review of electric system reliability on firmer statutory ground has
been supported by NASUCA as an independent measure in recent years. In
1998 NASUCA adopted the following resolution, in recognition that the
cooperative and voluntary underpinnings of NERC standards need
strengthening, particularly in areas where competitive concerns may
weaken traditional cooperation among utilities, and thus threaten
reliability:
* * * NASUCA supports efforts to develop a national reliability
organization that will continue the vital functions now
performed by NERC, and will do so in a manner that is
competitively neutral and recognizes the paramount concerns of
consumers in a reliable electric system;
* * * NASUCA supports efforts to establish an independent Board
of Directors that will govern NERC (or any successor national
organization) in a competitively neutral manner that will
benefit all consumers and that will not be dominated or
controlled by any particular industry participant or segment;
* * * NASUCA supports federal legislation that would clarify
FERC authority to review the reliability requirements imposed
by NERC (or any successor national organization) and to ensure
that such requirements are adopted and implemented in a manner
that benefits all consumers* * * NASUCA Resolution 1998-07,
Urging the Establishment of an Independent Board to Govern
Electric Reliability Matters and the Enactment of Federal
Legislation to Ensure FERC Jurisdiction Over the Actions of
Such a Board in the Future.
The provisions in Section 7031 are consistent with NASUCA's position
regarding reliability. Their inclusion, however, is not sufficient
justification to enact any of the other remaining provisions of the
electricity title of the proposed Energy Policy Act of 2003.
Conclusion
In conclusion, the bill would allow large and unwarranted rate
allowances for owners of existing electricity transmission lines and
facilities under FERC jurisdiction. Ultimately these allowances will be
translated into rate increases borne by end-use consumers unless the
increased allowances are demonstrated to be cost effective. NASUCA has
shown in the attached comments regarding FERC's pending transmission
incentive proposals that the proposed ROE adders may cost $13 billion,
are unnecessary windfalls for utilities that have already done the acts
intended to be induced, and are not likely to be cost effective.
The bill would eliminate longstanding protections of the Public
Utility Holding Company Act (PUHCA) intended to protect consumers from
utility holding company abuses, and would eliminate existing authority
of FERC to review proposed utility mergers. In light of recent
instances of energy market manipulation, holding company abuses, and
the possibility of further industry consolidation in the aftermath of
major losses incurred by energy generation and trading companies, it is
clear the consumers need continued, not less, protection from the
exercise of market power in the electricity markets under FERC
jurisdiction. For these reasons, NASUCA has concluded that passage of
the Electricity title of this bill is not in the interests of utility
consumers. NASUCA thererefore urges that the electricity title be
eliminated.
I want to thank Chairman Barton and the subcommittee again for
permitting me to share NASUCA's views on these important issues. I
would be happy to answer any questions you may have at this time.
[Attachments to statement are retained in Subcommittee files.]
Mr. Barton. Thank you. Ms. Tezak, we welcome your
statement. Try to make it between 5 and 6 minutes.
STATEMENT OF CHRISTINE L. TEZAK
Ms. Tezak. I usually have portfolio managers who give me
0.3 nanoseconds so I am grateful for your time. My name is
Christine Tezak, and I am an electricity analyst for Schwab
Capital Markets, Washington Research Group. Schwab Washington
Research analyzes for institutional investors the impact
Washington makes on the financial markets through politics,
legislation and regulation. My clients are institutional equity
investors, the majority of whom manage dedicated utility funds.
My perspective, therefore, may not include all of the concerns
that may be unique to bond holders or to the holders of public
power company debt.
Our analysis of the draft legislation in its current form
says that the majority of its provisions do not appear to
frustrate the FERC's ability to accomplish the unfinished
mandate to restructure wholesale markets that Congress gave it
in the 1992 Energy Policy Act. We believe that the escalating
conflict between the States and FERC, however, poses a problem
for investment in this sector if Congress becomes mired in the
middle of this fray and the net result is continued delay and
debate over restructuring. We believe that capital will be less
expensive for all participants in the market if FERC continues,
and is permitted to continue, its efforts to provide clear and
consistent rules for this business. Merrill Lynch, Solomon
Smith Barney, T. A. Creff and Goldman Sachs articulated
precisely this opinion as well--that means it is not my idea--
at FERC's January 16 technical conference.
The capital markets are, for the most part, disinterested
in the specifics of the political fights that are of such great
importance to regulators and congressional members. The capital
markets, however, will likely demand higher costs of capital to
offset the unresolved risks and perceived uncertainty if such
disputes persist. I am not going to offer you what we would
like to see in the bill, because it is not the appropriate role
of markets to make that decision. It is more helpful for us to
stay out of the political debate and help you by providing
differential pricing according to risk.
We view the draft legislation proposed by Chairman Barton
to be generally positive for the industry. This is because the
intent of Congress and FERC would appear to be in alignment.
Details on our analysis are furnished in the written testimony.
Therefore, it is our current assessment that the investment
climate for the electricity sector, generally, and for
transmission, specifically, can be enhanced somewhat by the
provisions in this bill. However, the investment climate would
be most dramatically improved in our view if rates were
unbundled and if this information were provided to consumers.
This is not forced retail choice but the provision of clear
information to consumers and to their regulators. In fact, we
believe that only through unbundling because we as investors,
indeed, we as consumers could determine if the incentive rates
proposed are indeed offset by the generation savings that are
widely anticipated. Otherwise, the concerns that others have
voiced here about their usefulness and their appropriateness
cannot be assessed.
The $73 billion in market capitalization decline that Mr.
Owens cited applies to the investor-owned utility group, not
the IPPs but the utility holding companies. And it is heavily
related to Wall Street's concerns and investors' confusion as
to whether you, Congress, will reregulate this business or not.
Congress needs to determine, in our view, whether it still
supports the 1992 Energy Policy Act as written and as upheld by
the Supreme Court in March 2002. If so, we believe Congress
could hopefully support FERC's efforts to provide regulatory
clarity and eliminate discrimination, not subvert FERC with
endless debate and a fruitless search for what we fear is the
search for a risk-free solution to energy infrastructure needs.
If everyone is upset, perhaps FERC is doing it right.
The longer this debate drags out, the more expensive
overall costs will be. We are even seeing it in the utility
holding companies whose corporate spreads used to be tighter
than they are now. Wall Street hates uncertainty and opacity.
Resolving these are both in your power. Please allow FERC to
work full-time on your behalf to implement the 1992 Policy Act.
We would like to see the disclosure of unbundled rate
information so that once and for all we all can assess what we
are working with. Thank you.
[The prepared statement of Christine L. Tezak follows:]
Prepared Statement of Christine L. Tezak, Electricity Analyst, Schwab
Capital Markets LP Washington Research Group
The following testimony expands upon Schwab Capital Markets LP
Washington Research Group's Electricity Bulletin authored by Christine
Tezak (Electricity and Environment Analyst) and distributed to the
firm's institutional investor clients on March 3, 2003. Schwab Capital
Markets LP Washington Research Group (Schwab WRG) has provided
institutional investors with investment analysis of the electricity
sector since late 1999. Further information or prior analyses will be
made available to the subcommittee and/or committee upon request.
Introduction: House Energy and Air Quality Subcommittee Chairman
Joe Barton (R-Texas) has initiated the debate on energy legislation by
circulating draft energy legislation Feb. 28, including a title on
electricity restructuring. Our analysis indicates that many of the
electricity provisions are based on compromises reached during last
year's conference on an energy bill. More importantly, the draft
language does not currently include language that would substantially
thwart the Federal Energy Regulatory Commission's (FERC) current
efforts for continued industry restructuring. In its current state, we
would view this draft language as predominantly positive from an
investment perspective. Both chambers of the federal legislature have
professed an interest in energy legislation; however, we're not yet
convinced that sufficient consensus exists to get an energy bill done.
The electricity title has been a sticking point in earlier rounds of
energy legislation; however at this early stage, the draft electricity
language appears to be less controversial than we had initially
expected.
The Federal Energy Regulatory Commission's (FERC) efforts to
continue restructuring of the electricity industry have caused
considerable concern on Capitol Hill; however the draft legislation
circulated by House Energy and Air Quality Subcommittee Chairman Joe
Barton (R-Texas) does not yet appear to contain any onerous provisions
that could thwart FERC's current efforts to develop its Standard Market
Design rulemaking. Schwab WRG continues to view continued efforts to
move forward with the restructuring of the electricity industry to be
the best investment environment for the widest variety participants in
the electricity marketplace--whether they provide generation,
transmission, distribution or a combination of these services--and most
importantly, the most likely to provide sustained long-term benefits to
consumers.
Friction between the FERC and states (expressed through the
concerns articulated by state regulators, legislators at both the
federal and state levels, governors and others) has been a concern to
investors looking at companies in the electric utility space.
Uncertainty over the course of continued restructuring has been cited
by credit rating agencies among other reasons in their downgrades of
various members of the sector, not exclusively independent power
producers.
TRANSMISSION INCENTIVES
In its present form, the electricity title of the draft legislation
calls for incentive ratemaking to encourage buildout of the
transmission grid. This is an effort already underway at FERC, which
released a proposed policy Jan. 15, 2003, that has this specific goal
in mind.
The Department of Energy and the Edison Electric Institute have
both documented the declining investment rate in the nation's
transmission grid. As early as the notice of proposed rulemaking for
Order 888, the FERC has made it clear that a robust transmission system
was, in its view, a necessary prerequisite to robust and functional
wholesale markets. However, a multi-year court battle followed,
culminating in a Supreme Court decision in March of 2002 that affirmed
FERC's regulatory direction.
While New York v. FERC and Enron v. FERC were being litigated, the
industry incrementally and consistently lowered the level of investment
it dedicated to transmission resources while the judiciary branch
reviewed who had ultimate jurisdiction over transmission--FERC or the
states. In spite of the crystal clear ruling from the Supreme Court
that FERC a) has ultimate jurisdiction over transmission, b) has the
authority to delegate it when it chooses, and c) never abdicated
regulatory jurisdiction over retail transmission, substantial friction
between the states and the federal agency remain, casting a pall over
investment in the sector. Were it not for this unresolved friction on
jurisdiction, in spite of a clear ruling from this nation's highest
level of the judiciary, we believe that incentives to build out the
transmission grid may not even be necessary, as the natural tendency of
business in a free market is to put capital to work to resolve
inefficiencies. Only in the electricity markets is the attempt to lower
supply costs through the addition of more efficient supply, and the
attempt to lower transaction costs through better transmission access
to generation so vigorously opposed in the name of ``consumer
protection.'' Consumers have benefited from restructuring and
deregulation in the telecom and natural gas industries, why is it so
staunchly opposed in this sector?
It is difficult for investors to understand why, when its
regulatory approach has been held up by the highest court in the land,
the FERC remains under attack by some state regulators and their
elected representatives for attempting to fulfill the mandate that
Congress itself had laid before it. When uncertainty exists, investment
atrophies. Congress either needs to legislate and clarify that it does
not agree with the Supreme Court's interpretation of the Federal Power
Act and its subsequent amendments, or it must allow FERC to continue
implementing the instructions Congress has issued to it. Must we have
catastrophic grid failures before regulators and legislators
acknowledge that our electricity infrastructure has atrophied? Will a
population center have to withstand a terrorist attack before political
leaders realize that regionalization can facilitate infrastructure
security? Will the same legislators who are now questioning the
implementation of the 1992 Energy Policy Act and the restructuring of
wholesale markets be the first to complain again that the regulator was
asleep at the switch, when Congress itself has been party to
frustrating a clear investment horizon?
The concern over states rights is worry that investors do not
share. Frankly, it is viewed as a political ploy fanned by the
interests of incumbents who feel their business model may be at risk.
The extent to which this impacts the cost of capital is determined by
the assumptions investors make about the ability of companies to manage
their regulatory environment.
FERC has made a concerted, well-documented effort to incorporate
feedback of states throughout the nation into the RTO program and into
Standard Market Design rule development. In fact, one of the primary
criticisms of the FERC in the capital markets is that it has been too
accommodating of the political obstruction undertaken by state
regulators and their elected representatives. Institutional investors
are extremely frustrated that the FERC is moving so slowly and with
such political deference and has not yet provided the clear market
rules and policy calls on structural parameters that Wall Street would
like to see before substantially deploying capital into this sector.
FERC has had an unending circus of outreach and meetings with concerned
regulators from the Southeast and the West. However, in spite of all
this effort, we as observers have seen only a paranoia driven by
vaguely defined risks now manifesting itself as incremental risk to the
regulatory outlook in the federal legislature in the form of continued
delay.
Wall Street is fatigued with opacity at all levels of corporate
structures and in virtually all industries. Opacity increases the cost
of capital. Uncertainty in the regulatory outlook, too, is a form of
opacity, and while it may not seem evident now, it is likely to
increase costs to consumers over the long term through higher costs of
capital and higher rates of return demanded to offset the murky
jurisdictional problem that remains perniciously unresolved.
While we believe that the transmission incentive language proposed
in this legislation and FERC's transmission incentive policy proposal
are encouraging for investment, we do believe that the most compelling
incentive that would stimulate investment interest in transmission
would be unbundling of rates. While transmission rate incentives are
useful, we remain skeptical that they will really be sufficient to
offset the risk proposed by continual friction over jurisdiction.
Unbundling of transmission and a clear definition of what must be
recovered in wholesale versus retail transactions would be very useful
to investors assessing the wisdom of investment in generation and
transmission assets. Congress needs to decide whether or not it still
believes in the 1992 Energy Policy Act. Today, Congress is becoming and
increasing part of the reason capital is hard to attract to this
business. Congress is calling for FERC to slow down, Wall Street is
frustrated FERC won't move faster.
EMINENT DOMAIN PROVISIONS
Barton's current draft includes what is often referred to as
``FERC-lite.'' These provisions would allow the federal government to
invoke eminent domain to site transmission assets only if a state fails
to act on an application in a timely fashion, or denies siting to a
project that the Department of Energy has determined is in the national
interest. It would also permit states to force the issue if a federal
agency is holding up a siting approval. FERC Chairman Pat Wood III has
not sought eminent domain authority in electric transmission for the
commission, even though the FERC has such authority when it comes to
natural gas pipelines. Such authority for FERC in electric
transmission, however, was part of Vice President Dick Cheney's May
2001 energy plan and is reflected in Barton's draft. We do not feel
that it is essential for FERC's efforts to improve regulatory certainty
to force the issue on eminent domain in legislation, and would view it
as neutral if this provision did not ultimately survive in a final
bill. This is conflicting interest that Congress can remedy by opting
not to act on eminent domain for electric transmission.
At a recent meeting of the National Association of Regulatory
Utility Commissioners, Congressman Rick Boucher (R-Va.) discussed his
concerns over eminent domain authority with an example of a
transmission line sought by American Electric Power. The state forced
the re-siting of this line based on environmental and social concerns
raised by the local communities. The RTO planning structures hold
appeal for investors because regional planning has the potential to
provide a forum in which such siting issues can be thrashed out early
in the project development phase. Economic, social and environmental
considerations absolutely should be weighed carefully in the siting of
both generation and transmission infrastructure. Here, too, unbundled
rates can give empowering information to state regulators and project
developers. However, we are still in the early stages of RTO
development and large-scale projects have not been proposed.
If a transmission project is proposed that impacts customers who
are not direct beneficiaries of that investment, (i.e., that state
regulators are now identifying with the pejorative moniker of
``economic improvements'' instead of native load accommodation or
reliability improvements), there is nothing in the RTO construct that
deems those impacts to be without cost. Ideally, the additional costs
of remedying environmental and social concerns should be part of the
stakeholder vetting of any project.
If resolving such concerns makes the ``cost'' of the project too
high, then the customers seeking the benefit would then have economic
incentive to seek an alternative solution. If customers in a load
pocket want a transmission line to them that would cross
environmentally sensitive areas, however the cost of breaching those
areas is too ``expensive'' in terms of the appropriate remediation of
local concerns in the areas in between, then perhaps the solution to
the load pocket is not transmission, but siting generation in its own
neighborhood. This is sound regulatory policy, fair to both communities
and precludes one city or state from forcing another to subsidize its
policy decisions.
Without the benefits of unbundled rates to make the assessment of
costs and benefits feasible on a project-by-project basis, and without
the establishment of regional decision-making through the RTO program,
the electricity sector will continue to be starved for investment.
Transmission enhancement beyond small incremental additions for retail
service will not take place, and generation will not get built where it
is needed, in our view.
Again, we believe that the real incentive that transmission needs
is clear regulatory policy. Congress either needs to revise the law
that was upheld by the Supreme Court if it objects to the court's
interpretation or it must facilitate, not obstruct, FERC's efforts to
implement regional markets based on unbundled rates.
PARTICIPANT FUNDING
One of the most significant issues for Southeast state politicians
and regulators who staunchly oppose the imposition of FERC's
restructuring issues in their states is the question of participant
funding. Although the 1992 Energy Policy Act (1992 EPAct) required open
access to all utilities' transmission systems, there has been a
backlash from some incumbent utilities, some of which believe that the
costs of hooking up all independent generators are more prohibitive
than the law intended. It is true that a large amount of unregulated
generation has been sited near the gas pipelines that emanate from the
Gulf of Mexico.
Participant funding is shorthand for a program under which
independent generators would contribute to the buildout of the grid at
the time of interconnection. Southeast incumbents Entergy and Southern
Co. have been the staunchest advocates of participant funding. It is
their position that independent generators have been siting capacity
throughout the Southeast in a manner that burdens the incumbent's
transmission system beyond the requirements of the 1992 EPAct mandate
for open access and would result in unnecessarily expensive upgrades to
the existing transmission and rate hikes for local ratepayers.
For their part, independent generators and their investors are not
opposed to the concept of participant funding, however, they have
serious concerns about the allocation of transmission capacity they
have paid to build. Sen. Trent Lott (R-Miss.) proposed legislative
language last session that suggested that generators fund 100 percent
of network upgrades, but fully half of the capacity created by such
upgrades would be given free to the incumbent utility. Such a proposal
is a poor investment proposition for the party funding it and therefore
would likely be, in our view, impossible to defend as a good business
strategy in execution. The net result would be no incremental
investment in the grid by generation participants, and such behavior
would solve no transmission investment concerns. Newer efficient
generation would continue to have trouble getting access to the grid in
some parts of the country.
Barton's draft, however, directs FERC to permit participant funding
when an approved RTO requests such approval of FERC. The current
language does not require FERC to use this funding methodology in all
cases, nor does it require its consideration simply upon the request of
a market participant (i.e., a transmission owner). We find this to be
consistent with where FERC is currently headed in its Standard Market
Design development discussions. FERC has made room in its political
philosophy for participant funding, and was even included in the
agency's much maligned July Notice of Proposed Rulemaking.
Further, participant funding in an environment of unbundled rates
has the potential to help stimulate more technologically innovative
investment in the transmission grid, and we would consider this an
incentive for the industry to really begin experimenting with new
technologies for transmission improvements. If a generator is faced
with high congestion costs to reach customers, then a generator will be
motivated to find the most cost efficient remedy to this fact. New grid
technologies in development by American Superconductor, Composite
Technology Corporation, and 3M (Minnesota Mining & Manufacturing) have
the potential to dramatically increase grid capacity through the
installation of new cable on existing right of ways. CTC's product--
which proposes to double line capacity for one-fifth the cost of
existing cable, can be strung on existing power lines and promises one
half the electromagnetic field disturbance of current cables--will be
tested at the Tennessee Valley Authority this summer. American
Superconductor's pilot projects continue to be successful and draw
interest in urban settings. However, transmission owners need to be
rewarded for improving the grid and under the current regulatory
paralysis, transmission owners--whether vertically integrated or
unbundled--have little reason to invest in the grid when their
regulators oppose it because it might benefit ratepayers outside of the
immediate service area.
Transmission owners today do not have the incentive to make
``economic'' transmission improvements, as they do not benefit from
higher throughput or the relief of congestion. Therefore, under the
current regulatory outlook, most transmission owners will continue to
make legacy-technology grid additions, as this larger capital layout
will earn a higher regulated return. That, or they will not invest in
the grid as they are currently benefiting from preferential dispatch of
their own generation or congestions charges earned thereon. Participant
funding has the potential to change this dynamic, as do performance-
based rates for transmission operators and owners.
On Feb. 20, the FERC declined a request to authorize participant
funding in a four-docket batch, when it chose to implement existing
interconnection policy (which does not include participant funding).
The commission based this exercise of discretion on the fact that the
participant funding methodology under the Standard Market Design
proposal is precisely that--a proposal; and secondly, the current
situation in the referenced dockets does not meet the criteria expected
in the Standard Market Design proposed treatment of participant funding
(specifically, an independent system operator and locational marginal
pricing, one of the rate methodologies that emerges when transmission
rates are unbundled). From an investment perspective, this appears to
be the correct course of action.
Only in an unbundled environment with a way to evaluate the costs
of congestion (in this case through the evaluation of locational
marginal pricing information) would a party with the burden to
participant fund be able to present the necessary economic information
to defend this investment to Wall Street. Blanket obligations to build
capacity without guaranteed access to that capacity or offsets that
reflect the contribution made to the overall grid system through the
reduction of congestion and transaction costs are simply indefensible
as investments.
Barton's legislation appears to be consistent with FERC's approach
that the availability of the participant funding methodology would be
contingent on an RTO being in place. The proposed Barton language
tracks closely with FERC's current policy position, and for this reason
we find the similarity in policy direction to be an incremental
positive for the sector's investment outlook if it remains close to its
current form.
PUHCA REPEAL AND REPEAL OF FERC MERGER REVIEW
When electricity restructuring legislation was considered in the
105th, 106th and 107th Congresses, it was our sense that broad-based
consensus existed to repeal the outdated Public Utility Holding Company
Act (PUHCA) and substitute these restrictions with the authority for
FERC to summon books and records to ensure that ratepayers are not
inappropriately subsidizing unregulated operations through regulated
rates.
As a practical matter, investors view repeal of PUHCA as a
positive. The reality however, is that PUHCA notwithstanding, companies
that are exempt of PUHCA requirements have drawn the attention of both
state and federal regulators who have been concerned that companies
facing difficult financial outlooks could attempt to subsidize overall
operations with the loans backed by the assets of regulated businesses
and guaranteed by rates. At the federal level, the concern has been
predominantly focused on natural gas, and on cross financings
undertaken by Enron ahead of its bankruptcy. Lately FERC has been
looking closely at the capital restructuring underway at El Paso Corp.
In electricity, California regulators were and remain frustrated
that PUHCA exemption permitted Edison International and PG&E Corp. to
dividend regulated returns to the parent companies that were later
unavailable to the regulated subsidiary during the California power
crisis to the extent they believed was appropriate.
Indeed, the repeal of PUHCA could facilitate merger and acquisition
(M&A) activity among the regulated businesses; however, we caution
investors that free flowing funds between regulated and nonregulated
affiliate companies are not likely to be in the offing. Current policy
development on financial transactions and cash management practices
have signaled that FERC does not intend to be less vigilant in managing
the exposure of regulated assets, and in fact the commission has been
strongly encouraged by representatives of the fixed income sector that
holds long-term utility debt to be more vigilant of their interests.
Further in meetings we had just this week, jaded utility investors said
they see precious few companies left that have the balance sheet to do
M&A anyway, and the spreads on the assets in the cash strapped
unregulated businesses are still too wide.
FERC review of M&A of electricity assets is defined under Section
203 of the Federal Power Act. The Barton legislation would repeal this
section of the law. Ironically, the General Accounting Office, the
investigative arm of Congress, recommended last June that FERC
oversight authority be broadened not narrowed, and merger review is one
way better oversight can be actualized. In combination with PUHCA
repeal, we would expect that the repeal of Section 203 might be
difficult to achieve. We view PUHCA, and not Section 203 approvals, to
be the primary obstacle to greater M&A activity in the group.
PURPA MODIFICATIONS
The Barton draft also includes modifications to the Public Utility
Reform Policy Act (PURPA). In its current form, the legislation would
require that real-time metering be provided to any customer that
requested it.
The language proposed would terminate mandatory purchase and sale
requirements for cogeneration (qualifying) facilities, also known as
QFs. Support for this measure depends on the asset owner. QF owners who
have the opportunity to sell power at a premium through green power
providers such as Green Mountain Energy (private), advocate the
termination of mandatory purchase and sale provisions. Those who have
no obvious customer base willing to pay a premium for their energy may
not.
RENEWABLE ENERGY NET METERING PROVISIONS
These provisions would facilitate the ability of a renewable fuels
generator to interconnect to the grid. Such treatment would be
beneficial to wind and solar generating companies which often provide
power on an intermittent basis.
RELIABILITY LANGUAGE
Making participation in reliability organizations and observance of
their rules mandatory has been a consensus item since the last
Congress. The primary opponent of the legislation in the Barton draft
is likely to be the existing North American Electric Reliability
Council (NERC), which almost certainly will bristle at the prospect of
being put under FERC jurisdiction. Mandatory reliability provisions
impacting transmission owners are not generally a hotly debated topic
within the industry; as such ``mandatory'' spending is usually quite
easily recovered in regulated transmission rates.
MARKET TRANSPARENCY, POWER TRADING, AND ENFORCEMENT
The Barton draft would order FERC to develop rules establishing an
electronic information system that would provide the commission and the
public with data to facilitate understanding of the markets and price
transparency. These obligations appear to be substantially met already
by Order 2001 released by FERC last April mandating the filing of
electronic quarterly reports of wholesale electricity generation and
transmission sales.
FERC's Office of Market Oversight and Investigation and its Office
of Markets, Rates & Tariffs, however, have not yet begun posting this
information on the FERC website or educating consumers how to use it.
Neither office has provided any public analysis of this data either,
something that we find very frustrating during the debate over the
quality of natural gas and electricity price indices. In our view, it
would be enormously useful to the industry generally and to that debate
specifically if the FERC were able to cross reference actual data with
reported prices and assess whether there is correlation between the
two, or whether indeed, the trade publication price indices are truly
out of whack with reality. Therefore, the good news for FERC is that
this legislative requirement echoes efforts it is already pursuing, if
slowly. Again this legislative proposal suggests harmony with the
direction the FERC is taking, not opposition.
The proposed legislation would put a prohibition on wash trades
executed with ``a specific intent to distort reported revenues, trading
volumes or prices.'' The industry is already taking measures to police
itself better, and we view the legislating of such a provision to be
redundant. However, if it ``plays well in Peoria,'' so be it, we do not
view such a provision as having incremental adverse investment impact
as currently written.
The Barton legislation would increase criminal penalties that can
be assessed under the Federal Power Act, and would extend their
applicability to any market participant, not just utilities. The
language would also increase civil penalty authority; however, it
appears to remain short of the expansion of civil penalties sought by
legislators such as Sen. Dianne Feinstein (D-Calif.).
CONSUMER PROTECTIONS (REFUNDS)
The proposed legislation would change the refund effective date for
complaints from 60 days subsequent to the date of filing, to the date
of filing. This is a direct reflection of the frustration California
parties experienced when the refund date for the California power
crisis was set for Oct. 2, 2000, and thereafter. The original compliant
filed by Sempra was filed on Aug. 2, 2000. We do not believe that
shortening the refund effective date is a serious threat to the
industry's ability to do business.
The proposed language also prohibits slamming and cramming of
retail customers in open access states, a relatively non-controversial
measure.
WHAT CAN/SHOULD CONGRESS DO TO HELP THE ELECTRICITY INDUSTRY?
Electricity today is not an attractive arena for investment. Wall
Street is fully capable of healing from the excesses of the merchant
power frenzy and the overvaluations that have since been viciously
corrected, and can manage through the losses associated with the fraud
perpetrated by Enron and the misbehavior of other firms both within and
outside of the electricity business. However, it cannot, with any sense
of fiduciary responsibility, pour the billions of dollars in investment
into the transmission grid that it appears we could so clearly benefit
from when the argument over who will pay for it remains a fight to the
death between FERC, the states and now their representatives on Capitol
Hill.
For all of the value destruction that has taken place in the
electricity sector in the shares of independent power producers,
traders, marketers and even some regulated utility concerns, the losses
borne by investors far outweigh those that will be assessed on
ratepayers. This is simple math. The state of California claims that it
is owed $8.9 billion in refunds for excessive power costs in 2000-2001.
The market cap of six independent power producers coughed up a combined
$30 billion in market capitalization over the two days that FERC acted
on price caps in June of 2001. In spite of the criticism levied against
the FERC, California ratepayers are going to see at least part of their
$8.9 billion outlay refunded, and frankly, the $43 billion in forward
contracts the state signed are likely to continue to see modification,
if not by FERC then in state proceedings under the California Business
and Professional Code (our research on this topic was published in two
Electricity Bulletins, dated Feb. 24, and March 6, 2003). We believe
that ratepayers are still coming out far ahead relative to investors in
the wake of this market dysfunction. Certainly no small part of the
risk of this business has been transferred to the investment community
from ratepayers, and isn't that what Congress intended in the 1992
Energy Policy Act?
Differences of opinion on policy will always take place, but
investment is paralyzed by the fact that the highest court ruled on
this issue 12 months ago, yet the FERC remains under attack in a
variety of venues. Frankly, the industry would be best served if
Congress would either endorse the interpretation of the Supreme Court
in March 2002 and let FERC get on with its job, or have the intestinal
fortitude to go in and change the law if it does not agree.
The regulators and legislators from the Southeast and the West are
demanding that Congress decree that any implementation of the RTO
program must be made on a risk-free basis. This is preposterous. Since
when is zero risk the only prerequisite for sound regulatory policy?
Are regulators omniscient when it comes to defining a path that
precludes risk? The colossal cost overruns of the investment in this
nuclear generation capacity were made under the aegis of a fully
regulated environment and paid for out of the pockets of ratepayers.
Independent power and merchant trading sector losses have not been
transferred to the ratebase except where state regulators have
permitted it to happen. California's regulators refused to allow their
incumbent utilities to contract power on a bilateral basis, in spite of
repeated pleas for that ability. When FERC imposed price caps and
dramatically changed the business outlook for traders and independent
power companies, these companies experienced losses on business
transactions and in the capital markets. Yet these independent power
companies and failed merchant traders have not come running to
regulators or to Capitol Hill to recoup their losses.
They have asked for fair treatment in the marketplace in the form
of clear rules, but they have not requested absolution from their
business risk. In fact at every turn, FERC has been vigilant, as
witnessed in the scrutiny afforded inter-affiliate lending by Enron and
El Paso Corp. over the last year, in its efforts protect ratepayers
from precisely that risk. The failure by the Public Utilities
Commission in California, however, to permit bilateral contracting was
a regulatory decision and unfortunately it will be recovered in rates.
There is no risk-free proposition in this country. The request to
prove that no harm could come to anyone under a proposed standard
market design strikes us as equivalent to saying that a newly elected
official should not be allowed to assume office until it is proven that
he or she will never offend a single member of his or her constituency.
It verges on the absurd. We take risk in this country every day, all
the time, in every single sector of the economy and in every aspect our
social environments. We do our best to manage these risks. We do not
sit around and do nothing waiting for them to subside for they do not.
To say that FERC should be arrested in its efforts to resolve the
problems clearly presented by the California crisis and by incomplete
restructuring reminds me of a captain's excessive concern for the ship
and its crew such that it never leaves port. That is no way to oversee
our energy infrastructure, and puts the nation as a whole at risk to
higher energy prices jeopardizing any economic recovery that Congress
is dedicated to facilitating.
Several companies that are performing well at this date are
considered ``overvalued'' relative to their growth rates. Investors are
not rewarding these companies or indicating their positive view of the
vertically integrated utility model, they are parking cash until
something better comes along because it pays better than treasuries. It
will be their fiduciary duty to diversify out of these positions as
soon as something else looks better. Several of the stocks trading at
the top of the sector's valuation range are vulnerable to the downside
for this reason.
From 1999 onward until late 2001, fund managers outside of the
classic utility fund arena began to hold shares in the electricity
sector. This was net new investment interest. Today, however, I can
tell you that the list of clients that I call because they hold
positions in the electricity sector has decreased dramatically. Even in
utility funds, managers are uncomfortably ``overweight'' in low-growth
but relatively well-performing shares, and have indicated that as soon
as telecom and or natural gas local distribution companies or anything
else in the economy begins to show some more life they will be
diversifying away from even these electricity assets because of the
intractable regulatory situation and the poor capital structure common
to so many participants. I am not speaking here of the independent
power companies, I am speaking of the large integrated (some
vertically, some unbundled) utility holding companies.
On Jan. 16, FERC hosted a technical conference to collect financial
industry feedback on the status of the electricity market. This was yet
another meeting, through which FERC continued to study, define and
improve its policy development. At this meeting, every representative
of the financial community present stated that it would benefit the
industry if FERC continued its work on restructuring the power markets
and developing consistent rules and improving regulatory certainty.
This happens to be in stark opposition to the political considerations
that are hamstringing the development of precisely such policies.
Investors can accommodate regional differences; however, they do
like consistency wherever it is feasible and appropriate. The capital
markets do not require the risk free solution that is currently sought
by regulators and state representatives in the Southeast and West. Nor
is there a widespread call in the capital markets for re-regulation of
the industry. While re-regulation would cause a reversion back to the
prior norm, there is no indication that the industry cannot manage to
survive in a new, restructured form.
Otherwise, investors are confronted with the following conundrum.
In the Southeast, for example, incumbent utilities' CEO's have begun
bragging to Wall Street about their plans to buy assets presently owned
by financially distressed independent power producers and put them into
rate base. It is interesting for investors, who are familiar with the
business plans of both types of participants, that the independent
generation assets when owned by an independent can't seem to get
transmission capacity to move power today, yet these same assets are
being touted as a productive part of an incumbent-owned portfolio.
Where should dollars be invested--which story is the truth?
From a capital markets perspective, we would ask that Congress
approach the problem like Hippocrates with the mantra: ``First, do no
harm.'' If Congress is not inclined to make a call on jurisdiction for
transmission once and for all, then help FERC do the job that Congress
itself directed it to do, not frustrate it with never-ending
deliberation and paralysis. The fastest way to get information into the
hands of state regulators who are concerned about restructuring is to
give them unbundled rate analysis. Then Wall Street can ascertain the
capital requirements needed for each course of investment to
rationalize both generation and transmission, empowering consumers and
their regulators to make better decisions.
Mr. Barton. Thank you. We now want to hear from Mr. Kanner.
STATEMENT OF MARTY KANNER
Mr. Kanner. Thank you, Mr. Chairman, members of the
committee. I thought the last panel near the end had a very
healthy and thoughtful discussion on what we need to do to
foster competitive markets to give consumers access to lower-
cost power supplies. We heard some of the elements. Mr.
Shimkus, you talked about the need for enhanced transmission
investment, as did Mr. Walden. And frequently there was mention
of PJM and how the system is working there. And I think all of
us would probably agree that that system has a history of being
operated in a coordinate fashion, having the economic dispatch
generation. That has been talked about today. I think it is
also important to look at it and realize that in fact it is not
perfect.
Noted economist Paul Jaskow, in his comments to FERC on
standard market design, looked at the PJM interconnection and
had these observations: That during the period 1998 to 2001 the
hours in which transmission constraints occurred increased 661
percent despite the fact that transmission congestion charges
increased by 500 to 1,000 percent; that PJM during that time
period also experienced increases in wholesale spot energy
prices and despite all of these price signals, investment in
transmission in PJM stagnated. Well, I think that tells us the
lessons we can draw from that is even in a region that has
tremendous experience in dealing with central dispatch, in
dealing with competitive wholesale supplies and operating an
integrated grid, that achieving workable competitive markets
isn't an easy task.
So the question I think before you is what do we do, what
are the steps that are needed if in fact we want to foster
sustainable, effective competition in wholesale power markets?
Let me share with you the recommendations of Consumers for
Fair Competition. First of all, as was discussed a little
earlier today, we need to band fraudulent and manipulative
practices and take those actions necessary to provide effective
remedies. This is not simply a question of one bad actor. If
you look at the trade press, the general press from virtually
every region of the country, you will realize that there have
been instances of market manipulation and abuse. Part of the
reason it is a complex system and that complexity creates
opportunities for parties looking to make money, to do things
that with hindsight many of us would agree are not the right
thing to do.
We need to facilitate effective market oversight. If we are
going to treat electricity as a commodity, then just like other
commodities the regulators need to have access to transactional
data in order to see whether or not abuses have occurred.
Third, we need real market transparency. Participants in the
market will benefit if they know how much is available, what
things are being sold for, at what times and what volumes and
at what price? Relying on aggregated information, statistical
data or delays in the filing of that information won't work.
Fourth, we need to separate the regulated and unregulated
utilities in terms of their investments or regulated and non-
regulated activities of utilities. Another financial analyst
was quoted recently in the general press as saying, ``Utility
investments rarely go wrong and utility unregulated investments
rarely go right.'' If that is the case, then we need to make
sure that when the consumers of those regulated utilities that
they are not on the hook for those investments gone bad. So we
need strict financial firewalls between the affiliates and the
operating utilities, and we need to make sure that they stand
alone.
We need to review all outstanding PUHCA exemptions. I think
the last couple years have shown us that Congress was prescient
in 1935 when it enacted PUHCA, that the reasons for PUHCA
remain valid today and that there are parties that currently
have exemptions, not subject to the same restrictions as the
registered holding companies, that a thoughtful review of those
exemptions are needed to make sure that they remain in the
public interest.
We also need to recognize that there is gaps in merger
review. There are certain types of mergers, mergers at the
holding company level, convergence mergers are between electric
and gas utilities that escape regulation, and we need to close
those gaps. And, last, we would recommend that Congress look at
the private power exchanges where third party deals are
facilitated and whether there needs to be a separation to
ensure that those are truly independent and not run by parties
that have an interest in the energy markets, avoid the intent
we saw before where Enron received proprietary information from
Enron Online, it exchanged platform, and used that to choose
what positions to take in the market.
There is a gap between what CFC recommends and what is
contained in the Barton bill. It is not an insignificant gap,
but we, as always, pledge to work with the members of the
committee to try and craft legislation that does what I think
is the desire of everyone here, which is to facilitate those
effective competitive markets, but it is a real challenge.
[The prepared statement of Marty Kanner follows:]
Prepared Statement of Marty Kanner on Behalf of Consumers for Fair
Competition
Mr. Chairman, members of the Subcommittee, my name is Marty Kanner;
I am testifying today on behalf of the Consumers for Fair Competition
(CFC), an ad hoc coalition of small and large electric consumer
representatives, small business contractors, consumer owned utilities
and others. Consumers for Fair Competition was formed to advance
policies necessary to promote effective wholesale competition and has
been active in the restructuring debate and efforts to block repeal of
the Public Utility Holding Company Act (PUHCA) absent sufficient
replacement provisions designed to protect consumers and investors.
Much has transpired since this Committee last discussed electricity
legislation. CFC believes it is important to reflect on the turmoil
that has occurred in the utility industry over the past few years and
proceed cautiously, focusing on those provisions needed to prevent
market manipulation and abuse and, thereby, restore consumer and
investor confidence in the industry.
At previous hearings, CFC testified about the difficulties
associated with transitioning the wholesale market from cost-of-service
rate regulation to reliance on competitive market pressures. The
features of the utility industry--the historic dominance of vertically
integrated utilities, the financial and regulatory barriers to market
entry and the physics of the electric system--pose significant hurdles
for effective competition and numerous opportunities for consumer
abuse. As witnessed over the past few years, these hurdles are real and
the consequences are severe.
LESSONS LEARNED
What are the ``lessons'' we can learn from events of the past few
years?
1. It's not just Enron. When the full breadth of the Enron scandal
became known, some discounted the revelations as an anomaly--the
distasteful actions of a rogue market player. Regrettably, the problems
are much broader. A cursory review of the general and trade press--
compiled as an attachment to my testimony--underscores the breadth of
the problem. A significant number of market participants, both
traditional utilities and new market entrants, have been accused of,
confessed to or been sanctioned for engaging in questionable
activities, market manipulation and consumer abuse.
