- ELECTRIC GRID RELIABILITY

[Senate Hearing 113-271]
[From the U.S. Government Publishing Office]

S. Hrg. 113-271

ELECTRIC GRID RELIABILITY

=======================================================================

HEARING

before the

COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

KEEPING THE LIGHTS ON--ARE WE DOING ENOUGH TO ENSURE THE RELIABILITY
AND SECURITY OF THE U.S. ELECTRIC GRID?

__________

APRIL 10, 2014

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Printed for the use of the
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COMMITTEE ON ENERGY AND NATURAL RESOURCES

MARY L. LANDRIEU, Louisiana, Chair

RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan DEAN HELLER, Nevada
MARK UDALL, Colorado JEFF FLAKE, Arizona
AL FRANKEN, Minnesota TIM SCOTT, South Carolina
JOE MANCHIN, III, West Virginia LAMAR ALEXANDER, Tennessee
BRIAN SCHATZ, Hawaii ROB PORTMAN, Ohio
MARTIN HEINRICH, New Mexico JOHN HOEVEN, North Dakota
TAMMY BALDWIN, Wisconsin

Elizabeth Leoty Craddock, Staff Director
Sam E. Fowler, Chief Counsel
Karen K. Billups, Republican Staff Director
Patrick J. McCormick III, Republican Chief Counsel

C O N T E N T S

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STATEMENTS

Page

Akins, Nicholas K., Chairman, President and Chief Executive
Officer, American Electric Power............................... 58
Cauley, Gerry, President and Chief Executive Officer, North
American Electric Reliability Corporation...................... 12
Hill, Thad, President and Chief Operating Officer, Calpine
Corporation.................................................... 68
Honorable, Colette D., President, National Association of
Regulatory Utility Commissioners (NARUC), Chairman, Arkansas
Public Service Commission...................................... 27
Hunter, James L., Director, International Brotherhood of
Electrical Workers Utility Department.......................... 65
Kelly, Sue, President and CEO, American Public Power Association. 20
Kormos, Michael J., Executive Vice President-Operations, PJM
Interconnection LLC............................................ 54
LaFleur, Cheryl A,, Acting Chairman, Federal Energy Regulatory
Commission..................................................... 5
Landrieu, Hon. Mary L., U.S. Senator From Louisiana.............. 1
Moeller, Philip D., Commissioner, Federal Energy Regulatory
Commission..................................................... 51
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 3
Roberto, Cheryl L,, Associate Vice President, EDF Clean Energy
Program, Environmental Defense Fund............................ 72

APPENDIXES
Appendix I

Responses to additional questions................................ 91

Appendix II

Additional material submitted for the record..................... 129

ELECTRIC GRID RELIABILITY

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THURSDAY, APRIL 10, 2014

U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:36 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Mary Landrieu,
chairman, presiding.

OPENING STATEMENT OF HON. MARY LANDRIEU, U.S. SENATOR FROM
LOUISIANA

The Chairman. Good morning.
Thank everyone for joining us for this important hearing
this morning entitled, ``Keeping the lights on--are we doing
enough to ensure the reliability and security of the electric
grid?''
I'm pleased to chair the first oversight hearing that this
committee has had in quite some time on this important subject.
This subject is important to many members of the Senate as
recently indicated by letters sent on a variety of different
issues, as well as to members of this committee. I thank the
members for joining us this morning.
Affordability and reliability of the electric grid is so
commonplace in America today that most people spend little time
even thinking about it. Except, of course, when the power goes
out and when the lights go off. Whether for a few minutes, a
few days or a few weeks, it can be inconvenient. It can be
maddening. It can also be life threatening.
In a small neighborhood just a few blocks from the New York
Stock Exchange in 1882 Thomas Edison's Pearl Street Station in
lower Manhattan illuminated 400 lamps in homes, offices and
businesses for the first time for 85 customers. It was indeed a
glimmer of how electricity would come to dramatically change
and improve and strengthen our country and make our daily lives
more convenient and more prosperous.
The U.S. electrification rate steadily increased from there
from a few percentage points in the early 1900s to about 70
percent in the early 1930s. But at that point only 10 percent
of rural households in America had electricity compared to 90
percent of urban homes. With government action and great effort
on the part of many parties, rural electrification ramped up
and was near 100 percent by 1960.
During the 20th century electricity production in the U.S.
shifted from being produced primarily from coal and hydropower
to a diverse mix of coal, natural gas, nuclear, petroleum and
recently, other renewables. With the rapid development of new
technologies, 50 years from now, we can be certain that there
will be even more diversity in electric energy sources that
power our country.
However, as the economy and technology rapidly evolve our
dependence on electricity only grows. Think about your average
day and how much we all rely on electricity.
The alarm clock or charged cell phone that wakes you up in
the morning.
The coffee pot that brews your morning coffee, the toaster
that warms a bagel or refrigerators that keep fruit fresh.
Traffic lights that make your commute to work safer or the
phone that you use to stay in contact with friends and family
to conduct important business.
That's just to mention a few.
These are just a few of the ways we rely on electricity in
our daily lives. A power outage of even a few minutes can be a
terrible inconvenience. It can be a costly occurrence or it
could be a real threat to public health, particularly when
temperatures are very high or very low or in the aftermath of
storms, disasters, hurricanes, floods, tornadoes, mudslides, or
fires.
In Louisiana we felt the impacts of long term power outages
after natural disasters which while understandable, were still
extremely difficult to deal with.
Today our committee is here to receive testimony about what
both the public and private organizations that have
responsibility for the electric grid are doing to maintain it
and to prevent brown outs or black outs. Can this grid be made
smarter, safer, more secure? Can we do so in a cost effective
way?
Our first panel will focus on new and emerging cyber
threats as well as long standing physical threats to the
electricity grid.
This committee has already taken steps to address this
issue by including in the Energy Policy Act of 2005 a first of
its kind provision to establish reliability standards,
including ones to address cyber threats to the Nation's
electric grid. In fact the electricity sector is still the only
part of our national, critical infrastructure that is subject
to binding cyber threat standards.
We will discuss some of that today.
As far as the physical threat to the electric grid is
concerned, the attack last year on the Metcalf substation in
California's Silicon Valley was the most serious attack ever on
the U.S. electric system. Fortunately Metcalf did not result in
a blackout in Silicon Valley, the horrors of which could only
be imagined. But the incident, as it's been reported, came very
close to causing the shutdown of a large portion of the Western
grid.
I commend the electricity industry and its Federal and
State partners involved for the significant improvements
they've made to reduce risk of a physical attack since that
took place.
I also know that last month FERC voted to direct NERC, the
North American Electricity Reliability Corporation, to direct
some additional standards and gave it 90 days to do so.
Grid reliability is a responsibility of the electricity
industry, as well as State and Federal agency partners. Each of
us has a role to play. In my view it is essential that
information regarding an attack or a threat of an attack be
transmitted to others that need that information in a timely,
secure and actionable fashion.
I'd like at this time to submit a letter regarding Senator
Feinstein's letter to the record and the response by Chairman
LaFleur on this subject that we will go into in more detail.
Without objection it will be submitted.
I believe that we must take, very seriously, these issues
and develop appropriate responses to these threats. But the
response must fit the size and nature of the threat. One size
does not fit all.
In Louisiana we have two large utility companies, Entergy
and CLECO, as well as a number of relatively small rural co-ops
and of course, municipal utilities. It just doesn't make sense
for small co-ops with minimal critical infrastructure to be
subject to the same requirements as larger suppliers. We must
keep that in mind.
Our second panel will focus on different aspects of the
reliability challenge, such as whether or not there's
sufficient generation and unfettered transmission to keep the
lights on when electricity demands peak throughout the country.
Senator Manchin and Senator Franken have been particularly
focused on this issue. The adequacy of power generation differs
a great deal from region to region. So rather than tackling the
entire issue at once, at the request of Senator Manchin, who is
here today, we'll look at the impact of coal fired generation
requirements in the PGM system reliability during the Polar
Vortex earlier this year.
I appreciate all of the Senator's concerns regarding the
threat to reliability from coal fired plant retirements caused
by new environmental standards as well as competition from the
gas market. The question of coal retirement is multifaceted.
There are different perspectives that will be shared today. I
look forward to a lively discussion on this question with the
second panel.
So in closing, we have a panel of expert witnesses here
today to discuss these issues.
Senator Murkowski, I thank you for your help in planning
this hearing today and for your cooperation, from you and your
staff. I want to thank all of you who traveled a great distance
to be with us today.
I'll now turn it over to Senator Murkowski for her opening
statement.

STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA

Senator Murkowski. Thank you, Madame Chairman.
I appreciate the opportunity to discuss, not only an
important and critical issue, but really very, very timely. The
hearing title, ``Are we doing enough to ensure the reliability
and security of the U.S. grid?'' is a central question that is
posed today. But really everybody in this room already knows
the answer to this question. We can always do more.
The next and more important question then is how should we
prioritize those efforts?
We can judge, I think, Madame Chairman, by the very filled
committee room this morning just how important this issue has
become when we've got standing room only on electric
reliability, I think that that says something about the
importance of this issue. We can judge from recent press
reports that our first commitment should really be to do no
harm or at least no further harm.
You've mentioned the Metcalf incident. Recent stories about
last year's Metcalf incident and a FERC report detailing
critical energy infrastructure information have served to
sensationalize the issue of physical grid security. Instead of
helping to protect the grid from attack the disclosures that we
have seen potentially increase its physical vulnerability.
Last month, Madame Chair, you and I wrote and asked the
Energy Department's Inspector General to review both the
handling of this sensitive, non public information and how it
came to be published in the Wall Street Journal. Late yesterday
Inspector General Friedman issued a formal management alert
informing FERC to the fact that this information should have
been classified and protected from release at the time that it
was created. This revelation, with its national security
implications, I find, extremely troubling. I would commend the
Chair, Chairman LaFleur, for taking swift action in response to
this report to secure the classified information.
But regardless of how sensitive national security
information was handled at FERC or how it found its way to a
reporter and we have asked EIG to find this out. The owners of
the grid and their regulators are quick to respond to incidents
such as Metcalf. Making use of the regulatory framework
established by Congress in the 2005 Energy Policy Act NERC
provided needed information in a timely fashion. A number of
government agencies, including the FERC, DHS and the FBI,
undertook significant work with the industry to promote
mitigation measures.
Then last month, under the leadership of Chair LaFleur,
FERC directed NERC to develop a mandatory standard on physical
security within 90 days. Even before the standard setting
process was underway we saw lessons learned from Metcalf being
applied. I think that that is critically important here.
As experts have recognized for some time, it is likely
impossible to ensure that every part of the grid could
withstand physical or cyber attack. Thus we need to redouble a
properly scaled and continuously improving approach to grid
reliability and security. After the facts about the universe of
today's threats are clear or perhaps just a little more clear,
we can debate whether new legislation might be necessary.
Now some are interested in empowering FERC to direct
emergency actions to protect the grid. I've got my own thoughts
on that. But clearly, the Commission must do better going
forward to protect non public information from disclosure.
But I will say it has been apparent for some time that we
may need to empower FERC to protect the grid from our own
Federal actions. This sort of every day vigilance is not and
need not be high profile. But it's vitally important. We should
not lose sight that for the electric grid reliability and
affordability must remain our core considerations.
The challenge before us is how to maintain and improve
reliability and affordability while keeping environmental
performance in balance.
As you note, Madame Chairman, we've got a very impressive
group of panelists before us today. I thank each of you.
I particularly would like to thank Chairman LaFleur for
your steady leadership there at FERC. Your extensive experience
in the energy industry is indispensible as we tackle these
myriad issues before the FERC including the cyber and the
physical security concerns.
But to each of you and to our second panel as well, equally
credentialed. I appreciate the opportunity to discuss this very
important subject this morning.
Thank you, Madame Chair.
The Chairman. Thank you, Senator Murkowski. Thank you for
joining me in that inquiry.
I'd like to submit to the record the document from the
Inspector General relative to what you and I both referred to
in our opening statements this morning.
Let me, at this time, welcome the panel that is joining us.
First, the Honorable Cheryl LaFleur, Chairman of the
Federal Energy Regulatory Commission. One of FERC's main
responsibilities is maintaining the reliability and resilience
of the grid. Thank you for your leadership. We'll have further
questions.
Next we have Gerry Cauley, President and CEO of NERC, where
he oversees and leads key programs affecting 1,900 North
American bulk power system operators, owners and users.
Next we'd like to welcome Ms. Sue Kelly, President and CEO
of American Public Power, who is advocating for 2,000
nonprofit, community owned, electric utilities throughout the
country in addition to others.
Finally, our last witness is the Honorable Colette
Honorable, Chairman of the Arkansas Public Service Commission.
Chairman Honorable is here representing the National
Association of Regulatory Utility Commissions where she serves
as President.
Welcome. Thank you all for being here.
Why don't we begin with your testimony, Chairman LaFleur?

STATEMENT OF CHERYL A. LAFLEUR, ACTING CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION

Ms. LaFleur. Thank you.
Chairman Landrieu, Ranking Member Murkowski and members of
the committee, my name is Cheryl LaFleur.
For nearly 4 years I've had the honor of serving on the
Federal Energy Regulatory Commission. I appear before you as
FERC's Acting Chairman, an appointment that I received in
November. I'd like to thank the committee for holding this
hearing and inviting me to testify.
One of my first decisions at FERC was to make electric
reliability a personal priority. FERC supports the reliability
of the electric grid in several ways.
First, we directly oversee the development and enforcement
of mandatory reliability standards for the bulk electric
system.
We also support reliability through our regulation of
wholesale rates and markets which compensate resources and send
investment signals needed for reliability and of interstate
electric transmission.
Finally, FERC is responsible for permitting energy
infrastructure including gas pipelines, LNG terminals and hydro
facilities.
The reliability and resilience of the grid really stems
from how it's planned, constructed, operated and how asset
owners respond to and learn from events that happen. That means
that in setting and overseeing reliability standards the FERC
has to pay attention to nuts and bolts issues like trimming
trees all the way to emerging issues like cyber security. Last
November we approved the fifth generation of NERC cyber
security standards that for the first time requires all bulk
electric system cyber assets to receive cyber protection
commensurate with their impact on the grid.
Reliability also requires protecting the physical security
of the grid assets from tampering, vandalism and sabotage. The
topic of physical security was highlighted by the April 2013
attack on the Metcalf substation in Northern California. In the
wake of that attack FERC worked with other Federal agencies to
communicate the facts of the attack and lessons learned.
FERC, also providing guidance to asset owners on steps they
could take to improve security based on modeling it had
performed. In addition to these efforts on March 7, 2014, FERC
directed NERC to develop mandatory physical security standards
for the grid within 90 days. In directing NERC to develop these
standards we recognize that many asset owners had already taken
steps to protect their critical facilities, but a mandatory
standard will reinforce, strengthen and broaden these efforts.
We also recognize that not every facility is alike. It's
very important that we have the list right and protect the most
critical facilities and that the responsive actions be
customized to the specific location's circumstance.
I'd like to discuss another aspect of this issue that's
received considerable attention. As I noted earlier FERC has
applied its familiarity with grid operations to perform
sophisticated modeling to identify system vulnerabilities. Last
month the Wall Street Journal published an article that
included some details of such FERC modeling. I stated then and
I continue to believe that publication of such information
about the grid undermines its security.
I appreciate Chairman Landrieu's and Ranking Member
Murkowski's recent statements highlighting the importance of
protecting this type of information.
In light of the release of internal FERC modeling
information we are working on many fronts to understand what
happened and to ensure that it does not happen again. As part
of this effort I asked the Department of Energy Inspector
General to advise us on how we could improve our processes with
respect to information security. Yesterday the Inspector
General issued a management alert indicating that some of
FERC's modeling work when it was created in early 2013 should
have been designated as classified information at at least the
secret level rather than as critical energy infrastructure
information as it was classified.
The Inspector General outlined a number of specific steps
to take. We are taking them immediately and giving it a top
priority.
What we look forward to is further recommendations. We're
doing our own work in how we can improve our processes and
culture to make sure this doesn't happen again. It's critical
that the public have the confidence that sensitive energy
information is protected.
During my 4 months as acting chairman, they've been
somewhat eventful and FERC has faced many challenges including
the ones we're focused on today. In this area I've repeatedly
emphasized to the really wonderful team of folks who work there
and externally that we have to have our actions guided by two
things.
One is protecting the reliability and security of the grid
for customers.
Second is protecting the integrity of the Commission so
people can have confidence in it.
Thank you for this opportunity to testify. I look forward
to your questions.
[The prepared statement of Ms. LaFleur follows:]

Prepared Statement of Cheryl A. LaFleur, Acting Chairman, Federal
Energy Regulatory Commission
Chairman Landrieu, Ranking Member Murkowski, and Members of the
Committee:
My name is Cheryl LaFleur. For nearly four years, I have had the
honor of serving on the Federal Energy Regulatory Commission. Today, I
appear before you as FERC's Acting Chairman, an appointment that I
received in November.
I would like to thank the Committee for holding this hearing on the
reliability and security of our nation's electric grid and for inviting
me to testify. One of my first decisions as a FERC Commissioner was to
make electric reliability a personal priority. Therefore, I appreciate
the Committee's interest in and commitment to these critical issues.
ferc's role in supporting grid reliability and security
Our nation relies on the electric grid to meet many vital needs: to
power our economy, to bolster our national defense, and to support our
quality of life. At FERC, we take seriously our obligation to the
American people to protect the reliability and security of the electric
grid and to enhance its resilience. Indeed, I believe that reliability
is job one, a fundamental responsibility for FERC and the electric
industry. From my past experience working directly for electricity and
natural gas customers, I know firsthand how hard even a short outage
can be on families, businesses, and communities. And a major
interruption in service could have devastating effects on our nation's
citizens and economy, whether it is caused by severe weather, a
cybersecurity incident, or a physical attack. FERC works with asset
owners and grid operators to address these threats on an ongoing basis.
FERC supports the reliability and security of the electric grid in
several ways. For example, FERC oversees the development and
enforcement of mandatory reliability standards for the bulk power
system. In addition, as part of its responsibility to ensure that
wholesale electric rates are just and reasonable, FERC must ensure that
these rates provide appropriate signals for investment in needed
infrastructure. Further, FERC is responsible for authorizing the
construction of certain energy infrastructure, such as interstate
natural gas pipelines, liquefied natural gas terminals, and non-federal
hydropower generation. The timely development of needed energy
infrastructure supports the reliability of the electric grid. Finally,
experts from FERC work with representatives of other federal and state
agencies and the electric industry to help identify and address threats
to energy infrastructure security.
I would like to briefly discuss the process for establishing
mandatory reliability standards and the continuing evolution of the
relationship among the parties involved. Section 215 of the Federal
Power Act, which Congress enacted as part of the Energy Policy Act of
2005, directs FERC to work with an independent Electric Reliability
Organization (ERO) to develop reliability standards for the bulk power
system. In 2006, FERC certified the North American Electric Reliability
Corporation (NERC) as the ERO. NERC develops reliability standards
pursuant to an open and inclusive stakeholder process and then submits
those standards to FERC for consideration. FERC may either approve a
proposed standard, or, if it identifies any deficiencies, remand the
proposed standard to NERC for further consideration. Section 215 also
authorizes FERC to identify gaps in reliability that require new
standards or modifications to existing standards and to direct the ERO
to address those gaps, but it does not authorize FERC to write or
modify the standards.
Section 215 transformed the relationship among FERC, NERC, and the
electric industry with respect to reliability. It marked the end of a
system under which a group of reliability councils loosely structured
under NERC developed reliability standards, with which the industry
complied on a voluntary basis. Section 215 inaugurated a hybrid system
that retained the industry development of standards through NERC, but
subjected those standards to FERC approval and enforcement.
Now eight years since enactment of section 215, the transition to
the paradigm that it established has gone well in many respects. There
certainly have been growing pains related to the overall level of
demands on the system, the volume of work, and disagreements among the
industry, NERC, and FERC in some areas. However, FERC and NERC continue
to build a strong relationship. We work closely with NERC CEO Gerry
Cauley, his team, and the Regional Entities to advance grid
reliability, security, and resiliency. This collaboration also includes
many stakeholders, such as individual utilities; industry trade
associations like the Edison Electric Institute, the National Rural
Electric Cooperative Association, and the American Public Power
Association, represented here by its President and CEO Sue Kelly; and
the National Association of Regulatory Utility Commissioners, here by
its president, Collette Honorable. I believe it is important to
recognize that, despite the unique nature and relative newness of the
process established in the Energy Policy Act of 2005, FERC, NERC, and
the industry have put in place for the first time foundational
reliability standards that are robust, mandatory, and enforceable.
Overseeing reliability standards for the grid requires that FERC
pay attention to the day-to-day, nuts-and-bolts activities necessary to
keep the lights on, like tree trimming and relay setting coordination,
while also staying abreast of emerging issues. Threats in the former
category, including severe weather, are more familiar, and responses
are relatively well understood. Threats in the latter category are new
and evolving, or at least our understanding of them is evolving over
time.
I believe that FERC is making progress on both of these fronts.
With respect to nuts-and-bolts issues, FERC has issued orders over the
last three-and-a-half years on new or modified reliability standards
for tree trimming, frequency response, reliability planning criteria,
and protection system maintenance and testing, among other areas. Going
forward, the challenge with respect to these and similar day-to-day
issues is to improve on the progress that FERC and NERC have made in
setting priorities, developing and implementing reliability standards,
mitigating violations, and disseminating lessons learned.
We face different challenges with respect to emerging issues, like
cybersecurity and geomagnetic disturbances. When it comes to threats
like these, we do not have the benefit of decades of experience at our
backs; instead, we are in the position of developing meaningful, cost-
effective regulation in an environment of rapid change and imperfect
knowledge. We must avoid both the temptation to defer action until we
have absolute certainty and the pitfall of promulgating specific rules
that rapidly become obsolete. In this regard, I believe that FERC thus
far has struck a good balance, as illustrated in part by our recent
rulemakings on geomagnetic disturbances and cybersecurity.
cyber threats to the grid
Congress referred specifically to cybersecurity when it enacted
section 215 of the Federal Power Act to make electric reliability a
core part of FERC's mission. Pursuant to that authority, FERC in
November 2013 substantially approved Version 5 of the Critical
Infrastructure Protection (CIP) standards. Under the Version 5
standards, all bulk electric system cyber assets, for the first time,
will be required to receive some level of protection, commensurate with
their impact on the grid. This advancement, combined with several new
cyber security controls developed by NERC, established the most
comprehensive cyber protections yet approved by FERC.
FERC also directed two important modifications to the Version 5
standards. First, FERC directed removal of language that requires
certain CIP requirements to be implemented in a manner that
``identifies, assesses, and corrects'' deficiencies. Commenters
disagreed over the obligations imposed by this language, highlighting
its inherent ambiguity and underscoring FERC's previously stated
concerns about its enforceability and consistent application across
regions. While I strongly support NERC's effort to reform its
enforcement process, enforcement considerations should not cause the
standards themselves to be ambiguous. Second, FERC directed NERC to
develop objective criteria against which NERC and FERC can evaluate the
sufficiency of entities' protections for low impact assets. Of course,
by definition, low impact facilities do not pose as great a risk to the
bulk electric system as high or medium impact facilities. However, the
lack of clear standards against which NERC and FERC can evaluate
entities' protections for low impact facilities would undermine one of
the most important improvements in the Version 5 Standards: the
requirement that all bulk electric system cyber assets receive a
defined level of protection commensurate with their impact on the
system. I believe that the Version 5 standards, and the further changes
that FERC directed, are a significant step forward for cybersecurity.
However, because cyber threats are fast-changing, established
standards are not enough. We must also engage other government agencies
and asset owners and operators to communicate threats, share our
expertise, and disseminate lessons learned. President Obama in his
February 2013 Executive Order on cybersecurity called on independent
agencies like FERC to engage voluntarily in the executive branch's
efforts to improve the cybersecurity of the nation's critical
infrastructure. FERC has been an early and sustained voluntary
participant in this process. Through our Office of Energy
Infrastructure and Security, we have worked with the Department of
Homeland Security (DHS), the Department of Energy (DOE), the Federal
Bureau of Investigations (FBI), and others to help support key
initiatives under the Executive Order. Our participation has included
coordinating with our Federal partners to provide information sessions
(including classified briefings) on threats to asset owners and
operators; actively participating in National Institute of Standards
and Technology working groups developing the Cybersecurity Framework;
and assisting DHS in identifying critical energy infrastructure.
physical threats to the grid
Grid reliability and security also requires protecting the physical
security of the assets that make up the grid--protecting them from
tampering, vandalism, and sabotage. FERC has long supported the
physical security of the electric grid as part of our broader emphasis
on strengthening the resilience of our nation's energy infrastructure.
Resilience begins with how the system is planned, designed,
constructed, and operated, and is informed by how asset owners and grid
operators respond to and learn from events. Many of these factors are
addressed in detail in the mandatory reliability standards that I
described earlier in my testimony. At the same time, no single action
or approach is sufficient. Building a resilient grid requires
comprehensive and ongoing assessments under a range of conditions, and
FERC is dedicated to this work.
An important part of these efforts is the sophisticated grid
modeling FERC performs. This modeling, which draws on our subject
matter expertise and helps us fulfill our responsibility to support the
reliability and security of the grid, identifies key energy
infrastructure facilities, taking into account a wide number of
assumptions, factors, and possible scenarios.
The topic of physical security has become more prominent since the
April 2013 attack on the Metcalf substation in northern California. In
the wake of the Metcalf incident, FERC has worked to explain to asset
owners and operators around the country the specific facts of the
attack and the need for asset owners to increase the physical
protection of key facilities. As part of this outreach, we have
participated with NERC, DHS, DOE, and the FBI in a 13-city physical
security campaign (including a detailed briefing about the Metcalf
incident) for utilities, states, and law enforcement agencies in the
United States and Canada. We have also provided asset owners and
operators with guidance on specific steps that they could take to
improve their facilities' physical security, informed by our modeling
and drawing on the combined expertise of FERC, relevant Federal
agencies, and NERC.
In addition to these ongoing efforts, on March 7, 2014, FERC acted
under our statutory authority to oversee reliability standards to
direct NERC to develop physical security standards for the grid within
90 days.
FERC required that these physical security standards include at
least three steps. First, the standards should require owners and
operators of the bulk power system to identify which of their
facilities are critical to the reliable operation of the interstate
grid. A critical facility is a facility that, if rendered inoperable or
damaged, could have a critical impact on the operation of the
interconnection through instability, uncontrolled separation, or
cascading failures on the bulk power system. We acknowledged that the
number of facilities that will qualify as critical will be relatively
small compared to the number of facilities that comprise the bulk power
system, and that not every owner and operator of the grid will have
critical facilities. Second, the mandatory reliability standards should
require owners and operators of identified critical facilities to
evaluate potential threats and vulnerabilities to those facilities.
Third, the mandatory reliability standards must require owners and
operators of critical facilities to develop and implement plans to
protect against attacks to their identified critical facilities.
In directing NERC to develop physical security standards, we
recognized that many in the industry already have taken steps to
identify critical facilities and to protect those facilities from
attack. A mandatory standard will reinforce these efforts and ensure
that all owners and operators of the bulk power system take such
important steps where appropriate. FERC also recognized that there is
not a ``one size fits all'' approach to physical security. Therefore,
we acknowledged that the steps owners and operators should take will
vary based on factors such as location of the critical facility, its
size, function, existing protections, and attractiveness as a target.
While on the subject of physical threats to the grid, I would like
to touch briefly on another aspect of this issue that has received
considerable attention in recent weeks.
As I noted earlier, FERC draws on our familiarity with electric
system operations to perform sophisticated modeling that helps to
identify and address system vulnerabilities. Last month, The Wall
Street Journal published an article that included some details of such
FERC modeling. I stated then, and I continue to believe, that
publication of sensitive information about the grid undermines the
careful work done by professionals who dedicate their careers to
providing the American people with a reliable and secure grid. The Wall
Street Journal appropriately declined to identify by name particularly
critical substations throughout the country. Nonetheless, I view the
publication of other sensitive information as highly irresponsible.
While there may be value in a general discussion of the steps we take
to keep the grid safe, the publication of sensitive material about the
grid crosses the line from transparency to irresponsibility, and gives
those who would do us harm a roadmap to achieve malicious designs. I
appreciate Chairman Landrieu's and Ranking Member Murkowski's recent
statements highlighting the importance of protecting this type of
information.
Under my predecessor, the modeling discussed in The Wall Street
Journal was categorized by FERC as Critical Energy Infrastructure
Information (CEII), a designation set forth in FERC's regulations. My
understanding is that, consistent with those regulations, certain
aspects of such modeling were shared with the owners and operators of
relevant facilities pursuant to non-disclosure agreements.
Unfortunately certain details of FERC's modeling have now been
disseminated widely through The Wall Street Journal. In light of these
events, we are working to fully understand what happened and what we
can do to improve our internal processes to ensure that no similar
disclosure will occur in the future. I have asked the DOE Inspector
General to help advise us about how we could improve our processes with
respect to information security. I look forward to the Inspector
General's report. It is critical that those who deal with FERC are
confident that all sensitive information is protected appropriately.
improving protection against cyber and physical threats to the grid
As discussed above, Congress and the Administration have taken
important steps to protect against cyber and physical threats to the
grid. I am committed to FERC working closely with our governmental
partners to support grid reliability and security to the fullest extent
possible under our existing statutory authority.
I have frequently suggested two legislative changes to further
enhance cyber and physical security. First, I have asked for a
narrowly-focused, FERC-specific Freedom of Information Act (FOIA)
exemption for sensitive information concerning physical or cyber
threats to, or vulnerabilities of, the bulk power system. The recent
decision of the U.S. Court of Appeals for the District of Columbia
Circuit in a case involving the International Boundary and Water
Commission will be useful in protecting such information pursuant to
the ``law enforcement'' exemption under FOIA. However, the specific
contours and reach of the case are not entirely clear. I therefore
believe a new FOIA exemption is still needed to definitively eliminate
any risk of disclosure that may chill the beneficial exchange of
information among FERC, NERC, and the industry.
Second, I have called on Congress to designate a federal department
or agency (not necessarily FERC) with clear and direct authority to
require actions in the event of an emergency involving a physical or
cyber threat to the bulk power system. This authority should include
the ability to require action before a physical or cyber national
security incident has occurred. However, it is important that any such
authority should not impede FERC's existing, above-noted authority
under section 215 to approve reliability standards developed by NERC
through its current processes.
other challenges to grid reliability
Finally, I would like to comment briefly on other challenges to
grid reliability, some of which the second panel at today's hearing
will discuss in greater detail.
As the Committee is well aware, our nation is currently undergoing
major changes in its power supply and associated infrastructure. There
are several drivers of this change. First, our nation is experiencing
significant growth in the use of natural gas for electric generation,
due primarily to the increased availability and affordability of
domestic natural gas, but also to its relative environmental advantages
and its role in balancing the growing fleet of variable resources. A
second factor driving changes in our power supply is the considerable
growth of renewable and demand-side resources, fostered by developments
in technology and by policy initiatives at both the state and Federal
level. Finally, new environmental regulations are also driving changes
in our power supply.
FERC has a role to play in protecting grid reliability as new
environmental regulations are developed and implemented. While it is
not FERC's responsibility to tell the Environmental Protection Agency
(EPA) what regulations to issue under the laws it is responsible for
enforcing, FERC can and should help the EPA understand the implications
that such regulations may have on electric reliability. For example, in
conjunction with the issuance of its Mercury and Air Toxics Standards
(MATS) rule, the EPA indicated that it will seek advice on requests for
extra time for electric generators to comply with the rule. In May
2012, FERC issued a policy statement outlining how it will advise the
EPA on this issue. FERC staff also participates in regular conference
calls with EPA, DOE, and the Regional Transmission Organizations (RTOs)
and Independent System Operators (ISOs) to discuss their efforts to
plan the system to meet future needs, including implementation of EPA
rules.
FERC's interaction with the EPA on the MATS rule provides one
template for FERC lending its expertise on such matters. Similarly, I
believe that it is important for FERC to follow the development of EPA
regulations on greenhouse gas emissions, because such regulations and
state implementation plans could have significant implications for how
the grid is operated in the future.
In addition, because vital decisions in this area will be made at
the state level, FERC can and should reach out to our state colleagues
on these issues. I have served with Commissioner Moeller, who is
testifying on the next panel, as one of FERC's leaders of a Forum on
Reliability and the Environment established jointly by FERC and the
NARUC. This Forum has provided a structure for conversations concerning
these issues, including not only FERC and NARUC representatives, but
also senior EPA officials. I look forward to working with my President
Honorable to continue and build on these efforts.
Finally, although the drivers of power supply changes are largely
outside of FERC's jurisdiction we must work to ensure the energy
industry and markets adapt to these developments in order to carry out
our statutory responsibilities. Just last week, FERC held a technical
conference to explore the impacts of this winter's cold weather events
on the RTOs and ISOs and to discuss actions taken to respond to those
impacts. This technical conference built on FERC's work over the past
two years to explore the need for enhanced coordination between the
electric and natural gas industries in light of significant growth in
the use of natural gas for electric generation. In addition, FERC is
considering how centralized capacity market rules and structures can
best support the procurement and retention of all resources necessary
to meet future reliability and operational needs.
conclusion
During the four months I have had the honor of serving as Acting
Chairman, FERC has faced several substantial challenges, a number of
which the Committee is focusing on today. I have repeatedly emphasized
to the wonderful team of employees at FERC that our actions should be
focused on enhancing the reliability and security of the electric grid
and assuring that the nation's energy infrastructure and markets meet
the changing needs of energy consumers. I look forward to working with
the Committee to advance these vital interests.

The Chairman. Thank you so much.
Mr. Cauley.

STATEMENT OF GERRY CAULEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY CORPORATION

Mr. Cauley. Thank you. Good morning, Chairman Landrieu and
Ranking Member Murkowski and other committee members and fellow
panelists. My name is Gerry Cauley.
I have 3 main points I'd like to offer to the committee
this morning.
The first is that NERC and industry have been working
really hard for a really long time to address both the physical
and cyber security of the power grid as well as the resilience.
Remind the committee that this is a North American
international grid that we do work with.
Not long after 9/11 American industry developed the first
set of physical security guidelines capturing the best
practices across industry in terms of physical security. NERC
approved the first set of cyber security standards in August
2003.
As the Chairman just mentioned FERC just approved the fifth
generation of those cyber standards. They encompass the
entirety of the bulk electric system and they adopt risk based
security methods that are captured in the NIST standards. We
have a very robust audit and compliance program that we go out
and monitor companies through our 8 regions. We've been very
active in ensuring that the companies are mitigating and
addressing issues. So a lot of work has been accomplished in
the area of cyber security.
It's also important to note that the electric industry,
along with nuclear, is the only industry, as was mentioned
previously, that has mandatory cyber security standards.
We have another little known standard that requires
companies, if there is a physical or cyber incident sabotage
even suspected, that they must report it to NERC and they must
report it to law enforcement.
In response to the FERC order of March 7 we've been working
very hard and very quickly. I think the order demonstrates
something I've been saying for quite some time is that the
Commission does have the authority, if needed, to direct NERC
to do a standard that they feel is in the public interest. They
did it previously with the solar magnetic disturbance, standard
order, and now with the physical security order.
I think it's a good order.
It focuses on the most critical assets.
It provides for a risk based approach.
It provides for accountability and verification.
The industry is behind the standard development. They are
supporting us in getting it done. We've taken steps to
abbreviate the process so that we can get this standard done in
the 90 days.
My second point is that NERC has a number of important
tools beyond the use of standards to address physical and cyber
security. We operate the industry's Information Sharing and
Analysis Center, the ISAC. This allows us to share threat
information and other security information with industry and
also collect information from industry and share it with our
government partners.
The ISAC operates in a controlled and confidential
environment so that the information that we're sharing is
maintained secure.
We also have a system of alerts. Since January 2010 we've
issued 27 alerts to industry covering a number of physical and
cyber issues. Immediately following the Metcalf incident last
April, on the very next day on April 16, we provided an alert
to industry outlining the methods and tactics used in the
Metcalf attack and what industry should do to address the
issue.
I believe we have the most robust, private/public
partnership between industry and government through our
Electricity Sector Coordinating Council. We have approximately
30 CEOs, not information officers, not security officers, but
the CEOs themselves, meeting on a quarterly basis with the top
officials from the various government agencies, including the
White House, Homeland Security, DOE, NSA, FBI and so on. We
meet quarterly. We discuss what actions we can take to improve
information sharing, incident response and tools.
NERC facilitated last November a great exercise that was a
severe level attack. I think was an opportunity for us to
demonstrate our readiness, but also identify what areas we need
to improve in terms of ensuring security and reliability.
My third point, Madame Chair, is a direct response to the
question of the hearing, you know, keeping the lights on, are
we doing enough?
My answer is we are doing enough. We're doing the right
things. We're doing the right things on a prioritized basis.
We're making progress and continuously improving.
The Metcalf incident was serious. But it's also a good
example of the resiliency of the grid. No customer outages
occurred during that incident.
But also Metcalf is an important turning point. It's a
signal about looking at physical security from a different
perspective, not just keeping bad people out of substations but
other aspects of security.
But in the context of all the things we look at, physical
and cyber security, there are many other issues that we have to
weigh. The storm is under a constant attack from natural
phenomena, storms. We have issues with operator training, human
error, equipment failures. So we want to make sure that we take
the cyber and physical aspects into context of the full
spectrum of risk that we have to manage.
Thank you. I look forward to your questions.
[The prepared statement of Mr.Cauley follows:]

Prepared Statement of Gerry Cauley, President and Chief Executive
Officer, North American Electric Reliability Corporation
introduction
Good morning Chair Landrieu, Ranking Member Murkowski, members of
the Committee and fellow panelists. My name is Gerry Cauley and I am
the President and CEO of the North American Electric Reliability
Corporation (NERC). NERC was designated the Electric Reliability
Organization (ERO) by the Federal Energy Regulatory Commission (FERC)
in accordance with Section 215 of the Federal Power Act (FPA), enacted
by the Energy Policy Act of 2005.
I testified before this Committee in May 2011 and July 2012 on the
subject of cybersecurity and the grid, and I appreciate the opportunity
to update the Committee on NERC's ongoing cybersecurity and physical
security activities to ensure reliability of the bulk-power system
(BPS). These activities include, but are not limited to:

Developing a physical security standard (as directed by FERC
on March 7, 2014), and conducting outreach to industry in
conjunction with our federal partners;
Planning and participating in a 13-city outreach effort in
response to a physical security attack at a California
substation;
Receiving FERC approval on Critical Infrastructure
Protection (CIP) Version 5 standards in November 2013, our most
updated version of the mandatory cybersecurity standards;
Issuing alerts related to cybersecurity and physical
security concerns and continuing information sharing through
the Electricity Sector Information Sharing and Analysis Center
(ES-ISAC);
Facilitating Grid Security Exercise (GridEx) II, for the
Electricity Sub-sector in North America with more than 2000
participants;
Participating in the Electricity Sub-sector Coordinating
Council (ESCC), which provides a forum for communication
between public and private sector partners in the Electricity
Sub-sector; and
Contributing to activities related to Executive Order (EO)
13636 and Presidential Policy Directive (PPD) 21, as well as
supporting the White House-initiated, Department of Energy
(DOE)-led Electricity Sub-sector Cybersecurity Capability
Maturity Model (ES-C2M2), which will assist with development
and measurement of cybersecurity capabilities within the sub-
sector.
the security challenge for the grid
The electric grid is one of the Nation's most critical
infrastructures. The North American BPS is one of the largest, most
complex, and most robust systems ever created. Several, if not all, of
the other critical infrastructure sectors are dependent on electric
power. As CEO of the organization charged with ensuring the reliability
and security of the North American grid, I am deeply concerned about
the changing risk landscape from conventional risks, such as extreme
weather and equipment failures, to new and emerging risks in the
security arena. As I said in my testimony in 2011, I am most concerned
about coordinated physical and cyber attacks intended to disable
elements of the power grid or deny electricity to specific targets,
such as government or business centers, military installations, or
other infrastructures. These threats differ from conventional risks in
that they result from intentional actions by adversaries and are not
simply random failures or acts of nature. NERC and industry take these
threats very seriously. Long before the advent of mandatory standards,
NERC and industry participants have worked to address physical and
cyber threats to critical assets. These threats are not new, but have
evolved and continue to demand more and more attention from industry,
which faces numerous risks. Recognizing the costs for ratepayers
associated with these efforts requires prioritization, along with risk
management, to ensure that we are focusing resources on the greatest
risks to the reliability of the BPS.
physical security
In April of last year, a substation in California was the site of a
physical attack. It is important to note the attack did not result in a
power outage; in fact, no customers lost service. Nevertheless, the
incident is a reminder of the vulnerabilities of our BPS and while
rare, demonstrates that attacks are possible and have the potential to
cause significant damage to assets and disrupt customer service. I
would like to commend the owner of the substation for working
tirelessly to not only recover from this attack, but to readily share
lessons learned with government authorities and industry. Immediately
after the event, the ES-ISAC issued an alert to inform industry of the
event and provide advice on steps to mitigate and protect against such
attacks. In addition, the ES-ISAC, DOE, FERC, the Department of
Homeland Security (DHS), and the Federal Bureau of Investigation (FBI)
developed an outreach effort to raise awareness of the event, inform
industry of mitigation activities, and provide a forum for industry to
meet with state, local, and federal authorities to discuss physical
security concerns for their regions. This was an unprecedented public-
private partnership effort to address physical security concerns and
involved US and Canadian interests.
After September 11, 2001, industry developed and updated physical
security guidelines to address the need for coordination and
communication. These security guidelines address physical security
response, best practices, and substation security. Specifically, they
provide guidance on:

Addressing potential risks;
Identifying practices that can help mitigate the risks;
Determining risk for an organization and practices
appropriate to manage its risk;
Identifying actions that industry should consider when
responding to threat alerts received from the ES-ISAC and other
organizations;
Defining the scope of actions each organization may
implement for its specific response plan; and
Conducting assessment of and categorizing vulnerability and
risk to critical facilities and functions.

In addition to these guidelines, NERC has a mandatory standard
requiring reporting to NERC and law enforcement of physical damage or
destruction of a facility or threats to damage or destroy a facility
(EOP-004-2).
NERC is developing a physical security standard, which FERC ordered
on March 7, 2014. NERC has 90 days to complete the standard and provide
it to FERC for approval. This standard will address physical security
threats and vulnerabilities for the most critical facilities and will
focus on risk management activities and foundational physical security
practices. The drafting team has already been formed and we fully
intend to produce a standard in the timeline identified.
nerc measures to address cyber threats and vulnerabilities
To address this changing risk landscape, NERC has worked with
industry and government to better understand security risks and manage
those risks. Based on all of the work NERC has been involved in to
date, it is clear that the most effective approach against adversaries
exploiting the newer risk landscape is through thoughtful application
of resiliency principles. Resiliency requires proactive readiness for
whatever may come our way and includes robustness; the ability to
minimize consequences in real-time; the ability to restore essential
services; and the ability to adapt and learn.
As I testified in 2012, NERC has developed a strategic approach to
ensure reliability of the BPS, focusing on five main elements: 1)
developing mandatory and enforceable standards; 2) ensuring compliance
and audit oversight; 3) enhancing the ES-ISAC capabilities; 4) engaging
in public-private partnerships; and 5) conducting outreach, training,
and education activities within and external to the BPS such as GridEx.
nerc's mandatory and enforceable cip standards
Since 2007, NERC has updated its standards to reflect the changing
cybersecurity landscape. On November 21, 2013, FERC issued an order
approving CIP Version 5. CIP Version 5 requires that all cyber assets
must now be categorized as Low, Medium, or High Impact assets. The
revised standards also include 12 new requirements with new
cybersecurity controls to address emerging cyber threats. In addition,
CIP Version 5 removes technology-specific requirements by replacing
them with a risk-based approach to implementing appropriate and
changing technologies. That is, rather than specifying how to implement
a requirement, the revised requirements specify the risk-based result
that must be achieved, which enables industry to implement new and
emerging technologies to address the risk. NERC is working with
industry on the transition to this new standard, which is one of the
most comprehensive, risk-based standards ever mandated.
ensuring compliance and audit oversight
Concurrent with developing mandatory reliability standards, NERC
supports the ERO's Regional Entities to improve the consistency of
compliance program results, improve risk-based approaches for auditing
and spot checking, and promote a culture of security and compliance
through education, transparency, and incentives. During this process,
NERC seeks to capture compliance applications, positive observations,
lessons learned, and recommendations. NERC's audit oversights enable
NERC to evaluate the processes and criteria used by Regional Entities
in their determination of registered entities' compliance with the NERC
Reliability Standards, including the CIP Standards.
Compliance with the NERC CIP standards is an important element for
properly securing the BPS. However, no single security asset,
technique, procedure, or standard--even if strictly followed--will
protect an entity from all potential cyber threats. The cybersecurity
threat environment is constantly changing and our defenses must keep
pace. Security best practices call for additional capabilities and
technologies beyond those required by the CIP standards.
enhancing the es-isac's capabilities
Not all threats and vulnerabilities can be mitigated through a
reliability standard. In such cases, NERC uses tools and technologies
through the ES-ISAC, including Alerts and a secure web portal. The ES-
ISAC gathers information from electric industry participants across
North America about security-related events, disturbances, and off-
normal occurrences within the Electricity Sub-sector and shares that
information with key governmental entities. In turn, these governmental
entities provide the ES-ISAC with information regarding risks, threats,
and warnings that the ES-ISAC is then responsible for disseminating
throughout the Electricity Sub-sector.
The two functions that the ES-ISAC supports, information sharing
and analysis, are vitally important to all other critical
infrastructures and key resource sectors that have active ISACs.
Effective collaboration and communication is essential to addressing
infrastructure protection and resilience within each sector, as well as
the important interdependencies that exist among sectors.
For many companies in the Electricity Sub-sector, the ES-ISAC
portal is the first and often primary interface with the ES-ISAC. It
allows the ISAC to reach thousands of industry members and hundreds of
organizations across the sub-sector and is the mechanism for industry
and government to contact ES-ISAC staff with questions, concerns, and
security-related information in a secure manner.
NERC Alerts
NERC staff with appropriate security clearances often work with
cleared personnel from Federal agencies to communicate unclassified
sensitive information to the industry in the form of NERC Alerts. As
defined in NERC's Rules of Procedure, the ES-ISAC developed the
following three levels of Alerts for formal notice to industry
regarding security issues:

Industry Advisory. Purely informational, intended to alert
registered entities to issues or potential problems. A response
to NERC is not necessary.
Recommendation to Industry. Recommends specific action be
taken by registered entities. Requires a response from
recipients as defined in the Alert.
Essential Action. Identifies actions deemed to be
``essential'' to BPS reliability and requires NERC Board of
Trustees approval prior to issuance. Like recommendations,
essential actions require recipients to respond as defined in
the Alert.