2. It's not just California. Again, a common assumption was that
the problem was isolated to California (and those states with the bad
fortune to be located close to it) and the result of California's ill-
conceived market rules or failure to foster construction of new
generation. While California's overly complex system and short supply
certainly created opportunities for abuse, similar problems have
occurred throughout the country--in Oregon, Minnesota, Kansas, Ohio,
Pennsylvania, New England, Louisiana and elsewhere.
3. Good Markets Need Good Information. Efficient markets require
complete, accurate and timely information. Reports of phantom ``wash
trades'' intended to boost perceived revenues, trading volume and
prices were fairly common in the electric industry. Similarly, there
have been multiple instances of parties reporting false information on
gas prices to private clearinghouses. Without good information,
effective market oversight is compromised, market confidence and
liquidity are shattered and consumers run the risk of paying excessive
prices.
4. Utility Diversifications Can Harm Consumers, Stockholders and
Competition. The record of utility diversification efforts is far from
stellar. An analyst with Williams Capital recently noted that ``utility
investment rarely goes terribly wrong; non-utility investment rarely
goes right.'' But, unlike other industries, it's not just the utility
and its investors that suffer from bad investment decisions. As
detailed in a December 26, 2002 Wall St. Journal front-page article
(which is attached to my testimony), utility customers suffer the
consequences. Utilities have inappropriately sought to charge consumers
of their regulated entities for the costs of unrelated diversifications
(i.e., buying unregulated assets at inflated prices and tap utility
assets to back the debt of nonutility ventures). Utility affiliates
must stand on their own: utility consumers should not subsidize
diversifications--either through cash infusions, backing affiliate
debt, or receiving inadequate compensation for services or assets
provided by the utility for the benefit of unregulated affiliates.
5. Enhanced Tools Are Needed to Oversee Markets. As noted by
Chairman Barton in a recent interview and FERC-nominee Joe Kelliher at
his recent confirmation hearing: Reliant's intentional withholding of
generation in California was not illegal under the Federal Power Act. I
hope we all agree it should be. If we are going to rely increasingly on
markets, then FERC needs market oversight authorities and tools akin to
those of the SEC.
6. PUHCA Does Matter. PUHCA includes a series of structural
requirements designed to maintain financially healthy utilities,
prevent abusive affiliate transactions and protect consumers and
investors. A central thesis of PUHCA--that investors and consumers are
better off when utilities concentrate on providing utility service--has
been borne out by recent events. In fact, an October 2002 report by
Moody's Investors Service noted ``a growing sense that the more
traditional power company business model, once considered outdated, is
again in fashion'' and that the credit ratings of these traditional
utilities have ``remained relatively stable as they have exhibited
solid financial flexibility''.
7. We May Only Have Seen the Tip of the Iceberg. The allegations of
market abuses are numerous. There may be much more occurring under the
surface--but we may never know. It is troubling that the two most
glaring ``smoking guns''--the Enron memo detailing abusive trading
schemes and the transcripts of Reliant traders and plant operators
engineering artificial shortages in order to raise prices--where
disgorged by the offenders, not uncovered by any regulatory oversight
body. If such blatant manipulative tactics have evaded federal and
state regulators, how many more covert abuses are occurring?
You are faced with an enormous challenge. The problems plaguing the
utility industry and its consumers and investors are numerous--real and
perceived market abuse, soaring and highly volatile prices, sinking
financial conditions and a lack of consumer and investor confidence.
CFC would urge you to only take those steps that you are confident will
address the shortcomings of the industry and our current system of
regulatory oversight and provide the needed structural protections for
consumers and investors.
CFC RECOMMENDATIONS FOR ELECTRICITY LEGISLATION
Given the anticipated timeline for action, deferring action on
electricity legislation may be the wise course of action. However, if
you choose to include electricity provisions in the pending energy
bill, CFC believes that the following elements must be included:
Bar fraudulent and manipulative practices. If Reliant's
activities were not illegal, they should be. Rather than
attempting to ban specific trading practices, any electricity
legislation must make it unlawful for any entity, directly or
indirectly, to undertake fraudulent, manipulative, or deceptive
actions in wholesale energy markets.
Facilitate effective market oversight. Today, the nation's
financial markets require the recording and submission of
transactional data. This information provides an ``early
warning system'' for potentially inappropriate trading
practices and an audit trail for any resulting investigation.
FERC must have similar access to transactional data in utility
markets.
Provide genuine market transparency. Efficient markets require
timely and effective price discovery. In addition, market
transparency alerts market participants and market overseers
with indications of anomalous trends that might suggest
manipulative activities. Actual--not statistical or average--
price information must be required on a real-time basis.
Separate regulated utilities and their unregulated affiliates
and prohibit cross-subsidization. Markets are distorted and
consumers and competitors are harmed when utilities charge
ratepayers for the costs of unregulated ventures or tap
ratepayers' revenues and ratepayer-financed tangible and
intangible assets to fund their diversification. FERC recently
took a step in the right direction by barring the issuance of
utility-backed debt for unregulated ventures. While only a
first step, this initiative should be codified and expanded to
shield consumers from the risks and costs of utility
diversifications. In addition, federal law should clearly
prohibit cross-subsidization and consideration should be given
to the proper form of separation needed to truly protect
consumers and investors and preserve competition.
Review All PUHCA Exemptions. Enron, after its acquisition of
Portland General Electric, self-certified that it qualified for
an intrastate exemption under Section 3 of PUHCA. CFC has
previously questioned Enron's qualification for that exemption
and noted that--had Enron been subject to the stricter PUHCA
requirements for Registered Holding Companies--many of Enron's
improper activities could have been prohibited or detected.
Interestingly, an SEC judge recently ruled that Enron did not
qualify for the intrastate exemption based on the percent of
revenues Portland General Electric earned from interstate
sales. A mandated review of all outstanding Section 3 PUHCA
exemptions is needed to ensure that those exemptions are still
appropriate and in the public interest. In addition, CFC would
support amending the statutory PUHCA exemptions for merchant
generation and telecommunications affiliates to require PUHCA
Section 10(b) review to ensure that the interests of investors
and consumers are protected.
Gaps in the review of utility mergers must be closed. The
weakened financial condition of the utility industry may
translate into a significant increase in mergers and
acquisitions (in fact, low stock prices of some utilities may
well encourage further acquisition efforts). Such activities
may be economically beneficial--but that can be determined only
after careful review. Certain M&A activities--disposition of
generation-only assets, mergers between holding companies and
acquisitions of gas utilities by electric utilities--may not be
subject to review by FERC. Congress must close this gap.
Private exchanges must be run independent of market
participants. Enron benefited from the proprietary information
it received from its private brokerage platform: Enron online.
The integrity of private trading platforms to facilitate third-
party trading is dependent on their market neutrality. The best
means of achieving this neutrality is to bar utility ownership
of exchanges that are designed to facilitate third-party
transactions.
COMMENTS ON DISCUSSION DRAFT
I have shared with you the views of CFC on what provisions should
be included in any electricity legislation. I would now like to share
our comments on Title VII of the February 28 Discussion Draft.
While CFC commends Chairman Barton for his interest in promoting
wholesale competition, Title VII of the Discussion Draft,
unfortunately, does not include the needed provisions outlined in my
testimony--and in fact eliminates existing consumer protections in
several key respects. Consequently, CFC cannot support Title VII in its
current form.
Most significantly, CFC opposes the proposed repeal of FERC merger
review and repeal of PUHCA.
As we have testified, CFC believes that PUHCA should not be
repealed--and numerous national organizations join us in this view (see
attached letter). If PUHCA is to be repealed, it must be accompanied by
strong consumer protections--outlined above--that are, regrettably,
absent from the Discussion Draft. Moreover, it is discouraging that the
lone ``protection'' touted by repeal advocates--access to books and
records--is an empty promise under the provisions of the Discussion
Draft, which includes an expansive exemption that is likely to swallow
the rule.
Mr. Chairman, our position on PUHCA repeal is clear. Nonetheless,
if the subcommittee is committed to lessening this important consumer
protection statute, we would encourage you to consider targeted
revisions designed to address specific limitations contained in PUHCA
that the Committee finds unreasonably restricts a valuable activity.
This is the general approach taken by Congress in 1992 and 1996--and is
a far preferable model to outright repeal.
We are similarly troubled by the legislation's repeal of FERC
review of proposed utility mergers. As the primary utility regulator,
it is appropriate and necessary for FERC to review proposed mergers.
This oversight is all the more important if we are to successfully
transition to a competitive market. Only FERC has the expertise to
assess the competitive impacts of a proposed merger on regional power
markets, and FERC is in the best position to condition a proposed
merger to mitigate anti-competitive impacts and oversee the merged
entity's compliance with those conditions. Given the limited resources
and utility expertise of the Justice Department and Federal Trade
Commission, reliance on those agencies for utility merger review is
inadequate. Moreover, the simultaneous repeal of merger review under
PUHCA is likely to create a regulatory black hole in which few proposed
mergers receive the necessary scrutiny.
CFC appreciates that the proposal includes provisions intended to
discourage or prevent abusive practices--increased penalties,
transparency and a prohibition on round-trip trades. However, as
outlined above, these provisions are not enough:
Increased penalties will have little effect if, like in the
Reliant case, those actions are not illegal. Moreover, without
strong market oversight and enforcement, imposition of
occasional penalties is a minor cost of business when companies
can reap millions on profits from manipulative schemes.
CFC supports transparency requirements--and the language in
the Discussion Draft is an improvement over prior proposals by
removing the explicit submission of statistical data and
narrowing the exclusion for ``sensitive'' information. However,
we remain concerned that the provision could still result in
submission of averaged prices if volumetric reporting is not
also explicitly required. In addition, Congress must also
require transparency--and accuracy--in gas price data
submission.
Barring a specific trading practice--such as round-trip
trades--is unlikely to have the needed remedial impact. In
fact, it may be seen as a tacit suggestion that other shady
transactions--not specifically banned--are deemed
``acceptable''. What is needed is a strong and unambiguous
prohibition on any and all fraudulent, deceptive and
manipulative practices. I have heard some suggest that
``manipulative practices'' is an ill-defined term. I would
submit that so was the phrase ``just and reasonable'' when
Congress passed the Federal Power Act in 1935.
The provisions on incentive- and performance-based transmission
rates, as well as participant funding, are less prescriptive than those
included in prior legislation. While we appreciate those changes, we
remain troubled by the tension created between these provisions and
Sections 205 and 206 of the Federal Power Act. Under accepted case law,
FERC sets rates of return that reflect the risk of the relevant
investment and sufficient to attract needed capital. Admonishing FERC
to set rates to reflect those factors--as directed by the Discussion
Draft--and then require adherence to Sections 205 and 206 creates an
ambiguity that could lead to unnecessarily high transmission rates. I
would note that, in an effort to encourage participation in the Midwest
ISO, rates of return as high as 36 percent were proposed. Simply
inflating transmission costs will foster neither competition nor
consumer benefits. I will also note that the provisions on incentive
rates and participant funding are in conflict: would a transmission
owner receive an inflated rate of return for a transmission line that
is participant funded? CFC would urge you not to adopt an inflexible
system on participant funding.
CONCLUSION
There are significant differences between what CFC believes is
needed in electricity legislation and what is included in the
Discussion Draft. As always, Mr. Chairman, we are committed to working
with you, your staff and the members of the Committee. However, we are
skeptical that appropriate and beneficial electricity legislation can
be negotiated and crafted at this time. If Congress cannot include the
provisions needed to detect, prevent and mitigate the opportunities for
market manipulation and consumer and investor abuse, then CFC would
urge deferral of action on electricity legislation until those
provisions can be included.
On behalf of Consumers for Fair Competition, I thank you for this
opportunity to testify.
March, 2003
Allegations of Market Flaws and Abuses
February 20, 2003--The Federal Energy Regulatory Commission
launched an investigation into whether Enron illegally retained
ownership of two cogeneration plants after it no longer qualified for
sole ownership once it bought the Portland General Electric utility.
(Source: The New York Times)
February 19, 2003--Federal regulators asked California's grid
operator for more information on energy companies that may have engaged
in questionable electricity trading tactics to avoid the state's price
caps in mid-to-late 2000. (Source: The Wall Street Journal)
February 6, 2003--A Securities and Exchange Commission (SEC) judge
rejected Enron's request to retain its exemption from the Public
Utility Holding Company Act (PUHCA), concluding that the company's
significant revenues from sales outside the state of Oregon--where it's
utility subsidiary is located--disqualified the company for the
exemption. (Source: Reuters News Service)
February 5, 2003--Reliant Resources Inc. was fined $13.8 million in
a settlement over allegations that the company intentionally withheld
power in the California market in order to drive up prices during the
state's electricity crisis. (Source: The Energy Daily)
January 30, 2003--Staff for the Federal Energy Regulatory
Commission concluded that natural gas markets remain ripe for potential
gaming this year despite stepped-up federal and industry scrutiny. The
report concluded that ``without proper monitoring, the likelihood of
successful manipulation could increase under current tight supply
conditions.'' (Source: The Energy Daily)
January 7, 2003--The California ISO released a report charging that
other companies engaged in Enron-like market manipulation tactics,
including the creation of phantom transmission congestion. (Source: Low
Angeles Times)
January 6, 2003--FERC Chairman Pat Wood has decided to bring before
the Commission an appeal that companies seeking to join the PJM
Interconnection and Midwest ISO are earning enormous rates of return--
as high as 63 percent--on their transmission assets. (Source: The
Energy Daily)
January 6, 2003--In a December report, the General Accounting
Office determined that federal regulators are unprepared to police the
deregulated market for natural gas. (Source: Public Power Weekly)
December 26, 2002--Energy companies, burned by disastrous forays
into commodities trading and other unregulated businesses, are
increasingly seeking to pass some of the financial burden of these
failed ventures on to their utility units--and some experts are worried
that this could lead to higher electricity rates for consumers in
coming years. For instance, Duke Energy Corp. agreed to pay $25 million
to its utility customers to settle regulators' accusations that the
company improperly stuck its utilities with expenses that rightfully
belonged to unregulated affiliates. Similarly, Kansas regulators found
that Westar Energy quietly shifted more than $12.95 billion of debt
from unregulated affiliates onto the utility side of the business.
(Source: The Wall Street Journal)
December 20, 2002--The Commodities Futures Trading Commission
(CFTC), in the first enforcement action over energy date reporting
scandals, issued an order in which Dynegy Inc. agreed to pay a $5
million fine to settle charges that two affiliates--for more than two
years--deliberately reported false gas market data to manipulate
published price indexes. (Source: The Energy Daily)
December 5, 2002--A former El Paso Corp. vice president and natural
gas trader has been arrested and charged with knowingly providing false
data to an energy industry newsletter that develops and publishes a
monthly index of gas prices. (Source: The Energy Daily)
December 4, 2002--In a letter to the Financial Accounting Standards
Board (FASB), Florida-based Teco Energy said current price quotes are
``unreliable'' and ``misleading'' due to the lack of effective
mechanisms to ensure accurate reporting by energy companies and data
collection by publishers. (Source: The Energy Daily)
November 19, 2002--A former energy trader and one-time employee at
one of the country's best-known index publishers told California
legislators that misreporting of energy prices by large companies was
routine, underscoring the scope of a practice now under review by
federal regulators. (Source: The Wall Street Journal)
November 16, 2002--A report by federal energy regulators--made
public after the Wall Street Journal sued to obtain the full record of
the Federal Energy Regulatory Commission investigation--details how two
power companies, Williams Cos. and AES Corp. may have conspired to
drive up prices during California's 2000-2001 energy crisis. The report
lends credence to allegations that California's generators colluded to
withhold power from the state. (Source: The Wall Street Journal)
November 13, 2002--A federal grand jury investigating the
California energy crisis appears to be focusing on whether major
electricity suppliers in the state worked together to rig prices--in
violation of the antitrust laws. (Source: Los Angeles Times)
October 28, 2002--Williams reported that employees ``misreported
natural gas trades'' to industry publications that compile price
indices. The same story also reported that earlier in October Dynegy
fired six people for similar actions. (Source: Platts Power Markets
Week)
October 28, 2002--A class action lawsuit has been filed against
AEP, claiming that AEP investors were misled about the value of AEP
stock based on false information created by AEP ``wash trades'' and
manipulation of gas index prices through false transaction reporting.
(Source: Platts Power Markets Week)
October 24, 2002--FERC initiated an investigation to determine if
ENRON improperly certified three wind generation facilities as
Qualifying Facilities in 1997. (Source: FERC Order Initiating
Investigation and Hearing)
October 23, 2002--The Commodity Futures Trading Commission's
inquiry into U.S. energy markets involves many companies and includes a
review of intentional reporting of false price data to publications
that produce indexes against which energy contracts are pegged.
(Source: The Wall Street Journal)
October 17, 2002--The head of Enron's energy trading operation in
the West, Timothy Belden, agreed to plead guilty to a criminal charge
for his role in manipulating electricity prices in California. (Source:
Los Angeles Times)
October 9, 2002--American Electric Power dismissed five employees
in their gas-trading unit for providing ``inaccurate price
information'' to industry trade publications. (Source: AEP News
Release)
October 7, 2002--Standard & Poor's Rating Services has long held a
view that the lack of regulatory insulation of a regulated utility from
the nonregulated operations of the Parent company is the cause of many
credit ratings downgrades over the past few years. (Source: Standard &
Poor's)
October 7, 2002--The Securities & Exchange Commission opened an
inquiry to determine whether Enron should maintain its exemption from
the Public Utility Holding Company Act. (Source: The Oregonian)
October 2, 2002--The Securities & Exchange Commission charged
Andrew Fastow, former ENRON CFO, with fraud. The SEC filed in civil
court ``seeking disgorgement of all ill-gotten gains.'' (Source: SEC
News Release 2002-143)
October 1, 2002--An official with the Federal Energy Regulatory
Commission said that owners of U.S. power plants and transmission lines
may be required to take ``personal responsibility'' and certify that
plant outages which impact market prices occur due to legitimate
reasons.
September 24, 2002--Dynegy settled fraud charges with the
Securities & Exchange Commission. The SEC alleged Dynegy engaged in
``wash trading'', selling and purchasing equal amounts of energy for
the same price from the same counter party, and improper accounting for
special purpose entities. Dynegy agreed to a cease and desist order and
paid $3 million, but was not required to admit to any wrongdoing.
(Source: SEC News Release 2002-140)
September 23, 2002--El Paso Pipeline was found to have withheld gas
line capacity. The Chief Judge found that El Paso had market power into
the California markets and exercised that market power by withholding
gas line capacity. The Chief Judge went on to recommend that FERC
impose penalties. (Source: Initial Decision Docket # RP00-241-006)
September 18, 2002--The California Public Utility Commission
alleges that five power generators deliberately withhold output during
the state's energy crisis in order to drive up prices. (Source: The
Wall Street Journal)
September 13, 2002--The Commodity Futures Trading Commission
reached a settlement with a former Avista Energy trader regarding his
role in the alleged manipulation of forward electricity prices in
California on the New York Mercantile Exchange. The illiquidity in the
market enabled price manipulation through large volume trades in the
closing minutes of the exchange. (Source: The Energy Daily)
September 10, 2002--IdaCorp admits violating FERC affiliate rules,
saying that its trading unit did not always buy transmission access
from its regulated utility affiliate on a third-party basis. (Source:
The Energy Daily)
August 19, 2002--Bill Hederman, the first director of the new FERC
Office of Market Oversight and Investigation, said that the Commission
does not yet have a clear definition of market power, and that a ``a
hard and fast definition will be closer to a year away.'' (Source:
Clearing Up)
August 16, 2002--Utility regulators in several states are moving to
ensure that the financial problems that decimated companies in the
wholesale-energy sector don't unduly hurt consumers of the electric
companies they regulate. (Source: The Wall Street Journal)
August 14, 2002--The market monitor for the PJM Interconnection LLC
said certain companies repeatedly created congestion in the Mid-
Atlantic electricity grid by gaming the system. Faulty incentives
induced market participants to shift power flows to capture more
profit, the monitor said. (Source: The Energy Daily)
August 13, 2002--The Federal Energy Regulatory Commission launched
a formal investigation into instances of possible misconduct by five
companies alleged to have manipulated short-term electric and natural
gas prices in the West. (Source: FERC Press Release)
July 23, 2002--The PJM Interconnection found discrepancies in
prices sold from energy providers in neighboring regions, with
marketers booking transactions along transmission paths that were
different from the actual path used in order to distort congestion
pricing. (Source: The Energy Daily)
July 16, 2002--Duke Energy acknowledged that it made 23 ``round
trip'' energy trades over the Intercontinental Exchange electronic
trading platform, of which Duke is one of 13 equity owners. (Source:
The New York Times)
June 28, 2002--The biggest reason Californians paid $7 billion more
for electricity in the summer of 2000 was the ability of power
suppliers to ask for and get high prices, says a new study by
university economists. (Source: Los Angeles Times)
June 24, 2002--A report by the Pennsylvania Public Utility
Commission alleged that PPL EnergyPlus deliberately withheld
electricity from the capacity market in early 2001 to create an
artificial shortage. (Source: Public Power Weekly)
June 18, 2002--A study by the General Accounting Office concluded
that the Federal Energy Regulatory Commission is not yet up to the task
of protecting consumers and ensuring that electricity is sold at just
and reasonable rates. The report determined that FERC is hobbled by
antiquated procedures, legislation and perhaps a mind-set more suited
to the old days when energy producers were regulated monopolies.
(Source: The New York Times)
June 10, 2002--Traders at Xcel Energy and Mirant discussed
``games'' to profit from California's chaotic electricity market in
2000 as they negotiated energy transactions, according to transcripts
Xcel has given to federal regulators. The Xcel and Mirant traders
discussed schemes to schedule nonexistent power use and to take
advantage of congestion payments on California's overburdened electric
grid.
June 8, 2002--Perot Systems was peddling ways to exploit market
loopholes in the California energy market, which the company had helped
develop. (Source: Los Angeles Times)
May 27, 2002--As noted by the head of the PJM market-monitoring
unit: ``I don't think any energy market is immune to manipulation''.
(Source: Business Week)
May 15, 2002--In a 2001 probe of Enron's online trading system,
FERC did not uncover either the looming financial collapse or its
manipulative trading practices. Senate Governmental Affairs Committee
Chairman Joseph Lieberman faulted the investigation for being
``incomplete'' and ``more noteworthy for what it overlooked than for
what it scrutinized, leaving consumers unprotected''. (Source: Wall
Street Journal)
May 8, 2002--Electricity industry analysts warned yesterday that
the memos showing how Enron Corp. manipulated California's power supply
in the past two years demonstrate that smart, very detailed market
rules have to be devised and enforced. (Source: The Washington Post)
May 7, 2002--Internal Enron documents outline trading strategies to
manipulate prices in California's power market. (Source: Wall Street
Journal)
May 2, 2002--Coal plant developer alleges that Illinois Power is
frustrating plant interconnection of the plant to favor a competing
coal plant owned by an affiliate of the utility. (Source: The Energy
Daily)
March 5, 2002--Cambridge Energy Research Associates issued a report
that noted ``we're a decade into deregulation and most power markets
remain ill-defined''. (Source: Wall Street Journal)
March 4, 2002--Staff of the Public Utility Commission of Texas
accuse six (unnamed) market players of manipulating the market in Texas
by intentionally mis-scheduling power needs to reap more than $1
million in load imbalance credits. (Source: The Energy Daily)
January 11, 2002--A coalition of major generators complained to
FERC that Entergy is charging excessive rates and deny comparable
service to competitors. (Source: The Energy Daily)
January 8, 2002--A coalition of generators (including Calpine,
Exelon, Mirant and Reliant) charged that Entergy is abusing market
power through its generator energy imbalance program, overcharging
independent generating facility customers for imbalances resulting from
generation under-deliveries. The coalition alleged that Entergy claimed
its incremental costs of meeting the imbalance were more than $100/mwh
greater than the prevailing market rate. (Source: Public Power Weekly)
October 5, 2001--FERC accused Exelon of illegally manipulating the
transmission system in the Pennsylvania-New Jersey ``Maryland (PJM)
Interconnection to enrich its power marketing affiliate (PECO Energy).
(Source: Energy Daily).
July 12, 2001--The Federal Energy Regulatory Commission (FERC)
decided to develop new tests to determine whether power providers
should be allowed to charge market rates for electricity. (Source: Dow
Jones Newswires)
June 29, 2001--a General Accounting Office study found that FERC
lacked the information or analysis needed to conclude that generators
in California had intentionally withheld electricity supply to
influence prices. (Source: GAO Report)
June 21, 2001--The New York Independent System Operator asked FERC
for emergency action on a plan to police the market and guard against
abuse in the wholesale electricity market. (Source: Energy Daily)
May 24, 2001--NSTAR, a Boston utility, accused two independent
power producers of charging excessive rates in the New England market
during times of power grid congestion. (Source: Energy Daily)
February 1, 2001--Consumer Federation of American and Consumers
Union write President Bush claiming that FERC ``has repeatedly allowed
sellers to charge ``market-based rates' when the underlying market
conditions are highly concentrated and the level of competition is far
from sufficient to discipline abusive and anticompetitive behavior by
electricity suppliers, or to ensure effective market functioning.''
(Source: CFA/CU Letter)
January 13, 2001--Leading economists Paul Jaskow and Edward Kahn
conclude that ``high wholesale prices observed in summer 2000 [in
California] cannot be explained as the natural outcome of ``market
fundamentals' in competitive markets since there is a very significant
gap between actual market prices and competitive benchmark prices''.
(Source: CATO Policy Analysis)
September 6, 2000--Economists on the California ISO Market
Surveillance Committee conclude that ``uncorrected market design flaws
. . . have enhanced the ability of market participants to exercise
market power in the California electricity market'' and that these
flaws caused or contributed to the June 2000 price spikes. (Source:
Market Surveillance Committee report)
July, 2000--The staff of the Federal Trade Commission found that
``as regulation is reduced and competition is encouraged, there is a
significant potential that these utilities [vertically integrated
utilities] will use their existing market power in generation,
transmission and distribution services to deter competition that could
benefit consumers''. (Source: FTC Staff Report)
May 24, 2000--New York State Electric and Gas claims that
Consolidated Edison can use Local Reliability Rules to require use of
its own generators--regardless of price--to relieve congestion and
raise prices in the area in which NYSEG operates. NYSEG claims a
proposed merger between ConEd and Northeast Utilities will exacerbate
this problem. (Source: Energy Daily)
May 5, 2000--An analysis by Tabors Caramanis & Associates alleges
that two transmission owning utilities, American Electric Power and
Entergy, claim more transmission capacity than necessary to serve
retail load in order to block competitive entry. (Source: Dow Jones
Newswire)
December 21, 1999--The East Central Area Reliability (ECAR)
executive committee asserted that Cinergy showed ``blatant disregard''
for reliability rules. The action was prompted by Cinergy ``leaning''
on the transmission grid and taking as much as 1,600 MW of power--which
they had not purchased--during high-price periods. The power would be
``returned'' when prices were lower.
Mr. Barton. Thank you. Now we would like to ask Ms. Sharon
Buccino from the Natural Resources Defense Council. You have 5
minutes for opening statement. Thank you for being here.
STATEMENT OF SHARON BUCCINO
Ms. Buccino. Thank you. I appreciate the opportunity to
testify today. The Natural Resources Defense Council is a non-
profit organization with 500,000 members across the country
dedicated to the protection of public health and the
environment. My testimony addresses the siting of electric
transmission facilities on Federal lands. NRDC acknowledges the
importance of removing bottlenecks and ensuring reliability in
the Nation's electricity grid. Improvements to the grid are
necessary to encourage development of renewable resources, such
as wind and geothermal power, and to serve consumers better,
including those on tribal lands. Solving these problems,
however, does not require the reallocation of authority over
Federal lands proposed in the draft bill.
In my brief time this morning, I would like to focus on one
particular provision in the bill, it is Section 216(j) which
allows a State to trump decisions by Federal land managers
regarding the siting of transmission facilities on Federal
lands. This provision would override fundamental protections
that Congress put in place almost 30 years ago to balance
competing interests in deciding how to use the public's land
and most importantly to give the public a say in the decision.
Such drastic steps are unnecessary to ensure affordable and
reliable electricity.
Efforts are already underway among utilities, States and
the Federal Government to increase the efficiency of siting
transmission facilities. For example, last summer, the Western
Governors Association signed a protocol with four Federal
agencies designed to streamline siting decisions. Legislative
changes are not necessary to make this work. Section 216(j) of
the draft bill will result in more conflict and controversy,
not less.
The Federal public lands are owned by all Americans and are
to be managed to the benefit of us all. The Federal Government,
not an individual State, is in the best position to manage
these lands in the national interest. These lands have
tremendous value for a variety of purposes, including energy
development and distribution but also recreation and the
preservation of the natural historic and cultural resources
that help shape our American identity. The Federal Land Policy
and Management Act of 1976, also known as FLPMA, explicitly
provides for rights-of-way across public lands for transmission
facilities, but it does so in a way intended to protect the
many other values of these lands and to give the public a say
in how their lands are managed.
Section 216(j) of the draft bill would remove the public
participation guarantees provided by Federal law. FLPMA,
together with the National Forest Land Management Act and the
National Environmental Policy Act, provides citizens the
opportunity to lend their voice in making decisions about how
their land should be used. State requirements simply do not
substitute for the loss of Federal participation requirements.
State agencies do not provide citizens the same guarantees to
participate that apply to Federal agency decisions.
There is a savings clause in the bill, but in my view, this
does not adequately preserve Federal protections. The simple
fact is that FLPMA and NEPA only apply to Federal decisions. So
once you take the decision away from Federal hands, it is
difficult to argue that the protections of NEPA and FLPMA
apply. Even if the savings clause did in fact preserve the
application of NEPA and other Federal protections to State
decision, the result would not be desirable from any
perspective. Presumably, the Federal land manager has already
completed or at least started a NEPA review when a State steps
in under the bill. It makes little sense for the State to then
conduct a separate review under NEPA once it takes over the
right-of-way decision.
Furthermore, one of the key elements of NEPA is the
consideration of alternatives to the proposed decision,
including a no action alternative. Yet this portion of NEPA
would be rendered meaningless under Section 216(j), for the
only reason a State would step in and trump the Federal land
manager's decision to approve a right-of-way is where the
Federal Government had not done so. And in these circumstances
there can be no meaningful consideration of alternatives or any
meaningful opportunity for members of the public opposed to the
project to influence the decision.
Cooperation and resources, not legislative changes are what
is needed to accelerate siting of transmission lines on Federal
lands. Federal land managers are the right officials to make
decisions regarding the use of Federal lands. There is little
evidence that Federal land managers prevent the siting of
transmission facilities. In fact, of the hundreds of rights-of-
way applications of the Bureau of Land Management and the
Forest Service each year, only a handful are denied. And I
would, again, like to refer the committee to the ongoing
efforts to address these issues. I mentioned the protocol of
the Western Governors Association. These efforts should be
given a chance to work before drastic changes to the management
responsibilities for Federal lands are made.
And I would just like to make one final point, which is it
is very important to remember that what we are talking about
here are Federal lands. They are lands that belong to all of
us. And if you look at the bill, it seems that things are all
mixed up, because at the same time you give States authority
over Federal lands, the bill gives FERC the authority to make
decisions on State lands. And in my view, even the most ardent
advocate of State rights is unlikely to support such
divestiture of authority from the entities most entitled to
make decisions about land use, and that is the owner of the
property. Thank you.
[The prepared statement of Sharon Buccino follows:]
Prepared Statement of Sharon Buccino, Senior Attorney, Natural
Resources Defense Council
My name is Sharon Buccino. I am a Senior Attorney with the Natural
Resources Defense Council. NRDC is a non-profit organization with over
500,000 members across the country dedicated to the protection of
public health and the environment. I appreciate the opportunity to
testify today. My testimony addresses the siting of transmission
facilities on federal lands. NRDC acknowledges the importance of
removing bottlenecks and ensuring reliability in the nation's
electricity grid. Improvements to the grid are necessary to encourage
development of renewable resources such as wind and geothermal power,
and to serve consumers better including those on tribal lands. Solving
these problems, however, does not require the reallocation of authority
over federal lands proposed in the draft bill.
The draft bill's proposal to allow a state to trump decisions by
federal land managers regarding the siting of transmission facilities
on federal lands would have severe consequences. See Title VII,
Sec. 7012 (adding Section 216(j) to the Federal Power Act). The federal
public lands are owned by all Americans and are to be managed to
benefit us all. The federal government, not an individual state, is in
the best position to manage these lands in the national interest. These
lands have tremendous value for a variety of purposes. Section 216(j)
would override federal protections that ensure a balancing of competing
interests in deciding how to use the public's land and, most
importantly, give the public a say in the decision.
Such drastic steps are unnecessary to ensure adequate, affordable
and reliable electricity. In fact, efforts are already underway among
utilities, states and the federal government to increase the efficiency
of siting transmission facilities. For example, just last summer the
Western Governors Association signed a protocol with four federal
agencies designed to streamline siting decisions. Legislative changes
are not necessary to make this work. Section 216(j) of the draft bill
will result in more conflict and controversy, not less.
A. VALUE OF THE PUBLIC LANDS/FEDERAL RESPONSIBILITY TO MANAGE FOR
BENEFIT OF ALL AMERICANS
The Federal Land Policy and Management Act of 1976 (``FLPMA'')
declared that ``the public lands be retained in Federal ownership.'' 43
U.S.C. Sec. 1701(a)(1). After years of disposal of federal land to the
states and private interests, Congress recognized that the remaining
federal lands were of tremendous value and should not be transferred
except under specific, limited circumstances. FLPMA was designed to
ensure that taxpayers receive fair market value for the use of public
resources and that these resources are managed in a way that protects
their scenic, historical, ecological, environmental, and archeological
values. 43 U.S.C. Sec. 1701(a)(8) & (9).
The federal estate contains 630 million acres.\1\ The vast majority
of the federal public lands are managed for multiple use by the U.S.
Forest Service and the Bureau of Land Management (``BLM'').\2\ They
provide boundless recreational opportunities, sustain diverse
ecosystems and species, and preserve historic and cultural resources
that help shape our American identity. The overwhelming majority of
Americans participate in outdoor recreational activities,\3\ and
increasingly they are heading for the public lands. In 2001, Forest
Service lands received over 214 million visits.\4\ The total number of
visits to BLM lands was over 60 million.\5\ These recreational
resources in turn provide major economic benefits to businesses,
including recreation-based businesses and communities adjacent to the
public lands.
---------------------------------------------------------------------------
\1\ U.S. Department of the Interior, Public Land Statistics (2000),
available at www.blm.gov/natacq/pls00/.
\2\ Id.
\3\ See, e.g., Bureau of Land Management, Recreation 2000: A
Strategic Plan, at 12.
\4\ U.S. Department of Agriculture, National Forest Service Use
Monitoring National and Regional Project Results (September 2002),
available at http://www.fs.fed.us/recreation/programs/nvum/reports/
year2/2002__national__report__final.htm.
\5\ U.S. Department of the Interior, Public Land Statistics (2001),
www.blm.gov/natacq/pls01.
---------------------------------------------------------------------------
FLPMA explicitly provides for rights of way across public lands,
including national monuments, for transmission facilities. 43 U.S.C.
Sec. 1761(a)(4); see also 43 C.F.R. Part 2800 (BLM right of way
regulations); 36 C.F.R. Part 251, Subpart B (Forest Service right of
way regulations). But it does so in a way intended to protect the many
other values of these lands and to give the public a say in how their
lands are used. It is the federal government, not an individual state,
that can determine the best way to manage these lands in the national
interest, that is to benefit us all.
Section 216(j) of the draft bill abandons this responsibility. The
provision transfers to the states the authority given by Congress to
the Secretary of Interior (for BLM lands) and the Secretary of
Agriculture (for Forest Service lands) to determine when rights of way
should be granted across federal lands. Nothing in the provision
requires the state to balance competing interests. The purpose of the
provision is get projects approved. Section 216(j) provides that a
state can trump the decision of federal land managers where a ``right-
of-way has not been issued within one year after the date on which [an]
application was submitted.'' Sec. 216(j)(1). The provision creates a
one-way street. States get to trump the failure of federal land
managers to approve a right of way. No provision exists for state
action where state interests oppose the proposed right of way. Even if
a state were to try to determine what was in the national interest, it
simply is not in a position to do so. This is precisely why these lands
have been retained in federal ownership.
B. PROMOTING PUBLIC INVOLVEMENT
Section 216(j) would remove the public participation guarantees
provided by federal law. The provision would remove decisions about how
federal lands are used from federal decision-makers. The provision
allows the state to make a right of way decision in place of the
Secretary of Interior or Secretary of Agriculture. Federal requirements
that apply to federal decisions would arguably not apply to the state's
decision.
Federal laws lay out a planning process for federal lands. FLPMA
governs lands managed by the BLM. 43 U.S.C. Sec. 1712(a). The National
Forest Management Act (``NFMA'') governs planning in the national
forests. 6 U.S.C. Sec. 1604. Although the details vary between
agencies, the basic process is the same. First, federal agencies must
write long-range plans that identify how areas of land will be managed.
If these uses will cause significant environmental impacts, agencies
must also write environmental impact statements evaluating the impacts
and considering alternatives. National Environmental Policy Act
(``NEPA''), 42 U.S.C. Sec. 4332(C). Based on these written land use
plans, federal land managers then make decisions about how individual
pieces of land will be used--for preservation, recreation, or the
siting of transmission facilities, for example.
FLPMA, NFMA and NEPA provide citizens the opportunity to lend their
voice at each stage of the process. 43 U.S.C. Sec. 1712(a) & (f) (land
use plans under FLPMA must be written ``with public involvement''
including ``adequate notice and opportunity to comment''); 16 U.S.C.
Sec. 1604(d) (NFMA requires ``public participation in the development,
review, and revision of land management plans''); 43 C.F.R.
Sec. 2802.4(d)(1), citing to NEPA's requirements for public involvement
in authorizing right of way, see 40 C.F.R. 1503.1(a)(4); 36 C.F.R.
Sec. 251.54(g)(2)(ii). Citizens unhappy with the plans, or with
specific decisions, can challenge them in hearings before the agency
and in court. 5 U.S.C. Sec. Sec. 702, 706 (provides right to challenge
agency decisions in federal court that are arbitrary and capricious or
not in accordance with the law); 43 C.F.R. Sec. 2804.1 (providing for
appeal of BLM right-of-way decisions to Interior Board of Land
Appeals); 36 C.F.R. Part 251, Subpart C (providing for appeal of Forest
Service special use decisions).
State requirements simply do not substitute for the loss of federal
public participation requirements. State agencies do not provide
citizens the same guarantees to participate that apply to federal
agency decisions. Many of the processes for public involvement in state
land decisions are informal, rather than formal ones required by law.
In addition, the ability of citizens to challenge state agency
decisions varies across states. Some states lack a formal
administrative appeals process to provide citizens the right to
challenge state land management decisions. Even where citizens have the
right to go to state court to challenge state agency decisions, the
public's ability to get a court to overturn an agency decision varies
across states.
The attempt at a savings clause in the draft bill (Section
216(j)(2)) does not adequately preserve federal protections. The simple
fact is that NEPA, as well as protections under the Endangered Species
Act and the National Historic Preservation Act, apply to federal
decisions. Once the decision has been removed from federal hands it is
difficult to argue that these laws apply. Congress arguably does not
have the authority to impose the requirements of NEPA and other federal
protections on state decisions.
Even if Section 216(j)(2) did in fact preserve the application of
NEPA and other federal protections to state decisions under 216(j)(1),
the result would not be desirable from any perspective. Presumably, the
federal land managers already completed or at least started a NEPA
review. It makes little sense for the state to then conduct a separate
review under NEPA once it takes over the right of way decision.
Furthermore, one of the key elements of NEPA is the consideration of
alternatives to the proposed decision including a no action
alternative. 42 U.S.C. Sec. 4332(C)(iii); 40 C.F.R. Sec. 1502.14. Yet,
this portion of NEPA would be rendered meaningless under Section
216(j). The only reason that a state would step in and trump the
federal land manager's decision is to approve a right of way where it
was rejected, not acted on or conditioned in a way that makes the
proposed construction or modification ``not economically feasible.''
Section 216(j)(1)(C). In these circumstances, there can be no
meaningful consideration of alternatives nor any meaningful opportunity
for members of the public opposed to the project to influence the
decision.
C. ASSURING DEVELOPMENT IN ENVIRONMENTALLY RESPONSIBLE WAY
Section 216(j) would also circumvent the process created by federal
law to ensure that development of public land resources, including for
electric transmission facilities, is done in an environmentally
responsible way. FLPMA allows for a variety of uses of the federal
public lands, but directs that they be managed in ``a manner that will
protect the quality of scientific, scenic, historical, ecological,
environmental, air and atmospheric, water resource, and archeological
values.'' 43 U.S.C. Sec. 1701(a)(8). NEPA sets up a process for the
analysis of potential environmental impacts of a proposed federal
decision, such as approval of a right of way for transmission lines. 42
U.S.C. Sec. 4332(C). As part of this process alternatives to the
proposed action are considered and ways to mitigate the adverse impacts
are identified. 40 C.F.R. Sec. 1502.14.
Other federal laws ensure that federal land managers assess the
impacts of a proposed right of way on endangered and threatened
species, as well as cultural resources. The Endangered Species Act
requires federal land managers to consult with the U.S. Fish & Wildlife
Service prior to approving an action that may affect an endangered or
threatened species. 16 U.S.C. Sec. 1536(a)(2). Likewise, the National
Historic Preservation Act requires federal agencies analyze the impacts
of their decisions on historic and cultural resources. 16 U.S.C.
Sec. 470. These requirements are not intended to prevent the siting of
transmission facilities on public lands, but instead to ensure that the
siting is done in a way that preserves other values of these lands.
As previously discussed, the draft bill's attempt at a savings
clause does adequately preserve these federal protections. Once the
decision becomes a state decision, requirements that govern federal
decisions arguably would not apply. Furthermore, the direction of
Section 216(j) is clear. Its goal is to get transmission facilities
approved. The provision leaves no room for balancing competing
interests or consideration of impacts on natural or cultural resources.
section 216(j) is unnecessary to provide affordable, reliable energy
Cooperation and resources, not legislative changes, are what is
needed to address bottlenecks in the nation's electricity grid. Federal
land managers are the right officials to make decisions regarding the
use of federal lands. There is little evidence that federal land
managers prevent the siting of transmission facilities. Of the hundreds
of rights of way applications BLM and the Forest Service receive each
year, only a handful are denied. The existing regulations of both
agencies require them to work with applicants to help develop proposals
that can be approved. 43 C.F.R. Sec. 2802.1(a); 36 C.F.R.
Sec. 251.54(e). The regulations also explicitly require consultation
with state and local agencies. 43 C.F.R. Sec. 2802.4(d)(3); 36 C.F.R.
Sec. 251.54(g)(2)(ii) & (iii).
Current efforts are in fact underway to enhance coordination and
cooperation among utilities, states, and the federal government in
addressing transmission siting proposals. In June 2002, the Western
Governors Association signed a protocol with the U.S. Department of
Interior, the U.S. Department of Agriculture, the U.S. Department of
Energy and the Council on Environmental Quality governing the ``Siting
and Permitting of Electric Transmission Lines in the Western United
States.'' \6\ The purpose of the protocol is ``to establish a framework
that will enable affected states, local governments, federal agencies
and tribal governments to participate in a systematic, coordinated,
joint review process for siting and permitting of interstate
transmission lines'' in the West.\7\
---------------------------------------------------------------------------
\6\ Available on the Western Governors Association website at
http://www.westgov.org/wieb/electric/Transmission%20Protocol/
wtp__page.htm.
\7\ Id.
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In addition, the BLM has initiated an effort to identify priority
corridors that once incorporated into land management plans will
simplify the environmental review for transmission lines within these
corridors. From the environmental perspective, permitting can proceed
more quickly by expanding capacity along existing rights of way and
avoiding environmentally sensitive areas such as roadless areas,
critical habitat, and national monuments.
None of these efforts require the dramatic shift in management
responsibilities over federal lands contained in Section 216(j) of the
draft bill. Instead of promoting existing cooperative efforts, the
draft bill promotes conflict and controversy. It is important to come
back to the fundamental point that the provision deals with federal
lands. As mentioned already, the federal government, not an individual
state, is in the best position to determine whether a right of way
application is in the national interest. It is the federal government,
not an individual state, that can best assure that all interested
members of the public have a say in the decision, including those who
treasure the scenic and recreational values of the lands involved but
may not reside in the state in which the proposed project would be
located.
In fact, the draft bill seems to have things all mixed up. At the
same time the bill gives states decision-making authority over federal
lands, it gives the Federal Energy Regulatory Commission the authority
to make decisions on state lands. See Title VII, Sec. 7012 (adding
Sections 216(b)-(d) to the Federal Power Act). Even the most ardent
advocate of state rights is unlikely to support such divesture of
authority from the entity most entitled to make decisions about land
use--the owner of the property.
Thank you again for the opportunity to testify on these important
issues.
Mr. Shimkus [presiding]. Thank you. And, Ms. Buccino, let
me ask you one question. All Federal lands are not national
forest or national parks; is that correct?
Ms. Buccino. That is correct.
Mr. Shimkus. Thank you. I would like to--Ms. Tezak, do you
agree with the State commissioner's characterization that we
had in the first panel of the Supreme Court decision and the
Cirrus cost/benefit study?
Ms. Tezak. No. I will take them in order. I based my
analysis on my reading of the Supreme Court decision, which is
something that is freely available to any member of the
investment public. And I would say that the statutory text, I
am quoting now, ``This statutory text thus and unambiguously
authorizes FERC to assert jurisdiction over two separate
activities--transmission and selling. It is true that FERC's
jurisdiction over the sale of power has been specifically
confined to the wholesale market. However, FERC's jurisdiction
over electricity transmissions contains no such limitation.
Because the Federal Power Act authorizes FERC's jurisdiction
over interstate transmissions without regard to whether the
transmissions are sold to a reseller or directly to a customer,
FERC's exercise of this power is valid.'' And I would say that
based on the questions you asked earlier, specifically Mr.
Shimkus, you got nothing but affirmation from the
representatives in the previous panel of the relevance of the
Interstate Commerce Clause.
Second, on the Cirrus study, when it was presented at the
National Association of Regulatory Utility Commissioners'
annual meeting in November, I was present and I asked the
gentleman from Charles River Associates who prepared that study
to help me understand why $2.8 billion of transmission is
required in the Southeast. And I asked him whether or not that
assumed any retirements or any rationalization of the alleged
over build capacity in the Southeast. The answer to that
question in front of about 100 people was no. My follow-up
question to him then was, is it possible that the benefits that
you have defined in this study then may be moderately expressed
or modestly expressed, they could be higher? His answer to that
was, ``Why, yes.''
Mr. Shimkus. Thank you. Let me also follow up with you on--
there was obviously the debate on repeal of PUHCA. How would
you feel that that would affect capital markets, especially
with the expansion of the opportunity for the transmission
grid?
Ms. Tezak. Eighteen months ago I think that I could tell
you that every one of my clients would have said unequivocally
it would facilitate merger and acquisition activity. However,
the damage that has been sustained on balance sheets probably
makes that reality less feasible than it would have 18 months
ago. Generally, I would say Wall Street looks favorably on the
repeal of PUHCA, and I would also tell you that Wall Street is
also looking very carefully at taking its own measures to limit
the ability of companies to use regulated assets as security
for unregulated benefits, regulated activities. In fact, Kara
Silver from MBIA testified at both the Senate hearing and at
FERC that they are taking steps as bond holders to tighten up
those from their side. So I believe that you can repeal PUHCA
and not be absent completely of addressing the concerns that
people have regarding rate based.
Mr. Shimkus. Thank you. Mr. Kanner, I appreciate your
comments. In the draft bill, have you looked and are you
satisfied with the transparency provisions that are listed
there?
Mr. Kanner. I think the transparency provisions are an
improvement over last year where in conference the language had
statistical information. I think it could be clarified in terms
of making clear that it is volumetric as well as price
information so that by price we don't end up with the same sort
of averaging that statistical information would be problematic
on. But I think there is also an important absence, which is
price data on gas prices. As we have seen, everyone from the
CSTC to GAO, to the investment community, to participants in
the market have said we cannot rely on the submission of gas
data to these data clearinghouses, and we need to have a
standardized systemic and honest system.
Mr. Shimkus. Thank you. I want to get this last one in. Mr.
Gent, based upon my line of constitutional questions earlier,
isn't--talk to me about the constitutional aspect of the
delegation of the Federal Regulatory Authority to a private
organization, and has that been done before and where, and how
does that fall in line with this whole constitutional debate?
Mr. Gent. The delegation of authority from the FERC to the
organization presumably authorized by this legislation is
enabled by Congress. There are other organizations that do
this. I think the security exchanges, NASDAQ, NASD and others
operate under similar type arrangements. We model this
organization after NASD.
Mr. Shimkus. Thank you. My time is up. I would like now to
turn to the ranking member, Mr. Boucher, for 5 minutes.
Mr. Boucher. Well, thank you very much, Mr. Chairman, and
thanks also to the witnesses for sharing their expertise with
us this afternoon. Mr. Norlander, let me begin with you. We
have heard calls from some members of this subcommittee and
some externally interested parties also for a repeal of the
FERC's merger review authority. The administration, I would
note, does not support removing FERC review of mergers, and in
fact is arguing that the FERC's jurisdiction to do that be
enhanced and that it have even a greater review of mergers.
That also happens to be my position.
You have testified to the general subject during the course
of your commentary, and so let me get you to explain to us, if
you will, why with the Department of Justice reviewing mergers
from an antitrust perspective the review of that single Federal
agency is not sufficient in order to protect the range of
interests that Federal review is designed to protect? In other
words, with the DOJ reviewing mergers, why is it necessary that
we also have another review independently taking place at the
FERC?
Mr. Norlander. I think that one reason has to do with the
unique nature of electricity. It can't be stored, it is not
fungible in the same way that corn flakes or other commodities,
other substances might be. And so therefore the expertise of
FERC in looking to see whether markets are going to be affected
by a merger should be retained at the FERC.
Second, I think that the FERC even now is changing its
understanding of what it means to exercise market power in the
markets that have been created. It has changed its standards
for market power assessments. It has an interim standard now
that is quite different from the sort of basic market share
approach, which is like if no one has more than 20 percent or
so, you have got 5 or more participants, everything should kind
of get the green light at the other agencies. And now we know,
both from experience in every one of these markets, and we know
from laboratory research on trying to model behavior of people
in these markets, in game simulation, and we know from the
mathematicians that these types of markets encourage a Nash
Equilibrium among the participants, that playing by the rules,
no collusion, none of the traditional kinds of antitrust
behavior. Many more participants may be needed to have a
market--to create a market that doesn't have market power.
So as we go on--as FERC is spending $13 billion to increase
the size of these geographic markets, if the number of sellers
condense, we will have merged away any gains that were achieved
by expansion.
Mr. Boucher. Okay. Thank you, Mr. Norlander. Ms. Tezak, let
me ask you, does Wall Street have an opinion about whether or
not FERC remains in a position to review mergers?
Ms. Tezak. Not specifically. I would say that on the topic
of mergers----
Mr. Boucher. Well, it wouldn't do any harm to the----
Ms. Tezak. Right.
Mr. Boucher. [continuing] efforts to attract capital or to
carry out effective mergers where they are appropriate if FERC
reviews these.
Ms. Tezak. I have never had a discussion with a single
client regarding Section 203 merger authority. PUHCA is their
focus.
Mr. Boucher. Okay. Thank you. Mr. Kanner, let me ask you
this: You have suggested in your statement that there might be
some amendments to the Public Utility Holding Company Act that
you would find to be appropriate, and you are recommending to
this committee perhaps targeted amendments to PUHCA rather than
wholesale repeal. What are the targeted amendments you would
suggest?
Mr. Kanner. Congressman, actually what my testimony says is
if there are specific impediments that PUHCA poses on needed
investment or needed activities, then we should look at those.
In our review of the Holding Company Act, there are really--if
you take both the statutory exemptions that have been created
and the SEC's rules, there are really two types of activities
in which PUHCA may be an inhibitor. One is the acquisition of
one utility by another, and I would question whether that
provides competitive benefits or not. And the second is
investments in transmission, certain types of investments in
transmission if a utility on one coast wanted to create a
subsidiary to build transmission to relieve congestion on the
west coast.
Congress, in the past, in 1992 and 1996, had targeted
amendments to the Holding Company Act designed to address
specific concerns. If there is a specific concern, we are more
than happy to entertain targeted fixes, making sure that it is
structured in a way that provides consumer benefits.
Mr. Boucher. Thank you. Mr. Chairman, with your permission
I just have one additional brief question I would like to
propound, and it shall be brief. Ms. Buccino, let me ask you if
anything is happening within the purview of your study that
would serve to facilitate the siting of transmission lines? I
think you mentioned some activity among the western Governors.
Could you take just a minute, and I mean really just 1 minute,
to tell us about that?
Ms. Buccino. Yes. I did mention the protocol that was
signed just last summer by the Western Governors Association
and the U.S. Department of Interior, the Department of
Agriculture, the U.S. Department of Energy and the Council on
Environmental Quality which is designed specifically to
coordinate the various reviews and accelerate the siting of
transmission facilities on public lands. The Bureau of Land
Management is also moving forward to identify priority
corridors and incorporate those within the land use plans and
therefore streamline and coordinate the environmental review
that is necessary. So I think it is very important to recognize
that these efforts are moving forward. Legislative changes are
not necessary, and in fact these efforts should be given a
chance before these drastic changes are made.
I would, if I could, just like to quickly respond to a
couple of comments that were made in the last panel on this
issue of siting transmission facilities, because Mr. Walden
referred to the bill containing and MOU process, and as I read
the bill, that is not what it does, it is much more than that.
These exercises, like the WGA protocol, is an MOU approach. But
what the bill does is drastically change the process that
Congress put in place a while ago to manage these lands and to
balance competing interests and to include the public. And
those drastic steps are not necessary to address these
problems, the siting problems.
Mr. Boucher. Thank you very much. Thank you, Mr. Chairman.
Mr. Barton Thank you, Mr. Boucher. The Chair recognizes
himself for the last 5-minute question period. Ms. Tezak, the
coop representative on the earlier panel, and several others,
have expressed displeasure about incentive rates for
transmission lines, even though the incentive language in the
current draft simply makes it discretionary, it is not
mandatory. And it would only be in the areas that the FERC
rules are highly congested areas or areas that it has been
difficult to raise the private capital, to get the new line
built. What is your industry's view of incentive rates? Do you
think that would encourage more transmission which over time
the more capacity you have, the lower the unit cost to use that
capacity should be if the market is truly functional, or do you
agree with the coops that the incentive language in the current
draft would be a negative?
Ms. Tezak. I believe that the reason a lot of people are
concerned about the negative impact of increased transmission
rates under an incentive schedule is because if remains in the
minds of many very clear whether or not the generation offsets
that are promised--the generation savings that should be
offsetting those expenditures are being realized. And so I
think for that perspective, they do have a valid point.
What I would say that is investors feel that the playing
field for transmission extremely, extremely slanted against
them. And a lot of that has to do with the ambiguity of the
jurisdiction over transmission and whether an expenditure is
defined as being related to wholesale or being related to
retail. Retail transmission is relatively easy to site and
recover. Wholesale transmission is not, and I believe that all
we view this as is an attempt to compensate for the fact that
the jurisdictional issue has not been revolved, that wholesale
ratemaking has not been fully refined, and it is a way of
attempting to keep the ball rolling while those disadvantages
are in place.
Mr. Barton. But in general you think your group would be
supportive.
Ms. Tezak. Absolutely.
Mr. Barton. Okay. what is your electricity analyst view
this concept of economic dispatch where the generation that is
the most economic and the least cost to develop gets some sort
of a priority to be used first before you go to the less
economically, which tends to be the older, plants that have
been in the--basically, in the baseload for a number of years.
Does your group have a view of this concept of economic
dispatch?
Ms. Tezak. Bring it on.
Mr. Barton. Oh, you are for it.
Ms. Tezak. Absolutely, because not only is there the
opportunity for a variety of generation owners to compete to
provide the most efficient power, but the spill-off effects
into the economy to us seem rather compelling because it makes
it incrementally less expensive for every consumer, whether
they be retail or industrial, to consume energy, and that has
got to be good for the economy.
Mr. Barton. Well, what would your answer have been to the
gentleman from North Carolina, the Honorable Mr. Ervin, when I
was asking him some questions he seemed to indicate that at
least within North Carolina either they didn't need it or it
could be utilized now even though North Carolina is a closed
State. How you have responded to him when I was asking him
about that?
Ms. Tezak. Well, my question, first, would be is what is
the cost of the generation that is being dispatched? Because
what is not clear to consumers that are in--not always clear to
vertically integrated utility customers is that there is
cheaper generation available, and particularly in the cases of
much older generation that has been fully recovered in rate
base already, there may be an opportunity to substitute away
from a plant that is in rate base, eligible for retirement and
use it for something else.
Mr. Barton. Mr. Norlander, I think you wanted to make a
comment.
Mr. Norlander. Just briefly. New York before we had our
utilities put there divested generation, we did have efficient
dispatch through a tight power pool. And so the plants would
run in the order of their cost. Today, we have a situation
where plants are dispatched based on the bidding behavior in
the stock markets. And I think that has actually led to
situations where we have coal plants with hockey stick bidding
where they break the plant up into 10 or 20 segments, and they
bid some of it based on what they think tomorrow's real-time
market will be. And that is evidenced in an arbitration
decision.
Mr. Barton. But you have a bidding system, which----
Mr. Norlander. Yes.
Mr. Barton. [continuing] should, by definition, if it is a
true auction market, get the most----
Mr. Norlander. That is the problem. That system--if you
wanted a marginal cost dispatch, then they should bid in their
marginal cost, but instead they are bidding what they think
they can get. and that kind of gaining behavior is the kind of
market analysis that FERC needs to get into.
Mr. Barton. Mr. Kanner, did you want to make a comment?
Mr. Kanner. I just wanted to add on, Mr. Chairman, that in
a constrained system, you don't necessarily have bidding
reflecting cost but rather what price you think you can get.
Mr. Barton. Well, I agree. In a constrained system,
obviously it is a demand price as opposed to a cost base price.
Mr. Norlander. Right. And, unfortunately, there are more
constraints throughout the country than I think is generally
realized, so there are more opportunities----
Mr. Barton. Which is the whole purpose of our bill, to
minimize some of those constraints. I mean that is why we are
here--less constraint, more capacity.
Mr. Norlander. If I might, Congressman, my----
Mr. Barton. My time is expired, so I am going to have--but,
sure.
Mr. Norlander. My suggestion to Mr. Ervin afterwards was
that he should have suggested to you that he might have looked
to Texas for some----
Mr. Barton. Oh. I don't think he would--and he is in the
audience so we are not talking behind his back--or he was in
the audience earlier. He is right--he is in the front row in
the audience. And he will have a chance on the record if he
wants to put in written rebuttal to what we are talking about,
we will give you that.
Well, I am going to let this panel go. You all have been a
delight, and--oh, I am sorry, we have a member who I did not--
Mr. Shimkus has already asked questions. Yes. All right. Then
we are going to release this panel and go to our third and last
panel. But thank you and appreciate your testimony.
If I could have our third panel seat themselves, the
audience resituate. While we are getting resituated, I am going
to take a point of personal privilege. My cousin from
Spigotville, Texas and his wife and son are here, Lee Ray Bice
and Regina and their son, and they are visiting Washington, DC,
I think, for the first time and wanted to see how friendly we
do these hearings and how everyone loves each other, so we are
glad to have them here. She is in the green, he is in the green
and he is in the blue coat there in the front row.
Okay. We are going to have our panel on ethanol and MTBE
and ETBE. We have still got a couple of people that are not
here, but we are going to start with those that are here. This
is our last panel of the day. We have Mr. Edward Murphy, who is
the general manager for Downstream Activities with the American
Petroleum Institute. We have Mr. Bob Slaughter, who is the
president of the National Petrochemical & Refiners Association.
We have Mr. Bill Douglass, who is CEO of Douglass Distributing
Company, who is here on behalf of the National Association of
Convenience Stores and the Society of Independent Gasoline
Marketers of America. We have Mr. Blakeman Early, who is an
environmental consultant for the American Lung Association, who
is here on behalf of the Northeast States for Coordinated Air
Use Management. We have Mr. Erik Olson, who is a senior
attorney for the Natural Resources Defense Council. And we have
places if they attend for Mr. Bob Dinneen, who is president and
CEO of Renewable Fuels Association, and Mr. Scott Segal, who is
the counsel for the Oxygenated Fuel Association.
We are going to start with you, Mr. Murphy. Your testimony
is in the record in its entirety, and we would welcome you to
summarize it in 5 minutes. And you need to push that button to
turn the microphone on.
STATEMENTS OF EDWARD MURPHY, GENERAL MANAGER, DOWNSTREAM,
AMERICAN PETROLEUM INSTITUTE; BOB SLAUGHTER, PRESIDENT,
NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION; BILL DOUGLASS,
CEO, DOUGLASS DISTRIBUTING COMPANY, ON BEHALF OF THE NATIONAL
ASSOCIATION OF CONVENIENCE STORES AND THE SOCIETY OF
INDEPENDENT GASOLINE MARKETERS OF AMERICA; A. BLAKEMAN EARLY,
ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION, ON BEHALF
OF NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT; ERIK D.
OLSON, SENIOR ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; BOB
DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS ASSOCIATION; AND
SCOTT M. SEGAL, COUNSEL, OXYGENATED FUELS ASSOCIATION
Mr. Murphy. Thank you very much, Mr. Chairman and members
of the subcommittee. My name is Edward Murphy, and I am the
downstream general manager for the American Petroleum
Institute, a trade association representing more than 400
companies from all sectors of the oil and natural gas industry.
API appreciates the opportunity to address the fuels supply
problems facing U.S. providers and consumers. Time is of the
essence because individual State MTBE bans will start to take
effect soon, with Connecticut's starting in October and New
York's and California's beginning in January of next year.
Differing start dates and gasoline requirements from various
states, combined with a Federal oxygen content requirement for
reformulated gasoline, will complicate an already tight fuel
supply system and increase the potential for disruptions in the
supply and distribution system.
As Congress considers a comprehensive national energy bill,
we urge it to address problems with fuel supplies that have
plagued the petroleum industry and energy consumers over the
last 8 years. Those problems were underscored in recent days by
the decision of the New York Mercantile Exchange to suspend
gasoline futures trading beginning in 2004 due to uncoordinated
State MTBE bans. The New York Mercantile Exchange decision can
be seen as a shot across the bow regarding the worsening fuel
problems we will face in the future if Congress fails to act.
We believe Congress should repeal the oxygen content
requirement for RFG that is in the Clean Air Act and require a
national phasedown of MTBE. As part of a package that meet
these objectives, we also support a renewable fuels standard
that phases up to 5 billion gallons over several years
nationally, with an averaging and credit and trading program to
allow the use of renewable fuels where most feasible and cost-
effective. In addition, we support provisions that would
protect and enhance the environmental benefits already achieved
from RFG.
Finally, we support limited liability protection that
recognizes that when Congress mandates the use of fuel
components, it is quite reasonable to disallow defective
product claims for introducing that product into commerce. This
limited liability relief would not affect liabilities for
cleanup costs, and the legal regime for cleanup of hazardous
spills would be left in full force.
These steps are a much better solution than the
alternative, which is continued State MTBE bans and further
aggravation of the already troublesome situation of a patchwork
of fuels requirements across the country. A solution that
relies on state-by-state MTBE bans to fix the problem is not
efficient and will exacerbate supply problems that are likely
to arise out of uncoordinated and disjointed State
requirements. Unique State fuel requirements isolate affected
markets and in the event of a supply disruption, could cause
shortages and price volatility, as experienced in 2 of the last
4 years in Chicago and Milwaukee. Sixteen States already have
enacted MTBE bans or caps and additional States are considering
bans.
The carefully crafted provisions I have discussed are
supported by an historic coalition, including API, numerous
farm and ethanol interests, Northeast State air quality
officials and environmental interests. They offer carefully
considered solutions to the fuels problems that have challenged
fuel providers and burdened American consumers. They protect
important environmental benefits achieved by reformulated
gasoline. API and its member companies stand ready to work with
Members of Congress to help ensure expeditious enactment of
this urgently needed legislation.
In short, the members of API are asking Congress to change
the law to allow us to produce the clean, affordable,
environmentally friendly supplies of gasoline that consumers
want and deserve to have. Thank you.
[The prepared statement of Edward Murphy follows:]
Prepared Statement of Edward Murphy on Behalf of the American Petroleum
Institute
Thank you, Mr. Chairman and members of the Subcommittee. My name is
Edward Murphy and I am the Downstream General Manager for the American
Petroleum Institute (API), a trade association representing more than
400 companies from all sectors of the oil and natural gas industry.
API appreciates this opportunity to address the fuels supply
problems facing U.S. fuel providers and consumers. Time is of the
essence because individual state MTBE bans will start to take effect
soon, with Connecticut's starting in October and New York's and
California's bans beginning in January 2004. Differing start dates and
gasoline requirements from various states, combined with a federal
oxygen content requirement for reformulated gasoline (RFG), will
complicate an already tight fuels system and increase the potential for
disruptions in the supply and distribution system.
As Congress considers a comprehensive national energy bill, we urge
them to address problems with fuel supplies that have plagued the
petroleum industry and energy consumers over the last eight years. We
believe Congress should repeal the oxygen content requirement for
reformulated gasoline that is in the Clean Air Act and require a
national phasedown of MTBE. As part of a package that meets these
objectives, we also support a renewable fuels standard that phases up
to 5 billion gallons over several years nationally, with an averaging
and credit trading program to allow the use of renewable fuels where
most feasible and cost-effective. In addition, we support provisions
that would protect and enhance the environmental benefits already
achieved from reformulated gasoline. Finally, we support limited
liability protection that recognizes that when Congress mandates the
use of fuels components, it is quite reasonable to disallow defective
product claims for introducing that product into commerce. This limited
liability relief would not affect liabilities for cleanup costs and the
legal regime for cleanup of hazardous spills would be left in full
force.
Repeal of the oxygen requirement and a significant reduction in the
use of MTBE were two of the key recommendations of the U.S.
Environmental Protection Agency's 1999-2000 Blue Ribbon Panel on
Oxygenates in Gasoline. The report is also important because it
recognizes that refiners today can provide clean-burning reformulated
gasoline without the oxygen requirement. Three years have passed since
those recommendations were made.
These steps are a much better solution than the alternative--which
is continued state MTBE bans and further aggravation of the already-
troublesome situation of a patchwork of fuels requirements across the
country. A solution that relies on state-by-state MTBE bans to fix the
problem is not efficient and will exacerbate supply problems that are
likely to arise out of uncoordinated and disjointed state requirements.
Unique state fuel requirements isolate affected markets and, in the
event of a supply disruption, could cause shortages and price
volatility, as experienced in two of the last four years in Chicago and
Milwaukee. Sixteen states already have enacted MTBE bans or caps and
additional states are considering bans.
In addition, there needs to be recognition that even without
federal legislation, ethanol is going to be in our gasoline system in
increased amounts--at a minimum to fulfill the federal oxygen content
requirement for RFG. But the current rules allow little flexibility in
how, when, and where ethanol would be used. We need a federal solution
that phases down MTBE in a uniform manner and allows the use of
renewable fuels where it makes the most economic sense.
API believes the provisions I have mentioned would provide a
solution to the serious problems affecting fuels supplies vital to the
motoring public. They would ensure needed flexibility in our fuels
policies. They would maintain stringent air quality requirements. And
they would serve the best interests of American consumers.
Let me briefly review the situation we face: In 1990, Congress
amended the Clean Air Act to require the use of RFG in areas with the
worst ozone pollution. Congress decided that RFG had to meet certain
emissions performance standards but also had to include a specific
amount of oxygen. The two most widely used oxygenates at the time were
MTBE and ethanol. Most of the RFG oxygenate demand was on the coasts,
where ethanol use faced significant economic, transportation, and
handling challenges relative to MTBE. As a result, as Congress full
well expected, MTBE became the most commonly used oxygenate in areas
near the coast. Ethanol became the oxygenate of choice in the Midwest
due to favorable economics and proximity to ethanol supply. However,
when gasoline was spilled or leaked and MTBE came into contact with
water supplies, odor and taste issues arose with even very small
concentrations of MTBE.
Many state governments reacted by banning the use of MTBE.
Unfortunately, there is considerable variation in the start dates and
requirements for these laws. For example, Connecticut's ban starts on
October 1, 2003, while neighboring New York's starts on January 1,
2004. Some allow incidental amounts of MTBE to remain, while others do
not. Differing state gasoline requirements will complicate and increase
the likelihood of disruptions in the supply/distribution system; this
will place considerable stress on the efficiency and, therefore, the
reliability of the gasoline distribution system--unless federal
legislative changes are made to the fuels provisions of the Clean Air
Act.
In the absence of federal legislation, consumers will be subject to
the costs of uncoordinated state actions. Individual states are
restricting the use of MTBE, but they cannot change the federal RFG
oxygen content requirement. That requirement is unnecessary,
uneconomical and inflexible. It requires the use of an oxygenate in
each gallon of gasoline in RFG areas. It is driving New Hampshire, for
example, to opt-out of the federal RFG program and try to impose a
state oxy-flexible RFG program, which could add yet another boutique
fuel to the system if they are successful. Maintaining the status quo--
with the federal RFG oxygen requirement in place and states continuing
to ban MTBE--will require using ethanol in RFG areas where it may not
be cost-effective. Alternatively, other states may pursue solutions
that further fragment the market in new and different ways.
Currently, most of the RFG is required on the east and west coasts,
yet ethanol is predominantly manufactured in the Midwest. As additional
state MTBE bans start to take effect, RFG markets will, by default,
need to use ethanol in each and every gallon of RFG in order to meet
the federal oxygen content requirement. The Connecticut, California and
New York MTBE bans alone are expected to result in ethanol demand in
those states of about 1.1 billion gallons in 2004. There are no
assurances that the full extent of the infrastructure needed to
transport the added amount of ethanol will be in place in time to
assure a smooth transition. As states get closer to the implementation
date for their fuel programs, the greater the temptation to change the
date rather than deal with the uncertainty. California has already
delayed its ban once. Such a changeable environment does not make the
investment decision process easier. A federal solution would remove
much of the uncertainty that exists now.
Individual state bans have the effect of balkanizing the fuels
markets, requiring that fuels with different characteristics be moved
through the limited distribution system. With more types of fuels comes
more complexity and less flexibility as the fuels used under one set of
requirements cannot be used to supply an area with other requirements.
This is a problem where adjacent states require different grades. It is
also harder to ensure that gasoline with MTBE does not intermingle with
other gasoline volumes since all gasoline is moved via the same
pipelines.
These factors all argue for a national phasedown of MTBE. In order
for such a phasedown to have the least impact on supply, it needs to be
done over a four-year timeframe.
While oxygenates are not necessary to make clean-burning fuels,
there is a public desire to increase the use of renewable fuels, such
as ethanol. We believe this goal and that of a flexible gasoline
distribution system can be met by a repeal of the federal oxygen
requirement, a uniform nationwide phasedown of MTBE, and a renewable
fuels standard rising to 5 billion gallons over several years. However,
for the renewable fuels standard to function effectively, it is
absolutely critical that refiners be allowed to freely buy and sell
credits for renewable fuels under a national average and credit-trading
program. That would allow for flexible and economical use of renewable
fuels.
Let me emphasize that the cost of an approach that includes a
federal phasedown of MTBE, repeals the federal RFG oxygen content
requirement and includes a renewable fuels standard with a flexible
national averaging, banking and trading program, would be less than
maintaining the status quo of state MTBE bans and maintaining the
federal RFG oxygen requirement. A study by the U.S. Department of
Energy (DOE) revealed that the cost of the renewable fuels standard
would be minimal, between 0.5 and 1.0 cents per gallon and likely less
with an effective banking and trading system. Importantly, a state-of-
the-art study in 2002 by MathPro, Inc., a leading economic analysis
firm, concluded that replacing the 2 percent oxygen requirement with
the renewable fuels standard would be less costly than the status quo
outcome of continued state MTBE bans and continuation of the federal
RFG oxygen requirement.
To conclude: If Congress fails to enact the proposed legislation,
consumers are going to face the increasing costs of uncoordinated state
MTBE bans--leading to increased strains on the fuel distribution
system. While individual states are restricting use of MTBE, they
cannot change the inflexible federal RFG oxygen requirement.
Maintaining the status quo of the federal oxygen requirement and state
MTBE bans will force the use of large volumes of ethanol in a very
inflexible and unnecessarily costly fashion--and it could severely
burden, if not disrupt, fuels distribution and supply.
The carefully crafted provisions I have discussed, as part of a
package that meets our objectives, are supported by an historic
coalition including API, numerous farm and ethanol interests, Northeast
state air quality officials and environmental interests. They offer
carefully considered solutions to the fuels problems that have
challenged fuel providers and burdened American consumers. They protect
important environmental benefits achieved by reformulated gasoline. API
and its member companies stand ready to work with members of Congress
to help ensure expeditious enactment of this urgently needed
legislation.
Mr. Shimkus [presiding]. Thank you, Mr. Murphy. I will now
turn to Mr. Bob Slaughter, president of the National
Petrochemical & Refiners Association. It is good to have you
here, and you are recognized for 5 minutes.
STATEMENT OF BOB SLAUGHTER
Mr. Slaughter. Thank you, Ms. Shimkus. NPRA thanks the
subcommittee for the opportunity to offer recommendations on an
updated national energy policy. NPRA is a national trade
association with more than 450 members who own or operate most
U.S. refineries and petrochemical manufacturing facilities. I
am Bob Slaughter, NPRA's president.
NPRA favors a supply oriented national energy policy with
the twin goals of energy supply and energy security. Our energy
policy should also recognize the importance of a healthy and
diverse domestic refining industry that produces most products
consumed here in the United State. NPRA recommends that the
subcommittee reaffirm many of the positions in last year's
House bill or in the subsequent conference.
NPRA supports quick elimination of the 2 percent RFG
oxygenation requirement. This will give refiners greater
flexibility to manufacture and distribute this important
environmental product in the most efficient and cost-effective
manner and also allow refiners to respond to State and local
concerns about MTBE without subjecting those areas to mandatory
use of ethanol, which is inappropriate during the summer ozone
season.
NPRA also urges the House to maintain its position in
opposition to a Federal MTBE ban. EIA has pointed out, and we
agree, that MTBE volumes and desirable blending attributes will
hard to replace leading to potential gasoline supply problems.
The States where most MTBE is used are already dealing with
this matter. Several have already delayed or are expected to
delay their target dates to limit MTBE use because of supply
concerns. There is no reason why these few States cannot deal
with this problem on their own. DOE and EPA can monitor the
supply and environmental impacts with the oversight of this
subcommittee.
NPRA strongly opposes a national ethanol mandate in
gasoline because fuel mandates are inefficient, inflexible and
costly policy mechanisms. Many NPRA members already use large
quantities of ethanol in their gasolines. They, along with
other industry experts and analysts, expect ethanol markets to
increase substantially because of the shortage of available
gasoline blend stocks. Thus, there is no need to impose a
national ethanol mandate on gasoline consumers to expand the
ethanol market. A mandate will stimulate only extra ethanol
usage that is economically inefficient, and it will increase
the cost of ethanol that would have been used in gasoline
without the mandate.
One size does not fit all in diverse America. There is no
need to force gasoline consumers in places like Main,
Massachusetts and Washington, DC, to name just a few, to either
use ethanol in their gasoline or pay for the privilege of not
doing so. This mandate really just creates a new tax on
consumers who live in parts of the United States where ethanol
use makes no sense. Some seem to view adoption of this unfair
tax as a great victory and boon to those who will pay it. It
would be of much greater benefit to repeal the 2 percent RFG
requirement, reject the ethanol mandate and allow consumers to
decide for themselves what gasoline is most appropriate for
their region's supply profile and environmental requirements.
The argument that the only alternative is a rigid ethanol
mandate in all our RFG areas looks like a straw man to us. It
would have been very controversial and hard to implement.
The Senate language even encouraged ethanol use in the
summer months, which creates environmental and potential
gasoline supply problems. As Mr. Douglass points out, that is
another remarkably bad idea. The national ethanol mandate is
already responsible for one miracle. It has succeeded in
uniting the editorial pages of the New York Times, Wall Street
Journal and Washington Post in firm opposition to the idea. And
they are right, and we urge the subcommittee to reject an
ethanol mandate.
NPRA supports the position taken by House conferees to
extend product liability protection to MTBE. Those who comply
with the government mandate should not be penalized and
subjected to large punitive damages for obeying the law. We ask
the committee to use care in evaluating the impact of boutique
fuels programs. State and regions have varying fuel needs.
Attempts to legislate fuel conformity could place additional
investment burdens on refiners who are concentrating on sulfur
reduction in gasoline and diesel. The impact on supply and
distribution of any proposed new boutique fuel problems should
be carefully considered, however.
The committee should also reject the Senate language
liberalizing opt-in requirements to RFG due to continuing
supply and investment concerns. The energy bill should also
stimulate additional gas supply, natural gas supply as soon as
possible. Natural gas usage has increased with little or not
thought given to supply availability. This places traditional
users of gas for feed stocks, like the domestic petrochemical
industry and those employed in it, to great risk. Natural gas
supply and demand must come back into balance.
In closing, we would urge you to maintain also the
viability of combined heat and power cogeneration systems
during the electricity market's transition to full competition.
We thank you again for the opportunity, and we look forward to
your questions.
[The prepared statement of Bob Slaughter follows:]
Prepared Statement of Bob Slaughter, President, National Petrochemical
& Refiners Association
Mr. Chairman and members of the Subcommittee, thank you for the
opportunity to appear before you today to discuss the need for a
comprehensive U.S. energy policy. My name is Bob Slaughter, and I am
President of NPRA, the National Petrochemical & Refiners Association.
NPRA is a national trade association with about 450 members who own
or operate virtually all U.S. refining capacity, as well as
petrochemical manufacturers who operate similar manufacturing
processes. NPRA's refining members include large integrated refiners,
large independent refiners, and regional independents as well as small
refiners.
Needed: A Focus on Increased Supply
To summarize our message today, NPRA urges policymakers in Congress
and the Administration to encourage production of an abundant supply of
petroleum products. A healthy and growing U.S. economy needs a steady
secure and predictable supply of petroleum products, at reasonable
cost. NPRA believes that federal policy in recent years has drifted
away from the need to emphasize the supply side of the energy equation,
and that an adequate energy supply has been largely taken for granted.
We need to reinstitute an energy supply ethic in federal policy to
provide both national energy security and maintain U.S. economic
growth.
To summarize our energy policy recommendations, NPRA urges Congress
to: repeal the 2% RFG oxygenation requirement; avoid a federal ban or
mandatory phase-out of MTBE; reject calls for an ethanol mandate;
extend product liability protection to MTBE and ethanol; avoid
unnecessary changes in fuel specifications; take steps to increase
natural gas production and supply; and ensure the continued viability
of combine heat and power systems in transitioning energy markets. We
will discuss these recommendations in more detail in subsequent
sections of this statement.
Domestic Refining is a Critical Asset, But a Challenging Business
We also ask policymakers to extend the concern over petroleum
product supply to include the domestic refining industry. Total daily
U.S. demand for petroleum products is approximately 20 million barrels,
and only 17 million barrels of this is supplied by U.S refineries. The
remaining 3 million barrels of demand is supplied from a combination of
several sources: the Caribbean, South America, Canada, Europe, and more
rarely, the Middle East and Asia.
No new refinery has been built in the United States since 1976, and
it is unlikely that one will be built here in the foreseeable future,
due to economic and political considerations, including siting costs,
environmental requirements, industry profitability and public concerns.
U.S. refining capacity has increased somewhat in recent years, but
it is increasingly hard to keep pace with growth in demand for
petroleum products. As it is, refiners have increased capacity at
existing sites to offset the impact of capacity lost elsewhere due to
refinery closures.