NERC determines the appropriate Alert notification based on the
risk to the BPS. Generally, NERC distributes Alerts broadly to users,
owners, and operators of the North American BPS using its Compliance
Registry. Entities registered with NERC are required to provide and
maintain updated compliance and cybersecurity contacts. NERC also
distributes the Alerts beyond BPS users, owners, and operators to
include other electricity industry participants who need the
information. Alerts may also be targeted to groups of entities based on
their NERC-registered functions (e.g., Balancing Authorities,
Transmission Operators, Generation Owners, etc.).
Alerts are developed with the strong partnership of Federal
technical organizations, including FERC, DOE National Laboratories,
DHS, and BPS subject matter experts (SME), called the HYDRA team. NERC
has issued 27 CIP-related Alerts since January 2010 (25 Industry
Advisories and two Recommendations to Industry). Those Alerts covered
items such as Sabotage events, Aurora, Stuxnet, Night Dragon, and the
reporting of suspicious activity. Responses to Alerts and mitigation
efforts are identified and tracked, with follow-up provided to
individual owners and operators and key stakeholders. In addition, NERC
released one Joint Product CIP Awareness Bulletin in collaboration with
DOE, DHS, and the FBI titled, ``Remote Access Attacks: Advanced
Attackers Compromise Virtual Private Networks (VPN).'' The ES-ISAC also
routinely shares actionable threat information through the portal to
defend against cyber attacks; this information sharing is a daily
activity.
The NERC Alert system is working well. It is understood by
industry, handles sensitive information, and communicates this
information in an expedited manner. The information needed to develop
the Alert is managed in a confidential manner and does not require a
NERC balloting process. Information sharing through the ES-ISAC is the
greatest asset we have to combat emerging threats to cybersecurity and
help ensure the reliability of the BPS.
As a result, NERC continues to grow the ES-ISAC's capabilities by
enhancing the ES-ISAC's private, secure portal to receive voluntary
reports from industry members and working with various organizations
(both industry and government) to obtain the data and mechanisms
necessary to conduct these information sharing activities.
engaging in public-private partnerships
NERC works closely with Electricity Sub-sector members, other
sectors, and our government partners on cybersecurity matters on a
regular basis through both formal and informal structures. NERC works
closely with the Electricity Sub?sector Coordinating Council (ESCC). As
NERC's CEO, I am a member of the ESCC, which coordinates policy-related
activities and initiatives to improve the reliability and resilience of
the Electricity Sub-sector. The roles of the ESCC are to represent the
Electricity Sub-sector, to build relationships with government and
other critical infrastructure sectors, and to participate in joint
initiatives as part of the ``partnership framework'' envisioned by the
National Infrastructure Protection Plan and Energy Sector-Specific
Plan. This past year, the ESCC underwent changes to broaden membership
to 30 CEO?level representatives, formally recognizing the significant
increased CEO interest and participation on cybersecurity issues. The
ESCC's focus to address physical security and cybersecurity issues,
working alongside our government partners, remains unchanged.
A broader partnership activity NERC was heavily engaged in this
past year was helping to implement EO-13636 and PPD-21. NERC and
industry SMEs participated in the working groups to help shape the
final products. The various EO and PPD working group activities all
focused on enhancing public-private partnerships, developing tools and
best practices for sectors to use, and ultimately, reducing risk to
critical infrastructure sectors. For all of these efforts, NERC worked
closely with industry representatives and government partners to build
new and improve upon existing cybersecurity-focused capabilities,
processes, and products.
NERC also continues to provide leadership to significant DHS-
affiliated public-private partnerships. These groups are:

Cross-Sector Cyber Security Working Group, which was
established to coordinate cross-sector initiatives that promote
public and private efforts to help ensure secure, safe, and
reliable critical infrastructure services; and
Industrial Control Systems Joint Working Group, which is a
cross-sector industrial control systems working group that
focuses on the areas of education, cross-sector strategic
roadmap development, and coordinated efforts to develop better
vendor focus on security needs for industrial control systems.

Within the sub-sector, NERC's Critical Infrastructure Protection
Committee (CIPC) focuses on both physical security and cybersecurity
issues impacting the BPS. The committee consists of both NERC-appointed
regional representatives and technical SMEs. CIPC coordinates NERC's
security initiatives and serves as an expert advisory panel to the NERC
Board of Trustees, standing committees in the areas of physical
security and cybersecurity, and the ES-ISAC. CIPC also coordinates with
government individuals and entities to hold joint briefings and
participate in other activities to address security policy matters.
NERC also collaborates with the Industrial Control Systems Cyber
Emergency Response Team to share threat, vulnerability, and security
incident information.
conducting outreach, training, and education activities
In addition to collaborating with industry and government partners,
NERC regularly conducts outreach to and training for our partners. We
do so through assessments, exercises, webinars, and guidelines.
GridEx II
In 2011, NERC facilitated the first-ever GridEx for the Electricity
Sub-sector in North America. NERC now holds a biennial distributed play
exercise and executive tabletop discussion to:

Exercise the current readiness of the electricity industry
to respond to a security incident, incorporating lessons
learned;
Review existing command, control, and communication plans
and tools for NERC and its stakeholders;
Identify potential improvements in cybersecurity and
physical security plans, programs, and responder skills; and
Explore senior leadership policy decisions and triggers in
response to a coordinated cyber and physical event of national
significance with long-term grid reliability issues.

NERC held GridEx II on November 13-14, 2013, where over 230
organizations participated in the Distributed Play session.
Additionally, a group of senior industry and government executives
participated in a tabletop session based on the Distributed Play
scenario but greatly expanded in scope. The exercise built upon the
objectives and findings from the 2011 GridEx recommendations and
simulated a coordinated cyber and physical security attack to offer
participants a worst-case scenario to review their existing command
control and communication plans and to identify potential areas for
improvement. The exercise was the most comprehensive effort to date
that addressed both cyber and physical security. NERC released reports
in March 2014 detailing lessons learned and recommendations. These
reports are posted on NERC's website.
Cyber Risk Preparedness Assessments (CRPA)
The ES-ISAC developed the CRPA program to assess, through
exercises, an entity's current cybersecurity capabilities and the
adequacy of existing reliability mechanisms. By conducting these
assessments, the ES-ISAC targets areas for improvement and identifies
best practices that it can then share with industry. Since 2010, over a
dozen entities have participated in the CRPA program and have responded
positively to the impact the CRPAs have on strengthening their
operations, and ultimately helping to protect the BPS.
The CRPA program continued to mature in 2013 with the addition of
the ES-C2M2 key practice areas informing and complementing the CRPA
program. The program used the ES-C2M2 to shape the analysis of the
exercise and focus the post-exercise discussion and report around the
response capabilities as defined through the ES-C2M2. As part of the
ES-ISAC's strategy to support adoption of the CRPA methodology more
broadly across the industry, the ES-ISAC hosted a workshop in 2013 to
provide training and templates for industry to use in support of their
own exercise programs. The CRPA also supported the GridEx II exercise,
providing documentation and training to exercise participants on using
the ES-C2M2 in assessing their organization's response capabilities.
Security Briefings and Guidelines
Another example of NERC's outreach and training efforts included a
classified briefing campaign in 2013. The ES-ISAC, DHS, DOE, and FBI
collaborated to host a series of briefings focused on tactics and tools
of emerging cyber threat actors. Similar to the 2014 physical security
outreach campaign, this campaign included a multi-city tour across the
United States and was developed following a NERC Alert that detailed
how attackers use common tools to infiltrate critical infrastructure
networks and gain access to control system networks. The briefings were
designed to raise awareness within the control systems community to
better protect the BPS.
In addition, NERC's CIPC holds security briefings and workshops
throughout the year to educate industry about items such as physical
security assessments and penetration testing. CIPC also developed
physical security guidelines for the Electricity Sub-sector to assist
entities in responding to a physical security situation. The guidelines
also include a reference document that any entity can adapt to its
specific physical security policies and procedures.
Finally, NERC hosts its annual Grid Security Conference
(GridSecCon), which brings together cybersecurity and physical security
experts from industry and government to share emerging security trends,
policy advancements, and lessons learned related to the Electricity
Sub-sector. GridSecCon 2013 included discussions focused on industry
being transformational, strategic, and tactical in its approach to
securing systems. Specifically, participants were asked to consider
different information sharing techniques; determine if their
organizations are resilient through self-assessments; test response
activities through exercises; work to ensure that security is built
into operations; and enhance the workforce by recruiting, training, and
retaining individuals who can address these and other issues.
Additionally, almost 200 stakeholders attended credentialed training
sessions in cyber and physical security.
ongoing reliability assessments
Assessment of Reliability Impacts Emerging from Large-Scale Generator
Retirements
NERC's mission to ensure the reliability of the BPS goes beyond
issues related to security of the grid. As directed by Section 215(g)
of the FPA, NERC, as the ERO, conducts periodic assessments of the
reliability and adequacy of the North American BPS. As part of
addressing these reliability assessments, NERC reviewed the impacts
resulting from implementation of Environmental Protection Agency (EPA)
regulations on generation. NERC's October 2010 Special Reliability
Scenario Assessment: Resource Adequacy Impacts of Potential U.S.
Environmental Regulations included a detailed analysis of the potential
resource adequacy impacts likely to result from four pending and
planned EPA regulations. NERC examined the individual and aggregated
impacts of: (1) Clean Water Act--Section 316(b): Cooling Water Intake
Structures; (2) Clean Air Act--Section 112, Utility Air Toxics; (3)
Clean Air Transport Rule; and (4) Coal Combustion Residuals.
NERC's initial analysis of these regulations indicated 78 GW of
projected retirements and derates by 2018. Additional impacts to BPS
reliability were also projected due to reduced reserve margins,
highlighting the need for additional resources.
NERC continues to monitor and report on the impacts of
environmental regulations on generation in the United States and
Canada, as industry responds to state, federal, and provincial
requirements. This is achieved through ongoing coordination with the
NERC Regions, the EPA, and industry at large. NERC is also monitoring
ongoing retirements and impacts to both resource adequacy and
operations, such as deliverability, stability, localized issues, outage
scheduling, operating procedures, and industry coordination. This
information is released regularly by NERC in both seasonal and long-
term assessments. NERC's latest projections are in line with the
initial 2010 analysis.
Accommodating Large Amounts of Variable Generation
In November 2013, NERC published a joint report with the California
ISO, which concluded that, when the portion of the resource mix
provided by renewable and distributed resources reaches 20% to 30% of
the total supply, the reliability of BPS can be diminished. This
results from reduced availability of essential reliability services to
support bulk system reliability. Larger dispatchable generating units
have always inherently provided essential reliability services for the
BPS. As these units are retired, and non-dispatchable renewable and
distributed generation connect to the grid without replacing the
essential reliability services, the availability of essential
reliability services is diminished. These services include demand and
resource balancing and voltage and frequency support.
As large quantities of variable energy resources--predominately
wind and solar PV--are integrated into the BPS, a greater proportion of
the system's total resource mix will have limited inertial rotating
mass capability and operational flexibility. These new resources with
much different operating characteristics will displace electric
generation, as well as the essential reliability services, provided by
large rotating machines and the operating characteristics those
machines provided. Therefore, it is necessary that in addition to the
energy and capacity needs of a given system, essential reliability
services must be assessed and given due consideration in both BPS
planning and policy implementation. NERC continues to assess these
challenges and is developing pro-active measures to address any
potential issues through a suite of tools available to NERC, including
but not limited to Reliability Standards.
conclusion
As outlined today, NERC has many tools available, including
standards and guidelines to provide foundational security efforts.
These, along with the ES-ISAC and all of its capabilities to help
address imminent and strategic physical and cyber threats to the power
grid, provide a coordinated comprehensive effort to address
cybersecurity and physical security. We work with government, industry,
and other stakeholders to share what we know, educate our partners, and
learn what we can to secure our systems and stay ahead of the threats.
We recognize the importance of protecting against the misuse of
non-public information. Because it is not a government agency, NERC is
not subject to the Freedom of Information Act. NERC works to ensure
that any information of a confidential nature is provided to federal
agencies in a protected format. We continue to encourage increased
information sharing by US Government departments and agencies with
asset-owners regarding potential threats. The only way industry
participants on the ground can truly protect against an event is to be
aware of a specific threat or concern. They know which of their assets
are critical. They know what they need to do to protect against the
majority of physical and cyber threats. However, if the government is
aware of a specific threat, communicating that information to those
individuals on the front lines is important. This communication differs
from providing public access to sensitive information, but is an
essential component of security protection.
We appreciate this opportunity to discuss with the committee NERC's
activities to protect the grid from physical and cyber threats, and to
assess the adequacy of generating resources as the regulatory
environment evolves.

The Chairman. Thank you, Mr. Cauley.
Ms. Kelly.

STATEMENT OF SUE KELLY, PRESIDENT AND CEO, AMERICAN PUBLIC
POWER ASSOCIATION

Ms. Kelly. Thank you very much.
My name is Sue Kelly. I'm the President and CEO of the
American Public Power Association. APPA is a national trade
association based in DC that represents more than 2,000, not
for profit, community owned electric utilities in 49 States. I
very much appreciate the opportunity to testify on grid
security.
But today I represent investor owned, cooperatively owned
and publicly owned utilities, independent generators and
Canadian utilities as well. For very legitimate reasons we
often have different views on the policy issues facing our
industry, but we all have come together on grid security. We
all supported section 215 that was passed in the Energy Policy
Act of 2005. Given the changing nature of threats to the grid,
we have also worked with DOE and DHS to develop the Electricity
Subsector Coordinating Council, ESCC, which I'll discuss later.
The overall reliability of the bulk electric system or put
simply, keeping the lights on, for both ourselves and our
neighbors is of a paramount importance to electric utilities.
Because electricity is produced and consumed instantaneously
and follows the path of least impedance ensuring reliability
and grid security is a collected affair in which we are all
engaged together. Cyber attacks, meteorological events,
potential terrorist acts, they've driven much of the public
discussion on this issue in recent years. But utilities have,
for decades, planned for physical threats.
Unlike cyber security threats, threats to physical
infrastructure have been around for many years. Utilities take
these threats seriously. We deploy measures to mitigate them.
But the sheer size and in some cases the remoteness of the
infrastructure requires that we prioritize the facilities and
concentrate on the ones that, if damaged, would have the most
severe impact on reliability.
Simple risk mitigation techniques like cameras and locks
can help address routine problems. But the key to electric
utility physical security is defense in depth which relies on
resiliency, redundancy and the ability to recover should an
extraordinary event occur. While our systems are built to
withstand attacks, successful attacks can happen.
We use modeling to build redundancies into the system to
support most critical assets. But since we have over 45,000
substations in the U.S. prioritizing the most critical assets
and focusing our planning on them is extremely important.
In recent months a few high profile attacks on physical
infrastructure have drawn increased scrutinies. One such
incident took place at the Metcalf substation on PG&E system in
California. Shooting at substations, unfortunately, is not
uncommon. But this incident demonstrated a level of
sophistication not previously seen in our sector. We've been
working to understand it and to share the lessons learned from
it.
Government and industry conducted a series of briefings
across the country and in Canada for utilities and local law
enforcement to help utilities learn more about the attack and
the potential implications for them. APPA and our fellow
electric sector trade associations take this incident very
seriously. The notion that recent media stories suddenly
spurred our industry to action or somehow enhanced grid
security are inaccurate.
These briefings were initiated prior to these stories.
However, in part to response to the Metcalf incident on
March 7th, FERC has directed NERC under section 215 to submit
proposed reliability standards on physical security within 90
days. APPA and our members, along with many other industry
stakeholders, are actively engaged in the NERC process right
now to develop this important standard.
Turning to cyber security.
APPA believes the best way to enhance security across
critical infrastructure sectors is by improving information
sharing between the Federal Government and these sectors. We
have therefore supported information sharing legislation that
passed the House. We look forward to reviewing the Senate's
version.
So far the cyber related section 215 standards coupled with
additional best practices in management processes have
prevented a successful cyber attack. But that doesn't mean it's
not going to happen. The industry therefore applies a similar
defense and depth approach to cyber security to insure a quick
response. Cyber security is going to have to be an iterate of
processes as nature of the threats continue to evolve.
Finally, I have to note that the partnership, coordination
and sharing of relevant threat information is crucial to grid
security. At the national level the ESCC plays an essential
role in coordination and information sharing. It has
representatives from trade associations, CEO of public power
utilities, IOUs, rural co-ops, TVA, the PMAs and ESCC members
coordinate with and periodically meet with officials from the
White House, DOE, DHS, Federal law enforcement and national
security organizations.
This dialog is currently focused on 3 areas, tools and
technologies, information sharing and incident response.
In conclusion APPA, on behalf of the entire electric
industry, would like to reaffirm the industry's ongoing
commitment to protecting critical electric utility
infrastructure from both cyber and physical threats. To do this
we have to work in partnership with all levels of government
from local law enforcement to cabinet level executive
departments. Confidential information, sharing and tools and
technologies are needed.
Thank you for the opportunity to appear before you today.
[The prepared statement of Ms. Kelly follows:]