It is becoming more difficult to add capacity at existing sites due
to increasingly stringent environmental regulations and the challenging
economic climate faced by the refining industry. EIA projects that U.S.
refining capacity may increase by 2 million barrels per day by 2010;
this would still not keep pace with the increase in U.S. demand for
petroleum products, which EIA estimates will grow by 1.6% per year each
year through 2025.
Product Imports Could Increase
This means that the United States, which has had a hard time
adjusting to the fact that 60% of its crude is now imported, may have
to become accustomed to another unpleasant fact: an increasing
percentage of petroleum products such as gasoline, diesel, jet fuel and
heating oil may also come from imports.
NPRA suggests that balanced and temperate actions, adopted now, can
prevent excessive dependence upon foreign refined products. It seems
clear that it is in the nation's best interest to manufacture a
significant portion of the petroleum products we need here in domestic
refineries. Reduced U.S. refining capacity clearly affects the amount
of control we have over our supply of refined petroleum products and
the flexibility of the supply system, particularly in times of stress
or disruption.
Currently, about 95% of such products are manufactured in U.S.
refineries. (U.S. exports of refined products to non-U.S. destinations
are relatively insignificant.) This indicates that we are at a good
time to adopt a policy to maintain a healthy and diverse U.S. refining
industry. Although the precise percentage of refined product
manufactured here will vary, adopting this policy now will help
mitigate or prevent any abrupt slide in U.S. refining capacity and any
adverse impact on the nation's energy security. And that policy is
founded in good common sense.
Refiners Are Investing Billions to Improve the Environment
Refiners currently face a massive task of complying with four
regulatory programs with significant investment requirements, all in
the same timeframe. Refiners must shortly invest about $20 billion to
sharply reduce the sulfur content of gasoline and both highway and much
of off-road diesel. Refiners face additional investment requirements to
deal with state and possible federal limitations on ether use, as well
as compliance costs with Mobile Source Air Toxics reductions and other
limitations. This does not include additional significant investments
needed to comply with stationary source regulations affecting
refineries.
On the horizon are other environmental requirements which will
necessitate significant investment. They are: the challenges and cost
of increased ethanol use, expected federal or state programs mandating
changes in diesel fuel properties (cetane and aromatics content, lower
gravity), and the potential for significant proliferation of new fuels
caused by the need to comply with the new 8 hour ozone NAAQS. These
factors will also significantly impact fuel manufacture and
distribution.
Average Refining Returns Are Modest
Refining earnings have recently been more volatile than usual, but
refining returns are generally quite modest when compared with other
industries. The average return on investment in the industry is about
5%; this is about what investors could receive by investing in
government bonds, with little or no risk. This relatively low level of
return, which incorporates the cost of investments required to meet
environmental regulations, is one reason why domestic refinery capacity
additions are modest and new facilities are unlikely to be constructed
here.
A Key Government Advisory Panel Urged Prudent Regulation
The National Petroleum Council (NPC) issued a landmark report on
the state of the refining industry in 2000. Given the limited return on
investment in the industry and the crushing investment required for
environmental regulations, the NPC urged policymakers to pay special
attention to the timing and sequencing of any changes in product
specifications. Failing such action, the report cautioned that adverse
impacts on the industry with supply ramifications could result. As the
above discussion shows, this warning has been widely disregarded.
Refiners Face Additional Facility Investment Requirements
In fact, release of the NPC report was roughly concurrent with an
ill-considered ``enforcement effort''' under the New Source Review
Program, an effort to add additional billions of unanticipated cost to
refiners just to stay in business. The enforcement initiative went
forward despite near-universal agreement that the NSR program
requirements were hopelessly confused and thus fertile ground for
arbitrary enforcement. The refining industry has been struggling to
resolve the enforcement issue on top of the many other challenges it
faces. (Going forward, the recently effective final rule reforming NSR
will add much-needed clarity and consistency to that program's
requirements. That rule, and the current proposal to clarify the
definition of routine maintenance under NSR, are rare instances in
which policymakers heeded the NPC's warning.)
Refiners Will Meet the Challenges, But Some Facilities May Close
Petroleum refining has never been an industry for the faint of
heart.
Domestic refiners will rise to meet the challenges of the current
situation. They have demonstrated the ability to adapt to new
challenges and keep the flow of products going to consumers across the
nation. But certain economic realities cannot be ignored and they will
impact the industry. Thus, refiners will, in most cases, make the
investments necessary to comply with the environmental programs
outlined above. In some cases, however, where refiners are unable to
justify the costs of investment at some facilities, those facilities
may close.
EIA summarizes the impact of past and future refinery
closures:``Since 1987, about 1.6 million barrels per day of capacity
has been closed. This represents almost 10% of today's capacity of 16.8
million barrels per calendar day . . . The United States still has 1.8
million barrels of capacity under 70 MB/CD (million barrels per
calendar day) in place, and closures are expected to continue in future
years. Our estimate is that closures will occur between now and 2007 at
a rate of about 50-70 MB/CD per year . . . All refineries face
investments . . . But smaller refiners may find their lack of economies
of scale and the size of the investments required put them at a
competitive disadvantage and would keep them from earning the returns
needed to stay in business.'' (EIA, J. Shore, ``Supply Impact of Losing
MTBE & Using Ethanol,'' October 2002, p. 4.)
Reasonable Regulation Will Help Refiners Maintain Supply
As the Committee can plainly see, the domestic refining industry
has major challenges ahead. NPRA's members ask that policymakers help
by insisting that future fuel specification changes be carefully timed
and sequenced consistent with the National Petroleum Council's
recommendations. This should be adopted as part of the nation's energy
policy revisions.
In addition, NPRA asks that an updated energy policy adopt the
principle that in the case of new environmental initiatives the
environmental objectives must be balanced with energy supply
requirements. As explained above, the refining industry is in the
process of redesigning much of the current fuel slate to obtain needed
improvements in environmental performance. This trend will persist
because consumers desire higher-quality and less-polluting fuels. And
our members want to satisfy their customers. We ask only that the
programs be well-designed, appropriately timed and cost-effective. The
Committee can advance both the cause of cleaner fuels and preservation
of the domestic refining industry by adopting this principle as part of
the nation's energy policy.
Industry Diversity Benefits Consumers and the Nation
As demonstrated above, a healthy and diverse U.S. refining industry
best serves the nation's interest in maintaining a secure supply of
energy products. Rationalizing and balancing our nation's energy and
environmental policies will protect a key American resource, the
domestic refining industry. Given the challenges of the current and
future refining environment, the nation is fortunate to retain a
refining industry that has many diverse and specialized participants.
Some of the largest companies in the world maintain their positions in
U.S. refining, while a vibrant set of entrepreneurial independents,
among the largest in the industry, are increasing their prominence and
importance in that industry. At the same time, regional and smaller
independents reliably and conveniently serve regional or smaller niche
markets. The U.S. refining industry has experienced difficult periods
before, but the continuing diversity within the industry suggests that
it has more than enough vitality to continue the industry's important
work, especially with the help of a supply-oriented national energy
policy.
The Market Situation Demonstrates a Need to Focus on Supply
NPRA believes that a new national energy policy initiative is long
overdue. And our testimony thus far has shown why that new policy must
be supply-oriented, and why it should view the need for a healthy and
diverse domestic refining industry as a cornerstone of a pro-supply
policy. We believe that any neutral observer would see the wisdom of
these two policy elements, especially because current events in the
crude oil and product markets demonstrate the need for them.
As this testimony is written, speculation about crude and product
price and supply is a hot topic in the media. Once again, the supply of
crude and products is stretched tight due to a confluence of external
factors. In this case, those factors are: the consequences of a strike
in Venezuela that crippled that country's export capability for months;
weather much colder than normal in parts of the country where energy
use is extremely sensitive to temperature; and uncertainty over crude
oil supply in the immediate future due to the international situation
involving Iraq.
The Energy Information Administration (EIA) Explains the Market
NPRA urges anyone interested in how we got where we are to take a
look at EIA's webpage and read the articles ``This Week in Petroleum''
since the beginning of this year. You will find each step in the
process explained, along with accurate predictions of subsequent
developments.
In summary, according to EIA, these are the facts: the strike in
Venezuela deprived the U.S., that country's largest customer, of a
significant amount of crude imports for several weeks. This happened
when crude oil inventories were at modest levels because OPEC lowered
production quotas for most of 2002. That action had already limited the
supply of crude.
Refiners tried to keep up refinery runs, and hence production, by
utilizing the crude available in the market and by drawing on crude
stocks. This delayed the impact of the Venezuelan disruption for a
short period and helped meet strong product demand. That is a
considerable achievement, given the extent of the crude supply impact
and the difficult time of year in which it occurred. It is another
example of the expertise and resourcefulness of the domestic refining
industry.
As crude inventories fall, crude runs to refineries decrease
because less crude is available. When crude runs are reduced, product
output declines. This may require tapping product inventories to meet
demand. The reduced product inventories then give rise to concerns
about the sufficiency of gasoline, diesel and heating oil supplies. EIA
refers to these possible occurrences as ``Dominos'' in its January 15
``This Week in Petroleum.'' Subsequent issues of that analysis
described what happened as the domino scenario unfolded. We have
attached the January 15 publication for your information.
Strong evidence such as this, and broad agreement that these are
the key factors should answer questions about the genesis of today's
crude and product supply situation. The fact that the nation is
possibly on the brink of war in Iraq certainly offers an additional
reason to believe that these are uncertain times when concern about
crude availability and supply are understandably present. And those
concerns have impacts in the marketplace.
Refiners are Working Hard to Supply Needed Products
Unfortunately, some of the media and a few policymakers have
alleged that industry misconduct is somehow responsible for the current
situation. This is not so now, just as it was proven not so in past
supply disruptions and uncertainties. Refinery runs are close to where
they were last year at this time, despite general agreement that crude
supplies are tight. Slightly lower utilization rates this time of year
are often due to planned maintenance when product demand is usually
low. Refinery maintenance is often non-discretionary and scheduled well
in advance of a largely inflexible date. The need for the refining
industry to run at high rates of utilization, 92-93% on average, well
above the 85% utilization rate considered full utilization in other
industries, is an important reason why the time available for
turnarounds is at a premium and hard to change. Another factor is that
some maintenance cannot be postponed for safety reasons, which cannot
be compromised.
This is also a difficult time of the year for refiners to face so
many market uncertainties. They will soon implement the required
changeover from winter to summer grade gasoline, which often requires a
delicate balance as winter product is drawn down to make way for summer
gasoline in time for the required certification date.
Many California refiners will experience the first seasonal
turnaround involving CARB3 and California RFG with ethanol, due to the
partial phase-out of MTBE in California this year. Please do not
misunderstand this point. It is not clear that today's market
conditions reflect problems involving seasonal changeovers. We mention
this subject to remind non-industry observers that this time of year is
an especially sensitive one if available crude supplies are stretched
thin and demand remains high, which is the case at present.
The current situation is not totally dissimilar to the summer of
2000 and early summer of 2001, when supply problems surfaced due to
market-related and operational difficulties beyond industry's control.
Investigations conducted of industry behavior at that time found no
basis for legal action against the industry. We are certain that the
investigations now being called for will result in the same findings
which exonerate the industry.
We note that one investigation, conducted by the Senate Permanent
Subcommittee on Investigations, made several recommendations regarding
imposing mandatory product inventory levels and restricting mergers. No
action has been taken on the findings and recommendations of that
investigation. The most prominent suggestion, regarding mandated
inventories, would actually increase the cost of business operations
for refiners, which might be passed on to consumers.
Refiners are constantly responding to difficult situations like the
present one, which make it a challenge to maintain adequate product
supplies. Modern energy policy has given them a tool which helps them
determine the most efficient way to continue meeting consumer demand.
The free market swiftly provides the industry with price and supply
information which they can respond to. Refiners also need maximum
flexibility to respond to this market information in their decisions
about product manufacture and distribution. Mandates and other command-
and-control policy mechanisms reduce flexibility and add unnecessary
cost to gasoline manufacture. Congress should remove existing mandates
and avoid legislating new ones, such as the proposed ethanol mandate.
A modern, supply-oriented fuels policy would give refiners greater
flexibility to meet fuel demand within broad performance standards.
Such a fuels policy would also rely on the free market to determine
appropriate product supply and allocation. It would avoid inflexible
command-and-control regulation such as prescriptive mandates, and
emphasize the development of new fuel legislation and regulation
through an open process involving all stakeholders, aimed at obtaining
the best practical answer rather than one that satisfies temporary
political aims. But most importantly, such an energy policy must focus
on balancing the duel goals of increased energy supply and continued
environmental progress.
NPRA Policy Recommendations
With this concept of a supply-oriented energy policy as a backdrop,
NPRA has reviewed the National Energy Policy legislation approved by
the House in 2001 and by the Senate last year. The Association offers
the subcommittee these specific recommendations regarding the fuels
provisions that may be under consideration for inclusion in this year's
energy bill.
First: Repeal the 2% by weight RFG oxygenation requirement [Clean
Air Act section 211(k)] to provide refiners with more flexibility to
meet supply and air quality requirements.
Elimination of this 2% requirement will give refiners increased
flexibility to deal with changing market conditions. It will also allow
them to blend gasoline to meet the standards for reformulated gasoline
most efficiently and economically, without mandated oxygenate content.
In some cases, refiners would probably continue to use some MTBE,
because of its good blending qualities and demonstrated ability to
reduce air emissions. The overall volume of MTBE in gasoline would very
likely decline, while providing relief to those who are concerned about
MTBE usage.
Second: Avoid a federal ban or mandatory phase-out of MTBE use in
order to maintain adequate gasoline supplies at reasonable cost; direct
DOE and EPA to work with any states that implement limitations on MTBE
usage to coordinate the implementation of these restrictions and to
maintain adequate supply.
NPRA is concerned about proposals to ban MTBE nationally or to
mandate a national phase-down of MTBE. Last year's Senate bill called
for an MTBE ban in four years. (A Governor could allow continued use of
MTBE in his own state, but this would be unlikely.) EIA predicts that
an MTBE ban would raise the national average price of RFG in 2006 by
several cents per gallon and reduce supply. (``Supply Impacts of an
MTBE Ban,'' September 2002)
MTBE elimination may cause an 11% reduction in some gasoline
volumes when fully implemented. (MTBE provides over 10% of RFG volume
in many RFG areas.) NPRA is concerned about the possible impact of this
change on supply and manufacturing costs. The supply and demand balance
in the nation's gasoline market is increasingly tight. Supply and price
can be affected by weather, unforeseen outages, and accidents,
resulting in economic losses and negative public reaction, and we are
seeing this happen with increasing frequency.
We should not exacerbate a tight supply situation by arbitrarily
eliminating a significant contributor to the nation's gasoline supply.
If concerns about MTBE usage continue, more deliberate but responsive
measures can be taken. But recent experience in the gasoline market
suggests that such significant changes should be taken only with
caution, and with full disclosure to the public regarding any possible
supply and cost impacts.
NPRA also does not believe that current evidence warrants the
drastic step of a national ban on MTBE. Taking such action based on
limited current knowledge would set a dangerous precedent for all
chemicals in widespread commerce. EPA is currently evaluating MTBE's
status under TSCA (the Toxic Substances Control Act), and NPRA suggests
that is the only appropriate course of action based on the evidence
today.
As EIA noted in a presentation last October: ``MTBE is a very clean
component from an air emission standpoint. It contains oxygen and has
no sulfur, no aromatics, no olefins and an RVP that is very close to
the RVP of the remaining gasoline components.''
The author also wrote: ``What is not appreciated by many people
outside of the petroleum business, is that losing MTBE is more than
just losing the volumes of this blending component . . . no other
hydrocarbon or oxygenate equals the emission and engine performance
characteristics of MTBE. Hence, losing a barrel of MTBE results in
losing more than a barrel of gasoline production. When you remove a
clean, high performance gasoline stream from the gasoline pool, it is
difficult to find material to replace its volume and quality
contributions.'' (EIA, J. Shore, ``Supply Impact of Losing MTBE & Using
Ethanol,'' October 2002, pp. 10, 12)
Recent EIA studies confirm that elimination of MTBE will also
affect many refiners' abilities to comply with the Mobile Source Air
Toxics rule, which requires refiners to maintain their average 1998-
2000 gasoline toxic emission performance levels. Loss of MTBE would
make it difficult to match historical toxics performance, and the
result might be that those refineries would have to reduce their
production of RFG to achieve compliance.
NPRA believes that these circumstances support a policy of
considerable caution towards any proposal to eliminate the option of
continued MTBE use, at least until there is certain and convincing
evidence that adequate supplies of replacement fuel components are
available.
Some stakeholders advocate a federal ban or phase-down of MTBE as a
means of securing an ``orderly'' market transition away from that
product in states where large quantities of MTBE are currently used.
This is a largely theoretical argument that assumes that federal
regulators and those who seek to eliminate MTBE can choose the one
appropriate date when MTBE usage should end. This argument ignores
actual experience in which affected states have modified their plans to
limit MTBE usage as they become aware of the difficulties inherent in
replacing it without adverse impact on gasoline supply.
In short, imposition of a uniform federal scheme to restrict or
eliminate MTBE usage runs a considerable risk that the decision will be
uniformly wrong. Experience with the 2% RFG oxygenation mandate has
taught us that if this occurs, political power can be brought to bear
to block the changes necessary to meet unanticipated problems.
For example, even the largest state in the nation found it
impossible to obtain a waiver of the 2% provision under similar
conditions, when it was clear to most observers that a waiver was
justified. This suggests that supply problems arising from an arbitrary
federal phase-out or ban of MTBE might be difficult or impossible to
correct, or that they might only occur accompanied by dubious new
policy initiatives influenced by the politics of the moment.
Third: Reject calls for an ethanol mandate--Imposing an ethanol
mandate on gasoline suppliers will make it more difficult and expensive
to manufacture gasoline and provides no compensating benefit to
consumers or the environment. An ethanol mandate immediately creates
winners and losers among fuel providers and regional consumers based on
their geographic location and history of ethanol usage or non-usage.
Thus it is both highly arbitrary and unfair. Inclusion of a credit
trading mechanism in the mandate scheme does nothing to temper the
injustice and economic inefficiency of the provision, because it
requires fuel manufacturers and their customers to pay for the
privilege of not using ethanol in their gasoline.
Many NPRA members already use significant volumes of ethanol, and
they expect to increase their ethanol usage in the years ahead. EIA and
other policy analysts also predict a significant increase in ethanol
markets in coming years, without a mandate. In short, given the
relative scarcity of quality gasoline blend stocks, ethanol has a
bright future without any need to resort to the outrageous expedient of
a national ethanol mandate.
Ethanol already enjoys a generous subsidy in the form of a 52 cent
exemption from the gasoline excise tax; this subsidy costs the Highway
Trust Fund in excess of $1.2 billion annually. A federal tariff offsets
the benefit of the gasoline tax exemption for most imports, making them
uncompetitive with domestic ethanol production. Ethanol also receives
tax incentives in 17 states.
The 5 billion gallon ethanol mandate included in last year's Senate
ethanol bill was the product of private discussions among a limited
group of stakeholders. It was never considered by the Committee of
jurisdiction in the Senate. NPRA opposes that provision. We urge the
subcommittee to make a clean break with the market intervention theory
typified by both the existing 2% requirement and calls for a
cumbersome, expensive and unnecessary ethanol mandate.
The Senate-approved language goes so far as to include language
intended to require widespread usage of ethanol even in the summer
months, when ozone concerns are most severe. This despite the fact that
the increased volatility of ethanol blends requires additional
investment and extraordinary measures to allow ethanol use in gasoline
during these periods. Extra pollution caused for the local environment,
supply problems for fuel suppliers or cost problems for consumers
apparently are of less importance than the desire of the ethanol
industry for consistent demand.
Few proposals on any subject unite the editorial pages of the Wall
Street Journal, New York Times and Washington Post. But the ethanol
mandate is one of them. All three papers have denounced the ethanol
mandate proposal in no uncertain terms. NPRA agrees with this unusual
consensus, and hopes that the House will put principle above political
considerations and reject the mandate proposal.
Fourth: Extend product liability protection to MTBE and ethanol--
When it passed the Clean Air Act Amendments of 1990 with the 2% RFG
oxygenation requirement, Congress clearly understood that MTBE would be
widely used to comply with that provision. In fact, the percentage of
oxygen required by weight was selected to allow MTBE and perhaps other
ethers to be used for that purpose. It was so clear that MTBE usage
would predominate, in fact, that the Clinton Administration came
forward with a rule that would have required some of the oxygen content
to be met by ``renewable'' oxygenates, i.e. ethanol, to ensure usage of
that product in the RFG pool. [That attempt, a clear end-run of the
statute and subsequent reg-neg agreement, was overturned by the U.S.
Court of Appeals for the District of Columbia in the case API and NPRA
v. EPA, 52 F.3d 1113, 1119 (D.C. Cir. 1995). In the decision, the court
also noted that U.S. EPA had ``conceded that use of ethanol might
possibly make air quality worse.''
The amendment establishing the reformulated gasoline program was
added to the Clean Air Act amendments in the Senate by Senator Daschle.
When the 2% requirement became part of the final bill, the refining
industry acted to comply. As foreseen, MTBE became the oxygenate of
choice because of its good blending characteristics, the fact that,
unlike ethanol, it could be shipped in pipelines, and the reality that
the higher volatility of ethanol blends made their use in RFG during
the summer ozone season problematic.
U.S. MTBE production increased from 146 thousand barrels per day in
1993 to roughly 230 thousand barrels per day in both 2001 and 2002. The
air quality improvements made possible by RFG use in the cities where
it has been required are well known. MTBE has contributed to those air
quality improvements.
In recent years, product liability suits have been brought against
refiners and petrochemical manufacturers due to MTBE contamination
found in groundwater. Those suits seek to overlook the fact that the
Clean Air Act amendments clearly required and contemplated widespread
usage of MTBE in the RFG program. As discussed above, Congress was also
aware that large quantities of MTBE would be needed in the RFG program.
No one should be penalized for obeying the law. Yet this is the
position in which refiners and petrochemical producers find themselves
because of these liability suits. Money spent to defend against these
unfair suits could be better used to produce additional supplies of
petroleum and petrochemical products for consumers and the nation's
economic benefit.
During the energy bill conference last year, Chairmen Tauzin and
Barton recognized the need for product liability language that would
help fuel suppliers defend themselves against these unfair charges.
This language was approved by the House conferees with bipartisan
support. NPRA encourages the subcommittee and full committee to include
the same or similar language in the House energy bill this year. It is
only fair that any fuel producer who responds to a congressional
mandate for use of a product be protected against legal action based
solely upon production or use of the mandated product.
Fifth: Avoid unnecessary changes in fuel specifications--As
discussed previously, the refining industry faces significant
investment requirements in order to comply with regulations to improve
the environmental performance of both gasoline and diesel fuel in
coming years. Significant investments will also be required to respond
to regulations affecting facilities. NPRA urges the subcommittee and
committee to limit additional fuel specification changes while work is
in progress to comply with these existing requirements. Although we do
expect a proposed rule this year to reduce the sulfur level in off-road
diesel over the period 2007-10, industry has been consulting with EPA
in the hope of coordinating the off-road requirements with the existing
highway diesel rule. We hope that this subcommittee will monitor
developments on that regulation.
Particular care should be used in considering so-called ``boutique
fuel'' gasoline programs. In many cases these programs represent a
local area's attempt to address its own air quality needs in a more
cost-effective way than with reformulated gasoline. NPRA welcomes
further study of the ``boutique fuels'' phenomenon, but urges members
of the committee to resist imposition of additional fuel specification
changes in a vain attempt to curtail state and local experimentation.
NPRA is also concerned about provisions in last year's bill that
facilitated certain opt-ins to the reformulated gasoline program. In
creating the RFG program, Congress established requirements for RFG
opt-ins that recognized the need to limit access to that program due to
supply and investment considerations. If anything, the reasons
underlying those concerns are stronger now than they were ten years
ago. Therefore, NPRA urges that current Clean Air Act language
regarding access to the RFG program be retained, rejecting any changes
to current language that limits participation in the RFG program to
those areas with a demonstrated need for that fuel.
Sixth: Take steps to increase natural gas production and supply--
NPRA's members include many petrochemical producers who depend on
natural gas supplies at a reasonable price for use as feedstock. Recent
price spikes for this product threaten the continued competitiveness of
the domestic petrochemical industry. We believe that quick action is
necessary to increase the supply of natural gas through expanded
domestic drilling opportunities.
NPRA also recommends that the subcommittee and committee explore
additional ways to expand gas supply through expedited siting of LNG
facilities and pipeline expansion, including the building of an
appropriate pipeline to make Alaskan natural gas available at
reasonable prices. We also encourage members to examine the overall
economic impact on the U.S. of the rapid expansion of natural gas use
as a utility and industrial process fuel in recent years. The impact on
feedstock users of this additional demand should be taken into
consideration, as should the ability of the available supply to meet
this new demand. We do not believe that this analysis is occurring, to
the detriment of traditional users of natural gas for feedstocks.
Seventh: Ensure the continued viability of combined heat and power
systems in transitioning energy markets--Many refineries and
petrochemical facilities have adopted combined heating and power (CHP)
technology as a way to improve their energy efficiency and reduce air
emissions. These systems provide the electricity and steam needed for
their industrial operations. Today's state of the art systems can
achieve efficiency ratings as high as 70%, which is more than twice as
efficient as conventional utility generators, with half the emissions
per BTU. NPRA urges the subcommittee and full committee to maintain
PURPA provisions that help CHP plants survive in an electricity market
that has not yet made the transition to full competition.
NPRA looks forward to working with the subcommittee and full
committee to accomplish these and other objectives as part of a supply-
driven national energy policy. I would be glad to answer any questions
raised by our testimony today.
Mr. Shimkus. Thank you very much. Now we would like to have
Mr. Bill Douglass, CEO, Douglass Distributing Company, and you
are recognized for 5 minutes, sir.
STATEMENT OF BILL DOUGLASS
Mr. Douglass. Thank you, Mr. Chairman, Congressman Boucher
and members of the subcommittee. We appreciate the opportunity
to testify today about the impact of national energy policy
legislation on the Nation's petroleum marketers. As you heard,
my name is Bill Douglass. I am CEO of Douglass Distributing
Company, headquartered in Sherman, Texas. Our company operates
10 convenience stores and has a distributorship that sells
gasoline and diesel fuel through 110 other retail outlets in
the Dallas-Fort Worth market.
I appear today on behalf of the National Association of
Convenience Stores, which we call NACS, and the Society of
Independent Gasoline Marketers of America, which is known as
SIGMA. Collectively, the members of these two associations sell
approximately 80 percent of the gasoline consumed in the United
States every year. Today, I intend to focus on the key
priorities that NACS and SIGMA believe should be included in a
national energy bill in order to promote one common objective:
To enhance the supply of motor fuel for the American motorist.
Ensuring a sufficient supply of gasoline and diesel fuel
will benefit individual consumers and the economy as a whole.
It is with this objective that we present the following policy
recommendations. First, Congress should repeal the oxygenate
mandate of the Reformulated Gasoline Program. Second, Congress
should provide for the orderly phase-out of MTBE in a manner
that does not impact overall gasoline supplies negatively.
Finally, Congress needs to address boutique motor fuels. Last
year, the House included a provision in its energy bill
requiring a Federal study into this boutique motor fuel issue.
Unfortunately, the timing of such a study will not serve to
assist this committee in developing a national energy policy
this year.
To help your efforts this year, NACS has commissioned a
study into this very subject that will be completed next month,
April 2003. This study is taking an in-depth look into the
current market conditions generated by today's overlapping
Federal, State and local fuel regulations and is assessing the
impact of potential changes to these regulations on overall
fuel supplies, product fungibility, cost and environmental
impact. NACS looks forward to sharing the results of this study
with this subcommittee.
Renewable fuel standard. The debate in the last Congress
seemed to focus on a different issue: The establishment of a
renewable standard, RFS, also referred to an ethanol mandate.
Last Congress, NACS and SIGMA strongly opposed this ethanol
mandate. This opposition continues today. We simply cannot
support a provision to replace one mandate, the oxygenate
mandate, with another, an ethanol mandate. NACS and SIGMA
recognize, however, that there is substantial political support
in the House and the Senate for the adoption of an ethanol
mandate. Therefore, if Congress decides to adopt an RFS in this
year's energy bill, we urge the committee to adopt the
following modifications, which will benefit overall gasoline
supplies and environmental protection, reduce the number of
boutique fuels, maintain the competitive position of
independent marketers and ease the introduction of the RFS.
First, NACS and SIGMA urge the subcommittee to adopt a
legislative provision to permit the commingling of divergent,
compliance fuels. EPA regulations currently prohibit a marketer
from blending compliance fuels if their mixture would result in
a non-compliant product. This prohibition reduces the
flexibility of the gasoline market to respond to supply
disruptions while having little or no environmental benefit.
Furthermore, it makes it considerably more difficult for a
marketer to sell ethanol-blended gasoline.
By allowing us to blend or commingle the ethanol and non-
ethanol fuels in our tanks, we will be better able to respond
to the shortages of one fuel or another. This will reduce the
price volatility and greatly ease the stress on the gasoline
distribution system. The environmental impacts of this action
will be minimal and will be far outweighed by the benefits to
supply and price stability. Therefore, NACS and SIGMA urge this
subcommittee to permit the commingling of compliant product in
order to provide the extra flexibility necessary to avoid
market disruptions and price spikes when these market
conditions develop.
Second, the RFS considered last year required the use of
ethanol throughout the year. This provision should be deleted.
Use of ethanol during the summer months will require refiners
to produce sub-RVP blend stocks, further reducing the overall
supply of gasoline, creating spot shortages and promoting
retail and wholesale gasoline price volatility.
Third, NACS and SIGMA are concerned deeply about the
proposed RFS credit and trading system considered last year.
Given the concentration and market power in the gasoline
refining and ethanol production industries, there is cause for
concern that some parties may attempt to hoard RFS credits in
order to disadvantage their competitors. NACS and SIGMA urge
this subcommittee to include a provision to assure----
Mr. Shimkus. You need to wrap it up real quick.
Mr. Douglass. [continuing] a competitive and open market
for RFS credits.
Finally, Congress should adopt a comprehensive Federal
Leaking Underground Storage Tank Program reforms. Last year's
House and Senate energy bills contained a modest provision on
UST reform, but NACS and SIGMA urge that this subcommittee not
to adopt half measures on this but they should enact
comprehensive underground storage tank legislation similar to
that being considered by this committee's Environment and
Hazardous Materials Subcommittee.
Thank you for this opportunity to share in the NACS and
SIGMA concerns and recommendations.
[The prepared statement of Bill Douglass follows:]
Prepared Statement of Bill Douglass, Chief Executive Officer, Douglass
Distributing Company Representing The National Association of
Convenience Stores and The Society of Independent Gasoline Marketers of
America
I. INTRODUCTION
Good morning, Mr. Chairman and members of the Subcommittee. My name
is Bill Douglass. I am Chief Executive Officer of Douglass Distributing
Company, Inc., headquartered in Sherman, Texas. Our company operates 10
convenience stores and a distributorship that sells gasoline and diesel
fuel in the Dallas-Fort Worth area.
I sincerely appreciate the invitation to present testimony before
you this morning on the issue of national energy policy legislation and
motor fuels. I appear this morning on behalf of the National
Association of Convenience Stores (``NACS'') and the Society of
Independent Gasoline Marketers of America (``SIGMA'').
II. THE ASSOCIATIONS
NACS is an international trade association comprised of more than
1,700 retail member companies operating more than 100,000 stores. The
convenience store industry as a whole sold 124.4 billion gallons of
motor fuel in 2001 and employs 1.4 million workers across the nation.
SIGMA is an association of more than 270 independent gasoline
marketers operating in all 50 states. Last year, SIGMA members sold
more than 48 billion gallons of motor fuel, representing more than 30
percent of all motor fuels sold in the United States in 2002. SIGMA
members supply more than 28,000 retail outlets across the nation and
employ more than 270,000 workers nationwide.
III. FOCUS ON MOTORISTS
My testimony this morning will focus on one simple message. As this
Subcommittee, and this Congress, debates national motor fuel policy,
NACS and SIGMA urge you to consider the impact this legislation will
have on our members' customers--your constituents.
The average motorist does not know or care whether gasoline
contains MTBE or ethanol; they simply want competitively-priced
gasoline and diesel fuel to power their automobiles and trucks. In
general, motorists favor environmentally-friendly fuels, and favor
strong environmental protections to assure that the use of motor fuels
does not harm air quality and does not pollute our nation's water
supplies.
These motorists' interests are closely matched by the interest of
independent motor fuel marketers, like myself. My company sells motor
fuels, but we do not make either the gasoline or the diesel fuel we
sell. Consequently, from a business perspective, I have little interest
in what my refiner-supplier puts into these products, be it ethanol or
MTBE. My primary concern is supply. My customers, and therefore my
company, benefit from plentiful supplies of gasoline and diesel fuel
from diverse sources, thereby assuring a competitive marketplace for
motor fuel. Furthermore, like our customers, we also support the
production of motor fuels that do not harm air quality and the strong
and effective enforcement of regulations to prevent petroleum releases
from underground storage tanks. We support these issues for the benefit
of our communities as well as for the benefit of our business.
Therefore, as you consider a fuels title to national energy policy
legislation this year, I strongly urge you to keep in mind the
interests of your constituents, and our customers, the motoring public.
NACS and SIGMA believe that this Subcommittee will have served its
constituents well if it puts aside special interest pressures and
instead develops energy policy legislation that focuses on expanding
overall motor fuel supplies, easing the pressures on the motor fuel
distribution system, and reducing motor fuel price volatility.
IV. KEY COMPONENTS OF FUELS LEGISLATION
For these reasons, NACS and SIGMA strongly support efforts in
Congress to adopt national energy policy legislation in 2003. To
accomplish these objectives, we urge this Subcommittee to include, at a
minimum, the following core provisions in the motor fuels title of a
2003 energy bill.
First, we support the repeal of the reformulated gasoline (``RFG'')
program's oxygenate mandate contained in Section 211(k) of the Clean
Air Act. Numerous studies have concluded that oxygenates, including
MTBE and ethanol, are not necessary for the production of clean-burning
gasoline. The oxygenate mandate is not environmental protection;
rather, it is political protection for the MTBE and ethanol industries
and should be repealed. Doing so will enhance the ability of America's
refiners to efficiently produce gasoline for America's consumers.
Second, we support an orderly phase-out of MTBE as a gasoline
additive in a manner that does not impact overall gasoline supplies
negatively. The contamination of ground water supplies by MTBE has been
documented widely. To address this problem, NACS and SIGMA support a
nation-wide phase-out of MTBE over a period of years Doing this at the
federal level will avoid the further segmentation of the market as
individual states proceed with their own bans. A phase-out over several
years will permit the orderly transition from MTBE to other fuel
components and mitigate the impact on overall gasoline supplies. In
addition, we also strongly support increased enforcement of federal
petroleum underground storage tank laws to help prevent any future
petroleum releases. I will return to this subject later.
Third, we support the adoption of legislative provisions to slow,
and ultimately reverse, the ``balkanization'' of the gasoline and
diesel fuel markets into islands of ``boutique'' motor fuels. Twenty
years ago, our nation had the most efficient fuel distribution system
in the world. Today, with the proliferation of boutique fuels, the
distribution system is under constant stress which has led to spot
supply shortages, wholesale and retail price volatility, and consumer
complaints. Congress must tackle this important issue in order to
improve gasoline and diesel fuel supply and reduce price volatility.
Any federal initiative that does not substantially restore fungibility
to the motor fuel supply and distribution system will only contribute
to the continued supply dislocation and price volatility witnessed over
the past several years.
V. CONSIDERATION OF AN ETHANOL MANDATE
During the consideration of energy policy legislation last year,
there was spirited debate over the proposed adoption of a mandate to
include ethanol in much of the nation's gasoline. NACS and SIGMA
strongly opposed, and continue to oppose, an ethanol mandate. We simply
cannot support a provision to replace one mandate--the oxygenate
mandate--with another--an ethanol mandate.
The details of this issue have been debated for several years as
representatives of the ethanol industry and the MTBE industry have
competed for federal market support. NACS and SIGMA are not concerned
with the rivalry between these two industries, but we are very
concerned about the impact the proposed resolution could have on
consumers.
The ethanol mandate proposed last Congress places the motor fuels
market in serious jeopardy. Our central concern is the delivery of
product to all markets throughout the country in a cost-efficient
manner. Because ethanol is predominantly a regionally produced product,
it must be shipped from its Midwest-production facilities to all
markets. The problem is that our pipeline system cannot transport the
product. This forces the market to rely on rail and truck deliveries, a
much more expensive method of liquid product transport. In addition, it
adds yet another level of potential disruption to the system. These
factors alone could lead to increased regional supply shortages and
even greater price volatility.
NACS and SIGMA do not oppose increased market opportunities for
ethanol; in fact, our members are the leading retailers of ethanol-
blended gasoline. However, we believe it would be a mistake for the
federal government to mandate its use on a national basis.
NACS and SIGMA recognize, however, that there is substantial
political support in the House and Senate for the adoption of an
ethanol mandate. Therefore, if Congress is intent on adopting a
renewable fuels standard (``RFS'') as part of an energy bill, we urge
that the following modifications be made to the fuels title offered by
the House to the Senate last fall. These suggested modifications will
benefit overall gasoline supplies and environmental protection, reduce
the number of boutique fuels, maintain the competitive position of
independent marketers, and ease the introduction of the RFS.
VI. COMMINGLING OF DIVERGENT COMPLIANT FUELS
First, Congress should adopt a legislative provision to permit the
commingling of divergent compliant fuels. Currently, EPA regulations
specifically prohibit the blending of ethanol-additized RFG with MTBE-
additized RFG during much of the year. In addition, the regulations
generally prohibit the blending of any two compliant fuels if the
resulting mixture would have a higher RVP (generated by the presence of
ethanol) than allowed in a specific market. These prohibitions
balkanize the gasoline markets and increase supply shortages during
market disruptions, while having little or no environmental benefit.
Furthermore, the requirements make it considerably more difficult for a
marketer to proactively sell ethanol-blended gasoline. There are a
couple of scenarios that last year's proposed fuels title would create
that could be improved by allowing the commingling of compliant fuels.
If the oxygenate requirement is repealed, MTBE is banned, and an
ethanol mandate is created, there will be at least two primary
varieties of reformulated gasoline sold across the nation--oxygenated
gasoline with ethanol and non-oxygenated gasoline. Existing regulations
would permit the blending of these fuels in the tanks of motorists'
cars, but not in the underground storage tanks (``USTs'') of gasoline
marketers. This limitation will impair the ability of marketers to
efficiently sell RFG and will make it more difficult for marketers to
offer ethanol-blended RFG to their customers.
Another complication raised by the implementation of the ethanol
mandate is the loss of fungibility for conventional fuel. Currently,
many states and localities impose volatility controls on gasoline to
control for pollution. Ethanol-blended conventional gasoline is
afforded a one-pound volatility waiver to accommodate for the increased
volatility contributed by the ethanol. However, if marketers begin
selling ethanol-blended conventional and non-ethanol blended
conventional, the mixture of the two products will result in non-
compliant product.
In both conventional and RFG markets, therefore, a marketer must
drain his storage tank in order to sell ethanol-blended product. If
that same mixture is not available at a later date, the marketer would
again be forced to drain his tank in order to refill it with non-
ethanol product. This places an undue burden on the marketer by
hindering his ability to provide uninterrupted service to his customers
and will cause temporary supply shortages at certain retail outlets.
Permitting the blending, or commingling, of these fuels in marketers'
USTs will increase marketer flexibility to respond to shortages of one
fuel or another, will reduce price volatility caused by such shortages,
and will reduce stresses on the gasoline distribution system.
Some may argue that allowing a marketer to commingle products will
increase the environmental impact. I submit that any impact on the
environment is likely to be minimal and will be far outweighed by the
benefits to supply and price stability. Even today, divergent compliant
fuels are being commingled in consumer's gasoline tanks throughout the
country. It will be rare that a marketer will be forced to commingle
product in his tank, certainly less frequently than a consumer will
fill his or her vehicle with divergent product. In fact, most of
America's gasoline retailers are branded marketers, locked into supply
contracts, who will not be faced with this situation except in extreme
supply situations. Unbranded marketers, which comprise approximately 30
percent of the market, are also unlikely to switch terminal suppliers
except in tight market conditions. The provision NACS and SIGMA are
advocating will simply provide extra flexibility to avoid unnecessary
market disruptions and price spikes when these market conditions
develop.
VII. UNDERGROUND STORAGE TANK REFORM
Second, Congress should adopt comprehensive federal leaking
underground storage tank (``LUST'') program reforms. Last year's House
and Senate energy bills both contained modest provisions on UST reform.
NACS and SIGMA urge that these provisions be expanded to accomplish
comprehensive UST reform. The Senate Environment and Public Works
Committee recently approved unanimously S. 195, Senator Chafee's UST
reform bill. In addition, this Committee's Environment and Hazardous
Materials Subcommittee is considering similar legislation.
This year's energy bill should not contain half-measures on UST
reform. Whether the issue is full enforcement of existing UST rules,
preventing future MTBE leaks, or providing States with more funding for
their UST enforcement and remediation programs, comprehensive UST
reform legislation should be an integral part of a 2003 energy bill
and, at the very least, must not be compromised by the enactment of
half-measures.
VIII. SEASONAL VARIATION PROTECTION FOR RFS
Third, the Senate's 2002 RFS proposal required the use of ethanol
throughout the year. This provision should be deleted. Use of ethanol
during the summer months will require refiners to produce sub-RVP
blendstocks, further reducing the overall supply of gasoline, create
spot shortages, and promote retail and wholesale gasoline price
volatility. If Congress is intent on mandating the use of ethanol in
gasoline, then Congress should permit industry to meet that goal in the
most cost-effective manner that causes the least disruption to gasoline
supplies. Mandating that a certain portion of the RFS be satisfied
during the summer months runs counter to this goal.
IX. CREDIT AND TRADING SYSTEM
Fourth, NACS and SIGMA are concerned deeply about the proposed RFS
credit and trading system contained in the 2002 Senate energy bill
fuels title. Given the concentration of market power in the gasoline
refining and ethanol production industries, there is cause for concern
that some parties may attempt to ``hoard'' RFS credits in order to
disadvantage their competitors. For example, if a Mid-West refiner with
national marketing interests uses more ethanol than it needs for
compliance and generates RFS credits, what incentive would that refiner
have to sell these credits at a reasonable, competitive rate to an East
or West Coast refiner that is a competitor? If that East or West Coast
refiner cannot physically obtain ethanol or locate affordable RFS
credits, it will be in violation of the RFS program.
NACS and SIGMA urge this Subcommittee to consider the adoption of a
provision to incentivize refiners who are ``long'' on RFS credits to
tender these credits to other refiners at a reasonable price. One
solution might be to penalize refiners that are ``long'' on RFS credits
in the same way refiners that are ``short'' on credits are to be
penalized if there is unmet demand for RFS credits in the marketplace .
Whatever solution Congress arrives at, assuring a competitive and open
market for RFS credits must be examined.
X. OTHER ISSUES
Many other issues are under consideration with respect to a fuels
title in an 2003 energy bill. NACS and SIGMA have adopted the following
positions on several of these additional issues.
First, independent marketers support the adoption of a provision to
shield MTBE users, manufacturers, and refiners from product liability
claims that MTBE is a defective product. The 2002 Senate energy bill
contained such protection for ethanol producers. Such protection should
be afforded to MTBE, as provided in the House counter-offer. It must be
noted that such liability protection will not shield marketers from
potential liability for MTBE releases--which generally is governed by
negligence law. Instead, this provision would simply move MTBE release
claims out of the product liability area of law.
Second, NACS and SIGMA support strongly a federal solution to
address the problems associated with the proliferation of boutique
fuels. To date, virtually all stakeholders have criticized the
balkanization of the motor fuels markets, but there have been no
studies completed to provide policy recommendations to halt, or
reserve, the introduction of boutique fuels. Last year, the House
included a provision in its energy bill requiring a federal study into
this issue. We continue to support a federal assessment of the problem.
However, the timing of such a study will not serve to assist this
Committee in developing a national energy policy.
Therefore, I am pleased to inform the Committee that one of the
associations I am representing today, the National Association of
Convenience Stores, has commissioned a study into this very subject
that will be completed next month, in April 2003. This study is taking
an in-depth look into the current market conditions generated by
today's overlapping federal, state and local fuel regulations and is
assessing the impact of potential changes to these regulations on
overall fuel supplies, product fungibility, cost and environmental
impact. NACS looks forward to sharing the results of this study with
this Subcommittee as soon as it is available and we hope that it will
prove a useful tool as you work to complete an energy bill this
Congress.
XI. CONCLUSION
Mr. Chairman, members of the Subcommittee, thank you for this
opportunity to comment on America's national energy policy. NACS and
SIGMA appreciate the chance to share our concerns and recommendations
with you as you prepare a new energy bill. I hope to have provided some
insight into the impact certain policies will have on the petroleum
marketplace and some provisions that could help mitigate those impacts.
We look forward to working with the members of this Subcommittee to
craft energy policy legislation that meets the goals outlined in this
testimony.
I would be pleased to answer any questions that my testimony may
have raised.
Mr. Shimkus. Thank you, sir. I want to move us forward.
There are going to be votes relatively soon, so if we can move
rapidly, then we can get to questions after we get back. Mr.
Early, environmental consultant for the American Lung
Association. You have 5 minutes, sir.
STATEMENT OF A. BLAKEMAN EARLY
Mr. Early. Good afternoon, Mr. Chairman. Thank you for
inviting me. My name is Blakeman Early. I am here on behalf of
the American Lung Association, and I am also presenting the
views of the NESCAUM, the Northeast States for Coordinated Air
Use Management, and I thank NESCAUM for allowing me to appear,
and they chose not to take a seat at the table.
I am appearing and presenting both their views because both
ALA and NESCAUM were on the Blue Ribbon Panel for Oxygenation
in Gasoline, convened under the last administration, that
studied very intensively the problems of oxygenates in fuels.
Both these organizations endorsed the recommendations of the
Blue Ribbon Panel, and both have been advocating legislation
based on those recommendations ever since.
Three important elements of those recommendations have long
been, we think, critical to the legislation that we think we
need. First is that MTBE be eliminated from all gasoline, not
just reformulated gasoline. Second is that the mandatory oxygen
requirement for reformulated gasoline be eliminated. And,
third, that Congress adopt an anti-backsliding provision that
ensures that when oxygen and MTBE are removed from reformulated
gasoline, the air toxics reduction potential of that, the
actual toxics that are reduced, is at least as effective as the
gasoline that is produced with oxygen and MTBE in it. These
were the three foundation blocks for legislation that both ALA
and NESCAUM have endorsed.
But in the spirit of compromise, the Lung Association and
NESCAUM have also endorsed legislation that included a
renewable fuel standard. We endorsed it in the 106th Congress
as well as in the 107th. The Blue Ribbon Panel recommended
other things, including the reform of the Underground Storage
Tank Program, augmenting EPA's authority to control fuel
additives that cause water pollution. And these elements were
included in a Senate-compromised bill that was passed
overwhelmingly by the Senate last year.
When that bill was being considered and we had been
negotiating with our friends in the oil industry and the
ethanol industry, the ethanol and the oil industry came
together and came up with their list of priorities for
legislation and for the first time introduced a new concept
they said was a necessary element in the legislation, which is
this safe harbor that shields industries from defective product
liability under Federal and State law. This was a new concept
that was introduced late in the negotiations. It is a concept
that both the Lung Association and NESCAUM oppose. We both
opposed it but notwithstanding the fact that the Senate adopted
a liability shield or a safe harbor that applied only to
renewable fuels, NESCAUM endorsed the Senate bill without
reservation. The American Lung Association endorsed the bill
except for that title of the bill, and I will explain why in a
minute.
We think it is very important to get rid of MTBE because,
as Mr. Olson will explain in great detail in his testimony,
there is widespread contamination of groundwater and drinking
water from MTBE. It is estimated that over 18 million people
are served by drinking water contaminated by MTBE. We also
understand that the continued use of MTBE is significantly
eroding the public support for the Reformulated Gasoline
Program, in general, a program that has been shown to actually
work to reduce air pollution. We think there is a broad
consensus throughout the country in support of getting rid of
MTBE all together. In addition, many States have adopted these
boutique fuel requirements specifically instead of adopting the
Reformulated Gasoline Program because of their fear of MTBE
contamination in their groundwater.
During the energy bill conference last year, the House made
an offer on reformulated gasoline even though there was not a
reformulated gasoline title in the House bill. This bill
essentially eliminated major provisions of the Senate-
compromised bill, which the Lung Association, NESCAUM and many
others think is the heart of solving this problem and getting
compromised legislation through the Congress. The House fuels
offer eliminated the ban of MTBE in gasoline. It struck the
language in the Senate bill that required that MTBE be
eliminated from all fuels within 4 years. The House fuel
offers----
Mr. Barton. How much more do you have, Mr. Early? We have
got a vote in 10 minutes, and I want to let Mr. Olson get his
oral testimony. Could you take a minute more and wrap it up?
Mr. Early. Yes. I am sorry, I am taking too long.
Mr. Barton. No, no. Just if you can----
Mr. Early. Well, let me say that the House offer, in our
estimation, for areas suffering from MTBE contamination was the
worst of both worlds, because it failed to--it removed the
provisions of the Senate bill that eliminated MTBE from the
fuel supply and assisted in cleaning up MTBE contamination
while imposing a renewable fuel standard that rose to 5 billion
gallons a year in 2012. It is the worst of both worlds,
particularly for areas in the Northeast. We urge the House to
return to the Senate compromise, which we think is the basis of
a sound compromise, the Senate bill without the safe harbor for
either renewable fuels or MTBE. Thank you, Mr. Chairman.
[The prepared statement of A. Blakeman Early follows:]
Prepared Statement of A. Blakeman Early on Behalf of the American Lung
Association
Mr. Chairman, my name is A. Blakeman Early. I am pleased to appear
today on behalf of the American Lung Association to discuss the use of
MTBE in Reformulated Gasoline (RFG) and conventional gasoline. The
American Lung Association has long been a supporter of the use of RFG
as an important tool that many areas can and should use to reduce
unhealthy levels of ozone. I am also here to share with you the views
of the Northeast States for Coordinated Air Use Management (NESCAUM)
with whom we have worked closely to craft essential changes to the RFG
program.
Clean Fuels Help Reduce Smog
As has been demonstrated in California, ``clean'' gasoline can be
an effective tool in reducing car and truck emissions that contribute
to smog. Based on separate cost effectiveness analyses conducted by
both the U.S. EPA and the State of California, when compared to all
available control options, reformulated gasoline (RFG) is a cost-
effective approach to reducing the pollutants that contribute to
smog.1 Compared to conventional gasoline, RFG has also been
show to reduce toxic air emissions from vehicles by approximately 30
percent.2
---------------------------------------------------------------------------
\1\ U.S. Environmental Protection Agency, Regulatory Impact
Analysis, 59 FR 7716, Docket No. A-92-12, 1993
\2\ Report of the Blue Ribbon Panel on Oxygenates in Gasoline,
September 1999, pp. 28-29
---------------------------------------------------------------------------
Background of RFG Proposed Changes
Both the American Lung Association and the Northeast States for
Coordinated Air Use Management (NESCAUM) were members of the Blue
Ribbon Panel on Oxygenates in Gasoline. Both organizations endorsed the
recommendations of the Panel in a report issued in 1999. And both
organizations engaged in extensive negotiations with the oil industry,
ethanol industry, corn growers and many other stakeholders regarding
needed legislative change to the RFG program. Throughout these
discussions we maintained that three recommendations of the Blue Ribbon
Panel were preeminent and must be included in legislation that modified
the RFG provisions of the Clean Air Act. These were: 1) that MTBE must
be eliminated from all gasoline, not just RFG 2) the mandatory oxygen
requirement for RFG must be eliminated, and 3) ``anti-backsliding''
provisions must be added to the law to ensure that when refiners
produced RFG without oxygen and without MTBE, the resulting fuel
reduced toxic air emissions just as much as currently produced RFG.
Both the American Lung Association and NESCAUM endorsed legislation in
the 106th Congress that contained these critical elements plus a
Renewable Fuel Standard (RFS) designed to compensate the ethanol
industry for its loss of market associated with the elimination of the
oxygen requirement in RFG.
As negotiations continued, a large numbers of stakeholders(except
the MTBE industry) supported the elimination of MTBE over four years,
and anti-backsliding provisions for air toxics. Other elements of the
Blue Ribbon Panel recommendations gained wide acceptance including:
expanding EPA's authority to address MTBE in groundwater under the
Leaking Underground Storage Tank (LUST) program, and augmenting EPA's
authority to test and regulate gasoline constituents based on threats
to public health or the environment from water contamination. But
further progress on compromise legislation was thwarted over a
disagreement between the ethanol industry which wanted an Renewable
Fuel Standard that ``grew'' the industry by increasing over time and
the API which opposed mandatory use of ethanol in volumes above those
needed for octane in RFG and conventional gasoline.
When the energy bill in the Senate gained momentum, the ethanol
industry and the API announced an agreement that introduced a
completely new element to the discussion. While agreeing on a level of
mandatory ethanol use through an RFS that would grow the ethanol
industry, the API and the ethanol industry announced that a necessary
element of any compromise legislation must include a ``safe harbor''
that shielded both industries from defective product liability under
federal or state law for the use of either MTBE or renewable fuels
including ethanol. Both the American Lung Association and NESCAUM
opposed this new concept. Ultimately, the Senate adopted many of the
recommendations of the Blue Ribbon Panel as well as a ``safe harbor''
that applies only to renewable fuels.
In the spirit of compromise NESCAUM endorsed the provisions of the
Senate compromise bill, while the American Lung Association endorsed
the bill language while calling for the removal of the ``safe harbor''
provisions. The attached NESCAUM letter explains well the important
concerns that motivated its support for the compromise.(See Attachment
A)
The American Lung Association Supports the Phase Out of MTBE in All
Gasoline
As a member of the Blue Ribbon Panel on Oxygenates in Gasoline, the
American Lung Association learned of the significant threat that MTBE
poses to the nation's water supplies. Subsequent data collected by the
USGS and presented in Mr. Olson's testimony heightens the concern over
MTBE contamination. It is estimated that over 18 million people are
served by drinking water contaminated by MTBE. (See Attachment B) We
also came to understand that the continued use of MTBE in RFG would
contribute to the undermining of public support for the RFG program.
Based on these two factors, we have supported the Blue Ribbon Panel
recommendation that MTBE be phased out of all gasoline, not just RFG.
We believe there is a broad consensus in support of the MTBE phase out.
Clearly, any discussion of federal fuel changes must start with the
elimination of MTBE. Fourteen states have already banned MTBE and five
more Northeast states may also do so. In addition, EPA found in its
boutique fuels study that the antipathy toward MTBE has lead many
states to adopt ``boutique fuels'' in lieu of federal RFG in order to
avoid high amounts of MTBE dictated by the mandatory oxygen
requirement.33 In short, removing MTBE from our nation's
fuel supply is both a political and environmental imperative that must
accompany any other fuel changes that Congress adopts. We believe the
introduction of MTBE phase out authority in the Senate energy bill,
along with ``anti-backsliding'' and other provisions that would
implement recommendations of the Blue Ribbon Panel represents a unique
opportunity to legislate constructive changes to RFG and conventional
gasoline. These changes should not have unacceptable impacts on the
price of gasoline especially if viewed in the context of maintaining
the status quo.
---------------------------------------------------------------------------
\3\ Study of Boutique Fuels & Issues Relating to Transition from
Winter to Summer Gasoline, Office of Transportation and Air Quality,
U.S. Environmental Protection Agency, October 24, 2001, p. 10.
---------------------------------------------------------------------------
While it is unclear to members of the public and most members of
Congress exactly what happened during the House-Senate conference on
the energy bill, the House made an offer based on the attached text.
(See Appendix A) This offer essentially eliminated major provisions of
the Senate compromise and subsequent discussions were unable to resolve
differences.
The House Fuels Offer Eliminates the Senate Ban of MTBE in Gasoline.
Under the Senate bill, the use of MTBE is to be phased out in no
more than four years. (See Attachment C, p. 22 and Attachment D, p.2)
This language is absent from the House offer. Therefore, the only
potential restrictions on MTBE use in RFG or conventional gasoline
would be through the use of state enacted restriction. However, in many
states these restrictions are being challenged by the MTBE industry and
the courts may ultimately rule that states are preempted by the Clean
Air Act Amendments of 1990 from restricting the use of MTBE.
The continued legal use of MTBE in RFG and conventional fuel
creates a nightmare of uncertainty regarding the future safety of water
supplies and compliance responsibilities for refiners who have limited
ability to prevent contamination of non-MTBE containing fuel by
supplies that legally contain MTBE. This uncertainty will continue to
discourage the use of RFG in areas that are newly designated non-
attainment for smog because of fears of MTBE contamination.
The House Fuels Offer Preempts State Prohibition of MTBE After
Enactment
The House language leaves intact Senate language that preserved
state restrictions on MTBE in effect prior to enactment of these
provisions but preempted state mesure that go into effect subsequent to
enactment. (See Attachment C, p. 25 and Attachment D, p. 4) The
refiners sought this provision to provide a rational, nationwide phase
out of MTBE in fuel in lieu of multiple different state bans. Since the
House offer does not ban MTBE, but does address its use, subsequent
state bans would be preempted.
The House Fuels Offer Eliminates EPA Authority to Regulate Fuel
Additives to Prevent Water Contamination.
EPA does not appear to have the authority under the existing law to
regulated gasoline additives because of their adverse impact on water.
The EPA has been exploring whether it has such authority under the
Toxic Substances Control Act since 2000. To my knowledge, EPA is still
exploring. This lack of authority is at the heart of the current
controversy over MTBE use in fuel. Having removed the ban on MTBE, one
might expect that a minimum response to the current MTBE crisis in the
House offer might be to give EPA the authority to regulate MTBE in
order to prevent water contamination. The House offer contains no such
language. The House language simply strikes subsection 833(c) of the
Senate compromise which contained carefully crafted language endorsed
by the API authorizing EPA regulate fuel additives based on their
capacity to threaten health or the environment via water pollution.(See
Attachment C, p. 22 and Attachment D, p. 2)
The House Offer Shields Refiners From Defective Product Liability
Lawsuits on MTBE Brought After Enactment.
The House language requires equivalent treatment for MTBE as is
provided in the ``safe harbor'' in the Senate bill for renewable fuels.
(See Attachment C, pp. 18-19, p. 24 and Attachment E, pp.6-7) This
language would bar any future lawsuits brought under federal or state
law on the basis of a MTBE being a defective product and refiners
failing to warn consumers of its water contamination hazards. This
prohibition would apply regardless of whether the contamination
occurred prior to the enactment of the RFG provision in the Clean Air
Act Amendments of 1990. The prohibition also applies regardless of
whether the contamination occurred from the presence of MTBE in
conventional gasoline that is not subject to an oxygen requirement and
contains MTBE solely because a refiner chose to add it to the fuel.
To sum up, for many areas suffering from MTBE contamination the
House offer was the worst of both worlds. It eliminated the most
important tools in the Senate compromise bill to stem MTBE
contamination and obtain cleanup assistance from refiners while still
imposing the burden of a Renewable Fuel Standard nation-wide.
Without the Senate Compromise bill, Massive Amounts of Ethanol Must be
Used in California and the Northeast
The Senate compromise bill represents a significant compromise that
the American Lung Association believes provides the best basis for
achieving modifications to RFG which meets the needs of the oil
industry, the ethanol industry, state air regulators, and air quality.
It is a compromise that should be able to be enacted and which clearly
would avoid an impending ``train wreck'' if existing state bans of MTBE
go into effect beginning with Connecticut in October of this year.
In a world where 14 to 19 states individually ban MTBE but oxygen
requirement is maintained in federal RFG, large amounts of ethanol will
be needed. The difference between this scenario and implementing the
Senate compromise is that the ethanol demand is inflexibly centered on
California and the Northeast where ethanol is not currently produced or
used in any significant volumes. According to the API, if MTBE bans in
California and the Northeast take effect with no change to federal RFG
requirements, California would need 843 million gallons of ethanol and
the Northeast would need 713 million gallons.(See Tab 2 and 3) We
believe the cost and price spike impact of such a scenario would be
much more significant than under the Senate compromise. This is because
ethanol must be transported and stored separately from the base
gasoline it is mixed with until it reaches consumer distribution.
Under the Senate compromise, the RFS credit and banking provisions
allow some refiners to use ethanol in the most economically efficient
manner, most likely where it is already made and used. These refiners
can sell RFS credits to those who cannot use ethanol economically. We
expect that octane for RFG used in the Northeast and California will be
met substantially by the use of iso-octane and alkylates. Refiners
supplying these regions would then be obligated to purchase RFS credits
from refiners using ethanol in mid-west markets where it has been
traditionally sold. Such an approach is far more practical than the
``forced'' ethanol use under the status quo scenario.
American Lung Association Opposes A Liability ``Safe Harbor'' for MTBE
Providing a defective product liability shield to MTBE, as provided
in the House offer last year is truly unsupportable. As explained in
detail in Mr. Olson's testimony, refiners and MTBE producers had
extensive knowledge of MTBE's hazards as a contaminant in groundwater.
They also knew that underground storage tanks of gasoline were leaking
literally across the nation. This knowledge was extensive in the mid to
late 80's. Nevertheless, the industry used MTBE extensively before the
RFG program was enacted in 1990 and also failed to inform Congress of
the dangers of adopting a clean fuels program that they knew would
vastly increase MTBE use. Given the complicity of the industry in the
creation of the MTBE contamination problem, we see absolutely no
justification for the removal a legal tool that should be available to
MTBE contamination victims to help address the clean up of widespread
MTBE contamination.
The American Lung Association Opposes a Liability ``Safe Harbor'' for
Renewable Fuels
One frustrating aspect of this debate is that, essentially, history
is repeating itself. Refiners chose to use MTBE in gasoline in part to
replace tetra-ethyl lead in gasoline after Congress banned it. You may
recall that as a result of the lead refiners placed in gasoline and
paint manufacturers placed in paint, 88 percent of children aged one to
five had blood lead levels above the threshold believed to have the
potential to impair cognitive development in the late 1970's. It took
ten years to get lead out of gasoline. Hopefully Congress can get rid
of MTBE in gasoline more quickly. The Congress must not adopt the
``safe harbor'' provisions that were adopted in the Senate compromise
that reduce the incentives to avoid renewable fuel additives to
gasoline that replicate in any way the problems of lead or MTBE.
Unfortunately, Section 819(e) of the Senate compromise bill provides
that no renewable fuel can be deemed to be defective in design or
manufacture ``by virtue of the fact that it is, or contains such a
renewable fuel''. The liability shield in this provision reduces the
incentive renewable fuel producers and purveyors have to be vigilant
and provide a safe renewable fuel product. Therefore, the provision
increases the likelihood of another MTBE situation developing rather
than decreasing it. Indeed, we fear that the provision could be
expanded to shield ETBE from defective product liability. ETBE is a
cousin to MTBE containing ethanol instead of methanol. According to the
Blue Ribbon Panel it exhibits many of the same water contamination
characteristics.4 Clearly this product, and others in the
same family of ``ethers'' as MTBE should not receive any sort of
liability shield. More importantly, neither should other renewable
fuels that may be used in the future, some of which may not have yet
been invented.
---------------------------------------------------------------------------
\4\ Report of the Blue Ribbon Panel on Oxygenates, September 1999,
p. 86, 88.
---------------------------------------------------------------------------
Since the oil refining industry is insisting on the ``safe harbor''
a question is clearly raised. What do they know about the dangers of
renewable fuels that we do not? Are there dangers that they know about,
as they did with MTBE in the 1980's that they are not telling Congress
as it contemplates mandating the use of renewable fuels? Why does the
ethanol industry support the ``safe harbor'' for renewable fuels? Are
there adverse consequences from ethanol use that they know about that
prompt their support for the ``safe harbor''?
Congress Must Adopt Needed Fuel Changes As soon As Possible
The Congress has been deadlocked over legislation to eliminate MTBE
and improve federal requirements for RFG and conventional gasoline for
years. With the exception of the liability safe harbor, the provisions
in the Senate compromise bill adopted last year represent a compromise
that addresses widely varying concerns in a reasonable fashion. We urge
you to grasp this opportunity and support this compromise.
Mr. Barton. Thank you. We are going to hear now from Mr.
Olson, and then we are going to recess. We have got two votes
on the floor. When we come back, we will hear from Mr. Dinneen
and Mr. Segal and then we will have questions. So, Mr. Olson,
if you could try to summarize in approximately 5 minutes your
testimony.
STATEMENT OF ERIK D. OLSON
Mr. Olson. I will definitely do my best and try to beat
that. Thank you for inviting me to testify this afternoon. I am
here on behalf of NRDC as well as the Environmental Working
Group. We would endorse what Mr. Early just suggested, that
both NESCAUM and ALA urged, which is basically that the Blue
Ribbon Panel's recommendations, the three foundation
recommendations, that there be a phase-out of MTBE, an
elimination of the 2 percent oxygen requirement and anti-
backsliding provision to maintain air quality benefits.
Two other important components of any legislation are that
there should be no waiver or preemption of liability or
responsibility, no safe harbor provision, in other words, and
also that there be authority to regulate fuel additives or
fuels based on water quality impacts. The air quality benefits
of the reformulated gas provisions have been clear, but there
are also clear downside water quality problems that I go into
in detail in the testimony, including some new U.S. Geological
Survey data.
The data are showing that in the neighborhood of 3 to 5
percent of the source waters in the United States contain MTBE,
which is a shocking number if you realize how short MTBE has
been widely in our fuel supplies. It also shows that in high
MTBE use areas as much as 14 to 15 percent of the water
supplies are contaminated with MTBE. While much of that is
below the EPA advisory level, which is based on foul taste and
smell, there are also cancer and other possible concerns with
MTBE. We have provided a map that is on page 9 of our testimony
which shows the widespread nature of MTBE contamination across
the country essentially in all States where intensive
monitoring has been done.
In addition, we highlight what the industry knew and when
they knew it about MTBE. Interestingly, the industry--some
members of the industry used to call MTBE, ``Most Things
Biodegrade Easier,'' or, ``Major Threat to Better Earnings.''
What is going on is that the industry has known for some time,
certainly before the 1990 Clean Air Act amendments, that MTBE
was highly soluble, is highly persistent and hard to
biodegrade, is coming out of leaking tanks it was widely being
found outside of leaking tanks and spills prior to the 1990
Clean Air Act amendments, and that the contamination was
already spreading at that point. In jury in 2002, just last
year in California, looked at this evidence and literally tens
of thousands of pages of internal industry documents, some of
which I have attached to my testimony, that show that industry,
according to the jury, acted, ``with malice,'' in failing to
warn and in failing to act on the MTBE problem before they did.
We are concerned that other additives waiting in the wings,
such as ETBE, TAME and DIPE, all ethers that are all highly
soluble, as is discussed in the testimony, will be the next
MTBE if they come into widespread use. Therefore, we urge
strongly that there be no safe harbor preemption of State law
or Federal law and no waiver of liability for MTBE or for other
fuels or fuel additives. We believe that it is necessary to
create the incentives to carefully handle and to use and
manufacture these fuels and fuel additives in a way that is
responsible, as between the companies that are manufacturing
the fuel that fully know what the properties are and consumers
or water utilities. It is clear that the industry ought to be
responsible for the contamination problems.
Finally, briefly in my testimony I highlight another issue
that is likely to come up in this committee, in this
legislation, which is the injection of MTBE and diesel and
other contaminants through hydraulic fracturing in some areas.
We strongly opposed any rollback in EPA's authority, which was
recently decided by a Court of Appeals decision to be under the
Safe Drinking Water Act and the National Drinking Water
Advisory Council has actually urge that EPA can maintain its
authority contrary to some of the legislation that was being
considered last year. So I have beaten my 5-minute timeframe,
and I will be happy to answer questions.
[The prepared statement of Erik D. Olson follows:]
Prepared Statement of Erik D. Olson, Senior Attorney, Natural Resources
Defense Council on Behalf of NRDC and The Environmental Working Group
INTRODUCTION
Good Morning Mr. Chairman and Members of the Subcommittee, I am
Erik D. Olson, a Senior Attorney at the Natural Resources Defense
Council (NRDC), a national non-profit organization with over 500,000
members dedicated to the protection of public health and the
environment. I also serve as chair of the Campaign for Safe and
Affordable Drinking Water, an alliance of over 300 public health,
medical, consumer, environmental, and other organizations seeking to
assure safe drinking water at a reasonable price to all Americans,
though today I do not appear on behalf of the Campaign. Part 1 of this
testimony focuses primarily on MTBE. Part 2 briefly notes another
important water issue likely to be addressed in the energy legislation,
the use of hydraulic fracturing in oil and gas activities, which may
harm water supplies. Part 3 highlights what the oil industry knew about
MTBE problems, and when they knew about them, and was written by the
Environmental Working Group, which authored the report summarized in
that section, and joins in this testimony.
We appreciate the opportunity to testify today. We have found it
difficult, however, to testify on legislation whose full text we have
not seen. In this testimony, with respect to certain issues we are
essentially ``reading the tea leaves'' from last year's introduced and
passed bills, the House offer to the Senate conferees, and frankly we
are guessing as to what the House energy bill may say. We therefore
respectfully request that we be provided an opportunity to testify
again when the bill has been introduced.
PART 1. MTBE: WATER QUALITY CONCERNS, AND THE NEED FOR FEDERAL
LEGISLATION
Why MTBE?
Because of serious air pollution triggering smog alerts in many
``non-attainment'' areas around the nation, EPA began investigating
changes in fuel supplies that could result in air quality improvements.
For many years EPA was investigating the possible widespread use of
methanol (a chemical cousin of ethanol) as a fuel. The petroleum
industry, on the other hand, had another idea: reformulated gasoline
that was produced from a byproduct fraction of petroleum cracking that
for years had little market, called methyl tert-butyl ether (MTBE).
MTBE could be used as an ``oxygenate,'' elements of the petroleum
industry argued, and would reduce carbon monoxide emissions and ozone
levels in the atmosphere, leading to air quality benefits.
1990 Clean Air Act Amendments
In enacting the Clean Air Act Amendments (CAA) of 1990, Congress
required the use of oxygenates in gas, in order to improve air quality.
The use of oxygenates makes gas burn cleaner. The oxygenate requirement
also was enacted in part because Congress hoped to give a big boost to
the ethanol industry, which can use distilled ``biomass'' to make this
alcohol. Instead of switching mostly to ethanol, the petroleum industry
chose to use MTBE as the oxygenate of choice. MTBE use skyrocketed (see
figure 1). By 1998, MTBE became ``the second most-produced organic
chemical in the U.S.,'' with about 10 million gallons used per day.
1
EPA Blue Ribbon Panel on MTBE
EPA's Blue Ribbon Panel on MTBE concluded that the Reformulated
Gasoline Program (RFG) established in the Clean Air Act Amendments of
1990 ``has provided substantial reductions in the emissions of a number
of air pollutants from motor vehicles . . .'' The reductions were
greater, in fact, than legally required. The panel also noted that
``there is disagreement about the precise role of oxygenates [such as
MTBE] in attaining the RFG air quality benefits,'' though oxygenated
fuels did, the panel concluded, probably reduce emissions. But in large
because of the water quality problems caused by MTBE, the panel
recommended:
``Action . . . to reduce the use of MTBE substantially (with
some members supporting its complete phase-out), and action by
Congress to clarify federal and state authority to regulate
and/or eliminate the use of gasoline additives that threaten
drinking water supplies;
``Action by Congress to remove the current 2 percent oxygen
requirement to ensure that adequate fuel supplies can be
blended in a cost-effective manner while quickly reducing usage
of MTBE; and
``Action by EPA to ensure that there is no loss of current air
quality benefits.''
Serious Concerns about Water Quality
While MTBE may have contributed to improved air quality in some
communities, the bad news is that MTBE is extremely soluble in water,
far more soluble than hydrocarbon components such as benzene, toluene,
and xylene (see Figure 2).
Industry Knew Long Before 1990 CAA Amendments MTBE Was a Problem
As discussed at length in Part 3 in this testimony, internal oil
industry documents that were only released in litigation show that the
oil industry well aware of MTBE's water-contaminating properties before
the 1990 Clean Air Act Amendments. These documents also show that the
industry was aware that spills or leaks containing MTBE spread very
fast, and were extremely difficult and expensive to clean up. Indeed,
by 1981, a Shell scientist wrote an internal report on an MTBE
contamination problem and the difficulties of cleanup. The joke inside
Shell was that MTBE really stood for ``Most Things Biodegrade Easier;''
later, other versions of the joke circulated, including ``Menace
Threatening Our Bountiful Environment,'' or ``Major Threat to Better
Earnings.'' (Attachment 5)
These and many other facts, documents, and testimony were
considered by the jury that found that there was ``clear and convincing
evidence'' in the South Tahoe case that Shell Oil and Lyondell Chemical
Company (ARCO chemical Company) acted ``with malice'' in selling
gasoline containing MTBE both because it was ``defective in design''
because the risks of harm outweighed its benefits, and because of their
failure to disclose the threats posed by MTBE.2 Several
other oil company defendants opted to settle the case before these
findings were rendered.
Other MTBE Chemical Cousins May Also Present Problems
Other ethers being considered as gasoline additives, such as ethyl-
tert-butyl ether (ETBE), tert-amyl methyl ether (TAME), and di-isoproyl
ether (DIPE) also are extremely soluble, like MTBE. (Figure 2). The
high solubility of MTBE has lead to widespread contamination of
groundwater and surface waters across the nation.
Widespread MTBE Contamination of Water
According to estimates from U.S. Geological Survey (USGS) experts,
there may be 250,000 leaking underground storage tank (LUST) releases
of MTBE.3 Pipeline releases, gas spills, and other sources
also contaminate groundwater and surface water with MTBE. USGS
estimates that about 35% of community water system wells are located
within 1 km of a LUST (9000 wells).4 USGS data indicates
that about 3% of groundwater wells in the U.S. contain MTBE, and about
5% of surface waters contain MTBE (FIGURE 3).5 Testing also
indicates that MTBE is often found in tap water--about 9% of water
supplies tested.6 According to USGS testing, about 15% of
drinking water in the Northeast contained MTBE.7 Most is
found at relatively low levels; about 1% exceed the low end of EPA's
advisory level (20 ppb), with1% over the low end of EPA's advisory
level.8
Health Concerns With MTBE
MTBE contamination of drinking water poses health concerns, but as
is usually true with chemical contaminants, there remains some
uncertainty as to how serious these risks are. EPA has found that MTBE
may be a carcinogen, but has not reached a final verdict on the issue.
There have been reports of acute human-health effects of MTBE such as
nausea, dizziness, and headaches by people exposed to MTBE-containing
fuel vapors in air, though some argue that these symptoms have not been
clearly linked to MTBE exposure.9 The human-health effects
of long-term inhalation or oral exposures to MTBE are
unknown.10 However, there is some evidence of possible
reproductive and developmental effects.11
There are no published studies evaluating MTBE and cancer in
humans, but MTBE has been shown to cause cancer in rats and mice
exposed by inhalation or orally.12 Federal agency reports
indicate that MTBE should be regarded as posing a potential cancer risk
to people based on animal cancer data.13 Although EPA has
concluded that ``MTBE poses a potential for human carcinogenicity at
high doses'' based on animal data, EPA says that these animal data ``do
not support confident, quantitative estimation of risk at low
exposure'' 14 EPA has based its Drinking Water Advisory upon
taste and odor thresholds (20 to 40 g/L) in humans, and has
not yet established any enforceable health standard for
MTBE.15 Consumer rejection due to taste and odor of MTBE
often has been a factor in water utility decisions to stop using or to
treat water sources contaminated with MTBE.
State Actions Banning or Restricting MTBE
In response to widespread concerns about MTBE contamination, at
least 17 States have adopted bans or serious restrictions on MTBE
usage, and two have required intensive studies of MTBE contamination
(Attachment 1).
Need for federal Legislation
There is an urgent need for federal legislation that would:
Ban MTBE, while maintaining air quality. Congress needs to
step in and enact a clear MTBE ban, but should accompany this
with a requirement that air quality benefits of reformulated
gas not be reduced. While there have been huge pollution
reductions in smog and cancer-causing air toxics from the
switch to reformulated gasoline, Congress can no longer ignore
the harm being done by gasoline and MTBE leaking into drinking
water supplies. Oil refiners have the ability to produce
gasoline that achieves just as much air pollution reduction
without oxygenates such as MTBE, but the law currently mandates
their use. Congress should act immediately to repeal the
mandate. It makes no sense to have a patchwork approach to this
problem with 15 to 20 states banning MTBE; if Congress doesn't
act and state bans go into effect, this could create needless
confusion and burdens for consumers.
Prohibit oil companies from producing a fuel that is less
effective at reducing smog and toxic air pollutants than the
RFG sold today when they remove oxygenates. We do not need to
take a step backward in combating air pollution in order to
protect groundwater.
Eliminate the 2% oxygen mandate. We agree with numerous state
officials, health groups, and API that Congress must lift the
oxygenate requirement (and ban MTBE) while maintaining air
quality benefits.
Give EPA clear authority to regulate fuel additives based upon
air and water quality impacts (the Senate energy bill last
Congress would embody this authority; the House counter-offer
last year did not).
No ethanol mandate. The legislation should set standards for
gasoline performance, rather than mandate a particular solution
to the problem.
Encourage use of clean, renewable biofuels made from biomass,
which reduces global warming while improving air quality and
reducing water risks. This should not be styled to effectively
mandate ethanol use, however.
No Waiver or Preemption of State or Other Liability for Fuel
Contamination
Our most overwhelming concern is that the legislation should not
include any waiver or preemption of state or other liability for
renewable fuels or MTBE. Introduced legislation (Rep. Peterson's H.R.
837 and Sen. Daschle's S. 385) include a so-called ``safe harbor''
provision that would preempt state law and effectively remove tools
available to states and municipalities to remedy tap water
contamination problems from fuel containing ``renewable fuels.'' The
provision would block lawsuits alleging that gasoline is a defective in
design or manufacture because it contains such renewable fuels. A
similar Senate measure last year was answered by a House conferees'
offer that would have expanded this waiver of liability and preemption
to MTBE.
Such a waiver of liability and preemption of State law is an
unacceptable overreach that will hurt the public, local governments,
the environment, and will encourage irresponsible corporate behavior.
As the South Tahoe jury found after an extensive trial and review of an
enormous number of industry documents and witnesses, many in the oil
industry knew of the risks of MTBE, and irresponsibly failed to act or
to warn the public or their customers.
Well before Congress enacted the 1990 CAA, the oil industry was
aware of the risks posed by MTBE to water supplies, of the difficulty
of cleaning up spills and leaks, of the persistence of MTBE, and of the
fact that many oil storage tanks were leaking. Elements of the oil
industry knew of problems a long time ago, and according to the
California jury, acted ``with malice'' in failing to disclose these
risks. (Attachment 4). As between this highly culpable oil industry
that knew about the problem, failed to remedy it, and profited from the
sale of their defective product, and the public water supplies that had
nothing to do with creating the problem, and would have to bill their
customers to remedy it, who should pay for the cleanup? Clearly, the
oil industry should not be let off the hook for this liability. Why
deny an important tool to local government and water utilities to
address this important drinking water quality and potential health
problem?
A liability waiver and preemption also would create unacceptable
incentives for manufacturers to introduce defective products. What will
be the next MTBE? TAME? DIPE? ETBE? Why do the renewable fuels
manufacturers need such liability protection? Do they know of problems
with their products that they are not telling Congress or us about,
much like the oil industry was not very forthcoming about the problems
with MTBE before it came into such widespread use?
The petroleum industry is clearly in best position to know about
and to take action to avoid another MTBE. Industry must have the
incentive to minimize the impacts of new fuel additives or new fuels.