Prepared Statement of Sue Kelly, President & CEO, American Public Power
Association
The American Public Power Association (APPA), based in Washington,
D.C., is the national service organization for the more than 2,000 not-
for-profit, community-owned electric utilities in the U.S..
Collectively, these utilities serve more than 47 million Americans in
49 states (all but Hawaii). APPA appreciates the opportunity to provide
the following testimony for the Senate Energy and Natural Resources
Committee's hearing regarding ``Keeping the Lights on--Are We Doing
Enough to Ensure the Reliability and Security of the U.S. Electric
Grid?''
APPA was created in 1940 as a nonprofit, non-partisan organization
to advance the public policy interests of its members and their
customers, and to provide member services to ensure adequate, reliable
electricity at a reasonable price with the proper protection of the
environment. Most public power utilities are owned by municipalities,
with others owned by counties, public utility districts, and states.
APPA members also include joint action agencies (state and regional
entities formed by public power utilities) and state, regional, and
local associations that have purposes similar to APPA.
introduction
The associations in our industry represent a broad variety of
stakeholder interests, including investor-owned, cooperatively owned
and publicly owned utilities, independent generators, and Canadian
utilities. For very legitimate reasons, we often have different views
on the policy issues facing our industry. On the issue of the security
of the electric bulk-power system, however, we have come together.
APPA, the Canadian Electricity Association, the Edison Electric
Institute, the Electric Power Supply Association, the Large Public
Power Council, the National Rural Electric Cooperative Association and
the Transmission Access Policy Study Group (associations) have all
supported the mandatory electric reliability regime created by the
Energy Policy Act of 2005, that applies to the reliability, cyber-
security, and now physical-security of the bulk electric system. In
recognition of the changing nature of threats to the security of the
grid, particularly cyber-threats given their rapidly evolving nature,
we have also worked with the Departments of Energy and Homeland
Security to expand and elevate the focus of the Electric Sub-sector
Coordinating Council (ESCC), which I will discuss in more detail below.
Given our similar positions on these issues, this testimony has been
endorsed by these associations.
In this testimony, I will discuss physical-security and its
importance to the reliability and overall security of the electric
grid. Next, I will focus on the importance of cyber-security and the
need for limited liability protection. And finally, I will detail how
electric utilities address cyber-and physical-security constantly and
simultaneously. (For the purposes of today's testimony, I use the
phrase ``grid-security'' as representative of both cyber-and physical-
security.)
Electricity, the movement of electrons, occurs naturally. But to
serve industrial, commercial and residential needs for lighting,
heating, cooling, refrigeration, computers, and many other daily needs,
large amounts of moving electrons must be generated from some other
fuel or energy source. Electricity is created from the conversion of a
fuel or other source of energy into electrons. Once electricity is
generated, it travels over high-voltage bulk power transmission lines
to the lower voltage distribution systems where it will be delivered to
homes and businesses and consumed. This all happens instantaneously, at
nearly the speed of light, making the reliable operation of the
electric grid a ``24 hours-a-day, seven-days-a-week'' job. Furthermore,
once electrons flow from the generating unit to the grid, their path
cannot generally be controlled. Therefore, the approximately 1,900
owners, users, and operators of the bulk power grid (comprised of the
generating facilities and high-voltage transmission lines where
electrons freely flow) must work together constantly to ensure security
and reliability.
physical-security
While cyber attacks, meteorological events, and terrorist acts have
driven much of the public discussion on grid security in recent years,
APPA's members and the entire sector have for decades planned for
threats to physical security. Unlike cybersecurity threats, which are
constantly evolving, many of the threats to physical infrastructure
have been identified for years, if not decades, and are more readily
understood than potential cyber threats. Electric utilities, including
public power utilities, take these threats seriously, and deploy
measures to mitigate such threats. At the same time, the sheer size and
in some cases, remoteness, of the infrastructure requires that
utilities prioritize facilities that, if damaged, would have the most
severe impacts on the ability of utilities to ``keep the lights on.''
This risk-based approach enables the industry to prioritize the most
important assets, and also allows it to change that prioritization over
time. The bulk electric system continually evolves because assets that
impact the system change over time. For example, the retirement of a
large coal plant might lead to greater reliance on a mix of natural gas
based generation, distributed generation, and large wind and renewable
projects, which would make very different use of the existing network
and require substantial new transmission to reliably serve customers
(also known as ``load''). This new mix of generation and transmission
will present different security risks as well, which the industry
analyzes and accounts for in the planning process.
The nation's electric distribution systems have always been, and
are today, regulated by state and local governments. Congress ``hard-
wired'' this deliberate separation of jurisdiction into the Federal
Power Act (FPA). APPA believes this division of jurisdictional
responsibility is appropriate, given the retail nature of distribution
systems and the vast differences in the configuration, size, and
ownership of the approximately 3,000 distribution utilities in the
U.S., approximately 1,900 of which impact the bulk electric grid. Each
individual utility's role in the security of its distribution
facilities is unique, due to these substantial differences.
Electric utilities intimately understand the importance of physical
security and have longstanding programs and protocols designed to
protect their utility systems. As the nature of physical threats has
changed over the years (in response to the rising number of incidents
of copper theft, for example), electric utilities have planned,
prepared, and responded accordingly. Today, due to the increased threat
of security breaches such as malicious vandalism and potential
terrorist attacks that can cause damage to this infrastructure,
utilities must develop the best available mitigation practices to
address such attacks.
Simple risk mitigation techniques like cameras and locks help
utilities deal with routine problems. The key to electric utility
physical-security, however, is its ``defense-in-depth'' approach that
incorporates resiliency, redundancy, and the ability to recover, should
an extraordinary event occur. While our systems are built to withstand
attacks, successful attacks may still occur even with such planning. We
use modeling to assess criticality and to build redundancies into the
system to support our most critical assets. By modeling, we can
determine how a specific event would require power to be re-routed,
which equipment would need to be taken off-or brought on-line, and in
extreme conditions, the amount and location of customer load (demand)
that must be shed to keep the interstate grid as a whole online and
prevent any potential damage to utility equipment that might lead to
extended outages.
With these plans in place, we can also determine the criticality of
individual assets on our systems. While determining what is critical is
complicated, numerous models that incorporate both government and
industry priorities help to narrow the focus to a manageable group of
assets that need to be treated as priorities. Since there are over
45,000 substations in the United States, this focused planning is very
important. Once identified, utilities make the necessary investments to
secure these assets and put in place the necessary redundancies to
ensure a quick recovery, should they go down. As our adversaries
evolve, so do the risks we face. Certainly, there is no single solution
that can make the grid completely safe and secure. But by focusing on a
series of strategies to mitigate risks (and by understanding that risk
elimination is practically impossible), utilities take every reasonable
step to avoid operational consequences related to physical damage to
their equipment.
In recent months, a few high profile attacks on physical
infrastructure have drawn increased scrutiny. One high profile incident
took place at the Metcalf substation on Pacific Gas and Elec-tric's
(PG&E) system in California. Though I am told that the FBI believes one
person is likely responsible for the damage at Metcalf, this incident
demonstrated a level of sophistication not previously seen by the
communications and energy sectors. As a result, the entire electric
sector has responded to this attack to assess its impacts and to share
lessons learned. The Department of Energy (DOE) and Department of
Homeland Security (DHS), in coordination with the Federal Bureau of
Investigation, the Electricity Sector Information Sharing and Analysis
Center (ES-ISAC) and industry experts, conducted a series of briefings
across the country for utility owners and operators and local law
enforcement regarding security of electric substations. These briefings
offered an opportunity to grid operators to learn more about the
Metcalf attack, was a response to it and other recent acts against the
energy sector.
APPA and our electric sector trade association brethren take this
incident very seriously. Shooting at substations is, unfortunately, not
an uncommon occurrence. But the sophistication of the Metcalf attack
and the fact that the perpetrator has still not been apprehended is
quite troubling. However, the notion that the Wall Street Journal and
other recent media stories have suddenly spurred our industry to
action, or have somehow enhanced grid security, is inaccurate. The
briefings mentioned above were initiated prior to these recent stories.
As discussed previously, the threat of physical attack has been part of
our planning for decades. The power stayed on in spite of the Metcalf
attack--due to cooperation and coordination with other electric
utilities in the region, and redundancy in the system that was planned
in advance.
As stated previously, the electric power industry (including
nuclear power facilities) is the only critical infrastructure sector
with mandatory reliability standards. However, given the evolving
nature of threats to both physical and cyber assets, we recognize that
standards can only go so far in protecting the actual facilities owned
and operated by governmental entities, cooperatives, and private
utilities. APPA, therefore, supports physical security initiatives at
both the bulk power system and distribution levels and has urged all
public power utilities to enact security plans that address both
physical-and cyber-security. In light of increasing interest in and
attention to physical security by the federal government and Congress,
APPA believes this issue should be viewed more comprehensively. On
March 7, 2014, under its authority granted in FPA Section 215, the
Federal Energy Regulatory Commission (FERC) directed the North American
Electric Reliability Corporation (NERC) to submit proposed reliability
standards within 90 days that will require utilities with critical
assets to take steps, or to demonstrate that they have taken steps, to
address physical security risks and vulnerabilities related to the
reliable operation of the bulk power system. Again, as contemplated
under Section 215, APPA and our members, along with EEI, NRECA, and
their members, are offering our expertise to NERC in drafting this
important standard.
APPA is grateful for Acting FERC Chairman Cheryl LaFleur's
appearance before this Committee today. She and her colleagues at the
FERC have a difficult task before them and we applaud their commitment
to making the electric grid safer and more reliable. The difficulty in
ordering this standard to be crafted was captured by Commissioner John
Norris in his concurrence to FERC's March 7, 2014, Order relating to
this standard. Noting that measures taken to address physical security
need to be reasonable and cost effective, he said:

As I have said previously, I believe that [the Metcalf]
incident is a serious one, and significant efforts should be
made to determine who was responsible for the incident, and to
identify appropriate next steps to prevent such incidents from
happening in the future. But, it has been well understood for
decades that our nation's grid has been vulnerable to physical
attack. We simply cannot erect enough barriers to protect North
America's over 400,000 circuit miles of transmission, and
55,000 transmission substations. While some locations may
require additional physical barriers, I continue to urge
caution against over-reaction. I remain concerned that the
recent momentum will result in the electricity sector
potentially spending billions of dollars erecting physical
barriers to protect our grid infrastructure. I am particularly
troubled because most if not all of those costs will be passed
through to ratepayers.

APPA, as a trade association of not-for-profit utilities, shares
Commissioner Norris' concerns and hopes that NERC's physical security
standards will be appropriately drafted to protect truly critical
infrastructure and ensure that expenditures in this area are reasonable
and needed.
While this will be NERC's first standard on physical security,
NERC's Critical Infrastructure Protection Committee (CIPC), has
recently produced industry guidance on physical security. Also, FERC
has recently approved NERC reliability standard EOP-004-2 (Event
Reporting), which requires reporting of physical attacks at bulk
electric system facilities. The industry also relies on the NERC
Electricity Sector Information and Analysis Center (ES-ISAC) to provide
industry alerts of physical attacks on electric facilities.
cyber-security
At the top of APPA's priorities, and our members' priorities, is
the safety, security, and reliability of the U.S. electric grid. By
protecting the facilities they own and operate and by following
increasingly robust cyber-and physical-security protocols, public power
utilities play an important role in the safety and reliability of the
grid. APPA's commitment to safety and reliability is not unique in the
electric sector--cooperatively and investor-owned electric utilities
all share this commitment. That is why our industry collaborated on the
mandatory reliability regime spelled out in the Energy Policy Act of
2005 (EPAct05), and now incorporated in Section 215 of the Federal
Power Act, as mentioned above. The electric sector participates, in
partnership with Congress, FERC, and NERC, in an ongoing effort to
establish and enforce comprehensive standards to strengthen the grid,
including those that enhance cybersecurity. APPA believes the best way
to support these ongoing efforts and to enhance security across
critical infrastructure sectors is by improving information sharing
between the federal government and such sectors, and vice versa.
As the grid evolves, unfortunately, so do threats to its integrity.
Thus, APPA recognizes that new--but narrowly crafted and limited--
authority may be necessary to fully address emergency threats. The
threat of cyber attack is relatively new compared to long-known
physical threats, but an attack with operational consequences could
occur and cause disruptions in the flow of power if malicious actors
are able to hack into the data and control systems used to operate our
electric generation and transmission infrastructure. While APPA
believes that the industry itself, with NERC, has made great strides in
addressing cyber-security threats, vulnerabilities, and potential
emergencies, we recognize that any true national emergency will warrant
involvement from many federal entities.
To date, the electric utility sector's FPA Section 215 processes
coupled with our actions beyond this Section 215 regime have prevented
a successful cyber attack causing operational consequences on the bulk
electric system. However, the years since full implementation of
Section 215 began in 2007 have been marked by jurisdictional debates
within the Executive Branch agencies and between the Executive Branch
and Congress regarding the appropriate response to the cyber threat
regime faced by all critical infrastructure sectors, with some
questioning the NERC/FERC standards and calling for more regulation and
others focused on enhanced information sharing.
This regulatory partnership between the federal government and the
electric sector has proven to be one marked by continuous ongoing
improvements in communication, technology, and preparedness as the
standards have evolved since 2007. APPA and its members, as well as
other utilities, also continue to work on the NERC Critical
Infrastructure Protection (CIP) standards on cyber-security. As cyber
attacks are ever-changing, so must be the nature of our defenses. As
such, CIP Version 3 is in effect and enforceable. Version 5 has been
approved by FERC, and is proposed to be enforceable by April 1, 2016.
We will continue to enhance these mandatory standards and the
independent actions we take to protect our critical cyber assets.
a note on liability protection
There has been discussion in this and other committees relating to
providing limited liability protection as an incentive for
participation in national cyber-security frameworks. Utilities
certainly need no incentive to secure their systems and protect their
customers. However, a federal limit on potential legal repercussions to
utilities when they are assisting their government partners with
national security or for following federal requirements are certainly
worth further discussion. Regulatory and legislative proposals from the
Obama Administration and Congress focus largely on the steps electric
utilities can take to protect and secure their facilities, ensure
reliability, and maintain security of customer data. At the same time,
it is important to establish guidelines to ensure that unwarranted and
counterproductive lawsuits are avoided when utilities are actively
engaged in cyber-security and compliance with federal guidelines or
regulations. APPA is concerned that electric utilities may not be
sufficiently protected from negligence claims alleging they failed to
protect against such attacks even when they have taken reasonable
precautions.
Some states are considering legislation to address liability
related to cyber attacks, but no state or federal statutes currently
exist to specifically protect electric utilities, including public
power entities, from lawsuits in response to a cyber incident. This
leaves APPA's members, which are units of state and local government
operating on a not-for-profit basis, vulnerable to time-consuming and
expensive litigation even when they are undertaking activities to
protect their systems.
Utilities already treat their customers' safety and security as
priorities. As the owners and operators of the nation's electric grid,
however, we have a unique responsibility to come together in support of
national security. Combining and sharing threat information among
ourselves and with the federal government will make the nation safer.
Utilities should be able share and receive any relevant threat
information without fear of retribution in the courts or regulatory
proceedings. Limited liability protection would allow utilities facing
cyber attacks to share threat information with relevant state and
federal law enforcement agencies and, possibly, with other utilities
and would result in increased grid security. Failure to provide these
protections to our sector could have a chilling effect on information
sharing.
Though the White House considers liability protection to be a
priority, the Executive Order on Cybersecurity, issued by President
Obama in February 2013, and the corresponding Cybersecurity Framework
issued by the National Institute of Standards and Technology (NIST) in
February 2014, do not include liability protections for cyber attacks.
This and previous Congresses have considered legislation focusing on
cyber-security proposals which have included provisions that would
grant liability protections to critical infrastructure owners and
operators affected by cyber incidents, but no such protections have
been enacted into law. Therefore, APPA and the associations support
legislation that would protect utilities from liability for cyber
incidents, when the utilities have taken appropriate, reasonable steps
to shield against such attacks.
the grid security partnership
Partnership, coordination, and sharing of relevant threat
information are crucial to grid security. At the national level, as
mentioned above, the ESCC, a public/private partnership between the
utility sector and the federal government, plays an essential role in
coordination and information sharing. Each of the 16 critical
infrastructure sections identified in Homeland Security Presidential
Directive 7, which outlines national policy for federal departments and
agencies to identify and prioritize critical infrastructure and to
protect them from terrorist attacks, has its own sector coordinating
council. Electric utilities are one of only two sectors regulated by a
mandatory compliance framework (see above). In October, 2010, the White
House's National Infrastructure Advisory Council (NIAC) recommended an
``executive-level dialogue with electric and nuclear sector CEOs on the
respective roles and responsibilities of the private sector in
addressing high-impact infrastructure risks and potential threats . . .
.'' This recommendation led to the creation by the electric utility
sector of the Joint Electric Executive Committee, which then
transitioned into its current role as a revised and expanded ESCC.
The ESCC includes representatives from electric trade associations,
including APPA, EEI, NRECA, the Canadian Electricity Association, the
Electric Power Supply Association, the Nuclear Energy Institute, the
RTO/ISO Council, NERC, and the NIAC, as well as CEOs of public power
utilities, investor-owned utilities, rural electric cooperatives, the
Tennessee Valley Authority, and the federal Power Marketing
Administrations. As part of the ``executive level dialogue'' initiated
by the 2010 NIAC recommendation, ESCC members engage in regular
coordination and discussion with federal officials from the White
House, relevant cabinet-level agencies, federal law enforcement, and
national security organizations. This dialogue is currently focused on
three areas: Tools & Technology (deploying proprietary government
technologies on utility systems that enable machine-to-machine
information sharing and improved situational awareness of threats to
the grid); Information Flow (making sure actionable intelligence and
threat indicators are communicated between the government and industry
in a time-sensitive manner); and Incident Response (planning and
exercise coordinated responses to an attack).
To support the ESCC's mission, a Senior Executive Working Group
(SEWG) of utility Chief Operating Officers and Chief Information
Officers, utility trade association executives, and other senior
executives who have relevant experience in the electric power sector
has been established. The SEWG meets by phone on a monthly basis and
creates ad hoc ``sub-teams'' to accomplish goals identified by the CEOs
and Cabinet Deputy Secretaries participating in the ESCC. In parallel
to this effort, the government has organized around these same goals
with a commitment to align government and industry efforts. The ESCC
has also helped to enhance industry-government partnerships between
electric utilities and law enforcement agencies at the federal, state,
and local levels.
Protecting critical infrastructure is a shared responsibility
between industry and government. While the government has a law
enforcement responsibility and a national security mandate, utility
owners and operators own the assets, pay for (via their customers)
protection of the assets, and have the operational expertise to keep
the lights on. Our industry continuously invests in security measures
that protect the grid against evolving threats and to make it more
resilient and robust, based, in part, on regular ESCC and ES-ISAC
updates on evolving national security threats. We look at all hazards
and threats, be they cyber, physical, or natural disasters when
protecting our systems. Most recently, a two-day exercise (GridEx II)
was held to help drill and prepare for extraordinary scenarios. More
than 200 industry and government organizations participated in the
grid-wide, international event. There was also an executive tabletop
exercise that brought together senior Administration officials and
senior utility executives to address the roles and responsibilities of
both government and industry in the event of a major power disruption
due to national security threats.
In conclusion, APPA, on behalf of the entire electric utility
industry, would like to reaffirm the industry's ongoing commitment to
protect critical electric utility infrastructure from both cyber and
physical threats. To do this, we need to work in partnership with all
levels of government, from local law enforcement to Cabinet level
executive departments. Information sharing with the assurance of
confidentiality, provision of tools and technologies to assist electric
utilities in better protecting their assets, and liability protection
for utilities that take reasonable measures to protect their systems
are all important elements of such a partnership. Thank you for the
opportunity to appear before you today to address these issues.

The Chairman. Thank you, Ms. Kelly.
Chairman Honorable.

STATEMENT OF COLETTE D. HONORABLE, PRESIDENT, NATIONAL
ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS (NARUC),
CHAIRMAN, ARKANSAS PUBLIC SERVICE COMMISSION

Ms. Honorable. Thank you.
Good morning, Chair Landrieu, Ranking Member Murkowski and
members of the committee. My name is Colette Honorable. I'm
President of the National Association of Regulatory Utility
Commissioners and Chairman of the Arkansas Public Service
Committee or Commission.
Thank you for the opportunity to testify about the security
of our Nation's electricity grid. There are 3 main thoughts I
wish to share with you this morning.
First, State utility regulators share your concern about
the resilience of our grid. For us it is job No. 1.
Second, the resilience our rate payers expect includes not
only security from physical and cyber attacks, but also the
ability to bounce back from severe storms and accommodate the
impacts of market and regulatory changes.
Finally, NARUC and the States have already taken several
important steps toward a more resilient grid. We welcome this
conversation about what more can be done.
The seriousness of the Metcalf incident must not be
discounted. However, physical threats are but one of the many
challenges utilities face each day. These vulnerabilities can
take the shape of a sophisticated Metcalf style attack or a
massive storm such as Hurricane Sandy. In Arkansas we've
experienced consecutive 100-year ice storms along with
vandalism on our electricity infrastructure.
Last August a lone assailant allegedly attempted several
physical attacks on the electricity infrastructure in Central
Arkansas. The suspect was apprehended in October. After
admitting responsibility was indicted on several Federal
criminal violations. The joint terrorism task force and local
law enforcement responded swiftly, engaged with the respective
utilities and met with me and my staff during their
investigation. This is a shining example of Federal, State and
utility cooperation.
Economic regulators view these challenges through the broad
lens of resilience. With severe weather seemingly more
frequent, concerns growing over cyber and physical security,
along with the general day to day operation of the transmission
system, providing reliable service may not be enough anymore.
So what are we doing to improve resilience?
The utilities own and operate the infrastructure. They know
or should know their systems better than anyone. Therefore, our
utilities are ultimately responsible for safety and security.
But as their regulators we acknowledge that it is our
responsibility as well. The public has, for the most part,
faith that their utility system works. But this faith can be
shaken following a prolonged outage or devastating pipeline
accident. As citizens we are thankful for Federal, State and
local law enforcement and intelligence officials, who are
focused on criminal accountability and national security. As
regulators our duty is to ensure reliable service in the face
of all threats, no matter the source.
The good news is that despite these vulnerabilities our
systems are indeed resilient. The entities that own and operate
them are skilled at restoration when something goes wrong.
Although customers will, at times, become disgruntled when the
lights go out, the industry does an excellent job of overall of
restoring service.
Utilities spend billions of ratepayer dollars to train,
educate and drill employees and maintain physical
infrastructure so that the lights are restored as quickly and
safely as possible. It is here that the role of the States is
paramount.
We are responsible for setting the rates for the Nation's
investor owned utilities and the regulations that govern them.
We determine who pays, how much and for what they are paying.
State commissioners take this role very seriously as it is
solely our responsibility.
My colleagues and I must weigh the cost of every proposed
improvement to those systems under our jurisdiction against the
risks and benefits of how these investments will impact
consumers, the people that we serve. In the end we would like
to all have the safest, most reliable system possible. That is
everyone's goal.
At the NARUC level we are doing a tremendous amount of
outreach and education through workshops, seminars, trainings,
participation in the ESCC and more. We are incorporating the
multitude of challenges the industry faces. We are also
preparing for new Federal emissions reductions rules that will
have different impacts throughout the country.
While many States have taken great efforts to reduce carbon
emissions well in advance of any Federal environmental
regulation, some of my colleagues have concerns regarding local
reliability issues due to the retirement of coal fired
generation in their States. State commissions seek investments
that deliver the best system improvements in rate payer value.
Whether these investments address physical or cyber security,
they must prudently meet the prevailing expectations of
reliability and affordability for the rate payer.
This requires appropriate dialog and discussion in an open
and transparent way. We rely upon the utilities to know where
vulnerabilities may be. We expect industry to communicate with
us so that we can best determine how to move forward.
In conclusion, as we've seen across this country States are
pursuing innovative approaches to ensuring grid resilience.
While NARUC does not endorse any particular program, we can
learn a great deal from those who are pushing ahead. Typically
the general public doesn't think about utility resilience
unless it is after a hurricane or another disaster that knocks
out power to millions.
But we hope that through these types of discussions and
improved coordination we can all become better prepared. NARUC
and the States are committed to it.
Thank you for the opportunity to address you this morning.
[The prepared statement of Ms. Honorable follows:]