Last year, there was a strong alliance behind a sensible solution
to the MTBE and oxygenate problem, which included API. The liability
waiver and preemption was added after that deal was cut, and is a deal
breaker. We oppose the safe harbor provision in the bill offered by
Senator Daschle (S. 385) and others this year in the Senate, and we
would oppose any legislation that contains the provision as part of the
energy bill.
PART 2 THE NEED TO REGULATE HYDRAULIC FRACTURING TO PROTECT UNDERGROUND
SOURCES OF DRINKING WATER
There is another threat to drinking water and ground water by
chemicals also used in gasoline and diesel fuel that is worthy of
discussion and protective action by Congress. Hydraulic fracturing is a
well development process that is designed to increase the yield of
natural gas from underground rock formations, including coal. Fluid is
injected down a well and into a rock formation at very high pressure in
order to break up the rock formation and enable more gas to flow toward
the well after all the groundwater has been removed.
Hydraulic fracturing fluid commonly contains many toxic chemicals
that pose a significant threat to underground sources of drinking
water. The carcinogen benzene, and MTBE, diesel fuel, and many other
chemicals are known to be used in hydraulic fracturing fluids. It is
well known that very small volumes of potent chemicals like benzene and
MTBE can contaminate millions of liters of ground water. In recent
years, that has been painfully obvious as MTBE contaminated ground
water and surface water across the country. Just 28 tablespoons of MTBE
could contaminate millions of liters of ground water at concentrations
that would render it unusable.16 It is important to note
that the large number of coal bed methane wells planned in the US are
of particular concern because their depths are relatively shallow and
10 of the 11 coal basins in the US are likely to lie, at least in part
within existing underground sources of drinking water.17
A draft report by EPA reveals that many of the estimated
concentrations of chemicals used in hydraulic fracturing fluids at the
edge of the fracturing zone exceed the drinking water maximum
contaminant levels (MCL)--even with an estimated dilution effect of
30.18 The EPA report reveals that the estimated
concentration of the carcinogen benzene is twice the drinking water
MCL. The estimated concentrations of other chemicals exceed their MCLs
by much greater factors--431 times the MCL in the case of
methanol.19
There are a very limited number of empirical scientific studies
that have evaluated the behavior of these chemicals in the subsurface
and their effects on groundwater quality. The toxic chemicals used in
fracturing fluid can be continuous sources of ground water
contamination since, as the EPA report reveals, as much as 39-75% of
fracturing fluids remain in the ground.20
After briefing some staff from this committee last September, it
was discovered that EPA's calculations for estimated subsurface
concentrations of chemicals of concern were based on values that were
not consistent with data in their report that resulted in estimated
concentrations 10 times lower.21 22 A January
2003 article in Environmental Science & Technology includes the
suggestion by a USGS hydrologist that EPA's dilution factor of 30 is
not justified and that even if ``only 20-30% of the fracturing fluids
remain in the formation and the fluids include diesel fuel, the aquifer
would be destroyed because the diesel will remain as a contaminant for
generations.'' 23
The near-impossibility of cleaning up underground sources of
drinking water once they have become contaminated is precisely why
Congress acted with precaution to protect existing and future sources
of drinking water in the Underground Injection Control provisions of
the Safe Drinking Water Act. Preventing widespread contamination of
drinking water is far less expensive than attempting to clean it up
later.
EPA's Congressionally-chartered National Drinking Water Advisory
Council, comprised of representatives of the water industry, state and
local governments, public health experts, consumers, environmental
groups, and others, unanimously adopted a resolution December 12, 2002
urging the Administrator ``to work through voluntary and/or regulatory
means as appropriate in order to eliminate the use of diesel fuel and
related additives in fracturing fluids that are emplaced in geologic
formations containing sources of drinking water.'' (Attachment 2).
Furthermore, the National Drinking Water Advisory Council urged the
Administrator ``to defend as necessary the US EPA's existing authority
and discretion to implement the Underground Injection Control Program
in a manner that advances the protection of our ground water resources
from contamination.'' Support for oversight of state Underground
Injection Control programs by EPA is growing in many states as they
face serious budget shortages.24
We are very concerned about Section 2201 of the legislation filed
by Congressman Barton that addresses hydraulic fracturing. EPA should
not finalize its report entitled ``Evaluation of Impacts to Underground
Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane
Reservoirs'' until meaningful field investigation has been accomplished
that includes collection and analysis of groundwater samples and
installation of monitoring wells. In addition, EPA must retain its
authority to oversee state regulation of hydraulic fracturing through
the Underground Injection Control program to prevent contamination of
underground sources of drinking water--consistent with Congress'
intentional precautionary action via the Safe Drinking Water Act.
PART 3: MTBE: WHAT THE OIL COMPANIES KNEW AND WHEN THEY KNEW IT
Internal Industry Documents Are Rewriting The MTBE Pollution Story
In 2002, the Environmental Working Group released a report
summarizing a series of internal oil industry documents that highlight
the true story about MTBE. That report, available in full at
www.ewg.org, is excerpted in this section of the testimony (web links
to electronic versions of the industry documents cited in this
testimony are included for readers of the electronic version of the
testimony; copies of some of the key documents are attached to the hard
copy version of the testimony).
Congress is considering legislation to strictly limit oil company
liability for contaminating groundwater in at least 35 states with
MTBE. The industry says it's only fair to shield MTBE makers from
lawsuits, since, they claim, it was the government that mandated oil
companies to reformulate gas with MTBE in the first place, to clean the
air.
But a different story has emerged from internal industry documents
and depositions, made public in recent successful lawsuits brought by
cities and Communities for a Better Environment that want oil companies
to pay to clean up water made undrinkable and unhealthy by MTBE. The
documents, provided to EWG by CBE's lawyers Scott Summy and Celeste
Evangelisti, show that the oil industry itself lobbied hard for the
MTBE mandate because they made the additive and stood to profit. A top
ARCO executive admitted under oath, ``The EPA did not initiate
reformulated gasoline . . .'' He clarified that ``the oil industry . .
. brought this [MTBE] forward as an alternative to what the EPA had
initially proposed.'' (Attachment 3)
By 1986, the oil industry was adding 54,000 barrels of MTBE to
gasoline each day. By 1991, one year before the EPA requirements went
into effect, the industry was using more than 100,000 barrels of MTBE
per day in reformulated gasoline. Yet secret oil company studies,
conducted at least as early as 1980, showed the industry knew that MTBE
contaminated ground water in numerous locations where it was used.
Oil companies are pressing Congress for liability protection
because hundreds of communities have serious MTBE contamination
problems, and company documents are coming back to haunt them in the
courtroom. In April 2002, the documents convinced a California jury to
find Shell, Texaco, Tosco, Lyondell Chemical (ARCO Chemical), and
Equilon Enterprises liable for selling a defective product (gasoline
with MTBE) while failing to warn of its pollution hazard, forcing a $60
million settlement with the water district for South Tahoe. (Attachment
4)
``The Government Made Us Do It''
As noted earlier in this testimony, MTBE is an ``oxygenate'' that
makes gasoline burn cleaner and more efficiently. Unfortunately, it is
also a foul-tasting, nasty-smelling, potential carcinogen that spreads
rapidly when gasoline escapes from leaky underground storage tanks,
contaminating sources of groundwater and drinking water from New York
to California. Once in soil or water, MTBE breaks down very slowly
while it accelerates the spread of other contaminants in gasoline, such
as benzene, a known carcinogen.
Some communities, including Santa Monica and South Lake Tahoe,
Calif., face tens or hundreds of millions of dollars in costs of
cleaning up MTBE or replacing contaminated water supplies. At least 17
states already have passed measures to ban or significantly limit the
use of MTBE in gasoline; two more have required intensive studies. We
believe that a federal ban is more a question of when than if.
Pressure is building to follow the lead of many states and ban MTBE
nationally by the year 2006. Members of Congress from corn-producing
states support the phase out in part because ethanol made from corn is
the primary MTBE substitute. Other members sympathetic to oil industry
concerns, in turn, are demanding that any ban on MTBE shield its makers
from product-defect liability. The proposal apparently would not
preclude suits against parties responsible for allowing MTBE to leak
from storage tanks, but would provide immunity from suits claiming that
MTBE itself was a defective product--precisely the charge that won a
$60 million settlement for the South Tahoe Water District this year.
The jury in that case found five oil and chemical companies liable for
selling a defective product--MTBE ``while failing to warn of its
pollution risks. (Attachment 4)
The MTBE Papers
The paper trail, dating at least to 1980, tells a different story:
How the oil companies took a byproduct fraction of gasoline refining
that had little profitable use and created a profitable market.
Beginning in the mid-1980s, well in advance of the 1992 federal mandate
to reformulate gasoline to meet the standards of the Clean Air Act,
elements of the petrochemical industry promoted MTBE to U.S. and state
regulators as the additive of choice.
Thousands of pages of internal documents and sworn depositions from
the producers at Shell, Exxon, Mobil, ARCO, Chevron, Unocal, Texaco and
Tosco (now Valero) have come to light through a lawsuit by Communities
for a Better Environment, a California public interest group. Many of
the same documents were used in a suit by the South Lake Tahoe Water
District against four oil companies and Lyondell Chemical Co. of
Houston (ARCO Chemical Company), the nation's largest MTBE producer. In
the CBE suit, several of the companies settled by agreeing to clean up
MTBE spills at more than 1,300 California gas stations; the others
continue to contest the case.
In 2002, a jury in the Tahoe case found Lyondell, Shell, Texaco,
Equilon, and Tosco guilty of irresponsibly manufacturing and
distributing a product they knew would contaminate water. In addition,
the jury found by ``clear and convincing evidence'' that both Shell Oil
Company and Lyondell Chemical Company acted with ``malice'' by failing
to warn customers of the almost certain environmental dangers of MTBE
water contamination. (Attachment 4)
In an interview with The Sacramento Bee, the jury foreman said he
found the MTBE papers, which demonstrated the industry's early
knowledge that MTBE would threaten water supplies ``among the most
compelling evidence he recorded in 635 pages of handwritten notes.''
The foreman stated that ``[t]here were lessons to be learned, but
(Shell) didn't (learn them) because it saw money to be made in selling
the product.'' After the jury verdict establishing liability, but
before the jury could assess monetary damages, the companies settled
the case for $60 million.
Oil Companies Knew MTBE Was a Threat to Water Supplies
Even though MTBE was not classified as a potential cause of cancer
in humans until 1995, refiners knew much earlier that its powerfully
foul taste and smell meant that small concentrations could render water
undrinkable, and that once it got into water supplies it was all but
impossible to clean up. A Shell hydrogeologist testified in the South
Lake Tahoe case that he first dealt with an MTBE spill in 1980 in
Rockaway, N.J., where seven MTBE plumes were leaking from underground
storage tanks. By 1981, when the Shell scientist wrote an internal
report on the Rockaway plumes, the joke inside Shell was that MTBE
really stood for ``Most Things Biodegrade Easier.'' Later, other
versions of the joke circulated, including ``Menace Threatening Our
Bountiful Environment,'' or apropos to the present attempt to limit
liability, ``Major Threat to Better Earnings.'' (Attachment 5)
In 1983, Shell was one of at least nine companies surveyed by a
task force of the American Petroleum Institute on ``the environmental
fate and health effects'' of MTBE and other oxygenates. Shell's
Environmental Affairs department replied to the trade association: ``In
our spill situation the MTBE was detectable (by drinking) in 7 to 15
parts per billion so even if it were not a factor to health, it still
had to be removed to below the detectable amount in order to use the
water.'' (emphasis added). The survey, the results of which were later
distributed to all API members, asked for information about the number
and extent of spills, chemical analysis of the spill and the
contaminated water, and health effects to people in the community.
Clearly, Shell was not the only company that knew about MTBE
problems. An environmental engineer for ExxonMobil (the companies
merged in 1999) testified that he learned of MTBE contamination from
Exxon gasoline in 1980, when a tank leak in Jacksonville, Maryland,
fouled wells for a planned subdivision. The ExxonMobil engineer said it
was learned MTBE had also leaked into the subdivision's wells from a
Gulf and an Amoco station.
Storage Tanks Were Known to be Leaking in the 1970s and 1980s
Refiners also knew that underground gasoline storage tanks were
susceptible to leaks, a fact that would amplify the problem with MTBE.
In 1973, an Exxon report on the problem said: ``The subject of
underground leaks at service stations is one of growing concern to
gasoline marketers. Large sums of money, time, and effort are exhausted
on a continuing basis in the location and detection of leaking tanks
and lines.''
In 1981, an ARCO memo said leaking tanks were ``a major problem . .
. The issue is essentially a health/safety and environmental one.
Escaping vapors can seep into basements, sewers and conduits, creating
not only a nuisance but the danger of explosion and/or fire. Escaping
gasoline also enters and pollutes the water table. (Groundwater is a
major source of the U.S. water supply.) Certain chemicals in gasoline
(namely the aromatics like benzene) may be carcinogenic or toxic in
certain quantities.''
By 1980, Exxon had an annual testing program for tanks and found
that 27 percent were leaking; two years later the failure rate was up
to 38 percent. In 1981, Shell and ARCO, the first refiners to add MTBE,
estimated that 20 percent of all U.S. underground storage tanks were
leaking. Five years later, in 1986, the EPA concurred. Prior knowledge
of the extent of leaking gasoline storage tanks was a major part of
South Lake Tahoe's case: Fully aware that tanks were leaking, the
petrochemical industry nonetheless introduced an additive known to
rapidly percolate down to groundwater from gasoline distribution
systems with known leaks. Efforts were ongoing to upgrade storage tank
systems, but when industry learned quickly that the new tanks were
still leaking, it continued to expand the use of MTBE anyway.
The Industry, not the EPA, Promoted MTBE as an Oxygenate
Recently disclosed court documents clearly show that the oil
companies, not state or federal regulators, were the boosters of MTBE.
The industry developed and promoted the concept of using reformulated
gasoline to reduce air emissions, assuring the EPA that reformulated
gasoline would be better than other options being considered. ARCO
Chemical Co.'s Manager of Business Development from 1987 to 1998
testified: ``What I recall is the EPA actually promoting using methanol
blends . . . and the refining industry said here's another option . . .
we can reformulate gasoline to reduce the emissions . . . that would be
equal to or better than you would get by substituting or mandating the
use of methanol vehicles . . . [T]he oil industry . . . brought this
forward as an alternative to what the EPA had initially proposed.'' He
continued, ``The EPA did not initiate reformulated gasoline.''
(Attachment 3)
Well before EPA mandated reformulated gasoline in 1992, the oil
industry was aggressively promoting MTBE. According to the American
Petroleum Institute, refiners were adding an average of 74,000 barrels
of MTBE to gasoline per day from 1986 through 1991, roughly one third
of the peak amount added to gasoline in 1998.
In 1987, a representative of ARCO Chemical (later absorbed by
Lyondell), which was rapidly expanding its MTBE production, testified
before the Colorado Air Quality Control Commission that the additive
would reduce emissions and improve gas mileage, that supply and price
were no barrier, and that consumers didn't need to be warned about the
presence of MTBE in gasoline. Nothing was said about the leak and
contamination problems that ARCO and the rest of the industry had known
about for at least seven years. ARCO's representative testified that in
the 1980s he played a similar role in ``assisting'' the states of
Arizona and Nevada in the development of oxygenate programs--programs
that resulted in those states adopting MTBE.
The Industry Attacked Safety Studies and Withheld Information From
Regulators
In 1986, the Maine Department of Environmental Protection published
a report documenting extensive MTBE groundwater contamination in the
state. The authors identified MTBE as a ``rapidly spreading groundwater
contaminant'' and discussed the option that ``MTBE could be abandoned
as an additive in gasoline stored underground'' or that gas with MTBE
``be stored only in double-contained facilities.'' The Maine Paper was
perhaps the earliest warning from government health officials about the
dangers of MTBE. To the oil companies, it was a call to arms. Documents
show that even as they were internally disseminating this study and
treating its findings seriously, the oil companies joined forces to
attack the study's authors and the article's ``damage'' in an effort to
discredit their findings and downplay the risks of MTBE.
The industry disinformation effort began even before publication of
the paper. A 1987 ARCO memo details the continued attack on the authors
and their research:
``We initially became involved with the Maine DEP prior to the
presentation of their first version of this paper at the
National Well Water Conference on November 13, 1986 . . . Since
the paper was presented last November, we have been working
with API, the newly formed MTBE Committee [of the Oxygenated
Fuels Association], and on our view to assess the potential
impact of this paper on state policymakers [and] to contain the
potential `damage' from this paper . . .''
The memo goes on to explain how the Maine Petroleum Council, the
state affiliate of the API, was preparing a paper claiming that MTBE
didn't speed up the spread of benzene in water, that MTBE ``only
spreads slightly further'' than benzene and other contaminants, and
that MTBE could be easily removed from water with existing technology--
none of which is true. Internally, however, the industry admitted the
Maine paper was a scientifically credible threat. A 1987 letter from an
ARCO refining executive to his Unocal counterpart admits the MTBE task
force didn't ``have any data to refute comments made in the paper that
MTBE may spread further in a plume or may be more difficult to remove/
clean up than other gasoline constituents.''
In 1987, at the same time that ARCO and API were leading the attack
on the Maine Paper, EPA issued a request to the industry for ``more
information on the presence and persistence of MTBE in groundwater.''
As reported in 2001 by the San Francisco Chronicle and The Sacramento
Bee, ARCO responded: ``Where gasoline containing MTBE is stored at
refineries, terminals or service stations, there is little information
on MTBE in groundwater. We feel that there are no unique handling
problems when gasoline containing MTBE is compared to hydrocarbon-only
gasoline.''
Internal Memos Warning Against MTBE Were Ignored
There were voices within the industry that warned against the use
of MTBE, on grounds both of public health and cleanup costs from the
inevitable leaks. A document dated April 3, 1984 from an Exxon employee
said:
``[W]e have ethical and environmental concerns that are not too
well defined at this point; e.g., (1) possible leakage of
[storage] tanks into underground water systems of a gasoline
component that is soluble in water to a much greater extent
[than other chemicals], (2) potential necessity of treating
water bottoms as a ``hazardous waste,'' [and] (3) delivery of a
fuel to our customers that potentially provides poorer fuel
economy . . . (Emphasis added.)
That same year, an Exxon engineer wrote the first in a series of
memos outlining ``reasons MTBE could add to ground water incident costs
and adverse public exposure:''
``Based on higher mobility and taste/odor characteristics of
MTBE, Exxon's experiences with contaminations in Maryland and
our knowledge of Shell's experience with MTBE contamination
incidents, the number of well contamination incidents is
estimated to increase three times following the widespread
introduction of MTBE into Exxon gasoline . . .'' Later, the
document notes: ``Any increase in potential groundwater
contamination will also increase risk exposure to major
incidents.''
An Exxon memo from 1985 discusses MTBE's ``much higher aqueous
solubility'' than benzene and other gasoline components:
``This can be a factor in instances where underground storage
tanks develop a leak which ultimately may find its way to the
underground aquifer. When these compounds dissolve in ground
water and migrate through the soil matrix they separate into
distinct plumes. MTBE creates the most mobile of the common
gasoline plumes. MTBE is not a known carcinogen like Benzene
however we can be required by public health agencies to remove
it based on its taste and odor characteristics.''
Thus, it is clear that the oil industry was not only well aware of
the fact the MTBE is extremely soluble, mobile, and persistent, but
that leaks could and had seriously contaminated water sources, well
before the Clean Air Act Amendments of 1990.
[Additional material submitted is retained in subcommittee files.]
ENDNOTES
1 Personal Communication with John Zogorski, USGS, March
11, 2003; Johnson, Pankow, Bender, Price, and Zogorski, USGS, ``MTBE:
To What Extent Will Past Releases Contaminate Community Water Supply
Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
2 South Tahoe Public Utility District v. ARCO, No.
999128 (Superior Court, S.F., March 4, 2002), SPECIAL VERDICT PHASE 1
(Attachment 4).
3 Johnson, Pankow, Bender, Price, and Zogorski, USGS,
``MTBE: To What Extent Will Past Releases Contaminate Community Water
Supply Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
4 Ibid.
5 Personal Communication with John Zogorski, USGS, March
11, 2003
6 Ibid.
7 Ibid.
8 Ibid.
9 Toccalino, P., ``Human Health Effects of MTBE: A
Literature Summary,'' USGS, available on the web at http://
sd.water.usgs.gov/nawqa/vocns/mtbe--hh--summary.html; citing inter alia
Agency for Toxic Substances and Disease Registry, 1996, Toxicological
profile for methyl t-butyl ether (MTBE): Atlanta, GA, U.S. Department
of Health and Human Services, Public Health Service, August 1996, 268
p., http://atsdr1.atsdr.cdc.gov/toxprofiles/tp91.html; Health Effects
Institute, 1996, The potential health effects of oxygenates added to
gasoline. A review of the current literature. A special report of the
Institute's oxygenates evaluation committee: Cambridge, MA, Health
Effects Institute, April 1996, http://www.healtheffects.org/Pubs/
oxysum.htm; National Institute of Environmental Health Sciences, 2002,
MTBE (in gasoline): National Institute of Environmental Health
Sciences, March 13, 2002, http://www.niehs.nih.gov/external/faq/
gas.htm; National Research Council, 1996, Toxicological and performance
aspects of oxygenated motor vehicle fuels: Washington, D.C., National
Academy Press, 160 p.; National Science and Technology Council, 1996,
Interagency assessment of potential health risks associated with
oxygenated gasoline: Washington, DC, National Science and Technology
Council, Committee on Environment and Natural Resources, February 1996,
http://www.ostp.gov/NSTC/html/MTBE/mtbe-top.html; Office of Science and
Technology Policy, 1997, Interagency assessment of oxygenated fuels:
Washington, DC, Office of Science and Technology Policy, National
Science and Technology Council, Executive Office of the President of
the United States, June 1997, 264 p., www.epa.gov/oms/regs/fuels/
ostpfin.pdf .
10 Toccalino, supra; citing inter alia National
Institute of Environmental Health Sciences, 2002, MTBE (in gasoline):
National Institute of Environmental Health Sciences, March 13, 2002,
http://www.niehs.nih.gov/external/faq/gas.htm; U. S. Environmental
Protection Agency, 1995, Proceedings of the conference on MTBE and
other oxygenates: a research update. Conference summary session seven:
Research Triangle Park, NC, U.S. Environmental Protection Agency,
National Center for Environmental Assessment, EPA/600/R-95/134, August
1995, 274 p., www.epa.gov/ncea/pdfs/mtbe/0850-A.pdf; National Research
Council, 1996, Toxicological and performance aspects of oxygenated
motor vehicle fuels: Washington, D.C., National Academy Press, 160 p.;
National Science and Technology Council, 1996, Interagency assessment
of potential health risks associated with oxygenated gasoline:
Washington, DC, National Science and Technology Council, Committee on
Environment and Natural Resources, February 1996, http://www.ostp.gov/
NSTC/html/MTBE/mtbe-top.html' Office of Science and Technology Policy,
1997, Interagency assessment of oxygenated fuels: Washington, DC,
Office of Science and Technology Policy, National Science and
Technology Council, Executive Office of the President of the United
States, June 1997, 264 p., http://www.epa.gov/oms/regs/fuels/
ostpfin.pdf.
11 Hartley, W.R., A.J. Englande, Jr., and D.J.
Harrington. 1999. ``Health risk assessment of groundwater contaminated
with methyl tertiary butyl ether.'' Water Science & Technology 39, no.
11: 305-310.
12 Toccalino, supra; Health Effects Institute, 1996, The
potential health effects of oxygenates added to gasoline. A review of
the current literature. A special report of the Institute's oxygenates
evaluation committee: Cambridge, MA, Health Effects Institute, April
1996, http://www.healtheffects.org/Pubs/oxysum.htm; National Institute
of Environmental Health Sciences, 2002, MTBE (in gasoline): National
Institute of Environmental Health Sciences, March 13, 2002, http://
www.niehs.nih.gov/external/faq/gas.htm;
13 Toccalino, supra citing inter alia; National Science
and Technology Council, 1996, Interagency assessment of potential
health risks associated with oxygenated gasoline: Washington, DC,
National Science and Technology Council, Committee on Environment and
Natural Resources, February 1996, http://www.ostp.gov/NSTC/html/MTBE/
mtbe-top.html; Office of Science and Technology Policy, 1997,
Interagency assessment of oxygenated fuels: Washington, DC, Office of
Science and Technology Policy, National Science and Technology Council,
Executive Office of the President of the United States, June 1997, 264
p., http://www.epa.gov/oms/regs/fuels/ostpfin.pdf; U. S. Environmental
Protection Agency, 1997, Drinking water advisory: Consumer
acceptability advice and health effects analysis on methyl tertiary-
butyl ether (MTBE): Washington, DC, U. S. Environmental Protection
Agency, Office of Water, EPA-822-F-97-009, December 1997, 48 p., http:/
/www.epa.gov/waterscience/drinking/mtbe.pdf.; California Department of
Health Services, 2001, Proposed Regulations, California Code of
Regulations, Title 22, Chapter 15, Section 64468.2. health effects
language--volatile organic chemicals: Sacramento, CA, California
Department of Health Services, R-16-01, April 12, 2001, 26 p., http://
www.dhs.
cahwnet.gov/ps/ddwem/publications/Regulations/R-16-01-RegTxt.pdf.
14 U.S. Environmental Protection Agency, 1997, Drinking
water advisory: Consumer acceptability advice and health effects
analysis on methyl tertiary-butyl ether (MTBE): Washington, DC, U. S.
Environmental Protection Agency, Office of Water, EPA-822-F-97-009,
December 1997, 48 p., http://www.epa.gov/waterscience/drinking/mtbe.pdf
15 Ibid.
16 Johnson, R., et al., ``MTBE: To What Extent Will Past
Releases Contaminate Community Water Supply Wells?'', Environ. Sci.
Technol. 2000, 34 (9), 210 A-217.
17 US EPA, 2002, Evaluation of Impacts to Underground
Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane
Reservoirs, p. ES-11, 5-14, and 7-2.
18 Ibid., p. 4-4.
19 Ibid., p. 4-4.
20 Ibid., p. 3-10.
21 Gurney, S., 2002, Comments submitted by the Natural
Resources Defense Council about US EPA draft report Evaluation of
Impacts to Underground Sources of Drinking Water by Hydraulic
Fracturing of Coalbed Methane Reservoirs., US EPA Water Docket ID No.
W-01-09-11
22 First letter to EPA Administrator Christine Todd
Whitman from Congressman Henry Waxman, October 1, 2002. Available at
http://www.house.gov/waxman/news--letters.htm.
23 ``Does Hydraulic Fracturing Harm Groundwater?,''
Environ. Sci. Technol. 2003, 37 (1), 11A-12A.
24 News from the Ground Water Protection Council found
at http://www.gwpc.org/News-2003/states-weigh.htm .
Mr. Barton. We thank you. We are going to recess. We will
reconvene at approximately between 3:20 and 3:25 to hear our
last two witnesses and then take questions. So we are in recess
for approximately 20 minutes.
[Brief recess.]
STATEMENT OF SCOTT H. SEGAL
Mr. Segal. continuing] of the MCL for MTBE. This committee
itself has recently considered material improvements in the
Underground Storage Tank Program, and OFA looks forward to
working with you on such legislation. Frankly, UST
implementation, enforcement and recently introduced legislation
are the most direct and appropriate ways to deal with instances
of gasoline components and water.
Further, we urge the subcommittee to support appropriate
liability protection for clean fuel additives. First, it is
important to recognize that MTBE usage in RFG derives from
compliance in a Federal mandate. Tom Daschle, the author of the
floor amendment that established the 2 percent oxygen standard,
stated during debate, ``MTBE and ETBE are expected to be major
components of any clean octane program.'' Under certain forms
of the then debated oxygenate mandate, Senator Daschle went as
far as to note that EPA predicts that the amendment will be met
almost exclusively by MTBE, a methanol derivative.
I want to take a word for a little bit of what we have seen
in the NRDC comments, in particular. Siting documents from a
lawsuit supported in part by MTBE competitors, Mr. Olson
implies that the Federal Government had no knowledge of
potential MTBE characteristics in water prior to the regulatory
developments associated with the 2 percent standard. In 1986,
the EPA stated in the Federal Register that MTBE may indeed
persist for long periods, that it was not likely to be readily
biodegraded or otherwise transformed in groundwater. This is
the precise observation that Mr. Olson thinks was new and
different in 1998, but EPA was well aware of it 13 years
earlier. In addition, we would be willing to submit, and in
fact we intend to submit, a memorandum on this issue for the
record.
Mr. Olson does not give the full context of the documents
he sites. For example, he leaves out the actual methodological
assessment of the main Department of Environmental Protection.
The next line from the document cited states, ``The authors,
Garrett, et. al., don't represent the views of the Department
of Environmental Protection Policymakers. Given MTBE's low
toxicity, DEP doesn't consider MTBE to be especially
hazardous.'' The main report that is cited also publicly thanks
the ARCO Chemical Company for its assistance in providing
documents related to the characteristics of MTBE, voluntarily
given to Garrett and his co-authors.
In addition, the contention is made that MTBE producers
have the temerity to lobby on behalf of their product, but most
participants opposed bans on MTBE. In fact, the record will
show that in 1997 the California Air Resources Board, a State
agency, convened a meeting with oil industry interests and NRDC
to pool resources to defeat a ban on MTBE. Mr. Chairman, I have
a copy of a Los Angeles Times article to this effect, which
makes very interesting reading, and I would be happy to submit
it for the record. After that meeting, an NRDC senior attorney
that attended was interviewed. She said, ``This is a unique
situation. It is the first time the oil industry saw their
interests as coinciding with the NRDC's.'' The LA Times even
referred to NRDC as, ``part of the oil industry's coalition.''
Last, we are highly suspect of the conclusions that have been
reached here. Because of allegations that have been discussed,
somehow this has been transformed into an argument that we
ought to maintain full products liability. First, no one has
suggested relief for negligent theories of liability. If a
defendant has negligently mishandled gasoline containing MTBE,
tort relief would still be available even under your
construction of last year. In fact, the California attorney
general, along with other local counsels, has obtained millions
of dollars in relief by simply undertaking underground storage
tank enforcement actions well outside of the tort system all
together. And as the Council of Economic Advisors found only
last year, only 20 cents on the dollar is returned in actual
damages in the tort system. Surely we can come up with
something better than 20 cents on the dollar.
I see my time has expired, so I just want to say that on a
going-forward basis we have big problems. We will continue to
have problems with fuel price and supply and with clean air.
One thing we can do is to adopt responsible liability
protections. The other thing we can do is to make sure that any
difficulties associated with splash-blended ethanol are
addressed by allowing us to incorporate ethanol into other
ethers, for example, ETBE. And, in fact, the Lyondell Chemical
Company, I understand, has a statement they have prepared for
the record that I would like to submit.
Mr. Barton. Without objection.
Mr. Segal. Thank you very much for the time and we look
forward to working with you on the legislation.
[The prepared statement of Scott H. Segal follows:]
Prepared Statement of Scott H. Segal, Counsel, Oxygenated Fuels
Association
Chairman Barton, Congressman Boucher and Members of the
Subcommittee, thank you for this opportunity to testify regarding
comprehensive national energy policy as it relates to national motor
fuels policy and the Clean Air Act. My name is Scott Segal, and I am a
partner at the law firm of Bracewell & Patterson. In that capacity, I
have represented clients here in Washington on environmental policy
matters for thirteen years. Today, I am here in my capacity as counsel
to the Oxygenated Fuels Association. In addition, I serve on the
adjunct faculty of the University of Maryland (University College) in
the area of Science and Technology Management.
Founded in 1983, the Oxygenated Fuels Association (OFA) is an
international trade association established to advance the use of
oxygenated fuel additives to improve the combustion performance of
gasoline, thereby significantly reducing automotive tailpipe pollution.
As the leading voice of the industry, OFA gathers, develops and
analyzes technical information on the blending, performance, handling,
health benefits and environmental properties of oxygenates used in
gasoline. OFA works with federal, state and local governments, national
health organizations, environmental groups and major allied industries,
such as automotive manufacturers, oil companies, and gasoline marketers
and other interested parties. OFA sponsors numerous technical analyses
and health science studies showing the automotive performance and
health benefits of oxygenated fuels.
1. GENERAL CONSIDERATIONS FOR U.S. MOTOR FUELS POLICY
Mr. Chairman, the decision to examine the impact of energy policy
on U.S. motor fuels issues could not be more timely. As today's hearing
is underway, disturbing trends are emerging regarding the security,
supply and price of motor fuels. Despite the fact that the spring
driving season is not yet upon us, gasoline prices at the pump are
already elevated. While much of the blame for gas prices rests squarely
on crude oil prices stimulated by current international uncertainties
in the Middle East and Venezuela, other self-imposed policy decisions
are also playing a role.
Last week, one analyst at the Oil Price Information Service
described current prices this way, ``It's Ash Wednesday, and we're
going to be asked to give up disposable income for Lent.'' The analyst
noted that ``high fuel prices rob consumers of money to pay for
computers, cars, home improvements and other economy-boosting goods and
services.'' (``No Stopping Gas Prices,'' USA Today, March 5, 2003,
citing Tom Kloza). The article in which he was cited went on to assess
complicating factors. And one of these was:
Conversion to ethanol instead of potential pollutant MTBE as an
ingredient in summer-season gas. The change is cumbersome, and
states such as California rely on distant states for corn-based
ethanol. ``Not a lot of folks can help them out if they get
into trouble'' with ethanol supplies, says Joanne Shore, senior
analyst at DOE's Energy Information Administration. (Id.)
In particular, problems in California are complicated by conversion
from MTBE to ethanol fuels. The noted oil analyst Trilby Lundberg put
the California situation in a national context, stating in part that,
``The increase of just over a nickel in the U.S. average is nearly
entirely due to California refineries switching over to corn-based
additives . . . Some refineries are changing over to a more expensive
blend of gasoline and ethanol, which temporarily cut the state's
gasoline supply by 10 percent.'' (Gas Prices Up to Near-Record Level,
Associated Press, March 10, 2003). Californians familiar with the
State's energy situation question whether moving away from MTBE makes
sense right now, particularly in light of the international situation.
The Daily Bulletin of California's Inland Valley reported:
Rising prices now are not due to a true shortage . . . but
simply to uncertainty. ``We've been living the good life for 22
years. We've had some of the cheapest gas in the world,'' said
Bob van der Valk, bulk fuels manager for Cosby Oil in Santa Fe
Springs. Market factors like the major oil companies' decision
to start blending their summer gas a different way are playing
a role as well, van der Valk said. Gas blended for summer usage
has always required more refining than the winter variety, he
said. But starting Monday, the major companies will mix their
summer gas with ethanol additives instead of MTBE (methyl
tertiary butyl-ether) for the first time--an added cost, and
complication, at a time when a potential war in Iraq throws the
reliability of Middle Eastern crude oil into question. ``The
last Persian Gulf War when hostilities broke out, we had an
interruption in crude oil supply, and there was an instant
spike in the price of gas on the street 25 to 30 cents. That
hasn't even happened,'' van der Valk said. ``That time we
didn't have the MTBE-to-ethanol switch. Last time it was just
strictly crude oil.'' (``Gas prices keep pumping up: No end in
sight as a gallon climbs to $1.97,'' March 3, 2003).
A consensus of studies confirms the price-supply impact of
switching from MTBE to ethanol. Noted petroleum economist Phil Verleger
puts it this way: removal of MTBE from the California market could push
the retail price of gasoline to levels previously unseen across the
United States. Research on price elasticity of gasoline--confirmed in
over 300 studies--means that high prices in California will pull
gasoline from the rest of the country, leaving everyone short of
supply. Verleger is a principal at PKVerleger LLC and BP Senior Fellow
at the Council on Foreign Relations.
As OFA has noted many times, the impact of MTBE on the national
motor fuels pool is extraordinarily significant. Today, many of
America's drivers use cleaner-burning gasoline designed to cost-
effectively reduce harmful motor fuel emissions and improve the air we
breathe. Introduced in 1995, Reformulated Gasoline (RFG) is used today
in the most polluted urban areas in 17 states and the District of
Columbia. RFG usage accounts for about 34 percent of the total U.S.
gasoline market (i.e., 2.5 million barrels/day or 100 million gallons/
day).
While the undeniable environmental benefits of RFG will be
discussed later in this statement, I want to keep our eyes on the
impact of MTBE volumes on fuel supply. DOE Under Secretary Bob Card
testified before the U.S. Senate in 2001 that,
MTBE's contribution to gasoline supplies nationally is
equivalent to about 400,000 barrels a day of gasoline
production capacity or the gasoline output of four to five
large refineries. Additionally, a loss of ability to use MTBE
may also affect the ability of the US gasoline market to draw
gasoline supplies from Europe, the major source of our price-
sensitive gasoline imports, since those refiners widely use
MTBE, albeit typically at lower concentrations than in the U.S.
(Statement before the Senate Energy and Natural Resources
Committee, June 21, 2001).
Not only do policies designed to hasten MTBE's exit from the
marketplace, therefore, complicate the existing picture for gasoline
price and supply; they also undermine our clear and present needs for
national security. It is no secret that as these hearings are
occurring, hundreds of thousands of U.S. men and women are being
mobilized in the Middle East. What few recognize is that a robust
supply of motor fuels is an essential prerequisite for a safe and
effective mobilization. The National Defense Council Foundation (NDCF)
noted that five different Presidents--Eisenhower, Kennedy, Nixon, Ford
and Carter--recognized that maintaining a healthy refining sector was
essential to national security. (National Defense Council Foundation,
The Growing Refining Gap, A Threat to National Security vi--Apr. 29,
1994).
As mobilization continues, one would be hard pressed to think of a
worse time to remove ten percent of the capacity of motors fuels
capacity in the nation's most populous cities. The amount of refined
products required to supply a modern military far exceeds the amount
required in the past. For example, during the peak of Operation Desert
Storm, the half million U.S. military personnel involved consumed more
than 450,000 barrels of light refined products per day, nearly four
times the amount used in World War II by the two million strong Allied
Expeditionary Force that liberated Europe.
While ethanol currently has a significant and growing share of the
fuel pool, some have suggested that mandating its further use could
answer price and supply questions. We believe that an ethanol mandate
does not provide an acceptable answer to U.S. energy security needs,
given ethanol's heavy dependence on fossil fuel inputs and its net
negative energy yield. Data from the Argonne National Laboratory, for
example, proves the point that an ethanol mandate ``is more likely to
increasenot reduceforeign oil imports, fossil energy use, and global
greenhouse gas emissions.'' (as cited in Sierra Club Statement Before
the Senate Committee on Environment and Public Works, at Cong. Rec.,
Aug. 3, 1994, at S10472). David Pimental of Cornell University further
noted that, ``Numerous studies have concluded that ethanol production
does not enhance energy security, is not a renewable energy source, is
not an economical fuel, and does not insure clean air. Further its
production uses land suitable for crop production and causes
environmental degradation.'' (The Limits of Biomass Utilization, August
16, 2001 at 9).
2. THE ROLE OF RFG IN ENVIRONMENTAL PROTECTION
By every measure, clean-burning RFG blended with MTBE has exceeded
all pollution reduction goals and substantially and cost-effectively
improved the nation's air quality. RFG has cut smog-forming pollutant
emissions by over 17 percent, the equivalent of removing 64,000 tons of
harmful pollution from the air we breathe or taking 10 million vehicles
off our roads. RFG has reduced emissions of benzene, a known human
carcinogen, by some 43 percent, while reducing total toxic air
emissions by about 22 percent. Cleaner-burning MTBE accounts for a
large part of the overall emission reductions from RFG. In 1998, the
Northeast States for Coordinated Air Use Management found that RFG with
MTBE substantially reduced ``the relative cancer risk associated with
gasoline vapors and automobile exhaust compared to conventional
gasoline,'' concluding that today's RFG reduces cancer risk by 20
percent over conventional gasoline. More recently, the California Bay
Area Air Quality Management District (BAAQMD) concluded that a
substantial reduction in cancer risk in the region is directly
attributable to MTBE.