Prepared Statement of Colette D. Honorable, President, National
Association of Regulatory Utility Commissioners (NARUC), Chairman,
Arkansas Public Service Commission
Good morning Chair Landrieu, Ranking Member Murkowski, and members
of the Committee. My name is Colette D. Honorable and I am President of
the National Association of Regulatory Utility Commissioners. I also
serve as Chairman of the Arkansas Public Service Commission, and will
be appearing before you in both capacities today.
Thank you for the opportunity to testify about the security of our
nation's electricity grid. For the nation's economic utility
regulators, ensuring the safe, reliable, and affordable delivery of
utility services is Job No. 1. This has been our responsibility for the
last century and a quarter, and will continue to be so now and into the
future.
NARUC is a quasi-governmental, non-profit organization founded in
1889. Our membership includes the public utility commissions serving
all States and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. Our members regulate the retail rates and services of
electric, gas, water, and telephone utilities. We are obligated under
the laws of our respective States to assure the establishment and
maintenance of such utility services as may be required by the public
convenience and necessity and to assure that such services are provided
under rates and subject to terms and conditions of service that are
just, reasonable, and non-discriminatory.
I have three main thoughts I would like to share with you today.
First, State utility regulators share your concern about the resilience
of our electric system--for us it is ``job number one'' every day.
Second, the resilience that our ratepayers expect includes not only
security from physical and cyber attacks but also the ability to bounce
back from severe storms and to accommodate the impacts of marketplace
changes and shifting regulations. Third, NARUC and the States have
already taken several specific important steps toward a more resilient
grid. We welcome a conversation about what more can be done.
Today's hearing on Grid Security is timely, and not simply because
of the recent press reports on the potential physical threats to our
electricity infrastructure. The seriousness of the Metcalf incident is
not being discounted; the details of that event are alarming and serve
as a lesson about the damage dedicated bad actors can do to our
infrastructure. But physical threats are one of the several
vulnerabilities facing our utility infrastructure every day. These
vulnerabilities can take the shape of a sophisticated Metcalf-style
attack or a massive storm such as Hurricane Sandy, which devastated
utility infrastructure in the Mid-Atlantic and blacked out parts of New
York and New Jersey for weeks.
In Arkansas, we've experienced a little bit of everything in recent
years, from consecutive 100-year ice storms to vandalism on our
electricity infrastructure. Our utilities responded admirably in all of
these circumstances, as they have across the country. In fact, in
August 2013, a lone assailant attempted several physical attacks on our
electric infrastructure in Central Arkansas. In three separate
incidents, this assailant allegedly downed a 500 kV power line, caused
substantial damage to a control house and damaged a 115 kV transmission
system. He was apprehended on October 11, 2013 after a fourth attempt.
The suspect admitted responsibility for the attacks and was indicted on
several federal criminal violations. If convicted, he will face life in
prison. Credit must be given to the swift, excellent work of the Joint
Terrorism Task Force comprised of the FBI, Department of Homeland
Security, the Department of Energy, ATF and local law enforcement. They
responded promptly to the incident, engaged with the respective utility
companies and met with me and my staff during the investigation and
demonstrated the benefits of such a strong collaborative effort.
From an economic regulator perspective, we view all of these
vulnerabilities through the broad lens of ``resilience.'' In these days
of seemingly more frequent severe weather, concerns over cyber and
physical security, and general day-to-day operation of the transmission
system, providing reliable service may not be enough anymore. I am not
here to defend or demean the industry, but the lights almost always
stay on despite the numerous challenges and vulnerabilities our
utilities face each day. And when the power does go out, service is
restored as quickly and safely as possible. Clearly, though, the times
and threats we face are changing. The utilities own and operate the
infrastructure themselves, and although we regulate them, they know, or
should know, their infrastructure better than anyone. Therefore our
regulated utilities are ultimately responsible for shoring up the
safety and security of their systems.
But as their regulators, and as the public officials entrusted with
the responsibility of ensuring the safe, reliable, and affordable
delivery of utility services, this is our responsibility as well. For
the most part, the public has faith that their utility system works as
intended, but this faith can be shaken following a prolonged outage due
to a damaging storm or in the wake of a devastating pipeline accident
that destroys homes and neighborhoods, or worse. As citizens, we are
thankful for federal, State and local law enforcement and intelligence
officials who are focused on criminal accountability and national
security. As regulators, our duty is to ensure reliable utility service
in the face of all threats, no matter the source.
The good news is that despite the grid's many potential threats and
vulnerabilities, these systems are resilient and the entities that own
and operate them are quite skilled at restoration when something does
go wrong. As we contemplate the critical issue of securing our nation's
electric system, a key component of a resilient system is the ability
to restore service. Though at times customers will become disgruntled
or angry when the lights are out for an extended period of time--the
owners, operators and utilities (be they investor owned, cooperatives
or municipals) do an excellent job overall of restoring service
following a disruption. This industry spends billions of ratepayer
dollars per year to train, educate and drill its employees and maintain
physical infrastructure so that the lights come back on after an
incident as quickly and safely as possible. It is here that the role of
the States is paramount.
State regulators are responsible for setting the rates for the
nation's investor-owned distribution systems and the regulations that
govern them. In vertically integrated systems, this jurisdiction
encompasses generation as well as intrastate transmission. In essence,
the State commissions determine who pays, how much they pay, and for
what they are paying. This responsibility is all the more important in
times of economic downturn, where in some cases people must decide
whether to pay an electric bill or buy medicine. State commissioners
take this responsibility seriously as it is solely our responsibility
and not within federal jurisdiction. My colleagues and I must weigh the
cost of every proposed improvement to those systems under our
jurisdiction against the risks and benefits of how these investments
will impact consumers. There are always a wide range of options
available and we must make sure we do all we can to maximize ratepayer
benefits. In the end, we all would like to have the safest most
reliable system possible, and that is everyone's goal. However, we all
must remember that at the end of the day, it is the consumer who will
be paying for every decision that is made.
naruc efforts
At the NARUC level, we are taking a direct focus on infrastructure
resilience. In fact, during my tenure as NARUC President, resilience
and reliability issues are among my top priorities. Our staff is
working around the clock on resilience and security issues. Through our
Committee on Critical Infrastructure, we are doing a tremendous amount
of outreach and education through workshops, seminars, trainings, and
much more. On the cybersecurity front, NARUC has launched a multi-state
tour, running training and educational seminars at our member offices
throughout the country. This training is the foundation of the
information sharing called for in Executive Order 13636, and relies on
the partnerships that NARUC maintains locally and federally, with
industry and our various government counterparts. In fact, by this
summer, NARUC will have initiated cybersecurity technical assistance
with 35 of our members. The only limitation in our ability to continue
this training is resources. We are grateful for the support of the U.S.
Department of Energy to allow us to come as far as we have. We are
ready and look forward to continuing this important work.
We are now expanding our focus on the broader topic of resilience
and incorporating the multitude of challenges our infrastructure faces,
from cyber and physical security to natural and manmade disasters. We
recognize the complexity of resilience and therefore have adopted an
innovative approach, bridging scientific and policy expertise to tackle
the challenges in front of us. This is evident in NARUC's participation
with the National Research Council's Resilient America Roundtable,
which will help decisionmakers use risk analysis to guide investments
in resilience. NARUC is also working with the National Academy of
Sciences to identify and share best practices for operations and
technological and management practices for resilience. Our innovative
approach also includes preparing for new federal emissions-reductions
rules that will have different impacts throughout the country. When we
shift from one dominant generation resource to another, we also trade
for a new set benefits and challenges. For example, while many States
have taken leadership efforts to reduce carbon emissions well in
advance of any federal environmental regulation, some of my colleagues
have concerns of localized reliability issues due to the retirement of
coal-fired generation assets in their States. There is no silver bullet
and, because of this, State regulators are well prepared to manage the
shift in a way that manages risks and optimizes benefits. It is my
humble but strongly held belief that this balance--this management of
risk--could not be achieved by market forces alone. Regulators ensure
this balance is struck in the face of an ever-evolving resource mix.
We are getting up to speed on all these developments--and quickly--
because utilities are coming to us with requests to harden their system
while making it cleaner and more efficient. NARUC has published two
papers on resilience since November 2013 (``Resilience in Regulated
Utilities'' http://www.naruc.org/Grants/Documents/
Resilience%20in%20Regulated%20Utilities%20ONLINE%2011_12.pdf, and
``Resilience for Black Sky Days'' http://www.naruc.org/grants/
Documents/Resilience_for_Black_Sky_Days_Stockton_Sonecon_FINAL_ONLINE--
Feb5.pdf), sharpening our focus as we prepare to act on these
investments. State commissions seek investments that deliver the best
system improvements and ratepayer value. To do so, a risk-based
approach is preferred. As utilities seek cost-recovery for resilience
investments, we need them to prioritize what aspects of their systems
are the most vulnerable so we can put ratepayer money where it is most
needed first. Whether these investments address physical or cyber
security, they must prudently meet the prevailing expectations of
reliability and affordability for the ratepayer.
The NARUC papers are conversation starters; we are engaging with
our members and other key stakeholders, including utility
organizations, the federal government, companies, and consumer
advocates, to broaden and inform the dialogue. NARUC staff is planning
on holding workshops for commissioners and commission staff around the
country to address these issues. The kinds of questions we will be
asking are: Do we need new tools to evaluate risks? What kinds of
contingency plans may be necessary to prepare for a 1-in-a-100-year
storm that may never come, or occur frequently for some States?
Importantly, this requires appropriate dialogue and discussion in
an open and transparent way. As always, we rely upon the utilities
which own and operate the systems to know where any vulnerabilities may
be; they need to communicate with us so we can determine how best to
move forward. To that end, we look to the North American Electric
Reliability Corporation to develop standards for 100 kV lines and
above. The NERC process has worked well thus far. We look forward to
working with them to implement a risk-based approach to resilience
across and between the transmission and distribution systems.
conclusion
As we've seen across the country, States are pursuing innovative
approaches to ensuring grid resilience. Some States deal with
hurricanes and tornados more frequently than others; we hope to learn
from our colleagues in States that are already pursuing resilience
programs. While NARUC does not endorse any particular approach, we can
learn a great deal from the States who are pushing ahead with new and
innovative policies. We applaud their efforts.
Typically the general public doesn't think of resilience until
after a hurricane or other natural or manmade disaster knocks out power
to millions. We hope that, through these discussions, we can all be
better prepared.
Thank you and I'd be happy to answer any questions at the
appropriate time.

The Chairman. Thank you all very much.
Thank you for biding by your time because we do have a very
important subject to try to cover. Unfortunately we're going to
have votes at 10:30. We're going to try to keep the hearing
moving though because I'll vote first, Senator Murkowski,
second. We'll keep the hearing going.
Before we start I'd like to call the attention of the
members to a document that the staff provided, particularly to
page three, to really understand the interconnectivity of this
grid. It says here that there are actually three, independent
regional grids: the Western Grid, The Eastern Grid and then
Texas has its own grid. But Hawaii is not on here, neither is
Puerto Rico or Alaska.
[Laughter.]
The Chairman. But the reason I call it to your attention is
that all of us are very supportive, really on both sides of the
aisle about the importance of State authorities, and it's
really impossible to keep this grid up without regional and
national cooperation. This document clearly shows the
interconnectivity in the United States as well as into Canada.
So it really does take a combination, as all of you have
mentioned of Federal, regional and State as well as private
entities. So it really is a quite complex and important
subject.
Let me start my first question to you, Ms. LaFleur.
What are you doing, specifically, to respond to Mr.
Friedman, the Inspector General's management alert yesterday?
I'm going to submit this to the record.
The alert said in part that ``the Department subject matter
experts have confirmed that at least one electric grid related
presentation created by the Commission staff should have been
classified and protected from release at the time it was
created. This document and others, on the essence of its
content, may in whole or part have been provided to both
Federal and industry officials in an unclassified setting. That
was not appropriate.
The methods used in creating and distributing this document
led us to the pulmonary conclusion that the Commission may not
possess adequate controls for identifying and handling
classified, national security information.'' There are 4
specific recommendations in this management letter that I know
you're familiar with. Could you just comment about what you're
doing, again, to implement these and what additional steps that
you may be taking as the Acting Chair to make sure that this
doesn't happen again?
Ms. LaFleur. Thank you for that question, Madame Chairman.
We are meticulously following, first of all, the
instructions of the Inspector General's management alert which
means we met with him privately to understand the documents he
was speaking of, gathering any paper copies we can find and
putting them in our secure information facility, wiping and
scrubbing all data bases, computers and any portable devices
across the Commission to make sure that the documents in
question, that potentially should have been classified, are
protected. It instructs us to reach out to the DOE on the
classification level going forward. It includes reaching out to
former employees, including our former Chairman and trying to
get our arms around any information that may be out there.
That's part of the instructions.
The Chairman. Can I ask you this?
Does FERC have a high level person that's responsible for
trying to help your legal department sort what's classified and
unclassified?
Have you all stood up any additional resources in that
sphere in the last few years?
Ms. LaFleur. Yes, we have a--our chief security officer has
our classification authority. He has delegated or derivative
classification authority under the delegation from the DOE and
our general counsel has been very involved in this also.
Since it happened we've taken a number of steps internally.
We sent out an immediate reminder to all employees of the
regulations that govern information security. I've ordered a
full, immediately, ordered a full internal review, kind of a
chain of custody of all the documents, when they were created.
We're giving that to Mr. Friedman's people.
Ultimately what we need to do is develop a crisp and clear
internal process so we understand what information we're
creating and have a process where the right professionals get a
chance to weigh in on what level of classification it should
have.
The Chairman. OK.
Thank you.
Mr. Cauley, let me ask you this. I understand that you
testified and I generally agree that the private sector is
doing a very fine job, under difficult circumstances. There
are, as Ms. Kelly said, a lot of different views, different
sizes of companies, different nature of entities that are
involved in providing this critical infrastructure for our
country.
But when you said that you thought that the industry was
doing all that it could I understand in the Metcalf incident
that there were no cameras facing to the outside perimeter,
only to the inside perimeter. Can you comment about that? When
and what actions has the industry taken since to maybe face the
cameras in a different direction to see who might be in the
area that shouldn't be?
Mr. Cauley. I think the common and best practice prior to
Metcalf was primarily focused on keeping, not only bad actors,
but children, just for public safety, keeping people out of the
substations. We have a very experienced driven, lessons learned
driven industry. So I think they were focused on what they
thought was the threat. I think that's the value of Metcalf in
looking at it in hind sight is there's opportunities to improve
that.
So my understanding, without disclosing too much, is that
there has been a change in perspective of both how the cameras
and lighting and motion detection and other devices that would
help protect it further. Not just at PG&E, but around the
industry.
The Chairman. OK, thank you.
One final question and each of you just hit this very
quickly. I'm going to turn it over to Senator Murkowski.
I generally am very strongly supportive of public/private
partnerships. I find them, in many areas, and of course we all
do, to be very effective and unique in some ways in the United
States. They don't operate that way in other parts of the
world. I think that that is generally what our constituents
believe is a very effective way to handle some government
responsibilities is to do it with the public and private
sectors.
So NERC and FERC, kind of, represent the best of that with
FERC being the Federal Regulatory Commission and NERC being the
private sector.
How would each of you all, starting with you, Ms. LaFleur,
say how this is working and give one example of some
improvement that you could think of.
Ms. LaFleur. Really in the grand scheme we've only been at
this, as between FERC and NERC, for close to 8 years. I think
it's working quite well. We have a somewhat unique hybrid
system where the old voluntary system of NERC guidelines had
superimposed on it this compliance system with $1 million -a-
day penalty. That's kind of an odd marriage.
So there were naturally some tensions in the beginning. But
I think what's really helped is the work we've done together to
set a set of priorities because of the hybrid system. We have
to have the same reliability priorities even though we might
disagree at times about exactly what should get you there.
That I think the communication at the top between the two
agencies is what has led and Gerry has led a culture at NERC of
learning and setting priorities from what happened. I think
that priority setting is the biggest step that we've taken to
make the standards better which is what keeps reliability
going.
The Chairman. Mr. Cauley.
Mr. Cauley. I think the model is working really well. It's
almost necessary because it's such a complex electric grid.
It's interconnected internationally with Canada and Mexico that
we're able to bring the expertise of the industry together.
We're able to work out the standards in a way that have no
unintended, adverse consequences and get the buy in for the
industry. Yet we have the oversight and direction and guidance
from FERC. They've exercised that a number of times. They've
pushed back on some standards. They've directed us to do a
standard to protect against solar magnetic disturbances.
So I think we have the best of the public interest being
represented and government oversight with the expertise and
full understanding of how the grid works from industry.
The Chairman. Ms. Kelly.
Ms. Kelly. I would generally concur in what Chairman
LaFleur and Gerry have said.
I would add that I think we're, kind of, moving past our
pimply adolescence and into early adulthood. There have been
some bumps along the road.
But one of the things that I would point to as an example
of ongoing cooperation is, and you know the phrase in the
statute, users, owners and operators of the bulk power system,
is pretty broad. In theory anyone who turns on a toaster is one
of those people.
So when the scheme was first enacted and implemented we had
to figure out who that universe was. We made an initial cut.
But we are now going back and NERC is looking, taking a second
look and deciding, you know, who truly needs to be in and who
can be out.
Going back to your discussion about the number of small co-
ops in Louisiana, it may be that some of those entities really
do not materially impact the bulk power system. Therefore could
be exempted from the scheme without adverse impact to the
system. So I think we're taking a closer look at that. I think
I'd welcome that because frankly that frees up resources to
concentrate on the entities and the facilities that truly do
impact it.
I think that's a perfect example of how, as we're moving
forward, we're refining the regime and improving it.
The Chairman. So a tighter, risk based analysis?
Ms. Kelly. Absolutely.
The Chairman. Would be welcome.
Ms. Kelly. Correct.
The Chairman. Alright.
Chairman Honorable.
Ms. Honorable. Thank you, Madame Chair.
I concur with the comments of both the Chairman and of Mr.
Cauley and Ms. Kelly. NARUC, in fact, supported this
legislation that created the FERC and NERC partnership.
Certainly in the real world sense once these standards are
implemented retail investor owned utilities come to their
respective State commissions for cost recovery to integrate and
implement the standards. Certainly even in Arkansas we've
approved cyber standards investments even in the last year.
So we expect the utilities to heed these standards. We also
plan to stand ready to be responsive when those requests come
our way.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Madame Chairman.
Thank you, Chairman LaFleur, for your responses to the
Chairman's question here in terms of those steps that you are
taking at FERC to implement or act on the IG's recommendations.
I think that's going to be critically important moving forward.
I was going to ask you what you might be doing to
strengthen the culture within FERC that supports the work of
the professionals. You know, I hear you say that a notice to
the employees has gone out reminding them of certain aspects,
certainly of the confidentiality. But that may be an area that
you need to look to more critically.
I'm not going to suggest how you might be doing your job
here. But I do think that that is going to be an important
aspect.
I want, in this vein, I want to just make clear that you
understand what you will be receiving from me. As the Chairman
of FERC you're effectively the Chief Executive to whom the
agency staff reports. I'm going to be asking the agency some
more extensive questions about the handling of documents and
supporting materials such as those that are referred to in the
IG's management alert.
I'm also going to have some written questions outside the
hearing about the inception of this study itself and its uses.
So I have directed my staff to prepare some interrogatories
for the agency. I'm not going to be seeking sensitive
information about the findings of the study or the merits of
the so-called modeling upon which it's based. But I will have
questions about the manner in which the study was conceived and
documents and the information concerning it were handled, how
they were intended to be used and were, in fact, used.
So I have asked my staff to contact your general counsel
today to begin discussing how I can get answers to these
questions without drawing further attention to the substance of
what we recognize to be the sensitive information itself.
I will be turning over the answers I receive to the IG for
his complete report. But what I'm asking of you today is to
have your cooperation and the cooperation, the full cooperation
of the agencies, its leaders in the senior executive service
and other very dedicated Federal employees, who support them,
in getting full and complete and of course, prompt responses to
my questions.
Ms. LaFleur. You will absolutely have our cooperation.
Hopefully a lot of them might be the same questions we've been
asking ourselves.
I agree with you about your comments on culture.
First of all, I think in many ways, FERC has a very strong
culture. In all the decades I've been dealing with FERC I've
never known a merger rumor to leak or all the confidential
information that FERC deals with day to day which is not to say
that we absolutely need to learn the lessons of what happens
here. But I think we deal in confidential information in our
dockets all the time.
But I've given this a lot of thought. I think culture
starts at the top. When I ran an operating company the CEO and
everyone had to take a lot of safety tours because I put in
place a rule that anyone, even a brand new trainee, could stop
a job if they saw any electrical safety incident of any
magnitude because that's how you convey that safety is
important.
I think here the culture of respect for confidentiality has
to start at the top as well. We need to make sure that everyone
knows they can ask questions. Before information is created and
as that process goes along, to make sure that we're doing it
with care and with an intention to asking the right
professionals to weigh in on classification or how it's
treated, how it's filed or anything else.
I'll take accountability for that because I think it has to
start at the top and go all the way through the organization.
Senator Murkowski. I appreciate that.
Chairman Honorable, I don't know why both of us seem to be
having difficulty with your name and title here this morning.
You spoke a lot about the reliance of the grid, the
resiliency of the grid. I think we acknowledge and accept that
there are risks that present themselves when it comes to
reliance. You mentioned outages that are caused by hurricanes
or major storms. I think people can, kind of, relate to that
but as we are seeing more assets, energy assets, retiring
there's, kind of, a quiet consensus out there that the risk of
a localized reliability event or effect is growing.
I guess the question to you is how acceptable a risk is
this if the impact to the reliability is caused by Federal
policy? When I say Federal policy, the push within this
Administration to move coal out, the fact that we're seeing so
many coal facilities going offline. During the Polar Vortex
this winter we saw that, I think, it was 89 percent of the coal
electricity capacity that is due to go offline was utilized as
that backup to meet the demand this winter.
So I think folks are prepared to accept a level of risk.
You have an outage when you have a really bad storm. But to
what extent do you think that they accept the risk if that is
brought about by Federal policy?
Ms. Honorable. Thank you for the question, Senator
Murkowski.
This is really a great example of the many challenges that
economic regulators face across the country in ensuring
reliability. This is--so your question is how acceptable is it?
For the economic regulator it is not acceptable.
Senator Murkowski. Right.
Ms. Honorable. We have, for that reason, been very engaged
with the EPA, with the personnel, even with Administrator
McCarthy, about this very important topic of reliability. We
are charged with ensuring reliability. It's our main core focus
in addition to ensuring safety and affordable utility service.
The utilities on the front line must ensure reliability.
When there's a disruption to the grid or an outage for any
reason the utilities on the front line to make sure that the
lights come back on, that the generation is moving, no matter
the source.
We, at NARUC, certainly don't pick winners and losers. We
embrace an all of the above energy approach. Senator, I know
that you do too. I've heard you say that very thing.
We believe that coal is a low cost option and that it
should be a part of our energy mix. We, therefore, are working
with the EPA to ensure that they hear us. At our November NARUC
meeting we issued a resolution regarding the 111D rulemaking
process to urge the EPA to ensure that the States have
flexibility, that the Federal Government respects the role of
the States, that the EPA also honors this notion of diversity.
We embrace that as economic regulators.
The fuel mix in one State is very different from another.
States such as Kentucky or West Virginia or Indiana very
heavily rely upon coal. So any rulemakings that impact a
State's generation mix will clearly be of importance to those
States, but also to all of us as economic regulators.
So I appreciate the question. I want all of the members of
the committee to know that we are working every day, literally,
on this issue. We are a constant voice in helping all of the
stakeholders around this issue continue to remember the
importance of reliability. It's job No. 1 for us.
Senator Murkowski. Tough one.
Thank you, Madame Chair.
The Chairman. Thank you very much.
Senator Franken.
Thank you so much for your leadership and interest on this
subject.
Senator Franken. Thank you, Madame Chair.
Thank you all for your testimony. I agree Chairman
Honorable about the flexibility.
The Chairman. Excuse me a minute.
I'm going to go vote and leave Senator Cantwell in charge
of the committee and I'll be back.
Senator Franken. Sure.
The Chairman. Please continue.
Senator Franken. OK.
I agree that we need State flexibility in addressing those
kinds of issues especially on the new rules that EPA will make
on the existing coal fired plants.
We're talking about grid security. It's a serious issue.
The attack on the Metcalf power substation in California is one
that could have happened anywhere at any number of substations
across our country.
As chairman of the Energy subcommittee, I want to make sure
that we're doing everything we can to secure our electric grid.
That's why I sent a letter, along with Senators Wyden and Reid
and Feinstein to our regulators advocating for stronger
security measures. I'm pleased that an order has been issued to
strengthen grid security. Thank you for that.
As we take steps to secure the grid, I think it's really
important that we engage the law enforcement community both at
the Federal level and at the State and local level. They are
critical partners in the effort to secure the grid.
Chairman LaFleur, Mr. Cauley, can you explain what you're
doing to ensure that law enforcement agencies and officials are
fully integrated into the efforts to secure our power grid?
Ms. LaFleur. Thank you for that question, Senator.
I'll mention two things.
The order that FERC issued on March 7 on requiring physical
security standards, one of the things it requires is that after
the critical facilities list is done each asset owner
identifies specific threats and vulnerabilities of each
facility. It contemplates that they will involve government
agencies such as law enforcement in assessing the threat and
vulnerability of a particular facility because who knows better
than the police, the location, the geography and so forth.
In addition FERC and other agencies, DHS and FBI, have done
a 13 city tour around the U.S. and Canada to explain the
lessons of Metcalf and local law enforcement is one of the main
attendees, as I understand it, at these meetings because,
obviously as you said, it could happen in any community.
Mr. Cauley. Thank you for the question, Senator.
I actually personally believe that the most important and
most effective security measure we can take is the relationship
between the utility company and law enforcement. We recognize
that years ago which is why I mentioned we have a standard
already. We've had it for many years that requires if there's
any issues of incidents related to physical or cyber security
that they must get reported to the local law enforcement.
We require companies to have pre-established contacts with
their local law enforcement because I just think having that
presence and their response capability is very important.
We also participated in the outreach. I went to one of
those myself. A third of the room was law enforcement, you
know, in addition to first responders and power companies.
I think going forward we need to emphasize that further. I
envision facilitating one on ones with utility companies and
the local law enforcement and first responders to not only make
sure in general they understand our critical infrastructure,
but specific stations which are most important, what kind of
response would be expected.
Senator Franken. Thank you.
In that way Metcalf was a wakeup call. We all agree on
that.
The reliability of the electric grid is essential to our
energy security. We are seeing more extreme weather events and
those can have serious affects on the grid. But distributed
generation makes a grid more resilient by allowing critical
facilities, military bases, hospitals, others to stay online
during an outage.
That's why I worked closely, with Senator Murkowski, to
introduce an amendment to the Shaheen/Portman bill to support
the deployment of combined heat and power district energy and
other distributed generation technologies. I know that Senator
Murkowski has a lot of constituents in her State in areas that
are far away from the centralized grid. She really understands
the importance of the issue.
Ms. LaFleur, what is FERC doing to support deployment of
combined heat and power, district energy systems and other
energy systems that operate in island mode?
Ms. LaFleur. Our responsibility is primarily for the
interconnected intrastate grid. We work in partnership with
State regulators, who have more responsibility at the
distribution level within a State.
What we've primarily done to support the growth of
distributed generation is make sure that our market rules in
the two-thirds of the citizens that are served by competitive
markets that these distributed facilities can compete fairly
and get paid for their electricity. We have put out a rule in
2013 on small solar installations. We've done rules on fly
wheels and some of the storage applications, demand response
which often relies on back up generation in hospitals and so
forth and others.
We are trying to make sure that there's fair compensation
for them in the wholesale markets that helps those grids
thrive.
Senator Franken. Thank you, because I just believe that
resiliency of the grid. Again, we saw in super storm Sandy. We
saw places where they were operating in island mode that it was
a good thing. It was a good thing for data storage and those
kinds of emergency.
Ms. LaFleur. I can never resist a plug for my alma mater,
Princeton, which kept its micro grid up and supported law
enforcement, I think, across much of New Jersey in the micro
grid in Hurricane Sandy, so.
Senator Franken. Absolutely. That's exactly, exactly what
I'm talking about. Thank you for bringing up Princeton.
Senator Cantwell [presiding]. Thank you.
Senator Risch.
Senator Risch. Thank you, Madame Chairman, Madame Acting
Chairman. Thank you very much.
First of all I want to thank Chairman Landrieu for holding
this hearing. The security of the electric grid is critically
important to most Americans. As with many, many things, most
Americans don't realize how important it is to them. When an
incident happens then everybody starts wringing their hands and
say, why didn't we do this or do that?
I want to focus on something that is available to electric
utilities in the government agencies that a lot of people don't
know about. In my State, in Idaho, we have a facility called
the Idaho National Laboratory. It is the flagship laboratory
for nuclear energy, has been since the 1940s. It is the lead
laboratory in America for nuclear energy.
What most people don't realize and the reason it is that is
because that's where the first reactor was built and the first
electricity was generated and the first light bulbs lit. But
what most people don't realize is they have a lot of other
missions. One of them is exactly what we're talking about and
that is grid security.
Since this is a relatively and I use the word relatively,
new area of focus, although electric utilities have been
focused on this for many, many years. It has become so
sophisticated that it takes much more than what would be an
ordinary effort.
At the laboratory today there are a number of facilities
that everyone should be aware of.
No. 1, we have a full, a full scale. I want to repeat that,
a full scale test grid that can be used to verify and validate
modeling and research which is being done on the grid. That is
being done there.
We have a SCADA test bed. This is a joint program with
Sandia National Laboratory. It supports industry and government
efforts to enhance the cyber security of control systems that
are being used throughout the electric industry, not only the
electric industry, but also oil and gas industries.
Currently they have a wireless test bed. Indeed we just
started improvements on the wireless test bed. We're going to
continue to do that.
As we all know there are more and more everyday components
that are being connected to the grid that are wireless. So this
wireless test bed is extremely important as we move forward
with grid security.
Last and this is important, particularly in light of the
Metcalf incident that has been talked about here. They are in
the early stages of this, but they are working on a project to
develop security protections, physical protections and others
for substations. So that's going to be extremely critical also.
We're very proud of the work that's done at the Idaho
National Laboratory. They've, like I said, they're renowned
when it comes to nuclear energy. But there are these new areas
that they are developing and grid security is certainly one of
the things that they're going to be focusing on.
The reason I wanted to say what I've said about this is I
want to make sure that everyone in the industry, everyone in
the government agencies knows that these facilities are
available because sometimes they have a tendency to fly under
the radar. So I want to state that for the record. Thank you
for making the time available, Madame Chairman.
Senator Cantwell. Thank you, Senator Risch.
Following up on that, if I could.
Senator Risch. Mention that you were there.
Senator Cantwell. I definitely believe that technology is
one of our friends here in this solution. I mean when you look
at the spectrum of things that we've tried to do whether it's
encouraging cooperation on voluntary standards or requirements,
I think, obviously things like rely equipment, synchrophasors,
storage capacity, so that you can move around problems.
What do you think, panelists, that we need to do to
encourage more of the development of these smart grid
technologies that give us the capacity to deal with these
outages?
In the context of that framework, is it more tax
incentives? Is it more regulation? Is it more cooperation?
Mr. Cauley. I would first respond by echoing the comments
of Senator Risch.
I've actually been to both the Pacific Northwest Lab and
the Idaho National Lab and they're very rich resources for the
industry. Our industry, ISAC, the Information Sharing Analysis
Center is plugged in to them. We know the SCADA testing and the
security capability.
We also use those resources for training purposes and
behind the scenes analysis of threats.
The grid is becoming more modernized. We've, particularly
in the West, there's the synchrophasors have been deployed
widely. At this point I don't know that there's any particular
incentive I would point at, but we're working to encourage
industry to get better visualization, situation awareness,
recovery tools, out of that increased capability and visibility
into the grid through smart grid technologies and
synchrophasors.
Senator Cantwell. Anybody else?
Ms. Kelly or Ms. LaFleur.
Ms. Kelly. Yes, I would just like to note that, as I
mentioned, tools and technologies is one of the main things
that FCC is working on but, you know, the partnership between
industry and government to try and improve the tools we have to
address these threats.
I would just also note that there is an emergency
transformer program that the Electric Power Research Institute
is working on with the Department of Homeland Security and ABB
to try and develop a more portable transformer that can be
brought in more quickly. So we really look forward to these
types of technological advances to assist us in dealing with
these issues. More R and D money would always be welcome.
Senator Cantwell. Ms. LaFleur.
Ms. LaFleur. I would just add that most regulation consists
of carrots and sticks. So here the stick is the reliability
standards because phasor measurement units and so forth help
people meet their standards because they make the grid more
reliable.
But the carrot is rate regulation. In 2005 Congress gave us
the section 219 of the Federal Power Act that allows for
incentives. We have rules allowing greater rate incentives for
advanced technologies to encourage people building transmission
to put the latest technology because they can get a little
higher return on equity if they put better technology on their
line.
We recently adopted a rule, for example, in PJM, allowing
them to require phasor measurement units for certain types of
lines. So that rate regulation helps support those investments.
Senator Cantwell. You're talking about new deployment. This
is, you know, if we are talking about the issue du jour and
apparently we are because right now the 9/11 service in
Washington State is down in part of our State. So it is the
issue du jour.
So if it is, why not look at ways to further incent, not
just on new deployment, but on the resiliency of the grid?
I mean, to me, the security measure is smart grid
technology and just figuring out why we don't see a faster
deployment. Yes, some of the technology is created, you know,
in Washington State. But then again, we've lived and breathed
and benefited from an electricity grid with cheap hydropower
for a long, long time. So it's more of an ethos for us.
But, so my question is, you know, isn't there a faster way?
But unfortunately, I have to go and vote.
Thank you, Madame Chair.
[Laughter.]
The Chairman [presiding]. I'd like to hear the answer to
that so please continue.
Thank you, Senator Cantwell.
Who would like to answer the Senator's question?
Ms. LaFleur. I'm going to take that as a challenge to go
back and look at how we do our rate regulation for existing
transmission.
But most of it is governed by formula rates. So as people
invest in those things, they can recover if it's a prudent
investment on their line. The question is whether we need to do
something to better incent those.
Some of it is happening through market rules, through rules
that encourage storage technology, one of the things Senator
Cantwell mentioned. But we'll look at some of our other rules
and give a more complete answer for the record.
The Chairman. Thank you.
Let me follow up on that question. I didn't catch all of
it, but I'm putting two and two together about what it might be
about.
It's an issue that's come up several times in conversations
with the industry, but Federal and State requirements for
distributive generation and how that can both positively and
sometimes negatively affect the price of electricity, the
ability or the requirement for utility companies to buy back
power at a certain price.
Could some of you comment about the current status of some
of that out West, particularly? Chairman Honorable, you should
start. I'd like just a comment.
Then as the members come back we'll finish their line of
questioning to this panel then move to our second panel in
hopefully about 10 minutes.
Go ahead and take that, if you would.
Ms. Honorable. Madame Chair, thank you for the question.
There is a wide array of stakeholder interest in this
issue, distributive generation. We are working together. We're
educating ourselves.
Learning about the importance of being innovative and
allowing customer choice, but at the same time it's important
to, particularly from an economic regulator perspective,
balance the interest to avoid cost shifting, to ensure that
reliability is maintained in the first instance. Certainly
distributive generation is an important innovation, quite
frankly, that's happening all across the world. But also from
an economic regulator perspective it's something we continue to
be challenged with making sure that all interests are balanced.
Pardon me.
The interest of the industry that does have to be able to
receive back this energy at anytime, the interest of consumers
from all walks of life, from all ratepayer classes and ensuring
the inherent equities of permitting those who would like to put
solar panels on their roof tops while ensuring that the lease
of these isn't carrying the cost of that.
So these are issues that we're exploring. We're educating
our commissions. Quite frankly our commissions are leading the
way in being responsive.
The Chairman. I'm going to come back to that question.
Senator Portman and Senator Manchin, I think that Senator
Portman is next, but are there scheduling conflicts that I
should know about, Senator Manchin with you?
Senator Manchin. Not now.
The Chairman. OK.
Senator Portman.
Senator Portman. Thank you, Madame Chair. Thank you for
holding this hearing. I really appreciate it.
I know that this is a focus with this panel on cyber
security, but we also talked about reliability a little bit and
I know the next panel is going to focus on that. I really
appreciate your willingness to move forward, you know, on a
hearing so quickly after your taking the Chairmanship.
I'd like to ask a couple of reliability questions just
because we've got some great experts here on this panel who
maybe can give us a preview of what we're going to hear next,
but also for us to be able to compare and contrast what we're
going to hear from some of the industry folks.
First, I guess, Chairman LaFleur, I'd like to hear from you
a little bit about what you think we ought to be doing in terms
of reliability and price spikes. At a FERC technical conference
last week you were quoted as having said, ``I'm also very
concerned about the price, both the absolute magnitude of the
price spikes and the increases we saw this winter and the
variability when you see these price spikes it's a symptom that
protecting reliability is causing this issue.''
Can you elaborate a little on that? By the way, is that an
accurate quote because you never know?
Ms. LaFleur. Yes, the quote was in the context we had
somebody had said we're mainly here to worry about reliability
not price. I made the comment well, they're closely related
because when you see the extraordinary price spikes, as we saw
in some regions of the country in January and February, that
means the grid operator is doing very unusual things to keep
the lights on. That ultimately goes into customer's
pocketbooks. So we need to say why is that happening and what
can we learn from it?
We're in the middle of probably one of the biggest power
supply changes we've ever seen particularly the increased
reliance on natural gas to generate electricity. What we looked
at very much in the tech conference last week was how we can
get the rules right to make sure that No. 1, we have the gas
infrastructure in place so that the pipelines are there so that
the constraints don't cause the gas price list to spike up.
But second that the market rules and sometimes very geeky
specific rules are written in a way to allow people to buy
their gas at a more economic time of the day to avoid some of
the spikes we saw this winter. FERC has a number. We're
actually trying to change the timing of the gas and electric
markets to make that happen.
But more fundamentally, one of the things I've been leading
is a look at the capacity markets. These are the forward
markets. We look 3 years or 5 years out to see what capacity is
needed on the system. We have to make sure that the rules are
written so that we're properly rewarding the base load
facilities that are very stressed by the short term gas prices.
We're seeing a lot of retirement of base load that could
ultimately be detrimental to reliability. So we're taking a
very focused look at our base load and what it needs to survive
in the markets to make sure that the market price is right both
for new resources and old.
So a very geeky answer, but that's very much what the tech
conference was about. What can we learn and get the rules right
next year.
Senator Portman. Yes, no. I don't think it's very geeky. I
think it's an answer that goes to a lot of the important
issues. I think we're going to discuss these further in the
next panel.
But one thing you didn't discuss is the impact of Federal
regulations on a system. I think that's also not geeky, but
it's important. In your testimony you said that FERC should
help EPA better understand some of the implications of
individual regulations. What, you know, their impact might be
on electricity, particularly, and reliability.
You mentioned that you had worked with EPA on the finalized
mercury and air toxic standards and that FERC should follow the
development of EPA greenhouse gas emissions rules.
Let me just ask you this. As you know EPA is currently
working on a lot of rulemaking. That would include it affects
the utility sector, certainly the 316B cooling water intake
rule, the NOX zone rules, the particulate matter 2.5
rules, regional haze, coal ash.
So let me ask you this with regard to those regulations.
What is FERC doing to help EPA understand how these rules
collectively might impact grid reliability?
Ms. LaFleur. We've tried to be a source of reliability
expertise to EPA. A lot of our work has been focused on MATS
because that had such short timelines. But my colleague,
Commissioner Moeller, who I believe is right behind me and on
the next panel.
Senator Portman. He'll be on the next panel.
Ms. LaFleur. I co-chaired a forum that met with NARUC and
EPA and we've had meetings on 316B, on coal ash and right now a
lot of the focus is on greenhouse gas.
I think that as rules are developed we need to be
commenters in the draft stage, such as in the greenhouse gas
rules that are coming out June 2, I believe, to make sure that
those rules are achievable while reliability can be preserved
and then look at our knitting how, if you look at the
greenhouse gas rules, they could potentially make changes for
the markets and the infrastructure, make sure we're doing what
we need to do to support reliability as those rules come in.
So it's commenting to the EPA and looking to make sure the
infrastructure is keeping up.
Senator Portman. I hope on the front end you will do not
just commenting, but analysis for them as to what the effect
is.
Ms. LaFleur. Yes.
Senator Portman. It's kind of like this cost benefit
analysis that, you know, we talk about a lot. This is certainly
a cost. Reliability is a cost, as you say to consumers. We
talked about the price spikes.
You didn't talk about the potential for brown outs which is
also there and black outs and you know, we've gone through a
tough winter, admittedly. But we've really stressed the system.
Now we're looking at a potentially hot summer too, you know.
So we are at a point where we need your input on the front
end here to give them comments but also to be sure these
regulations are not going to make it even more difficult for us
to have reliability with all the issues. In the historic
regulator model States, in conjunctions with regulated
utilities were responsible for ensuring the construction and
maintenance of adequate generation, adequate reserves.
Who's in charge now? Who do you think is responsible for
ensuring adequate generation reserves are constructed and
maintained in the so-called organized competitive market?
Ms. LaFleur. The States still play the critical role in
deciding where the generation goes and a lot of the generation
permitting and citing. But in the two-thirds of the country,
including Ohio, that are in competitive markets, we're relying
on the competitive markets to send the investment signal to
make sure that the generation get paid. So it will either stay
online if it's needed or get built which means that FERC has a
big role to play.
That's why the competitive markets have done a very good
job over the last 12 to 15 years in deploying the assets that
were already built before we went into this system. But now
we're in a major investment cycle. We need to make sure that
they draw the investment we need to keep the resources online
or bring resources online for reliability. I think FERC has a
big role to play.
Senator Portman. OK.
I know my time is up. But we do need to get into this issue
for the next panel on base load. I'm sorry I didn't get a
chance to ask Ms. Kelly and Chairman Honorable and others about
this because I do think this grid liability issue is critical
and look forward to following up with you personally, but also
with the whole panel on this issue.
Ms. LaFleur. Of course. Thank you.
The Chairman. Thank you, Senator.
Senator Manchin.
Senator Manchin. Thank you, Madame Chairman and to Ranking
Member Murkowski, I think she'll be back. She's voting now.
But as you know my colleague, Senator Portman, who just
spoke and I, wrote to you both last month urging the--having a
hearing on the grid reliability and stability. I want you to
know how pleased I am that you did this in such an expedited
manner. Thank you so much for this is extremely important what
we just came through this winter.
There are two fuels that keep the lights on, just two right
now that keep the lights on 24/7, 365 and that's nuke and coal.
Gas will get into that position. They're not in that position
yet, but they will get there.
These two base load fuels provide almost 60 percent of the
power this country demands. Without these base load fuels our
grid can't function. We know that. You all have said that and
we cannot keep the lights on.
I'm having a difficult situation, you can imagine, in my
side of the aisle with Administration's attitude toward what
we're dealing with. I just want the facts to come out. That's
why I asked for this today.
I want you all, who are on the front line, people they're
relying on you. They're life basically is depending on can we
have electricity, keep the lights on, when they turn it on when
they need it for their, whether it's the air condition, the
heat or for their ventilator or for their oxygen, whatever it
may be. With what we've come through right now, you know, coal
still is 30 percent of our power, our national mix, plus, 30
plus.
As you are doing, do you think about the fact that nearly
20 percent of the coal fleet is being retired? 20 percent of
the coal fleet is being retired. Add the fact that EPA has
proposed new source performance standard. What it's going to do
will effectively ban the construction of any new coal plants.
So then you start looking at the reliability, how do we
maintain this system? How do you keep it running?
That's all I'm asking this Administration to look at. How
do we keep the lights on so people's lives will not be
endangered and we not lose people?
Coal isn't the only base load fuel, as you know, nukes too.
In the current market condition it's unlikely that we're going
to build any nukes. Yet we may need to replace as many as 100
nuclear units by 2050 if the licenses are not extended again,
as you know.
How can the system continue to work for the long haul under
this sort of strain? Everything I've asked any expert they say
it can't. We are setting ourselves up for a major reliability
crisis.
During the Polar Vortex this winter a whopping 89 percent
of AEP, I have two providers in my State, AEP and First Energy.
AEP said 89 percent of the coal units that are slated to be
closed were running 100 percent just to keep up with the
demand.
PJM is a RTO that handles our area, as you know. We spoke
to them and they're here being represented. I appreciate they
came in and spoke to me.
But they were saying that, you know, this was a critical
time. You knew, I think, Chairman, they were taking emergency
action to keep the system up. They've done a great job. I mean,
they're Johnny on the spot. I appreciate all that.
But even they can be strained. They said they were down
anywhere from 500 to 750 megawatts out of a 140,000 plus
megawatts. They're responsible that the system could have gone
down.
With that being said, they said they had another tool in
the tool box was reducing the voltage on the lines that keep
1,500, maybe 2,000 megawatts, right?
With that system there you got 10,000 megawatts of coal
fired power coming offline. What happens? You're going to be
short next year.
So I'd just like to know and I'll start with you, Chairman
LaFleur, your view of this. Should FERC be pushing certain
kinds of fuel or should it be looking at basically the
portfolio in the mix that our utilities have?
I guess, you've touched on it, FERC's proper role.
Ms. LaFleur. Yes.
Thank you for that question.
I do not think it's FERC's job to pick certain kinds of
fuels. The whole concept of a market is that it uses a
generalized product that allows different fuels to compete
fairly and so if there are preferences for certain kinds of
fuels that is not a fair market by definition.
I think FERC should try to be guided by reliability and
what the customers need not by a preference for a particular
fuel.
Senator Manchin. Let me ask you this because I know time
and we'll go through in a second round. But right now just
explain as simply as possible, any of you all want to jump in,
the system the way it works now you have producers such as AEP
and First Energy in my. They're responsible for producing the
energy that's needed that goes into the transmission which is
what we're calling the grid.
Ms. LaFleur. Um hmm.
Senator Manchin. Then you have RTOs such as PJM who is
responsibility is to make sure it's reliable.
Ms. LaFleur. Um hmm.
Senator Manchin. Affordable and dependable.
Who makes the decision what goes on and what the
reimbursement rate would be? So if you're saying that we think
your portfolio is out of balance and we don't think you can
continue to give us what we need. Who makes that decision to
say I want another coal fired plant or I want to get rid of
that coal fired plant. I want more gas generation or we need
more renewables because I believe, you know, in West Virginia
we're blessed.
We've got it all. We've got coal. We've got gas. We've got
wind. We've got solar. We've got it all.
We're using it all. They just don't like it.
Ms. LaFleur. PJM does an analysis 3 years out and says how
many megawatts are we going to need to keep this system on?
Then they run an auction where resources bid in. They say I
have so much coal. I have this. I have nuclear.
Senator Manchin. Yes.
Ms. LaFleur. Some of the existing plants say I'll run at
any cost. Others put their----
Senator Manchin. Who makes the decision on price? If they
say I'm only going to reimburse you on what a gas turbine or
gas plant would cost even though I know you need coal. I can't
do that. I'm only going to do this.
Who makes that decision?
Ms. LaFleur. What you're referring to is embedded in the
auction rules. So I would say PJM. But those rules have been
approved by FERC which is why we're looking at are the capacity
markets--
Senator Manchin. Can you overrule PJM if you think they're
not having--their portfolio does not have a good mix?
Ms. LaFleur. If they come in and say we want to do this and
somebody else comes in and says no, if you do that then this
will happen to my plant. We try to balance all that and make
the fairest decision based on the record of the law.
Senator Manchin. So the utility, AEP or First Energy, can
come to you and says listen, we're shutting down. You know, we
shut our coal plants down. It's super critical we shut down
because they couldn't get reimbursed. That's what they told me.
Ms. LaFleur. So they're saying the prices aren't working.
Yes, they can come to us. That's why we're doing that right
now.
Senator Manchin. They're going to need the power. They
needed it this----
OK.
Madame Chairman, can I just ask maybe----
The Chairman. Go right ahead.
[Laughter.]
Senator Manchin. Can anybody explain to me the price spike
and the gouging that went on during this Polar Vortex and what
the people in West Virginia are going to get hit with their
bills? I'm hearing it's unbelievable. They're getting almost
double bills. They're double the cost of their utilities.
Can you give me a reason why that happened?
Ms. LaFleur. The simplest way to explain it is during
periods where power was really short because there was a
successive days of night and day unusual cold.
Senator Manchin. Gotcha.
Ms. LaFleur. Generators who were reliant on gas had to
spend a lot of money to get emergency gas to get----
Senator Manchin. Why did it cost? Did the gas companies
take advantage of them? Is the pricing structure so that we
can't adjust quick enough?
Ms. LaFleur. To the best of our knowledge of our analysis
so far, there was no market manipulation. It was actual supply
and demand forces of the demand for gas verses how much there
was.
Senator Manchin. So nobody has long term contracts for gas?
They can spike the price every day because of demand? They
don't do that with coal or nukes.
Ms. LaFleur. Some people have long term contracts, but the
price spikes by if more people bid than there is gas. Then
that's what made the price go up.
Senator Manchin. Gas, it's not as----
Ms. LaFleur. It's more variable than a private, like with
the coal----
Senator Manchin. Yet we're putting all of our eggs in that
basket.
Ms. LaFleur. That's why we need more pipelines.
Senator Manchin. So that means consumers in West Virginia
and around the country are going to be held hostage?
Is that fair?
Mr. Cauley.
Mr. Cauley. In 2010 we predicted, through an independent
study that 76 gigawatts of coal would be retired. We updated
that last year to be 83 gigawatts.
Senator Manchin. At that time the EPA said only 4
gigawatts, correct?
Mr. Cauley. Something like that, sir.
Senator Manchin. So they were off by couple thousand
percent.
Mr. Cauley. A lot.
Senator Manchin. Yes.
Mr. Cauley. We've been working with EPA. They've been
cooperative with us. But we're still trying to get the message
out that over dependence on one fuel, on gas, is very volatile
pricing and it's not as reliable.
The other concern is that there's not any discussion in the
value proposition of the reliability services provided by base
load units, coal and nuclear units, such as inertia, balancing
of frequency, voltage control. The more we move this out into
distributed and undispatched. They're not essentially
controlled resources. The harder and harder it's going to be to
manage reliability on the grid.
So that's what we're seeing in these recent events is units
that are allowed to operate whenever they'd like to operate are
creating the price issues and not adding to reliability.
So our role is to get that message out there and make sure
that the State regulators----
Senator Manchin. The difference what you're saying is
basically you can bring a peaking plant on. You can turn on and
off as far as the renewables, but you can't turn off nukes and
you can't turn off coal. Once it goes it's got to go.
Mr. Cauley. Correct.
Senator Manchin. So that's where your base comes in.
The Chairman. Senator Manchin?
Senator Manchin. I'm so sorry.
[Laughter.]
The Chairman. It's OK. It's been really----
Senator Manchin. I was waiting for this.
[Laughter.]
Senator Manchin. I just want to thank you all for getting
the facts out----
The Chairman. We have a second panel that will focus on
this as well.
Senator Manchin. This was a warm up.
The Chairman. Yes, this was a warm up.
We really, really appreciate that line of questioning.
I just want to, as we close this panel, thank you. It's
obvious that there are many more questions, many more subjects
to talk about.
We have a second panel that will add some light and
illuminate this subject even more.
But I do want to put into the record, Senator Manchin, that
coal is a very significant base load. Gas is now almost 30
percent and nuclear as well. It just shifted quite a bit over
the last 15 years. Some of it is regulation. Some of it is
market driven. But we're going to look forward to drilling down
more.
Senator Manchin. Madame Chairman, if I could just say one
quick thing on this, what you just said there?
The Chairman. Yes, go right ahead.
Senator Manchin. You know, I come from West Virginia. We've
been a large coal producing State. We've been blessed with
natural gas, the fracking. We really have been blessed with
everything.
If someone came to me in West Virginia and the citizens of
our State and said listen, we've got a new super fuel out. It's
commercial hydrogen. We'll be ready in 3 or 4 or 5 years to go.
You know what? It would be tough, but we would adjust. We
would adjust.
I'm not here trying to push a product that you don't want.
But when we hear from people like you, the professionals, that
says we've got to have it. I've got an Administration that's
fighting me every way they can to get rid of it.
You got to have it, but you don't want it, but you know you
need it. You know, somebody's got to put the facts out. That's
what we're doing today.
Thank you.
The Chairman. Yes.
Thank you very much because you've been a leader. We
appreciate your leadership.
As we end this panel though, Chairman LaFleur, let me
express to you in the strongest possible terms my opposition to
the application filed at FERC for by American Midstream to
abandon the Midla pipeline. I know that you cannot discuss this
publicly. But I want to just call this to your attention. The
letter is in your file. It needs to be responded to.
Again, this gets back to the whole issue of getting fuel to
people when they need it to keep lights on. This is about
pipelines. We've talked about electricity generation. But it's
an extremely important issue for both generators, middle men
and middle women and consumers.
So thank you. I'm looking forward to following up.
Again, thank you all. If the second panel will come forward
we'll start momentarily.
Ladies and gentlemen, if I could re-convene the meeting.
Thank you.
We have a large crowd. Thank you for quickly adjusting
panels.
We have 6 experts on this panel and we only have about 30
or 35 minutes left to go. So I want to do this quickly. I'm
going to ask each of you to limit your remarks to 4 minutes. If
you can do it in less time I would really appreciate it because
we do want to leave time for at least one round of questions.
First, Philip Moeller, also here representing FERC, perhaps
from a different perspective, we're looking forward to hearing
that.
Michael Kormos, Executive Director of President of
Operations of PJM, Senator Manchin, who will also give us some
additional insight into the line of questioning that you've
raised.
Mr. Nicholas Akins, Chairman and President of CEO of
American Electric Power, we thank you for being here.
We also have Mr. James Hunter, representing the
International Brotherhood of Electrical Workers. I'm proud to
have the unions here and the work that you all do and the
perspective that you bring to this issue, I think, is very
valuable.
Mr. Thad Hill, President and Chief Operating Officer of
Calpine Corporation, thank you for being here.
Finally Ms. Cheryl Roberto, again we thank you for your
views from the Clean Energy Environmental Defense Fund, for
your perspective that you bring to this issue as well.
So if we can start with you, Commissioner Moeller. Really
we're going to hold you all to 4 minutes so we can have a very
robust line of questioning.