OFA has consistently taken the position that an essential
prerequisite for substantive revision of the Clean Air Act is that the
actual reductions in air emissions that result from use of oxygenated
RFG be preserved in any subsequent formulation of fuel.
3. ISSUES RELATED TO WATER QUALITY
Opponents of the continued use of MTBE point to allegations
regarding MTBE in certain water sources. Is this fair commentary? The
answer is--no--providing gasoline is properly contained and accidental
spills and leaks promptly cleaned up. In 1996, MTBE was discovered at
low levels in groundwater sources in California. MTBE has also been
detected at low concentrations in other parts of the country. MTBE has
since received an inordinate amount of attention from US public
officials who have attempted to ban MTBE in their jurisdictions.
Initially, the US problem resulted almost entirely from a serious
lapse in the regulation of underground gasoline storage tanks (UGSTs),
which resulted in thousands of leaking UGSTs by the late 1980's. So
widespread was the problem that the EPA established a program in 1988,
the Leaking Underground Storage Tank (LUST) Trust Fund, to provide
financial assistance to close down or bring these tanks up to
standards. Yet by 1999, over ten years later, only 80% of leaking tanks
had been closed down or repaired. By 1999, EPA also estimated that
almost 400,000 releases from regulated USTs had been identified. In
spite of these sobering statistics, however, US public debate has
focused only on MTBE detected at some of these leak sites, and not on
larger problems associated with gasoline.
Claims have been made that MTBE is more water-soluble than other
gasoline components. What has been completely overlooked, or ignored is
that MTBE can only be introduced into the environment mixed with much
larger quantities of the gasoline in which it is blended, usually
through gasoline leaks or spills. The much larger problem in fact, is
that where you find MTBE, which is not toxic or hazardous to health and
the environment, you also find gasoline, containing compounds that are.
More information on toxicity is attached as an addendum to this
statement.
This Committee itself has recently considered material improvements
in the UST program, and OFA looks forward to working with you on such
legislation. Frankly, UST implementation, enforcement and recently-
introduced legislation are the most direct and appropriate ways to deal
with instances of gasoline components appearing in water.
Objective analysis points to MTBE having become a convenient
scapegoat as the one entity to which blame for a collective failure to
protect US groundwater resources can be conveniently transferred. An
Australian fuels expert recently characterized this phenomenon as
``shooting the messenger'', a reference to the fact that some
countries, such as Canada, actually use MTBE detections in water as an
``early warning'' of potentially significant gasoline leaks into the
ground that need to be cleaned up as quickly as possible.
Citizens in the Americas are well aware that gasoline and water do
not mix. Many countries around the world have safely and securely used
MTBE extensively as an octane enhancer since the early 1970's, and
ethanol enriched gasoline--another water soluble, but toxic oxygenate--
since the 1980's. Where strict compliance with and strong enforcement
of gasoline storage and handling regulations is observed, MTBE and
other water-soluble additives have a statistically insignificant
likelihood of ever contaminating water supplies.
4. PRODUCT BANS SET DANGEROUS PRECEDENTS
Mr. Chairman, it is our understanding that you do not support
product bans, as a general rule, and that the case for a ban of MTBE is
unacceptably weak. Yet there are some who would urge the adoption of a
ban as a matter of political expediency. We urge the Subcommittee in
the strongest terms not to ban MTBE.
While Congress has acted to ban certain toxic chemicals, it has
never done so without an extensive scientific record of confirmed risks
and, in some cases, with an opportunity for the appropriate
administrative agency to revisit the prohibition based on additional
factual information. Congress has enacted only one statutory
prohibition on a toxic chemical, a ban on PCBs in the Toxic Substances
Control Act, enacted in 1976. Even this prohibition allowed EPA to
permit the use of PCBs where it could be shown that there was no
unreasonable risk. Furthermore, while EPA has taken regulatory action
before to take chemicals out of commerce or limit their use, such as
asbestos, lead, and a few major pesticides, EPA only exercised its
authority after substantial scientific analysis and an opportunity for
public review and comment. None of the product bans thus far proposed
allows EPA to make additional findings concerning the actual risk to
human health nor allows EPA to exercise its regulatory expertise to
provide for exceptions or changes based on changed circumstances. In
fact, the data cited in the addendum below disproves toxicity claims.
In this respect, a ban of MTBE is both arbitrary and unprecedented.
A ban of MTBE is also objectionable because of the typically short
phase-in periods for such actions (some to be implemented in four years
or less). In o1ther parts of the Clean Air Act, Congress has taken
action to prohibit the sale of certain chemicals or change the design
of certain products, but never according to such an abrupt schedule. In
Title VI of the 1990 Clean Air Act Amendments, for example, Congress
mandated a phase out of Class I chlorofluorocarbons (CFCs) over a ten-
year period, and a phase out of Class II CFCs over a 30-year period.
Likewise, in Title IV of the 1990 Clean Air Act Amendments, Congress
ordered a reduction in emissions of sulfur dioxide over a ten-year
period. Title II of the 1990 Clean Air Act Amendments provides for a
tightening of standards for automobile emissions that extends in a two-
step process over eleven years. Indeed, the investments required to
make the Clean Air Act RFG work were substantial enough to warrant a
five-year planning and implementation period alone.
Restrictions on MTBE not only harm MTBE manufacturers, but they
also set a dangerous precedent that could inhibit the success of
federally mandated environmental programs in the future. To encourage
the development of environmentally protective products and processes in
the future, Congress must ensure that the rules for participating in
markets are clear and fair, and that the participant has a reasonable
expectation to earn a return on an investment. Proposed bans on MTBE in
four years or less send a disquieting message that Congress can
arbitrarily change the rules at any time, with potentially ruinous
consequences for those who have taken risks and made good faith
investments.
5. LIABILITY ISSUES
Mr. Chairman, as you know, instances of alleged contamination of
water sources by gasoline containing MTBE have recently been the source
of a number of lawsuits. These suits are now ongoing, and I am not in a
position to comment on any particular lawsuit or settlement
discussions. However, I would like to address some of the underlying
issues relevant to public policy on litigation.
By way of review, I would note that last year's Senate energy
proposal contained a safe-harbor provision applicable only to ethanol
fuels. That provision stood for the proposition that because the
government would be mandating renewable fuels, no plaintiff's attorney
should be able to sustain the legal argument that merely complying with
the law--that is, making gasoline that satisfies the requirement--could
be the basis for strict products liability. If the government tells you
to make a particular fuel, it makes little sense to regard such a
product as ``unreasonably dangerous.'' If the purpose of products
liability is to deter unwanted behavior, such liability cannot do so
when the government mandates the product.
When the House entered into conference discussions with the Senate
last year, House negotiators correctly realized that the same argument,
as a matter of law, fairness and policy, was clearly applicable to MTBE
and other ethers.
First, it is important to recognize that MTBE usage in RFG derives
from compliance with a federal mandate--the requirement that RFG
contain two percent (by weight) oxygen in order to achieve the goals of
the Act to clean the air. An honest assessment of the conditions
surrounding the adoption of the two-percent oxygen standard leaves
little doubt but that Congress intended substantial use of MTBE. For
example, Senator Tom Daschle, the author of the floor amendment that
established the two-percent standard, stated during debate, ``The
ethers, especially MTBE and ETBE, are expected to be major components
of meeting a clean octane program.'' (Clean Air Act Amendments of 1989,
Cong. Rec., March 29, 1990 at S3511). Under certain forms of an
oxygenate mandate, Senator Daschle went as far as to note that, ``EPA
predicts that the amendment will be met almost exclusively by MTBE , a
methanol derivative.'' (RFG: Whose Recipe Is It Anyway, and Will It
Work?, Cong. Rec., May 16, 1990 at S6383).
Senator Daschle recognized what we all know: there are substantial
benefits to using MTBE as far as environmental protection is concerned.
In the floor debate on the two percent standard, Senator Daschle cited
evidence that, ``NOx, hydrocarbons, and carbon monoxide are
dramatically reduced by adding the oxygenate MTBE to gasoline.'' (Id.).
Even opponents of MTBE concede that the federal mandate lies at the
heart of MTBE use. California Governor Gray Davis wrote to EPA, ``The
only reason such MTBE-free gasoline is not being made available today
is U.S. EPA's enforcement of the 2.0 percent oxygen requirements.''
(Letter from Hon. Gray Davis, Governor of the State of California, to
Hon. Carol M. Browner, Administrator of U.S. EPA, April 12, 1999).
Some argue that because the text of Clean Air Act is silent as to
which oxygenate should be used, that somehow there was no intention to
use MTBE. However, the overwhelming consensus of those supporting the
two-percent standard was that the provision was intended to be
satisfied in a cost-effective manner that would not cause unacceptable
price and supply disruptions. Given the dynamics of ethanol price and
supply, it is inconceivable that the two-percent standard was intended
to be a de facto ethanol mandate. In fact, farm-state proponents of the
two-percent standard vigorously denied such an intention throughout the
debates on the standard.
Given that the action of the Congress clearly underscored the
requirement for MTBE use, it makes little sense to allow for the
propagation of a legal theory that complying with Congress' wishes is
sufficient for products liability. Of course, if gasoline containing
MTBE is negligently spilled, liability may still be an issue. Last
year's debate on liability did not extend to negligence theories, and
every MTBE case thus filed contains in whole or in part such negligence
theories. The safe harbor provision in question here is narrowly
tailored and does not interfere with the ability of plaintiffs to
obtain relief for truly negligent behavior that results in diminished
value of resources.
There are many examples of the Congress adopting such narrowly-
tailored provisions dealing with liability in specific contexts. We
have included a short list of such examples as an addendum to this
statement. Perhaps the closest fact-pattern deals with a flame
retardant, TRIS. The Federal Government required its use in children's
sleepwear, only to learn that the retardant was carcinogenic, whereupon
it was banned. The Federal Government not only limited liability, but
it set up a settlement fund to deal with claims made by companies that
manufactured TRIS.
Some have argued that imposition of strict product liability is a
prerequisite for appropriate remedial actions. We respectfully
disagree. First, negligence theories more than suffice to address
remedial questions. Second, the use and improvement of the UST program,
as discussed above, provides a far fairer and efficient mechanism to
address the problems of alleged contamination. Third, one can hardly
think of a less efficient mechanism for addressing water quality
concerns than imposition of inflexible strict liability theories. A
recent report from the Council of Economic Advisors found that using
the tort system in this way ``is extremely inefficient, returning only
20 cents of the tort cost dollar for that purpose.'' (Council of
Economic Advisors, Who Pays for Tort Liability Claims? An Economic
Analysis of the U.S. Tort Liability System, April 2002, at 9). Surely
we can construct a policy that addresses UST leaks such that greater
than 20 cents out of every dollar spent goes to actual clean up!
6. A LOOK TO THE FUTURE
The problems of tightness in supply and refining capacity are
likely to be with us for the time being. The need to maximize energy
security will continue as well. As new fuel choices present themselves,
we should adopt public policies that do their best to minimize external
costs associated with new fuels and fuel additives. We must maintain a
robust and competitive market in fuel additives, and not allow one
particular approach to dominate.
One thing we can do is adopt responsible liability protections when
fuel choices are or have been mandated. Failure to do so undermines the
introduction of new fuel additives that will be essential for a
competitive marketplace. The Council of Economic Advisors is clear on
this point: ``At higher levels of expected liability costs, however,
firms will choose to forgo innovation or to withhold a product from
market, resulting in a net negative effect of expected liability costs
on innovation.'' (Id. at 6). Given the current dynamics of the fuel
market, we can ill afford less alternatives.
Another approach to consider is support for transition assistance
for additive manufacturers. In the event that policies are adopted that
make continued use of MTBE less likely, Congress should make clear that
it will make adequate resources available on a timely basis to
transition current additive manufacturers to new and different products
capable of meeting America's energy needs.
If Congress should choose to adopt some form of ethanol mandate,
then policies must be put in place that facilitate such mandates on the
most acceptable terms. For example, mere splash blending of ethanol is
likely to prove to be unacceptable on a number of fronts. The
volatility of splash-blended ethanol will cause unacceptable
environmental and performance complications, particularly in certain
regions of the country not currently using the product. In addition,
ethanol's requirement for segregated pipeline transportation poses high
hurdles to efficient movement and allocation of product to distant
markets. As both coasts are enforced to embrace ethanol, this problem
will only get worse.
One way to address the problems with splash-blended ethanol is to
incorporate ethanol into an ether, ETBE. An ether with less affinity
for water than MTBE, ETBE addresses both the volatility and pipeline
transportation issues. However, in order to facilitate greater ETBE
use, ETBE must be placed on equal-footing with splash-blended ethanol.
This means that ETBE must be treated fairly in tax and regulatory
contexts. For more information, please see a separate statement
submitted for the record in this hearing by the Lyondell Chemical
Company.
Mr. Chairman, Congressman Boucher, and other Members of the
Subcommittee, thank you for your careful attention to these matters.
OFA and its members look forward to working with you on a fair and
effective national fuels policy--one that protects consumers, human
health and the environment.
Mr. Barton. Appreciate your testimony. We are going to now
begin our questions. We are going to recognize Mr. Boucher of
Virginia for 5 minutes.
Mr. Boucher. Well, thank you, Mr. Chairman, and thanks to
all the witnesses for informing us about the matter of ethanol
use today. We are the wiser by virtue of your presentations. I
just have two basic questions, and I am going to be brief about
both of these.
Here is the first question, here is the thesis, that it
actually takes more energy to produce ethanol than the energy
value of the petroleum that is saved when ethanol is consumed,
and that most of the energy that is used in ethanol production
actually comes from petroleum in growing and processing corn.
And so by using ethanol we actually have a net petroleum loss.
That is the thesis. I would like to hear from those who would
either support it or would like to rebut it. And who wants to
go first?
Mr. Dinneen. Congressman, if you don't mind, I think I will
jump into this first, and I would ask maybe to submit for the
record the most recent comprehensive study conducted by the
Department of Energy's Argonne National Lab, which looked at
all of the energy balance studies that have been done over the
past 10 and 15 years and concluded that without question
ethanol has a positive energy balance.
Mr. Barton. Without objection.
Mr. Dinneen. The ethanol industry is growing significantly,
as I indicated in my statement. Every new ethanol plant is
using the most efficient technologies today, so we are just
growing more and more energy efficient. There are a few studies
that have been out there for quite some time that my good
friend to my left likes to cite all the time from one professor
at Cornell University who uses a number of outdated inputs. The
United States Department of Agriculture has looked at his
data----
Mr. Boucher. Now, these are the studies that can conclude
that there is some sort of net deficit.
Mr. Dinneen. That is correct.
Mr. Boucher. Yes. Okay.
Mr. Dinneen. But USDA has looked at his studies as well and
found them to be extremely lacking, and I would like to submit
USDA's analysis of the Cornell papers as well.
Mr. Boucher. Okay. We will be happy to look at that.
Anybody else want to comment on this subject? Yes, Mr.
Slaughter?
Mr. Slaughter. Mr. Boucher, I think there is a law of
physics that says for every ethanol study there is an equal and
opposite study. It has been true now for about 20 years
whatever study comes out there is a counter study with exactly
the opposite finding that hits the streets quite shortly. I
have watched that go back and forth for a number of years. I
think the only answer you can take away from it is that there
is negligible impact either way. It is either negligibly minus
or it is negligibly plus, but I think the operative word is,
``negligibly.''
Mr. Boucher. All right. Other comment on that question?
Mr. Murphy. Mr. Boucher?
Mr. Boucher. Mr. Murphy.
Mr. Murphy. Yes, Mr. Boucher. We think that the renewable
fuels standard, a renewable fuels standard, would serve to
reduce imports. We don't make the case that it would
dramatically reduce imports. And, of course, one thing to keep
in mind is this is not an ethanol mandate, this is a renewable
fuels mandate. And some of what is going to into that are
things like biodiesel and things that we don't even understand
and appreciate at this time. And that is why it is so important
that we have the EPA approve any additive that is used under
this before it is added to gasoline. So I think we perhaps put
too much focus, as you pointed out, on ethanol, because ethanol
may be today's answer, but I don't know if it is the answer 5
years from now.
Mr. Boucher. Okay. Other comments on this very briefly? Mr.
Early?
Mr. Early. We have looked at this issue, Mr. Boucher, and
there isn't any question that the efficiencies that have
occurred in the ethanol industry have resulted in the
production of, I think, a net benefit from an energy
perspective, although I caution that it is a modest benefit.
Because when you are using ethanol and gasoline at only 10
percent, and the studies show you get somewhere around a 20 or
30 percent net benefit, 10 percent of 20 percent is only 2
percent, so it is a very modest benefit. But I believe it is
positive.
Mr. Boucher. Okay. Let me move to my----
Mr. Segal. Mr. Boucher? Mr. Boucher?
Mr. Boucher. All right. Very quickly, Mr. Segal.
Mr. Segal. Very quick comment.
Mr. Boucher. My time is almost up.
Mr. Segal. I am not even going to enter the fray on the
efficiency argument except to say this: There is one problem in
the whole discussion you have heard so far. If ethanol has
indeed made major efficiency gains, and I have copied down what
Bob said, ``most efficient technologies all being in place and
therefore now has a positive energy yield,'' one does have to
question why ethanol--that is not the argument ethanol makes in
advancing the tax incentive where they say that, ``We just need
a little bit more tax incentive until we make certain
efficiency breakthroughs and then we won't need it anymore.''
But in answering this question, they have always come up with
the most efficient technologies. A little bit of an
inconsistency is all I am saying.
Mr. Boucher. Okay. Thank you. The second question I have is
this, and, again, this is for anyone who wants to respond. Tell
me about the general condition of the ethanol industry in the
United States today. Is there adequate capacity to meet the
potential that the provision we all think is coming in the
energy legislation would create? Is it a competitive industry
or is it so concentrated that just a few producers could
effectively control the price to the detriment of consumers?
Who wants to comment?
Mr. Dinneen. Congressman, again, I am sorry you missed my
opening statement in which I talked about the growing ethanol
industry today. We opened 12 plants last year, there are 11
more under construction. We will open 70 ethanol plants in
operation as of this Saturday. It is a very competitive
industry today. We are producing 2.8 billion gallons on an
annualized basis at the current time. We will process more than
a billion bushels of grain this year producing that ethanol. We
will have more than 3 billion gallons of ethanol production
capacity. Our industry is growing quickly in order to satisfy
the increased demand that is occurring as a result of State and
Federal laws, and we are going to be there for our customers.
Mr. Boucher. Anyone want to comment beyond--Mr. Slaughter?
Mr. Slaughter. I will just say, Congressman Boucher, that
last year's--one of last year's rationales for the renewable
fuels mandate was that we needed the mandate to pull demand. I
am glad to hear that evidently it is no longer necessary to
increase demand in the ethanol industry. And I just would go
along with what Mr. Segal has said about two different stories
being told at two different times.
Mr. Boucher. Well, I think it is interesting that we are
having this dramatic growth in the industry without the
mandate, and I wonder, Mr. Dinneen, why the mandate might be
necessary.
Mr. Dinneen. Well, our customers are suggesting that
current law is too restrictive. They want a more flexible
program, and indeed we are building because States are phasing
out the use of MTBE, which under current law with the Clean Air
Act oxygen requirements would require a tremendous amount of
ethanol being used in the Northeast and other areas where
refiners want to have additional flexibility. At the end of the
day, the refiners, the marketers, they are our customers. We
want to make sure that the use of our product makes sense for
them. And so more than a year ago we began negotiations with
the American Petroleum Institute and others to come up with a
new program that would give the refiners the flexibility that
they have sought in order to meet demand in those clean air
areas while still meeting clean air standards, while still
giving us the assurance that if we are going to repeal the
oxygen standard that is driving ethanol growth today, that we
would replace it with something that would provide an
equivalent amount of demand. And that is what this is about, it
is trying to give refiners the flexibility that they have
sought.
Mr. Boucher. Okay. Let me say thank you. We appreciate very
much your contribution to this debate. Thank you, Mr. Chairman.
Mr. Barton. Thank you. The Chair recognize himself for 5
minutes. I am reminded of the late Mr. Rogers' Neighborhood. We
started every show with, ``It is a nice day in the
neighborhood,'' you know, ``and all of you are special to me.''
I wish Mr. Markey were here to hear that. Somebody last
night asked me to say some poetry, so--but I think it is a
little tacky for my MTBE friends and my new ethanol friends to
get into these little tacky, tacky, nitpicky arguments, because
we are all friends here and we are going to be friends.
Mr. Boucher. Doesn't matter what the other people say.
Mr. Barton. It has been a long day.
I want to go to Mr. Segal on this issue of liability
protection for MTBE. In the bill that was in conference with
the Senate last year and in our draft--I don't think it is in
the draft, but at some point in time we will put out an
amendment, probably at full committee, that addresses
liability. What we were talking about in the last Congress and
what we are actively considering in this Congress is not
liability protection for negligence or something that gets into
the water table and is defective. We are simply saying that
there should be liability protection for a legal product that
was authorized by Federal law and at least, if not directly,
indirectly mandated by the oxygenate fuel requirement under the
Clean Air Act. So could you be a little more specific on what
liability protection MTBE would like to see in any type of
Federal bill that goes forward?
Mr. Segal. Yes, Mr. Barton. First, it is important to make
a distinction between products liability and negligence
theories for liability. What we are talking about here is it
makes little sense to have a liability theory which essentially
says if you make a product that is in compliance with Federal
law, that is certified by a Federal agency, that it is exactly
to specifications that are mandated by the Clean Air Act, that
the mere fact that you have produced either such an additive or
such a product could be used ipso facto to prove that it is an
unreasonably dangerous product. That doesn't make any sense.
The reason we have products liability theories, quite honestly,
is to deter folks. Now, wait a minute. If the Federal Clean Air
Act says thou shall make this product, it is a little difficult
to believe that we are sending a clear message of deterrence by
applying products liability.
Now, by contrast, negligence theories, which say if I have
MTBE-containing gasoline or ethanol-containing gasoline, for
that matter, and I spill that material through my own
negligence and if a plaintiff's attorney can prove up a
negligence case, then relief can be had that will be targeted
directly toward cleanup. I will also say there are legal
actions that are independent of the tort system. The State of
California has successfully prosecuted violations of the
Underground Storage Tank Program and recovered millions of
dollars that have gone, again, to cleanup. But these settlement
agreements that some of these discussions that Mr. Olson
referred to, you know, there is not even a statement in those
settlement agreements that the money has to be spent on
cleanup. So it really is not an efficient way to target
remedial assets to the actual problem, and that is what we are
about.
Mr. Barton. But what was under consideration in the last
Congress, and will be under consideration at some point in this
Congress, is a very limited protection to simply indemnify a
legal product against being considered to be liable in a
lawsuit because it is that product.
Mr. Segal. That is exactly right, sir. The protection, it
just extends to the defective product theory under products
liability, not to negligence theories, not to recoveries under
the underground storage laws.
Mr. Barton. All right. Now, Mr. Dinneen, I thought you gave
a fairly incoherent answer to Mr. Boucher's question about the
need for a continued mandate for ethanol.
Mr. Dinneen. I apologize.
Mr. Barton. That is all right.
Mr. Dinneen. Mr. Segal accused me of that too.
Mr. Barton. You are not the first witness to give an
incoherent answer, and it is probably my hearing, not your
answer. But my assumption is that your trade group continues to
support a Federal--an increase in the Federal mandate for
ethanol use to 5 billion gallons per year at some date in the
future; is that correct?
Mr. Dinneen. That is correct.
Mr. Barton. Okay. I just wanted to get that on the record.
Now, Mr. Murphy, my good friends at API, I am a little bit
confused by your position on this issue. My understanding is
that API does support an MTBE ban; is that----
Mr. Murphy. We do support a phasedown of MTBE consistent
with----
Mr. Barton. A phasedown, so you have changed the
terminology.
Mr. Murphy. Well, at some point----
Mr. Barton. You would argue that is not a ban.
Mr. Murphy. Well, we do support a phasedown which would
give us adequate time to make the necessary refinery
investments.
Mr. Barton. Is it API's positions that the States under
current law don't have the right to ban MTBE themselves?
Mr. Murphy. We are concerned if the States do ban MTBE,
that they are likely to do that in an uncoordinated,
inconsistent fashion.
Mr. Barton. So you do----
Mr. Murphy. So we end up with boutique fuels and we end up
with----
Mr. Barton. All right. But you are not answering my
question.
Mr. Murphy. Excuse me.
Mr. Barton. That is all right. It has been a long day. Does
API believe that a State that wishes to ban MTBE can or cannot
under the existing Clean Air Act, specifically Section
211(c)(4)?
Mr. Murphy. Well, I am not an attorney, but I do believe
that there has been no adverse court finding that they cannot
do that.
Mr. Barton. So you would think that--API's official
position would be that a State that wishes to ban MTBE could;
is that correct?
Mr. Murphy. That is correct, sir.
Mr. Barton. Okay. My time has expired, and let us see,
recognize Mr. Allen for 5 minutes.
Mr. Allen. Thank you, Mr. Chairman. I want to continue this
discussion about liability waivers, and I guess I will begin
with you, Mr. Segal, and I think I would like Mr. Douglass to
comment on this. If a liability waiver, products liability
waiver, granted exclusively for the manufacturers of MTBE and/
or ethanol, who is left to pick up the cost of contamination? I
heard your comment about a negligence case, but in the kinds of
underground contamination cases we have had in Maine, you can
forget negligence for all practical purposes. And I am
wondering whether there is going to be an expectation that
somehow gasoline stations and owners are supposed to pay for
the cleanup? I just don't quite understand how this is likely
to operate. And if I could just add--well, let us start there,
begin with you.
Mr. Segal. Okay. Please. First of all, what I think we all
can agree on, in terms of a common goal, is to make sure that
resources get to the place where they can actually impact on
remediation. Whether that comes through the tort system or
whether it comes through another system the most efficient
mechanism to do it ought to be the one that I think we would
all agree we should put first.
Our point of view is this: If you use the tort system as
that mechanism, first of all, only 20 cents on the dollar is
delivered out of the tort system. Surely we can do better than
that. Our argument is the Underground Storage Tank System, that
is the Leaking Underground Storage Tank funds and remember we
are considering legislation to expand and make easier the use
of those funds for remedial activities, that is a much more
efficient way, a much more efficient approach. It also avoids
the downside consequence of discouraging new additive, new and
innovative additive manufactures from getting into the
business.
I think Dr. Murphy made a good point, which is that it is
not a renewable fuel standard, it is a renewable fuel standard,
not an ethanol mandate, which to my mind means that you want
other new additives that might be available as time goes on.
The problem with using the tort system is if you say, hey, you
met the requirements of the Clean Air Act but you are still
going to get liability, that is going to weigh on companies in
introducing new additives, which I think are going to be
essential for the energy security and environmental protection
of the country on a going-forward basis.
So Underground Storage Tank Fund is one place the money
comes from, negligence theories applicable to those who
actually mishandled or spilled the gasoline is indeed another
place, and successful enforcements under State underground
storage tank laws. And there a good record of victories on
those.
Mr. Allen. I understand the argument, but what I hear you
saying, the other side of that coin is that the injury falls
where the injury falls in most cases; that is, the person with
the contaminate well has the contaminated well and barring
proof of negligence of something else, they are the one who
suffers the loss. The current system at least spreads that----
Mr. Segal. The LUST System, the Leaking Underground Storage
Tank System spreads the risk even better than the tort system.
Mr. Allen. I hear you.
Mr. Segal. Okay.
Mr. Allen. If I could have a quick comment from Mr.
Douglass, and then I would be interested in Mr. Olson's
comments as well, particularly if I could, with respect to Mr.
Olson, I would like you to address again the question of what
manufacturers may know or not know before the product enters
the market and whether that bears on the liability waiver as
written. Mr. Douglass?
Mr. Douglass. Yes. Thank you, Congressman Allen. My
personal net worth is wrapped up, for the most part, in
properties that sell gasoline, and therefore we are very
attuned to this whole MTBE issue. And we have concluded that
the gradual phaseout would be in our best interest for MTBE,
because the liability doesn't--just doesn't go away apparently
under the existing conditions. So we are concerned that if we
don't get a gradual phaseout and/or an upgrade in the
underground tank inspection and enforcement system, our
properties are going to be liabilities and not assets.
Mr. Allen. Thank you. Mr. Olson?
Mr. Olson. I would just point out three points. One is that
the approach of exempting basically the MTBE folks in the oil
industry from liability here would be to stick it to the gas
station owners, and I think that is really sort of part of what
is going on here. I wanted to read just one sentence out of
the--there has only been one decision that I am aware of that
has addressed this MTBE issue. It is the Lake Tahoe case, and
after an extensive jury investigations, thousands of pages of
documents, the jury was asked, ``Do you find by clear and
convincing evidence that the Defendant Shell Oil and the
Defendant Lyondell Chemical Company, ARCO, acted with malice in
selling gasoline containing MTBE that is defective in design
because of a failure to warn?'' They failed to warn, according
to this jury, their customers, they failed to warn the public,
et cetera, among other problems that were found by the jury.
I think what is going on is clearly there was--this ought
to be left up to the juries and to the courts to determine
whether these kinds of defective and design type problems
existed, and it is the companies that had all this information.
We want to create the incentives for companies that are
developing new additives or the ones that introduced old
additives to try to make those products in a way that aren't
going to contaminate water supplies. We have got widespread
contamination in Maine, as you mentioned, widespread
contamination in many other places. We need to create the
incentives to avoid that. That is what the tort works for.
Mr. Allen. Thank you. Thank you, Mr. Chairman.
Mr. Barton. Mr. Olson, before we recognize Mr. Shimkus,
what was defective, according to that jury?
Mr. Olson. Well, there were two things that were defective,
according to the jury. One was that the companies failed to
warn. That was----
Mr. Barton. No, what was defective about the product?
Mr. Olson. It was that it was so persistent that it was
known to contaminate water supplies, that it----
Mr. Barton. What did it contaminate? What was the harm in
the contamination?
Mr. Olson. The harm in the contamination was it was
contaminating the water supplies to the point they couldn't be
used.
Mr. Barton. Did people drink the water and they died?
Mr. Olson. You couldn't use the water because, basically--
--
Mr. Barton. Because why?
Mr. Olson. Well, if I took----
Mr. Barton. Because it smelled bad.
Mr. Olson. If I took this glass of water and gave it to
you----
Mr. Barton. Isn't that the harm, it smells bad?
Mr. Olson. It is undrinkable.
Mr. Barton. It smells bad.
Mr. Olson. It is undrinkable.
Mr. Barton. Is there any case anywhere where it has been
proven to be harm to public health because of MTBE? I don't
doubt there are cases where MTBE has gotten into the water
supply. There haven't been many of them lately, because we are
doing a better job of stopping the leaks from the underground
storage tanks. But isn't it true that the contamination and the
harm is that it smells bad?
Mr. Olson. Well, Mr. Chairman, there are a couple of
problems. One is that it smells so bad and it tastes so bad
that consumers simply won't drink the water. If you had a glass
of water in front of you, sir, that had serious MTBE
contamination, you wouldn't drink it.
Mr. Barton. But that is not a health problem. That may be
aesthetic problems.
Mr. Olson. No, I am saying that. So that is one problem.
The second problem is that there are health issues. There are
several studies that suggest that it may be a carcinogen.
Mr. Barton. No, not suggest, that prove.
Mr. Olson. Well----
Mr. Barton. If I drink enough diet Dr. Pepper, there is a
suggestion that it is a carcinogen, okay, but there is no proof
that if I am a normal imbiber of diet Dr. Pepper that that is a
carcinogenic. I can go out in the hall and pass gas and that
odor is harmful, in a sense, to the people that are around me
at the time, but I have not been identified as EPA yet because
of that as a mobile source polluter.
Mr. Green. Mr. Chairman, I won't touch that with a 10-foot
pole.
Mr. Barton. I apologize for being a little exercised. I am
not personally offended by you, Mr. Olson. I know you represent
a large group, and you have got an issue that you want to
present before us, and we are going to try to reach a
compromise that satisfies everybody.
Mr. Olson. May I finish responding. I guess I do think it
is important to note, first of all, that water supplies are
rendered unusable and millions and millions of dollars are
spent on many of these water supplies because consumers simply
won't drink the water. So that is a real injury. The second
point is that there really are significant public health
questions and this stuff is contaminating people's water. If
you talk to consumers that are drinking water from one of these
supplies about whether they think it is a good idea that they
have----
Mr. Barton. I am all for stopping any leaks from the
source, I am with you in that regard. Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. Let me go to Mr.
Segal real quick first. You say that the whole reason that fuel
prices are higher in California are higher because of ethanol.
Yet right now ethanol is cheaper than gasoline. And the CARB
and the refiners are telling us that ethanol-blended gasoline
is selling for less than MTBE-blended gasoline. Can you explain
why that is the case currently?
Mr. Segal. Sure.
Mr. Shimkus. So it is the case. So it is the case. You
said, ``Sure.''
Mr. Segal. I just said, ``sure, I can explain.''
Mr. Shimkus. Okay.
Mr. Segal. All right.
Mr. Shimkus. Well, come on. I don't have a lot of time.
Mr. Segal. Okay. I hear you, I hear you. I will keep it
quick. It is more expensive to utilize ethanol. In other words,
the cost of blend stocks increases even if the market price of
the ethanol itself isn't as relevant as the cost of what it
takes to----
Mr. Shimkus. True or false, the gasoline price at the pump
currently between ethanol-blended gasoline versus MTBE-blended
gasoline currently is cheaper with the ethanol in California?
Mr. Segal. I guess I would have to say false, and we do
cite in our testimony----
Mr. Shimkus. So you disagree with CARB. Okay.
Mr. Segal. I agree----
Mr. Shimkus. That is fine. Let me go to Mr. Slaughter. Mr.
Slaughter, how many refineries were there 20 years ago?
Mr. Slaughter. Twenty years ago, there would have been
maybe 200.
Mr. Shimkus. Ten years ago?
Mr. Slaughter. Two hundred or more.
Mr. Shimkus. Ten years ago?
Mr. Slaughter. Something between 200 and the current 149.
Mr. Shimkus. And so currently we have 149.
Mr. Slaughter. One hundred forty-nine.
Mr. Shimkus. And so you have increased efficiency quite a
bit to meet the demand; is that correct?
Mr. Slaughter. Well, we aren't quite meeting demand,
Congressman Shimkus. Demand is for 20 million barrels a day,
and we have about 16.8 million barrels a day of refining
capacity.
Mr. Shimkus. So where does the additional refined product
come from?
Mr. Slaughter. It is imported.
Mr. Shimkus. Okay. So we are importing refined product.
Okay. Now, 20 years ago, how many--what was our percentage of
imported petroleum products to this country that you were
refining?
Mr. Slaughter. Well, I am most familiar with the gasoline
statistics. We are currently refining about 95 percent, as I
remember, and it would have been more than that.
Mr. Shimkus. Is it safe to say that we have increased our
reliance on foreign oil in the past 20 years?
Mr. Slaughter. Definitely.
Mr. Shimkus. We have increased it.
Mr. Slaughter. Yes.
Mr. Shimkus. Even after the 1991 Gulf War. All right. So my
friends and colleagues on the panel who have been asking about
this issue, let me--so nothing that you have done has decreased
the reliance on foreign oil.
Mr. Slaughter. Well, I would say the industry does a lot to
try to reduce the reliance on it----
Mr. Shimkus. But you haven't. Really, we have increased our
demand.
Mr. Slaughter. Well, you can certainly say that we could
increase access to some producing areas in the U.S.----
Mr. Shimkus. Okay. Let me just jump this so I don't run out
of my time.
Mr. Slaughter. Go ahead.
Mr. Shimkus. Mr. Dinneen, what is one of the--what has been
the only way that I know of that we have deceased our reliance
on foreign oil domestically in the past 10 years?
Mr. Douglass. Well, clearly, the 70 ethanol facilities that
have been built over the last 20 years are adding absolutely to
domestic gasoline supplies.
Mr. Shimkus. And I would also add, and I know my colleague
in the chair, the ability for natural gas vehicles has probably
helped decrease some of the reliance on gasoline products. But
we have done nothing in this country to decrease our reliance
on foreign oil. In fact, we actually have increased our need
for imported gasoline products over the past 10 years. That is
safe to say, correct? So what we have done over the past 7
years, since I have been here, we have kind of changed the
debate on the whole oxygen issue.
Now, there are many provisions of this bill that many of
you guys want, and there is one provision that you don't, and i
would suggest that you get on board to keep the ones you want
or you may end up losing everything. The reality is this: We
have changed the debate from the oxygen issues because of
arguments by California that they have new technology, and we
have addressed the true fact that we have a demand for fuel in
this country, and it is being met by imported oil and imported
refined products. So now this 5 billion gallon renewable
requirement is there for one issue. Why the mandate? The
mandate is here for national security. The mandate is here to
make sure that we have an ability to have refined products that
we can use to keep this Nation going.
Now, it is not going to meet all our demands. We are going
to be relying on foreign oil even after we get through with
whatever occurs in the Middle East. But we have to start doing
something to decrease our reliance on foreign oil, and one of
the ways we are doing it is through ethanol. And thanks for
answering my questions, my 5 minutes went quickly, but to
answer the question, why the mandate, national security. I
yield back the balance of my time.
Mr. Barton. Mr. Hall is recognized for 5 minutes.
Mr. Hall. Thank you, Mr. Chairman.
Mr. Barton. Knowing that he and I are on the same plane
that leaves at 5:09.
Mr. Hall. He says Mr. Hall is recognized for 5 minutes.
Four minutes are already gone, right? I would ask Mr. Douglass
a question that we have talked about before. I am not sure I
totally understand, but you have indicated that Congress ought
to adopt a legislative provision to permit the commingling of
the divergent and compliant fuels. And as you know and as you
have pointed out, the EPA regulations specifically prohibit
that blending----
Mr. Douglass. Correct.
Mr. Hall. [continuing] of ethanol atotized RFT with MTBE--
atotized RFG. The two can't mix of any two compliance fuels if
the resultant mixture would have a certain RVP probably higher
than allowed in some specific markets. How does that affect
you?
Mr. Douglass. Well, the serious problem for us is that, as
you know, we are not in a corn growing area, and so we
currently do not have the supplies of ethanol that would be
available, say, in the Midwest. But if we got the ethanol into
our market and we were supplied by ethanol, we would have to
clean our tanks and prepare for that because, as you know,
ethanol is water-sensitive and you can't commingle, if you
will, with gasoline unless the gasoline is completely dry and
the tanks are completely dry. So we have to empty our tanks
technically whenever we switch from gasoline RFG or non-RFG to
ethanol-blended fuel. If we lost the supply of ethanol because
of a supply interruption, we would have to empty our tanks
again to put the RFG or the non-reformulated fuel back in. It
is a very difficult thing to do.
Mr. Hall. As Douglass Distributing Company, you can sell
each to anyone and they can mix it, can't they?
Mr. Douglass. Correct. Any customer can mix it any day. We
are just not permitted under the law to commingle it.
Mr. Hall. Why aren't you?
Mr. Douglass. That is the current EPA regulation.
Mr. Hall. And what is the effect of the person you pass it
on to making such a mixture?
Mr. Douglass. Well, when they add it to their tank it is
negligible. All the studies that we have read and read from
California that it has an negligible effect on the
environmental air.
Mr. Hall. I think that is about the easiest one I can lob
to you right now. Let me see if I can find another one. There
is something else I wanted to ask you about.
Mr. Barton. Who is the best congressman from Rockwell,
Texas?
Mr. Douglass. Congressman Hall.
Mr. Barton. There you go. That is pretty easy, isn't it.
Mr. Hall. Don't fool with him. He is one of those 25,000 or
30,000 Republicans that look for my name there and they have to
look for it, believe me, the way you Republicans hide it on
those ballots down there.
Mr. Barton. Well, they find it pretty regularly.
Mr. Hall. Well, I will yield back the balance of my time,
because I want to be on that airplane.
Mr. Barton. We recognize the gentleman from California, Mr.
Radanovich, for 5 minutes.