STATEMENT OF PHILIP D. MOELLER, COMMISSIONER, FEDERAL ENERGY
REGULATORY COMMISSION

Mr. Moeller. Thank you, Chairman Landrieu, Ranking
Republican Murkowski, members of the committee. I'm Phil
Moeller, a member of the Federal Energy Regulatory Commission
since 2006. Thank you for holding the hearing on this important
topic.
We've gone through quite a winter, particularly in the
Eastern interconnect that you referenced on the page 3 of the
staff handout with particularly starting January 5th with the
Polar Vortex events. I think we need to send appreciation to
the thousands of people who kept the system running in the
control room, Mr. Hunter's members, people who made decisions,
dispatch. They came through remarkably well in a system that
was very stressed.
I've consistently said that we'll let the market decide
which fuels are the winners based on economics and
affordability, but I can't be reliability neutral. On this
subject it's just too important. We have to maintain
reliability of the Nation's grid.
I went back and looked at the letter that Senator Murkowski
wrote me in 2011 and my response and my House testimony that
year in which I called for a more formal process to analyze the
potential reliability implications, particularly environmental
rules. To my knowledge that process has not yet occurred. But I
still continue to advocate for it.
The reasons are as follows.
We've had a couple of unusually warm winters before this
one and the system was very stressed. Yet in 53 weeks we're
going to lose all those MATS plants that are slated for
closure. Now plants that retrofit generally have a fourth year,
sometimes a fifth year, but the fifth year is full of
uncertainty and some of the other panelists will relate to
that.
So as referenced earlier our region has very different fuel
mixes depending on where you come from, some areas more
dependent on natural gas, my home in the Northwest, hydropower.
But we're seeing a lot of stress, particularly with prices
down, not only with the coal plants that are going to be shut,
but also with the nuclear fleet that's been referenced that
should be kept in mind.
Specifically the Midwest is looking at some challenges in
the summer of 2016 where they project a reserve margin that
will be of deficit. Although that reserve margin has been moved
upwards to only two gigawatts, it also depends on the fact that
the assumption is that consumers will be using less electricity
per year. That's a pretty big assumption to make.
We also have individualized situations. I reference one in
my written testimony where the local area is going to be in a
conundrum as to how they go forward without a coal plant.
On this issue we have a variety of opinions. We have
executives who will say we can get through this period without
any problem. We have others that are very concerned.
My focus has been to try and get the data.
Which plants retire when?
Where they are in the system?
What they provide in terms of, not just power, but perhaps
voltage support is very, very important.
As I have called for data, frankly, we've had some that's
been contradictory and some that hasn't been particularly
effective in its--we're not exactly confident in a lot of the
numbers and that has me very concerned going into the next two
to 3 years. I again would call for the fact that we need to do
a better job in government working with the private sector,
some kind of a formalized process to analyze this.
A lot of it's just going to depend on the weather. If we
have mild weather for the next couple of years we might make it
through. But if we have extreme weather in the summer or as we
saw in the winter, the system will be extremely stressed.
That's where reliability is paramount and people's, frankly,
their safety and their lives are at stake if we have extended
extreme weather and the system isn't able to produce power.
Thank you again for the chance to testify. I look forward
to questions.
[The prepared statement of Mr. Moeller follows:]

Prepared Statement of Philip D. Moeller, Commissioner, Federal Energy
Regulatory Commission
Chairman Landrieu, Ranking Member Murkowski, and members of the
Committee, thank you for inviting me to testify regarding the continued
reliability of our nation's bulk power system. I am Philip D. Moeller,
and I have been a Commissioner at the Federal Energy Regulatory
Commission since 2006.
Every day, men and women sit in windowless control rooms making
decisions on how to operate the power grid. They ensure that the right
power plants are running at the right time, and they carefully balance
power generated with power consumed. On a minute-to-minute basis, they
ensure that the lights, heaters and air conditioners stay on, and that
manufacturing and other business activity continues. This winter had
more than a few days when electricity supplies were at their limits,
yet the operators kept the system running without interruption. Every
one of us today owe each of them appreciation for their hard work. And
going forward, we owe them the resources that they need to keep the
lights on in the future.
I have long-stated that I can be ``fuel-neutral'' but I cannot be
``reliability-neutral''. That is, I can be neutral as a regulator with
regard to how competitive markets ultimately decide which types of
power plants are most efficient and affordable, regardless of whether
those power plants are fueled by water, natural gas, fuel oil, uranium,
coal, wind, the sun or any other fuel. But I cannot be neutral about
the reliability of our electricity.
In preparing today's testimony I reviewed the positions that I have
presented to Congress over the years on the subject of the reliability.
For more than three years I have worked on the reliability implications
of our nation's unprecedented transition in the fuels we are using to
generate electricity. Sufficient and reliable electricity is necessary
for both economic opportunity and the heating and cooling that are
essential to the health and safety of our nation's citizens. An
insufficient or unreliable supply of electricity endangers economic
recovery and can be a matter of life and death during periods of
extreme heat or cold.
Specifically in order to prepare for today, I reviewed the letter
that I sent to Senator Murkowski in August 2011 in response to her
questions about the reliability implications of environmental rules
impacting the nation's generation fleet. I also reviewed my testimony
to the Energy and Power Subcommittee of the House Energy and Commerce
Committee dated September 14, 2011. In both documents, I called for a
more formal analysis of electric reliability implications of these
rules, potentially including the Commission, the Environmental
Protection Agency (EPA), the US Department of Energy, the North
American Electric Reliability Corporation (NERC), and regional market
participants. As far as I know, this formal analysis never commenced.
I was, and remain concerned that EPA's analysis greatly
underestimated the amount of power production that would be retired due
to these rules. I reiterate today what I stated then: I am not opposed
to closing older and less environmentally-friendly power plants, but I
am concerned that the compressed timeframe for compliance with the new
environmental rules was not realistic given the amount of time it takes
to construct new plants and energize transmission upgrades to mitigate
plant closures. In addition, EPA's analysis failed to analyze whether
there was sufficient transfer capability to move power from areas of
energy surplus to areas short of power. Given that public policy
aspirations cannot violate the laws of physics, we need to act
carefully in transforming the power grid.
After two unusually warm winters in most of the country, our latest
winter exposed an increasingly fragile balance of supply and demand in
many areas in the Eastern Interconnection. Prices at times were
extraordinarily high and consumers used more power because of the cold
weather, which multiplied the impact of higher prices. Consumers are
now beginning to receive utility bills that in some cases are
reportedly several times what they paid during similar periods in
previous years. Although the operators of the power grid worked hard to
keep the system working, the experience of this winter strongly
suggests that parts of the nation's bulk power system are in a more
precarious situation than I had feared in years past.
In approximately 53 weeks, coal plants that do not employ specific
emission-control technology will be closed. Those plants undergoing
retrofits have the option to request a one-year extension. Those
particular plants will also have the option of requesting an additional
year for compliance, although this option comes with the uncertainty of
being subject to civil litigation for violating the Clean Air Act
during the additional year.
Regarding the structure of our electricity markets, our nation
consists of different regions with unique market structures and varying
mixes of fuels used to generate this electricity. New England and
California are increasingly reliant on natural gas as a fuel to
generate electricity, while much of the Mid-Atlantic, Southern and
Midwestern regions rely more on coal, and my home of the Pacific
Northwest relies heavily on hydropower. Thus the impact of
environmental rules on generation resources and constraints in fuel
supply chains differ across the nation.
Although there has been attention focused on the loss of coal-fired
generation, nuclear plants are under increasing economic pressure to
close as a result of record low capacity prices. In addition to several
announced nuclear plant closures, some utilities have predicted
additional retirements if specific units are unable to operate
profitably. Losing these plants has long-term implications both to the
reliability of the system and on the nation's emission profile.
To the extent that a region has other resources, the retirement of
power plants may not have a material impact on consumers. Yet the
experience of this past winter indicates that the power grid is now
already at the limit. Heading into the next several years, some regions
of the nation will be more vulnerable to supply shortages than others.
It is vitally important to recognize, as this latest winter
demonstrated, that weather is a significant variable in terms of
electricity demand. We can hope for mild winters and summers over the
next several years, but hoping for mild weather is not a practical
method of planning to meet economic growth and public safety.
For example, the Midwest is struggling to understand whether or not
it will have sufficient capacity to handle peak weather over the next
few years. In particular, in the region served by the Midcontinent
Independent System Operator (MISO), the reserve margin is now expected
to be at a deficit of approximately 2 Gigawatts (GW) in the Summer of
2016. Although this figure has been revised downward from a projected
deficit of approximately 6 GW a few months ago, the new figure assumes
that consumers will collectively reduce their electricity consumption
every year by approximately .75 percent. Again, weather will play a
role in the actual rate of consumption, as will the strength of
economic (and especially industrial) recovery in the region.
In addition to looking at MISO collectively, specific locations
across the Midwest may have more significant problems. For example, the
Upper Peninsula of Michigan has long depended on a coal plant to serve
local customers, but at this time, it is not clear how that part of the
state will receive electricity service in the future. Regulators,
including FERC, are considering this matter, but resolving regulatory
issues is only one step in the process of building infrastructure. That
is, infrastructure still needs to be built after the regulators
conclude their processes, and that takes time.
Other regions of the country face similar problems, and executives
at the utilities have various levels of confidence in their ability to
promise the delivery of power on the hottest and coldest days of the
year. Some executives are very confident in the ability of the power
grid to handle the new environmental regulations, and other executives
are hopeful that the weather will be mild. But beyond relying on the
confidence of utility executives, as a FERC Commissioner with
responsibility for the reliability of the grid nationwide, I need
actual data on which power plants are retiring, and which resources
will be ready to replace those retiring plants. To date, obtaining
reliable data and thoughtful analysis as to the changing generation mix
and its consequences has been a challenge.
Moreover, advocates for strong environmental rules promise that
nothing they do will threaten reliability. And they promise to get
their rules right. But on the other hand, advocates for traditional
sources of power assert that the rules are not right, and that
reliability may be threatened. These differing viewpoints can be tested
with data.
In preparing this testimony, I sought the latest data from the
various regions on the power plants being retired, and the resources
that are replacing them. Lots of data are available, and some of them
are contradictory. But lacking in that data is any guarantee that this
nation will continue its history of reliability on the coldest and
hottest days of the year. While nobody can guarantee future
reliability, we can do better in understanding the risks and issues
facing the power grid in the future. As the history of my testimony
before Congress demonstrates, the sufficiency of our generating
resources has been clouded by uncertainties arising from changing
environmental regulation. While we have been sensitive to the fragility
of our electric infrastructure in certain pockets of the country, this
winter has demonstrated that our margin of surplus generation is
narrower and more constrained than many understood. Together, industry
and the federal government can do better in devoting resources to
looking carefully at individual power plants that are expected to
retire, the load they serve, and the strategies being used to replace
those power plants.
In conclusion, our nation is undergoing an unprecedented change in
the electricity sector in a very compressed time frame. I continue to
believe a more formal review process is necessary including the
Commission, the EPA, and non-government entities to analyze the
specific details of retiring units as well as the new units and new
transmission that will be needed to manage this transition so as to
best assure reliability of the nation's electricity sector.
Thank you again for the opportunity to testify, and I look forward
to answering any questions from members of the Committee.

The Chairman. Thank you so much for adhering to the time.
Mr. Kormos.