Mr. Radanovich. Thanks, Mr. Chairman. I won't take the full
five but do want to ask a couple of questions. Thank you,
panel, for being here. Mr. Murphy, I do have a question. You
had mentioned that in Connecticut and my State of California
and New York, once these bans on--all these bans MTBEs take
effect, that they would result in an ethanol demand in those
States of about 1.1 billion gallons. Mr. Dinneen testifies that
there is plenty of capacity. Do you agree with that, and if
not, can you give me an idea of why that might not be the case
for these States?
Mr. Murphy. I do agree that there should be more than
adequate ethanol capacity. I think in fact the Department of
Energy has recently come out with some studies that confirm
that. Our concern is not with the adequacy of the ethanol
supplies, our concern is with the logistical and gasoline
production problems that result when the application of an
inflexible mandate to use ethanol in each and every gallon of
gasoline regardless of whether or not that makes economic sense
to use it. We are wiling to use ethanol, willing to use
renewable fuels where they make economical and environmental
sense. That is likely to be primarily in the Midwest but
perhaps not entirely, but it should be market driven not driven
by mandates.
Mr. Radanovich. Very good. Thank you for clarifying that
for me. Mr. Douglass, welcome to the committee. I want to ask
something to clarify in your statement, which addresses a
provision in the Senate bill that requires the use of ethanol
throughout the year. You have advocate deleting this provision,
and I am wondering if you can be more specific as to the
benefits and detriments requiring year-round ethanol usage?
Mr. Douglass. Well, under the current regulation, they
control the revapor pressure, if you will, the volatility of
the fuel. And the problem in the summer if we have to put
ethanol in in the summertime, it pushes it above the current
controlled revapor pressure. So the refiners would have to go
back and reformulate and make an even lower grade, a costly
process, and we are just very concerned that it is another
boutique fuel that will end up with shortages and price spikes.
Mr. Radanovich. Very good. Thank you for clarifying that
for me. And those are the extent of my questions. I yield back.
Mr. Boucher [presiding]. The gentleman yields back, and the
Chair now recognizes the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman, and I would like to
thank both you and the chairman for allowing me to waive on the
committee because this is so important, obviously to our
country, but also to Texas. Mr. Early, didn't the Blue Ribbon
Panel call for a reduction in MTBE and not the elimination of
it?
Mr. Early. All members of the Panel supported getting rid
of MTBE except for, of course, the MTBE panelist itself. So----
Mr. Green. But what did the report say?
Mr. Early. The report said a phasedown or a possible phase-
out, I believe is the----
Mr. Green. Okay. Not a reduction then.
Mr. Early. I think the--as Mr. Murphy has been using the
term, ``phasedown,'' that was clearly in the report, but the
report also acknowledged that phaseout was supported by most of
the members of the panel.
Mr. Green. Okay. Maybe we are just into semantics. Because
I had the impression that it was only--it called for a
reduction in the use but not complete elimination of it. Is
that correct, the mic wasn't on?
Mr. Segal. Mr. Congressman, my recollection is that the--
what was called for was phasedown to historical use levels
which was----
Mr. Green. Okay. Well, we will get a copy of it. Mr.
Dinneen, let me ask you a little bit, because obviously you can
tell where I come from from my accent. The----
Mr. Dinneen. There is a 5:09 plane, Congressman.
Mr. Green. Oh, I am going to Houston, not Dallas at 7:12,
so we have a lot of time here.
Mr. Douglass. All right. I just didn't want you to miss
your plane, that is all.
Mr. Green. It wouldn't be the first time if I did. I
understand there is a substantial amount of Federal tax and
tariff and quota subsidies under ethanol. Are you aware of any
other agriculture or consumer products that receive similar
treatment?
Mr. Douglass. I wouldn't be an expert in anything other
than ethanol. I can tell you that indeed your premise is
correct, the U.S. Congress has seen fit to provide significant
incentives to the increased production and use of fuel ethanol,
and they have proven to be successful.
Mr. Green. I know that a few years ago it was at least
about 50 cents a gallon? Is that generally correct?
Mr. Douglass. The tax incentive that goes to refiners and
gasoline marketers is 5.2 cents less than 18.4 cent tax on
gasoline for a 10 percent ethanol blend. So that has the
equivalent value of 52 cents per gallon of ethanol, yes.
Mr. Green. Okay. Mr. Murphy, one of the concerns I have
had, and I have a lot of questions, I guess, because of the
concern about MTBE, and I have said it many times, whatever
makes my car run I don't want to drink. And just because I can
taste MTBE there be something else that may be in there that I
can't taste that are known carcinogens. What is the refining
industry doing to continue efforts to improve the Underground
Gasoline Storage Tank Program? And it seems to me no reason why
gasoline containing either ethanol or MTBE should ever leak
from storage facilities.
Mr. Murphy. Well, we certainly are doing all we can to
ensure that the tanks do not leak. I think the latest data,
though, is even under the standards that were first passed in
1988, I believe only about 86 percent of the tanks have been
inspected, and there is a lot of suspicion that the tanks that
have not been inspected could in fact be leaking. And, of
course, leaking tanks is not the only way that MTBE enters the
groundwater.
Mr. Green. That is true. There can be spills, there can
be----
Mr. Murphy. Two-cycle gasoline--two-cycle engines.
Mr. Green. In fact, I think testimony last year was that
that was the situation in Lake Tahoe, the two-cycle engines.
Mr. Dinneen, does ethanol evaporate faster than other gasoline
components?
Mr. Douglass. When blended with gasoline it does. ethanol's
volatility itself is actually much lower than that of gasoline,
but when blended with gasoline, ethanol does have higher
evaporation, yes.
Mr. Green. Mr. Olson, how does that relate to the National
Resource Defense Council? Seems like that would be higher
overall harmful emissions if you have ethanol evaporating.
Granted, I don't want to drink MTBE but I don't also want to
smell whatever is evaporating. Has the council looked at that
issue?
Mr. Olson. Yes, we have. Basically, what we have said we
are in favor of is a performance-based renewable standard that
would take a look at the whole cycle energy savings as well as
look at the air impacts.
Mr. Green. Okay. I understood and I read your testimony
about the failure to warn in your conversation with the
chairman. Other than MTBE, should we also hold manufacturers
responsible for whatever else may be in gasoline, whether it is
ethanol that may be evaporating or whatever other elements of
gasoline if they are not warned what may be in the water or in
the air?
Mr. Olson. Well, I guess I would respond, first of all,
that I don't see why it is important for Congress to step in.
There has been a single case. Why should Congress be stepping
in and preempting States from adopting their own laws, which is
what is suggested here?
Second, if a company acts, ``with malice,'' in failing to
warn their consumers, including the gas stations and others,
about a product and that results in harm, sure, that is what
the tort system is for. And, obviously, if you don't have them
responsible, the refiners and so on and the MTBE manufactures,
who ends up paying for that cleanup? In many of these case, it
is going to be the little----
Mr. Green. I am almost through with my time, but let me ask
one final question. I have a district in Houston and we have
used RFG, and it has been successful in our air quality
problems, but I have been told because of the nature of our
humidity and that during the summer, which in Houston starts in
early May and lasts until early October, that ethanol is not
appropriate. Can any panelists talk about that during the
summer in some of the parts of southern United States?
Mr. Dinneen. Not appropriate. I guess I would say how? I
mean, certainly, technically, the fuel could certainly be used
and would perform quite well in your vehicle. If you are
suggesting that not appropriate because of increased
evaporative emissions, the Clean Air Act currently does not
allow ethanol-blended fuels to have an increased volatility
when sold in the marketplace. Refiners have to accommodate for
ethanol's additional volatility in the manufacture of the fuel.
So from an air quality standpoint, there would be no emissions
impact, and from a performance standpoint, there would be no
negatives either.
Mr. Murphy. Mr. Congressman, I can just add to that. I
think the problem is that of course--and Bob is certainly
correct in the case of--Mr. Dinneen is correct in the case of
the RFG. You have to meet the evaporative emission standards
regardless of whether or not you had ethanol. So you have to
produce a different and slightly more expensive blend stock if
you intend to use ethanol with that. We have done extensive
studies and there was mention made of the seasonal component of
an RFS. Those studies indicate that renewables are likely to be
used throughout the year, because renewables and ethanol do
have other advantages that in many cases make them worthwhile
to use because of the volume effect, the octane effect,
reduction in toxics and so on. So we do believe that we are
going to use ethanol and renewables throughout the year in an
environmentally acceptable way, meeting and in fact exceeding
existing environmental standards.
Mr. Green. Okay. And one last thing: I understand for a
number of years that ethanol is difficult to transport. Is it
only available in tanker trucks or is it available--can you
pipeline it? Has all the research been done that we can
actually pipeline it?
Mr. Murphy. Well, again, it is not presently pipelined. Is
has an affinity for water, and so it cannot be shipped through
common pipelines. Ethanol is shipped in tanks trucks and on
railroads. Again, there was a recent Department of Energy study
which suggested that the--concluded that the infrastructure was
adequate to supply it. The problem with the existing service is
that the only way in which, for instance, we could supply
ethanol-blended gasoline to Long Island is to bring ethanol
through New York City--ethanol tank trucks through New York
City out to Long Island. We are willing to use the ethanol, we
are willing to use the renewable fuels, but we would like to
use those where it makes good economic and environment sense to
do it.
Mr. Green. And, obviously, with the tax credits that you
already have for that, it is still not to the level that it is
economically viable.
Mr. Murphy. Well, of course, the problem at the moment is
unless the law is changed we are going to be looking at an
effective ethanol mandate the next several years that is in
fact much larger than the volumes that we have been considering
heretofore.
Mr. Green. I guess that is subject to Congress. Thank you,
Mr. Chairman.
Mr. Boucher. Yes. The gentleman's time has expired.
Chairman Barton has asked me to make two announcements. First
of all, that a bill will be made available by the committee on
Monday, and this will be comprehensive energy legislation. And
so members should look for the legislation on Monday. They can
then begin considering amendments they would like to draft to
this measure. And the markup of the legislation will commence
in this subcommittee on Wednesday and probably go for about a
month.
And we will all be looking forward to that event. I would
like to say thank you to this panel for a very interesting
presentation today. I want to say thank you to all of the
witnesses, all 19 of them, who have graced us with their
appearance during the course of the day. It has been a long but
informative day for us. And there being no further business to
come before this subcommittee, we stand adjourned.
[Whereupon, at 4:12 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Bob Dinneen, President and CEO, Renewable Fuels
Association
Mr. Chairman and Members of the Committee, I would like to thank
you for the opportunity to provide comments on national energy policy.
Today's hearing is very timely. Crude oil prices are rising, driven by
concerns over possible conflict in Iraq and continued political unrest
in Venezuela. At the same time, gasoline output is down, in part,
because refiners have responded to increased demand for heating oil.
Consequently, the need for an energy policy that reduces our nation's
dependence on foreign sources of energy by increasing the production
and use of domestic fuels such as ethanol and biodiesel has never been
greater. I commend the Chairman and the Committee for convening today's
hearing.
The Renewable Fuels Association is the national trade association
for the domestic ethanol industry. Our membership includes ethanol
producers and suppliers, gasoline marketers, agricultural organizations
and state agencies dedicated to the expanded production and use of fuel
ethanol. The U.S. ethanol industry consists of 69 production facilities
located in 20 states with an annual production capacity of 2.75 billion
gallons. Production capacity continues to expand, particularly among
farmer owned cooperatives, the fastest growing segment of our industry.
Thus, the U.S. ethanol industry and farmers across the country stand
ready to contribute more meaningfully to our growing energy needs.
THE NEED FOR A COMPREHENSIVE ENERGY POLICY
Continued unrest and the threat of war in Iraq coupled with
political upheaval in Venezuela have focused renewed attention on the
need for a comprehensive national energy policy that ensures a reliable
fuel supply. As you know, the U.S. currently imports more than 57% of
our oil, and our imports are predicted to grow to 68% by 2025. At the
same time, we rely increasingly on our energy supplies from unstable
regions of the world, including Iraq. In fact, last year we imported
450,000 barrels of oil per day from Iraq! In addition, the war on
terrorism has renewed interest in reducing energy imports and
diversifying the energy sector.
In testimony before Congress, R. James Woolsey, former Director,
Central Intelligence, said, ``We have to realize that our fuel
distribution . . . systems are almost certainly going to come under
attack in some way. Their high degree of centralization and their
fragility to terrorist attack is a serious matter. One thing we have to
be looking at is how to decentralize and how to make more flexible and
less fragile our energy distribution networks. It means local
production of renewable fuels . . . rather than relying on imports and
central fuel stations.''
President George Bush has recognized the contribution American
agriculture can make to provide a more reliable fuel supply through the
production of domestic liquid fuels such as ethanol and biodiesel. In
calling for the Congress to pass an energy bill last fall, President
Bush said, ``We need an energy bill in America. An energy bill that
enhances renewables like ethanol. An energy bill that makes us less
dependent on foreign sources of crude oil.''
Deputy Secretary of Energy Kyle McSlarrow echoed the
Administration's support for expanded use of ethanol in the U.S. fuel
supply last week in testimony before this Committee. Among the eight
goals the Administration feels should guide the energy debate,
McSlarrow stated, ``the Administration strongly supports a renewable
fuels standard that will increase the use of clean, domestically
produced renewable fuels, especially ethanol, which will improve the
Nation's energy security, farm economy, and environment.''
The increased use of renewable fuels will expand U.S. fuel
supplies. Ethanol and biodiesel are blended with gasoline and diesel
after the refining process. Thus, the increased use of these fuels adds
directly to domestic fuel supplies. Blending ten percent ethanol in a
gallon of gasoline provides an additional ten percent volume to the
transportation fuel market.
2002 RECORD YEAR FOR U.S. ETHANOL INDUSTRY
The U.S. ethanol industry has been a responsible partner in the
fuels marketplace, increasing production capacity to meet the growing
demand for ethanol created by state and federal law. In 2002, the U.S.
ethanol industry set records in production, production capacity, and
number of new facilities. Twelve new state-of-the-art production
facilities were completed in 2002; and with expansions at existing
plants completed, the industry produced more ethanol in 2002 than at
any time in its history--2.13 billion gallons.
Last year's record production represents a 20-percent increase over
2001 and a 45-percent increase since 1999. This record-breaking
production is continuing this year. In January, the industry set an
all-time monthly production record of 177,000 barrels per day,
representing a 31-percent increase over last January's production.
But the industry is not done yet. There are another eleven ethanol
production facilities totaling more than 500 million gallons of
capacity currently under construction, which will increase ethanol
production capacity to more than 3 billion gallons by the end of this
year. At current production rates, the industry will produce a record
2.8 billion gallons of ethanol in 2003.
Ethanol is the third largest and fastest growing market for U.S.
corn. In 2002, over 800 million bushels of corn were processed into
ethanol and valuable feed co-products, boosting corn prices by 30-40
cents per bushel nationally. The U.S. Department of Agriculture
estimates that the ethanol industry will process as much as one billion
bushels of corn this year, approximately 10 percent of the national
crop. Additionally, ethanol is the second-largest user of grain
sorghum. More than 45 million bushels of grain sorghum were used in
ethanol production in 2002.
The recent growth in ethanol plant construction has been led by
farmers seeking to capture new value-added markets for the commodities
they grow. Since 1999, farmer-owned ethanol facilities have increased
their percentage of total production capacity to more than 30%. Today,
farmers own 29 of the 69 plants in operation. Eight of the 11 plants
under construction are farmer-owned. With this new production, taken
together farmer-owned ethanol plants will be the single largest ethanol
producer in the country.
Ethanol production facilities represent local economic engines
throughout rural America, creating jobs, investment opportunities,
value-added markets for farmers, and increased local tax revenue. A
recent study 1 found that an average 40 million gallon
facility would have the following positive economic impact on the local
community in which it is located:
\1\ ``Ethanol and the Local Community,'' John Urbanchuk, AUS
Consultants and Jeff Kapell, SJH & Company, June 2002.
---------------------------------------------------------------------------
Provide a one-time boost of $142 million to the local economy
during construction;
Expand the local economic base of the community by $110.2
million each year through the direct spending of $56 million;
Create 41 full-time jobs at the plant and a total of 694 jobs
throughout the entire economy;
Increase the local price of corn by an average of 5-10 cents
per bushel, adding significantly to farm income in the general
area surrounding the plant;
Increase household income for the community by $19.6 million
annually; and,
Boost state and local sales tax receipts by an average of $1.2
million (varies depending on local rates).
RISING ETHANOL DEMAND
The tremendous growth in ethanol demand over the last several years
is a direct response to state efforts to reduce the use of MTBE. To
date, sixteen states have acted to phase out the use of MTBE, and the
ethanol industry has acted responsibly to build additional capacity so
that refiners could continue to supply consumers with competitive fuels
that meet federal Clean Air Act requirements. Without commenting on
whether such state actions are justified, between 3.5 and 4.5 billion
gallons of ethanol would be needed to replace MTBE, depending on how
new EPA regulations implementing the 8-hour ozone standard impact state
decisions to opt into the RFG program.
The U.S. ethanol industry has proven it can supply such demand, if
necessary.
In California, most major refiners have voluntarily switched to
ethanol one year ahead of schedule. With the transition two-thirds
complete, the results can only be described as seamless. There have
been no ethanol shortages, transportation delays or logistical problems
associated with the increased use of ethanol in the state. Today,
approximately 65% of all California gasoline is blended with ethanol,
and it is estimated that 80% of the fuel will contain ethanol by this
summer. As a result, while there was only about 100 million gallons of
ethanol being used in the state last year, California refiners will use
between 600-700 million gallons of ethanol in 2003.
Concerns about ethanol supply, transportation and logistics have
been successfully answered. Pat Perez, manager of the California Energy
Commission's (CEC) Transportation Fuel Supply and Demand Office, said
recently the transition to ethanol is ``progressing without significant
problems.'' Furthermore, CEC spokesman Rob Schlichting told the San
Jose Mercury News in a February 27 article that the substitution of
ethanol for MTBE in California has not added to recent retail price
increases ``because ethanol is more plentiful than previously expected
and cheaper than gas.''
With the transition to ethanol in California nearly complete, the
focus turns to the Northeast. Connecticut is currently scheduled to
phase out MTBE use by October 1, 2003, followed by the state of New
York beginning January 1, 2004. As in California, the U.S. ethanol
industry is committed to supplying customers there, if necessary, also.
The use of ethanol is not new to Connecticut or New York and
ethanol is indeed currently being blended in both states. At our
National Ethanol Conference in Scottsdale, Arizona, February 19, Paul
Stendardi of Getty Petroleum Marketing spoke of the ethanol blending
that is currently occurring in the Northeast. Specifically, Stendardi
said, ``We've been blending with ethanol longer than 12 years. Right
now we blend in Providence, Rhode Island, New Haven, Connecticut,
Albany, New York, Newark, New Jersey and Paulsboro, New Jersey. We take
the ethanol into Providence by rail. We truck it down to New Haven. And
we take the ethanol into Paulsboro and Newark by water. And it's railed
into Albany, New York.'' Blending ethanol is common practice throughout
the country and logistics for converting terminals is very
straightforward.
In addition to the ethanol blending currently occurring in the
Northeast, California's successful transition to ethanol should give
East Coast policymakers confidence that ethanol can be used to satisfy
the Clean Air Act oxygenate requirement in a smooth and orderly
fashion. In fact, the Northeast is even better equipped for the
transition to ethanol than California as the Northeast draws from a
wider variety of fuel supply sources including the Gulf, Mid Atlantic
and off-shore refineries. This diversity of fuel supply options will
help keep a competitive and steady supply of fuel components coming
into the region.
FUELS SECURITY ACT OF 2003
The U.S. ethanol industry has clearly demonstrated it can continue
to provide refiners with adequate supplies to meet current Clean Air
Act requirements, even as states take action limiting the use of MTBE.
But we have heard the requests of our customers for greater flexibility
in meeting those standards, i.e., eliminating the federal RFG oxygen
content requirement. Consequently, we have worked for more than a year
to develop a consensus proposal that addresses the concerns of a number
of stakeholders, including environmental and water quality officials
apprehensive about MTBE, petroleum companies appealing for greater
flexibility, and ethanol producers expanding to meet the increased
demand created by current federal and state laws.
The result of this collaborative effort was legislation
overwhelmingly approved by the United States Senate during
consideration of the energy bill last year, and recently reintroduced
as the Fuels Security Act of 2003 in the Senate, S. 385, and introduced
in the House of Representatives by Congressmen Collin Peterson (D-MN)
and Tom Osborne (R-NE), H.R. 837. The Renewable Fuels Association
continues to support this legislation.
The Fuels Security Act of 2003 provides a federal resolution to
persistent concerns related to MTBE, avoiding a patchwork of state
actions that complicate the fuel distribution system. It maintains the
existing clean air benefits of federal RFG with strong anti-backsliding
provisions. It provides refiners with the flexibility they have sought
in meeting Clean Air Act requirements by eliminating the federal RFG
oxygen standard. And it provides some marketplace certainty to farmers
and ethanol producers that have acted responsibly to meet the demand
created by current law.
Renewable, domestically produced fuels can and should play a larger
role in meeting our nation's energy needs. Creating a Renewable Fuels
Standard (RFS) in which a small percentage of our nation's fuel supply
is provided by renewable, domestic fuels such as ethanol and biodiesel
provides a positive roadmap for reducing consumer fuel prices,
increasing energy security, and stimulating rural economies by
harnessing America's renewable energy potential.
The RFS included in the Fuels Security Act of 2003 boosts the
demand for renewable fuels such as ethanol and biodiesel to 5 billion
gallons by 2012. A recent analysis by the U.S. Department of Energy,
``Infrastructure Requirements for an Expanded Fuel Ethanol Industry,''
concludes, ``no major infrastructure barriers exist'' to expanding the
U.S. ethanol industry to 5 billion gallons per year. This is because
credit banking and trading provisions included in the bill maximize
refiner flexibility. The bill does not require that any renewable fuels
be used in any particular area, allowing refiners to use these fuels in
those areas where it is most cost-effective. Moreover, there are
several provisions allowing the requirement to be adjusted or
eliminated if price or supply problems occur. Small refiners are
exempted from the RFS for several years, allowing those companies an
easier transition to the program. Finally, recognizing that MTBE
producers made investments in reliance upon a federal mandate, the bill
provides significant transition assistance to MTBE producers.
The Fuels Security Act of 2003 is a comprehensive approach to a
myriad of fuels issues that has generated broad support from several
previously competing interests. It protects the environment, provides
refiner flexibility and marketplace certainty to farmers. I encourage
you to give it careful consideration as you craft comprehensive energy
legislation over the next several months.
CONCLUSION
Mr. Chairman and members of the Subcommittee, the issues before you
are extremely complex and finding a fair resolution will be difficult.
But the need for a comprehensive energy policy that ensures a reliable
fuel supply for our nation has never been greater. America's economic
prosperity and national security depend on the availability of
reliable, affordable energy. Therefore, increasing the production of
domestic fuels and diversifying our energy infrastructure are critical
components of energy policy legislation. Providing for an expanded role
for domestic, renewable fuels such as ethanol in the U.S. fuels
marketplace is vital if we are to reduce our dangerous dependence on
imported energy.
Media reports of your discussion draft suggest it will include a
renewable fuels standard, and we commend you for your support of the
expanded use of biofuels to meet our nation's energy needs. The U.S.
ethanol industry stands ready to work with you and the Committee to
develop comprehensive energy legislation that addresses the concerns of
all stakeholders.
Thank you.
______
Supplemental Comments of The Electricity Consumers Resource Council and
the Electric Power Supply Association
The Barton discussion draft contains in Section 7031 what is
commonly referred to as the ``consensus reliability'' language. Though
we recognize that many disparate stakeholders have endorsed this
section, we do not believe that it is a true consensus document and we
do not believe that it will, in fact, enhance reliability.
By way of background, the Electricity Consumers Resource Council
(ELCON) and the Electric Power Supply Association (EPSA) were part of
the process that developed, and endorsed, the original ``consensus
reliability'' language roughly seven years ago. That language was
unfortunately the result of a Christmas tree effort, as every
stakeholder representative (including us) tried to add language to
advantage their own particular group. Since then, when we have looked
at that end product and subsequent revisions, we see that they all have
similar flaws.
We recognize that this is an issue in which few Members have an
interest. All Members--and all industry stakeholders--support increased
reliability. Certainly we do. But we do not believe that this language
will serve that purpose.
What Does It Actually Do and How Does It Do It?
Section 7031 does not enhance reliability--rather it establishes a
regulatory process which is designed to authorize on organization to
set standards that are supposed to increase reliability. Although
promoters of this language purport to model it on the securities
industry, that model fails under scrutiny. For example, violators of
rules promulgated by the National Association of Securities Dealers can
be denied the ability to trade. It is unclear how violations and
violators would be sanctioned or punished in the electricity industry.
Clearly, removal from market activities would be difficult if not
impossible when dealing with owners of interstate transmission lines.
And, since electricity functions in ``real time,'' violations of
reliability rules would cause real, possible irremediable, damage
before any action could be taken in response.
It Could Lead to Balkanization of the Grid
The language in Section 7031 grants deference to regional groups
founded on an interconnection-wide basis. This is in response to
demands from western officials that ``the West is different.'' This may
be, and in fact reliability rules recognizing these regional
differences can be developed without granting deference in the
standard-setting process to any regional group. If the facts support a
regional standard, that regional standard should be adopted. But by
granting deference to one group, this language opens the door for
deference to be granted to other groups (perhaps to one organized on an
RTO-wide basis, perhaps to consumers who actually pay the bills). This
will encourage the development of regional, rather than national,
standards, and make it more difficult for power to move from one region
to another.
It Does Not Account for Commercial Impact
For those truly interested in making wholesale markets more
competitive, reliability should not be considered in a vacuum. The
issues of reliability and commercial impact are inextricably
intertwined. Reliability standards should not be developed without an
examination of their impact on commercial practices. Ideally this would
be done by the same organization. The current bifurcation of duties
between the North American Electric Reliability Council (NERC) and the
North American Energy Standards Board (NAESB) has a number of problems.
For consumers and new entrants to the market, participation in NERC and
NAESB standard-setting processes entails a considerable outlay of often
unavailable staff resources. Moreover, the fact that reliability and
commercial decisions will be made by two different organizations will
lead to all sorts of complications. We continue to believe that one
organization, tasked with both standard-setting responsibilities,
should consider both reliability and commercial impacts.
In conclusion, we hope that the reliability language (Section 7031)
is not approved simply because no one has taken the time to examine it
and its potential impact. Everyone wants reliability, and it is worth
time to develop the legislative language that will truly achieve it.
______
Prepared Statement of Lyondell Chemical Company
Lyondell Chemical Company appreciates the opportunity to comment on
the development of energy policy as it pertains to the use of
oxygenates in ``clean'' transportation fuels. Lyondell, along with its
predecessor companies, has been commercially producing fuel oxygenates
since 1969 and fuel ethers since 1979. Currently, as the world's
largest producer of fuel oxygenates, Lyondell is well positioned to
comment on the oxygenate issues. We support the Oxygenated Fuels
Association statement on methyl tertiary butyl ether (MTBE) and will
focus this statement on ethyl tertiary butyl ether (ETBE).
We believe that if Congress is going to enact a Renewable Fuels
Standard, ETBE, ethanol's ether, should be allowed to play a
significant role. France and other European countries have used ETBE
successfully for several years. Lyondell has participated in that
market since 1992.
In summary, ETBE will expand the gasoline pool, protect air quality
and water resources, allow ethanol distribution through existing
infrastructure, and minimize ethanol's impact on the Highway Trust
Fund. However, in order for these benefits to be realized, some
adjustments must be made to the current law. First of all, the ethanol
used in ETBE must be treated equally to direct blended ethanol in the
tax structure. In addition, it must receive comparable product
liability protection to ethanol and ethanol blends in fuels.
ETBE BENEFITS
ETBE is made by chemically combining fuel ethanol with butanes,
which are derived from U.S. natural gas production. This combination
forms an ethanol ether that can be easily blended in the refinery with
many advantages as compared to the direct blending of ethanol into
gasoline at the terminal. The advantages of ETBE can be summarized as
follows:
ETBE Expands Gasoline Supplies and Reduces our Dependence on Foreign
Imports
On an energy basis, ETBE delivers three times more non-petroleum
alternative energy for expanding gasoline supplies than direct ethanol
blending. On a volume basis, every gallon of ethanol generates 2.3
gallons of ETBE with the addition of the butanes. If all the U.S. MTBE
capacity switches to ETBE, it will consume 1.7 billion gallons per year
(BGY) of ethanol and make 3.9 BGY of ETBE. This volume of ETBE would
provide more than 5 BGY of gasoline using ETBE's premium gasoline
quality characteristics in the refinery to blend in more subquality
gasoline components that normally could not be utilized in gasoline.
This additional gasoline possible with ETBE is equivalent in volume to
the gasoline refined from imported Iraqi crude oil, to the development
of ANWR, or to the Venezuelan gasoline imports. Accelerating ETBE
production can immediately replace the gasoline shortfall from any MTBE
reductions within the next two to four years while direct ethanol
blending under RFS still comes up very short on expanding gasoline
supply even at 5 B Gal/yr after 2012.
Unlike Ethanol, ETBE Expands Summertime Gasoline Supplies
Without its pollutionincreasing RVP waiver, blending 10% ethanol
into the ``low RVP'' summer gasoline used in the high pollution market
areas will actually shrink gasoline supplies by 0.2 to 2.8% (energy
basis) according to the Energy Information Administration (September
2002). The ``low RVP'' gasoline is the key smogfighting control program
that is widely used in 50% of the gasoline markets today. The use of
this pollution control program by the states is expected to greatly
spread to other markets in order to meet the EPA's new, more
restrictive ozone standard.
On the other hand, blending 10% ETBE, with its favorable low RVP
property, will actually expand the supply of ``low RVP'' gasoline by
more than 10%. An example of supply reductions with ethanol is
currently being experienced with California's switch from MTBE to
ethanol. The supply reductions are now resulting in severe price
increases.
ETBE Substantially Increases the Economic Efficiency of Ethanol
Unlike ethanol, the very low water solubility of ETBE permits it to
be blended into gasoline at the refinery where the ETBE blend can then
be costeffectively distributed via pipeline and barge to all gasoline
terminals. Since it can be freely mixed with all other gasolines, it
also eliminates the gasoline segregation barriers that contribute to
``boutique fuel'' shortages and other higher cost associated with
ethanol blending. Since ETBE can be efficiently blended at the
refinery, it eliminates the need for any new infrastructure investment
for the refiner blending ethanol in the gasoline marketplace.
ETBE Protects Water Resources
ETBE is 75% less water soluble than MTBE and 99% less than ethanol
which is 100% soluble. This means substantially reduced risks to
groundwater resources from leaking underground gasoline storage tanks.
Not only is ETBE much less soluble in water, it has other physical
properties which shortens its migration distances and makes it much
easier to remove from water with existing lowcost cleanup technologies.
In addition, ETBE's high octane replaces more toxic aromatics during
the refinery blending process which, therefore, reduces the risk of
aromatics leaking into the groundwater.
ETBE Provides the Greatest Air Pollutant Reductions
ETBE reduces exhaust emissions of VOC's, NOx, Toxics,
and CO by nearly three times more than that of ethanol blended by
itself. ETBE also eliminates all of the large evaporative VOC increases
associated with ethanol. In addition, because of its high displacement
of aromatics in gasoline, ETBE provides 20% more CO2
reduction than using straight ethanol. The net result is that ETBE is
one of the most effective motor fuel compounds for reducing overall
emissions from the vehicles.
ETBE Lessens the Burden on the Highway Trust Funds
Maximizing the use of ETBE could free-up nearly $800 million
dollars per year from the Highway Trust Fund for incremental road and
highway projects (that would otherwise be lost under conventional
ethanol blending).
Since ETBE blenders will be able to use the Alcohol Tax Income
Credit rather than the Gasohol Excise Tax Exemption (used for
conventional ethanol blending at the terminal), the amount of ethanol
subsidy diverted from the Highway Trust Fund will be greatly minimized.
Of the 3 billion gallons per year of new ethanol demand created under a
RFS, 1.5 billion gallons are expected to be subsidized from General
Revenues instead of the Highway Trust Fund if ETBE use were maximized.
REALIZING ETBE BENEFITS
Though ETBE is an excellent and proven product and delivers the
above benefits to ``clean'' gasoline, it cannot carry the higher burden
of unequal risk or tax treatment under the law as compared to the
direct blending of ethanol in gasoline. In that regard, the following
additions or changes in the Energy Bill are necessary to correct these
regulatory inequalities.
Requires Equal Access to Ethanol's Tax Subsidy
Without full and encumbered access to the tax subsidy used for
ethanol blends, ETBE economics will be uncertain for the refiner
particularly when the refiner will need the certainty of ethanol
blending to meet a possible (RFS) requirement. Since ethanol in ETBE
utilizes the Alcohol Blenders Income Tax Credit instead of the Gasoline
Excise Tax Exemption (used by terminal blenders of ethanol), access to
the ethanol tax subsidy by the refiner is highly dependent on his
income tax status and not on the value of the ETBE product. Since
future AMT constraints and taxable profitability are unpredictable and
can eliminate the value of the income tax credit used for ETBE
blending, the refiner cannot depend on ETBE's future economics being
competitive with those of direct ethanol blending. As a result of this
economic uncertainty under the current tax code, the refiner will have
no choice but to commit to direct ethanol blending to meet a possible
RFS.
To provide equal footing with the tax treatment for ethanol
utilizing the Gasoline Excise Tax Exemption, the uncertainty of the
income tax credit needs to be corrected by modifying the tax codes to
give the refiner access to alternative tax liabilities.
The Senate energy bill from the last Congress included provisions
that would make the necessary correction. The Joint Committee on
Taxation, in a letter dated February 7, 2002, determined that the score
for this adjustment would be negligible. We encourage the 108th
Congress to make the same correction.
Comparable Product Liability Protection to Ethanol and Ethanol Blends
The Senate energy bill from last Congress provided product
liability protection for ethanol and ethanol blending in gasoline. ETBE
viability will depend on equal liability protection as that afforded to
ethanol. We urge Congress to assure the equal treatment by removing the
ether exemptions included in last year's Senate bill.
Independent Health and Environmental Fate Review
Though industry has provided the required health and environmental
fate studies required to safely commercialize ETBE both in the US and
Europe, further studies may be required to improve the acceptance of
ETBE as a fuel additive. An independent third party health and
environmental fate study of ETBE, similar to that done for ethanol
blends, may be necessary.
Transition Cost Assistance for MTBE producers switching to ETBE
production
Though much of the MTBE capacity (approximately 30%) in the US
already has the flexibility to produce ETBE, the economic hurdles and
risk for the remaining MTBE capacity may still be too great a risk to
obtain the necessary capital from the finance community. Therefore, any
transition cost assistance program for the MTBE industry should be
extended to include those willing to convert their MTBE process units
over to ETBE.
Without these changes or additions, the uncertainty and added risk
for potential ETBE users will be too great. As a result, it would be
very unlikely that the market for this beneficial product would be
realized.
Mr. Chairman, Lyondell believes that ETBE can make an important
contribution to increased gasoline supplies and cleaner air without
negatively impacting groundwater. We ask your support for the necessary
legislative provisions that would allow the benefits of ETBE to become
a reality.
______
Calpine Corporation
25 March 2003
The Honorable Joe Barton
Chairman, Subcommittee on Energy & Air Quality
House Energy and Commerce Committee
Washington, DC 20515-6115
Dear Chairman Barton: I very much appreciated the opportunity to
testify before the Subcommittee on March 13th, and I thank you for your
keen interest in our industry.
Attached, please find my reply to your subsequent question of March
14th. Please do not hesitate to contact me for any further information
or clarification.
Sincerely,
Ron Walter
Executive Vice President
Question: ``Mr. Walter, I understand that Calpine is an independent
generator, thus you build power plants in a variety of states and try
to sell power on the electrical grid. How does your ability to sell
power differ from states that are open to competition to those that are
closed?''
Answer: Calpine builds and operates power plants throughout the
United States and sells electric energy at wholesale. Some of Calpine's
plants are located in regions where transmission and reliability
functions are managed by an Independent System Operator (ISO), which
also administers markets for energy and capacity. Calpine also operates
in regions where the transmission grid remains under the direct control
of vertically integrated monopoly utilities. Calpine sells power under
long term contracts wherever and whenever possible and also bids into
spot and day-ahead markets where these exist.
In regions where ISOs/RTOs are fully operational and markets are
independently administered, Calpine, like all market participants, can
be assured of fair and objective treatment in terms of interconnection
to the grid, access to the grid and scheduling of transmission service.
In these regions, we also find an order of dispatch that adheres
strictly to economic merit (with due regard to security constraints),
energy prices that are the result of competitive behavior,
independently verifiable prices for congestion, and predictable market
rules. In these regions, wholesale customers have the ability to access
the most efficient generator at the most competitive price. Also in
these regions, price discovery and operational behavior is made
transparent by real time posting of results on publicly accessible
Oasis or other internet-based platforms.
In regions where the transmission grid remains under the control of
monopolies and markets are neither independently administered nor
organized, Calpine, like all market participants, typically experiences
costly transmission interconnection, one-party, non verifiable
calculation of available transmission capacity (ATC), and access to the
grid under terms and conditions that are not equally imposed by the
transmission owner on itself and its affiliates and on all other market
participants. We also experience unpredictable scheduling of
transmission service and no market-based value for congestion. In these
regions, there is no publicly posted daily order of dispatch and
therefore no independently verifiable economic merit for the dispatch.
There is also an absence of spot and day ahead and forward markets for
generation capacity and energy, absence of market signals for
construction of new generation and transmission, an unequal playing
field in regard to rate and non-rate treatment of investment and fuel
costs, and indefinitely postponed retirement of older, inefficient,
high emission generating plants.
Procurement of wholesale power differs widely from state to state.
In Calpine's experience, States that have restructured to allow for
competition have concurrently leveled the playing field, thereby
assuring equal access to the market for both native utilities and
independent power producers. In pro-competition states, it is typical
for state regulatory commissions to affirmatively oversee the
procurement process in order to ensure that it is conducted openly and
fairly and that the results are independently verifiable. By contrast,
in states with protected markets, procurement of supplies at the
wholesale level by the native utility is generally carried out under
somewhat opaque rules that frequently result in the award of contracts
to the utility itself or to its affiliates. Recent examples of such
procurement practices can be found in Missouri, Wisconsin and
Louisiana, among others.
Question: Mr. Walter: How would the Federal Energy Regulatory
Commission's (FERC) commitment to open access help or hurt your company
and what would the impact be on consumers?
Answer: Open access, and related independently managed dispatch and
market functions, are conditions precedent to a competitive
marketplace. Without non-discriminatory open access to the grid,
Calpine is unable to reach potential customers and remains therefore
entirely captive of the native utility to which its plants are
connected. In the South and West, where competitive markets are either
limited or nonexistent, and where transmission access is not
independently administered by ISOs/RTOs, Calpine faces continuing
difficulties in obtaining transmission service from the local,
vertically integrated utilities. In sum, only an independent third
party such as an ISO/RTO can guarantee access to the grid, for all
market participants, on equal, non-discriminatory terms and conditions.
Consumers and ratepayers benefit from open access and related
competitive markets in several important ways:
1. The evidence is incontrovertible that competitive power markets
exert downward pressure on prices. As stated in my testimony,
this has directly contributed to the more than 30% reduction in
residential rates in the last fifteen years. This is true,
notwithstanding the short but aberrant experience with the
flawed California ``market.''
2. In Texas, over 6,000 MW of outdated generation capacity is scheduled
for retirement because it is no longer economically
competitive. Ratepayers will consequently no longer carry the
burden of the cost of this inefficient capacity.
3. In Louisiana, a competitive market based on true economic dispatch
would likely result in the retirement of up to 15,000 MW of
outdated gas/oil fired generation. The difference between the
existing, outdated capacity and the state-of-the-art capacity
that is available to replace it would be:
A near 40% decrease in fuel use (whose costs are currently
directly assigned to ratepayers),
Elimination from the rate base of the un-amortized plant
investment
A 93% reduction in NOX emissions
A 47% reduction in CO2 emissions.
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