STATEMENT OF MICHAEL J. KORMOS, EXECUTIVE VICE PRESIDENT-
OPERATIONS, PJM INTERCONNECTION LLC

Mr. Kormos. Good morning. On behalf of PJM I also want to
thank Chairman Landrieu, Ranking Member Murkowski, members of
the committee and their staff.
I'm Michael Kormos. I'm Executive Vice President of
Operations for PJM. Again, as has already been discussed, PJM
is going through a major transition as we shift from coal to
gas. We see significant coal resources retire on our system.
As part of our responsibilities to maintain reliability and
that is our primary responsibility. As been mentioned, we do
run a 3 year forward capacity auction where we look to procure
adequate commitments from resources to cover the expected load
plus an adequate reserves. Throughout the next 3 years, through
the METS integration period, we have, in fact, procured not
only the minimum amount we needed, but in fact excess. With
that we believe we will be able to maintain reliability.
Having said that I will not tell you it is not going to be
without a challenge.
Our fuel mix is changing fairly radically with the
retirement of coal, with the low availability of natural gas
and with our increased use of demand response to meet our
needs. Coal will continue to play a big role in PJM. It will
still be one-third of our capacity going forward. However the
cushion we've enjoyed that coal has provided, as the other
units have, is in fact diminishing.
Coal, in many parts, is being replaced by demand response.
For those who may not be familiar demand response is a
contractual obligation for a customer interrupt when needed.
The issue with demand response that it's typically not
available to us until we are at or very near an emergency and
it is typically extremely high priced, one of the most highest
priced resources on our system.
Having replaced our coal resources with demand resources I
would expect to see that much more significant volatility in
the energy market as we will have to rely on them more as being
part of our capacity mix.
Also, as we mentioned before, we are moving much more into
natural gas. In many ways we are becoming more balanced. We're
going to be about a third natural gas.
Natural gas also has its challenges as well, particularly
in the winter, like typically it has been a very good resource
for us. Prices have been very affordable. During the winter
when it competes with residential heating for natural gas we do
see some difficulties in managing it.
The prices can become quite volatile. Those prices will
ultimately be reflected into the energy prices. Quite frankly
the contractual terms have been onerous that we've had to be
able to secure it.
While we ultimately secured enough gas this winter that
under some of the contractual terms we had to accept led to
some of those increased costs that were mentioned previously.
While talking about the Polar Vortex I will tell you it was
probably one of the most difficult winters I've been involved
in in the last 26 years. I'd probably have to go back literally
20 years to 1994 to see a winter of that. We saw extended
periods of cold.
We saw demand response, our demand being 20 to 40,000
megawatts. That's 20 to 40 nuclear plants over what our typical
winter loads would be. We saw 22 percent forced outages on our
system.
I would agree while we were close we were able to maintain
reliability through it even though it was a fairly difficult
time period.
Just in summary I would mention I would not be realistic
for me to stay up here and tell you there will never be an
interruption in service. But having said that, I do believe
that we have met our reliability objectives. We have procured
the capacity we need. We will be able to serve the load in all
but the most extreme circumstances.
I do caution however, we will have to continue to work with
our regulators as well as our members as we make this
transition, particularly in the energy pricing side as we see
in that volatility.
[The prepared statement of Mr. Kormos follows:]

Prepared Statement of Michael J. Kormos, Executive Vice President,
Operations, PJM Interconnection LLC
On behalf of PJM Interconnection, L.L.C. (PJM), I want to thank
Chairman Landrieu, Ranking Member Murkowski and members of the
committee and its staff for calling this important oversight hearing
today. My name is Michael Kormos, and I serve as the executive vice
president of operations for PJM Interconnection. As depicted below, PJM
is the Regional Transmission Organization (RTO) serving all or parts of
the states of Illinois, Indiana, Michigan, Ohio, Kentucky, Tennessee,
West Virginia, North Carolina, Virginia, Maryland, Delaware,
Pennsylvania, New Jersey and the District of Columbia. You can think of
PJM as the ``air traffic controller'' of the electric grid ensuring the
delivery of electricity across the high-voltage electric transmission
grid to customers in the 13-state region we serve. We are not the local
utility, nor do we control the distribution lines that deliver
electricity to individual homes and businesses. Rather, like an air
traffic controller, we operate the high-voltage electric grid for our
member companies, which include companies such as American Electric
Power, Dominion and Exelon to name a few.
We are not alone in this endeavor. There are other RTOs serving
other parts of the nation including the Midcontinent ISO, which serves
the upper Midwest as well as the region served by Entergy; ISO New
England, serving the New England states; and the California ISO,
serving that state among others.
Reliability is job one at PJM, and, as executive vice president, I
oversee PJM operations associated with ensuring the reliability of the
electric grid in our region. In addition, PJM operates the world's
largest competitive wholesale electricity market where we serve as a
platform for procuring electricity both day ahead and in real time for
the 61 million people in our footprint as well as procuring sufficient
resources three years ahead to meet our future reliability
requirements. Finally, we are responsible for planning the build-out of
the electric grid, another PJM function that I oversee.
The committee has asked me to provide testimony on the impacts of
future environmental regulations on the future reliability of the power
grid. Although we are at the beginning of implementation of a host of
new environmental regulations including the Environmental Protection
Agency's Mercury and Air Toxics (MATS) rule, its Section 316 Cooling
Water Rule and its Greenhouse Gas Rulemaking, we at PJM are required,
as part of our reliability function, to look forward and try to
incorporate the impact of these rules into our future plans for
ensuring reliability of the grid. That task is not easy. For example,
amid a changing fleet of resources, in order to ensure that we can keep
the lights on during stressed conditions, we are called upon to procure
more resources than we might need based strictly on the actual demand
on the system in a given day in order to take into account the many
short and longer-term contingencies that can occur--ranging from
extreme weather conditions to generation plant outages to economic
rebounds. Today, we procure at least 116 percent of our forecasted
needs three years ahead (known as our ``reserve margin'') to take into
account these contingencies and often procure additional resources
above 116 percent of forecasted demand when it is economic to do so.
This cushion has served us well. Over just the past six months, we saw
record-breaking heat waves in September of 2013 and record cold in
January of 2014, both events which broke previous records for demand on
the system.
Where does this leave us in managing the impact of environmental
regulations? My bottom line message today is several-fold:

As illustrated in the top two lines of the chart below, we
have procured adequate reserves for the next three years (and
will continue to procure such supplies on a rolling year-by-
year basis three years forward) and, in fact, have procured
into 2017 approximately 5,000-8,000 megawatts more than our
target reserve margin to address contingencies. As a result,
the PJM region has adequate reserves to meet our forecasted
needs through the next three years including 2016 when the EPA
MATS rule is scheduled to take effect.
Although overall, we have procured adequate reserves to meet
the projected demand, the mix of resources will change
dramatically during this period. We are seeing a rapid ``change
out'' of the generation fleet with a record number of coal
plant retirements: approximately 12,000 megawatts in 2015/2016
alone and a total of more than 19,000 megawatts of coal
retirements from 2011 to 2019. This kind of turnover of the
generation fleet usually takes over a decade--yet we are seeing
this turnover occurring over the next two to three years.
The PJM generation fleet profile will markedly change in
this short time period. Coal will still play a large role in
our overall resource fleet representing over 32 percent of the
total generation mix in PJM. But our future reserves will be
made up of a great deal more demand response resources, natural
gas generation, renewables and imports from other regions.

``Demand response'' occurs when customers respond to a directive
when PJM calls an emergency to curtail their use of electricity. For
factories, this could mean temporarily halting a production line. For
residential customers, this could mean having their air conditioners
automatically cycle during emergency periods. Retail customers decide
whether or not they wish to commit to make these curtailments, but,
once they so commit, they are bound for one year or one summer (as PJM
is counting on these curtailments in order to ensure region-wide
reliability) and face penalties for failing to curtail their
electricity use in response to PJM-designated emergencies. In return,
the customers who participate in the program at the wholesale level are
paid the same clearing price that we would otherwise pay a generator to
produce electrons during this period.
As another game changing event, natural gas has proven to be the
``fuel of choice'' for new generation developing in our region. Over 64
percent of new resources in our queue are proposed gas-fired
generation. Improvements in the efficiency of combined-cycle generating
plants, the availability of Marcellus and Utica shale right in our
region as well as the impact of the EPA rules on coal generators
clearly have driven the industry to invest in new gas-fired rather than
coal-fired generation.
All of these rapid changes leave us with a mixed picture of the
future:

As indicated previously, PJM has procured adequate reserves
three years forward and will continue to do so on a rolling
basis three years forward into the future.
Although we have procured adequate reserves, the reliability
``cushion'' we previously enjoyed with the large fleet of coal-
fired generation has substantially diminished. As a result, and
due to the fact that demand response resources are only
available to us when we are approaching emergency conditions
(what is defined as a ``pre-emergency'' condition), we
potentially will have to run the system closer to its limit
than we have previously in order to be able to call on demand
response resources. As a system operator, I am not comfortable
with having to plan my system to go into emergency (or pre-
emergency conditions) before I can call upon resources to
restore the system to more normal operating conditions. But,
the limitations that have been placed on the availability of
demand response resources along with the loss of the cushion of
coal units have made this the ``new normal'' operating
condition for PJM into the future.
Finally, many of your constituents, especially those on
variable rate plans, will likely see more volatile wholesale
prices than they have in years past. Although the exact amount
of exposure to the wholesale markets that retail customers see
in their monthly bills varies by state, there is no question
that at the wholesale level, as we depend more on natural gas,
volatility in the cost of electricity will significantly
increase from what we have seen in past years when we could
rely more on predictably-priced coal and nuclear facilities to
meet our baseload requirements. Natural gas prices have proven
quite volatile. Although they generally have cleared at levels
of $4 to $5 per million BTU, during the height of the polar
vortex in January of this year, prices reached over $100 per
million BTU. In addition, because the short-term natural gas
market is not as transparent as the electric markets, we saw
generators subjected to extremely onerous terms and conditions,
which required us to pay for gas at times when it was not
economic to run the particular generator, and we witnessed
generators procuring gas for an entire weekend merely to ensure
its availability to meet the increased Tuesday morning demand
after the three-day Martin Luther King Day holiday. These all
are issues we are working with the Federal Energy Regulatory
Commission to prepare for a more gas-centric world in the
future.
While I am on the subject of the Polar Vortex, I will just
note that this was the most difficult winter challenge the grid
has faced since the winter of 1994. Summer heat stresses
transmission lines while winter cold is particularly hard on
generators. It was not simply cold in the PJM region--it was
deeply cold over a very long period across our entire
footprint. On many days, demand was 20,000 to 40,000 megawatts
above normal January peaks. When you consider that only 18 U.S.
states use more electricity in an entire year than the PJM
region consumed during the single month of January, you get an
idea of the extreme stress January placed on the system. An
unprecedented 22 percent of our generators--coal, nuclear and
gas--were forced out of service by problems such as equipment
breakdowns, prolonged operations in extremely cold temperatures
and fuel supply limitations. Advanced planning and close
coordination between PJM and our members paid off as we were
able to meet record demands without interrupting power supplies
to anyone. While the system was indeed very tight, we were
never--as some accounts have portrayed--700 megawatts away from
rolling blackouts. On the worst day, January 7, our next step
if we had lost a very large generator would have been to
implement a small voltage reduction. This action, which is
unnoticeable to consumers, can produce up to an additional
2,000 megawatts. Even this step, however, proved to be
unnecessary, and we were able to meet the record peak with our
remaining reserves.

Going forward, we, along with the other RTOs and independent system
operators, have requested that EPA build into its Greenhouse Gas
Rulemaking a ``reliability safety valve,'' which would ensure that
regional reliability considerations are taken into account before a
particular state or federal implementation plan is approved. We
negotiated a similar Reliability Safety Valve with EPA in the MATS
rule, one which generation owners have employed to seek a fourth year
extension on complying with the MATS rule. We believe reliability
reviews need to be hard-wired into any final EPA rule at key points in
the process including at the beginning when the parameters of the rule
are being developed and at key points in the rule's implementation. We
look forward to working with the administration and the Congress on
these issues going forward.
Let me end where I began. I cannot say that we will never have an
interruption in service in the PJM footprint. No one can realistically
make that assertion. We are figuring out how to meet reliability
objectives by deploying the resource portfolio mix that results from
governmental policy preferences and the economics of competing resource
options. We are working hard to manage these changes to ensure
reliable, cost-effective service to the 61 million Americans that
depend on us every day.

The Chairman. Thank you very much.
Mr. Akins.

STATEMENT OF NICHOLAS K. AKINS, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, AMERICAN ELECTRIC POWER

Mr. Akins. Thank you, Chair Landrieu. I want to thank you
and certainly, Ranking Member Murkowski for putting on this
hearing. It's very important it's been 2 years in the making, I
think. There's been a lot of activity associated with our
industry.
We're American Electric Power. We serve 11 States including
Louisiana, West Virginia and Ohio. It's been certainly an area
where we're very focused on the activities associated with the
grid.
We have the largest transmission system in the country.
We're one of the largest generators in the country as well.
When we look at some of the issues that have occurred over the
winter it really makes us think about this all the above
strategy. Does it actually include voltage reduction and
perhaps low jetting? That's not a good place to be particularly
in the extremes when people are living through extreme cold or
extreme heat, people die in their homes as a result.
That's something I think that we're very concerned about.
So a month ago I made headlines when I said that 89 percent
of the generation that AEP will retire in mid 2015 was called
upon to meet electricity demand in January. That's a fact. We
needed it.
In fact it's also a concern. Those power plants will no
longer be available after next year to help meet demand peaks.
The capacity markets aren't supporting the development of
diversified generations or replace them.
I'm not saying we should abandon mercury MATS or any of
those types of activities. What we have been concerned about
all along has been the timing associated with the transition
that needs to occur so that we can make thoughtful decisions
about what happens to the grid in the future and how we
accommodate the multiple set of diverse resources that will be
attached to it.
So even PJM's market which is probably the most developed
in the country and I certainly thank Mike Kormos and his team
for the what--their efforts during the winter time operations.
They're trying to support several fixes that will be put in
place. There's several changes to be made in the capacity
markets so that we can adequately have a view of what new
generation should look like in the PJM markets. We support
those changes.
Really it goes to the notion of not having long term price
signals to support new investment in generation. You're seeing
that over and over again with generation. We're retiring a
substantial amount of our fleet during the period. Twenty-five
percent of the coal fleet will retire by mid-2015.
Certainly you've heard nuclear operators saying that
they're also challenged. I believe, Chris Crane today said 5
units, 5 nuclear units, may come offline if there's not changes
to the capacity market. So there's clear concern when it's
reflected through base load capacity that we ensure that we are
able to maintain that type of capacity going forward.
So AEP is retiring more than 6,500 megawatts in the next 14
months. There's no turning back on those units. When we
anticipate closing units we are obviously harvesting those
assets to continue toward closure, making human resource
decisions about moving people from those facilities to other
facilities. It's a very difficult proposition to go through to
close down a plant.
We're in that process. They will close down in mid-2015.
What we're concerned about is the additional closures that may
occur as a result of not only impending regulatory
environmental regulatory impositions that may occur such as the
greenhouse gas rules and others that could have a more dramatic
effect.
The issue you're really having with base load generation is
you're seeing the cost go up as a result of regulations and
other activities. At the same time the capacity markets aren't
supporting these long term assets that support the grid. That's
a key concern because you're getting hit from both directions.
That's why we're seeing these multiple announcements of
retirements.
So going forward when you think about the grid itself
there's many aspects. We talk about physical security. We talk
about security associated with the grid from a cyber
standpoint.
Every bit of importance should be placed upon, not only the
capacity in the market threats. But also the combined impact of
the environmental regulations. What impact they ultimately have
on the reliability of the grid going forward.
Thank you.
[The prepared statement of Mr. Akins follows:]

Prepared Statement of Nicholas K. Akins, Chairman, President and Chief
Executive Officer, American Electric Power
Good morning Chair Landrieu and Ranking Member Murkowski, members
of the Committee and fellow panelists. My name is Nicholas K. Akins,
and I am Chairman, President, and Chief Executive Officer of American
Electric Power (AEP).
AEP is one of the largest electric utilities in the United States,
delivering electricity to more than 5.3 million customers in 11 states.
AEP owns nearly 38,000 megawatts of generating capacity in the U.S. and
the nation's largest electricity transmission system, a 40,000-mile
network that includes 2,100 miles of 765-kilovolt extra-high voltage
transmission lines. AEP's transmission system directly or indirectly
serves about 10 percent of the electricity demand in the Eastern
Interconnection, the interconnected transmission system that covers 38
eastern and central U.S. states and eastern Canada, and approximately
11 percent of the electricity demand in ERCOT, the transmission system
that covers much of Texas. AEP's headquarters is in Columbus, Ohio.
Today's hearing is focused on electric grid reliability and
security, and whether we are doing enough to address significant
challenges to the grid.
We are beginning to make progress as evidenced by the fact that
this hearing is occurring today and is one of the first under Chair
Landrieu. The white paper authored by Senator Murkowski provided
excellent background and potential solutions. Additionally, Federal
Energy Regulatory Commission (FERC) Acting Chair Cheryl LaFleur has
recognized the challenges facing the gas and electric industries.
However, we need to do more to ensure that we maintain a diverse
portfolio of generation reserves, and we need to do it sooner rather
than later. This country's grid was tested in January, and we passed,
but barely.
A month ago, I made headlines when I said 89 percent of the
generation that AEP will be retiring in 2015 was called upon to meet
electricity demand in January. That is a fact. These units were called
upon by PJM and relied upon to maintain regional reliability. In making
this statement, I am not saying we should abandon or postpone the
Mercury and Air Toxics Standards (MATS) rule. Nor am I saying we should
avoid building more natural gas-fueled powered plants. What I am
calling attention to is the fact that our nation's fleet of power
plants is undergoing a significant transition, and we need to ensure
that the electric system that the American economy relies upon is
equipped to serve that need in a reliable manner. AEP has been sounding
the alarm on long-term reliability for several years now and time is
running out.
The current capacity markets are not functioning as intended. From
my perspective, the current structure of the capacity markets is not
attracting a mix of new generating resources that will keep the lights
on, nor providing the correct pricing signals for the existing fleet.
This, coupled with the high number of base load unit retirements,
jeopardizes the reliability of the grid.
Most of the new capacity being offered is either gas or demand
response. There are a host of difficulties in coordinating the gas and
electric industries, and demand response continues to be paid similar
capacity prices to steel-in-the-ground generation despite having rules
and penalty provisions that are much less prescriptive.
the polar vortex: a warning signal
During this past winter, PJM was faced with certain challenges that
threatened the reliability of the electric grid. PJM set a new all-time
winter peak load of 141,846 megawatts on January 7, 2014. In fact,
eight of PJM's top 10 all-time winter peaks occurred in January
2014.\1\
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\1\ Polar Vortex 2014, Michael Kormos, PJM, FERC Technical
Conference Presentation, p. 3
---------------------------------------------------------------------------
At the same time that peak demands were being set, approximately 22
percent of total installed generation capacity in PJM was
unavailable.\2\ Some generation units experienced forced outages
resulting from equipment failure, cold temperature operations and some
fuel supply issues. The initial polar vortex event at the beginning of
January was an extreme, followed by continuing arctic weather
throughout the month. The polar vortex represented only two of the 10
days PJM needed to call on Emergency Operating Procedures.\3\
Fortunately, the system operated without a loss of load event. It could
have been much worse. As FERC Acting Chair LaFleur said at the April 1
FERC technical conference, ``We had a difficult winter for both the
electric and gas infrastructure and markets across the country. As
others have noted, the system bent but it did not break. Reliability
was sustained, but at times was very close to the edge.''\4\
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\2\ Polar Vortex 2014, Michael Kormos, PJM, FERC Technical
Conference Presentation, p. 6
\3\ http://www.pjm.com//media/committees-groups/committees/mc/
20140224-webinar/20140224-item-01-winter-operations.ashx. Slide 6 on
Cold Weather Operations report.
\4\ http://ferc.capitolconnection.org/
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The weather events experienced this winter provided an early
warning about serious issues with electric supply and reliability. PJM
was not alone. Many of the Regional Transmission Organizations (RTOs)
and Balancing Authorities needed to call on Emergency Procedures to
ensure reliable operations. This country did not just dodge a bullet--
we dodged a cannon ball.
We need to take action now to ensure adequate power plant capacity,
fuel diversity and grid investment after the retirement of significant
amounts of base load generation in mid-2015 and beyond. Because the
base load generation that will retire in 14 months will not be fully
replaced, this reliability concern is imminent and is a concern we need
to proactively address.
Although average consumers may not be well versed on the
intricacies of grid reliability, after examining their power bills,
they will understand all too well the price volatility that comes with
it. We are focused today on reliability, but price signals--and there
have already been high price signals--are a symptom of reliability
threats. FERC Acting Chair LaFleur summed it up well at a technical
conference last week when she said, ``I'm also very concerned about
price, both the absolute magnitude of the price spikes and the
increases we saw this winter and the variability. When you see these
price spikes, it's a symptom that protecting reliability is causing
this issue.''\5\ She is absolutely correct.
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\5\ http://ferc.capitolconnection.org/
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reliability impacts: flawed capacity markets
Reliable electric service is a critical public need. Our nation's
economic success depends upon our ability to preserve this fundamental
resource. To that end, we must ensure that we have the necessary long
term investment to maintain reliability. The competitive wholesale
markets are not currently providing the structure necessary to maintain
that reliability and do not currently provide the proper economic
signals to foster new power plant investment for the future.
The real value of steel-in-the-ground capacity must be recognized
in the competitive markets. Insufficient revenues from both the
capacity and the energy markets mean additional nuclear and fossil
generation may be retired. We already have the retirement of the
Kewaunee Nuclear Plant in Wisconsin. This 556-megawatt facility was
retired May 7, 2013, ending a 40-year service life. Plant owner
Dominion Power said ``this decision was based purely on economics.''\6\
Vermont Yankee in New England, owned by Entergy, closed for the same
reason.\7\
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\6\ Dominion news release, May 7, 2013.
\7\ http://www.entergy.com/vy/
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Exelon announced last month that they will consider closing
efficient nuclear plants by the end of this year because they are no
longer profitable. Exelon's CEO Chris Crane told the Chicago Tribune
that, ``Despite our best-ever year in generation, some of our nuclear
units are unprofitable at this point in the current environment, due to
the low prices and the bad energy policy that we're living with. A
better tax policy and energy policy would be the clear answer, but if
we do not see a path to sustainable profits, we will be obligated to
shut units down to avoid the long-term losses.''\8\
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\8\ Chicago Tribune, March 9, 2013, Business Section, page 1
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Even PJM's market, which is probably the most developed in the
country, does not provide the type of long-term price signals that
encourage and support investment. This lack of investment, coupled with
announced retirements, puts reliability at risk.
The market flaws that create economic inefficiencies include
inequities in the treatment of actual generating assets versus demand
response (DR), imported power and even new planned generation. Yes, PJM
has more than 8,000 megawatt of planned (mostly gas) generation\9\
identified in the last two auctions, but many of those generators are
being proposed with some form of state regulatory funding support. What
this means is that many new builds are the result of state directives
rather than a response to market signals. Other market design problems
exist with demand response compensation. While existing generators are
required to be available for dispatch when needed and face financial
penalties for failure to respond, most demand response is only required
to perform in the summer.\10\ Even then, most of the summer demand
response is only required to perform 10 times a summer for a maximum of
six hours each time. In PJM, only 1,911 megawatts of demand response
voluntarily responded at the peak on January 7.\11\ A total of 12,000
megawatts of demand response cleared the PJM capacity auction for 2016/
17.\12\ This comprises about half of the PJM reserve margin for 2016/
17, and 99 percent of that demand response is a summer-only
resource.\13\
---------------------------------------------------------------------------
\9\ The PJM ``2016/2017 RPM Base Residual Auction Results'' report
(page 1).
\10\ The PJM ``2016/2017 RPM Base Residual Auction Results'' report
(page 10) shows that of the 12,407MWs of DR cleared for 2016/17, only
88MWs were available year-round.
\11\ PJM Emergency Demand Response (Load Management) Performance
Report 2013/2014
\12\ PJM ``2016/2017 RPM Base Residual Auction Results'' report
(page 10), Table 3B.
\13\ Slide 13 of Kormos presentation at April 1, 2014 FERC Tech
Conference on Polar Vortex. Target Reserve level is approximately
25,000 MWs. DR cleared for 2016/17 was approximately 12,000MWs.
---------------------------------------------------------------------------
Importing power from plants in other reliability regions can also
be an issue. On July 15, 2013, a Tennessee Valley Authority
transmission constraint, exacerbated by the reduction of a MISO
resource, resulted in the curtailment of more than 3,300 megawatts of
PJM imports,\14\ including 29 megawatts of imports on firm
transmission.\15\ This is the reliability risk of depending on imported
power. PJM has cleared power imported from Louisiana in its capacity
auction, although the ability of that Louisiana power to ever be
delivered into PJM territory during emergency conditions is problematic
at best.
---------------------------------------------------------------------------
\14\ http://www.pjm.com//media/committees-groups/committees/mrc/
20130829/20130829-item-13-hot-weather-operations-presentation.ashx.
Slides 8 and 9.
\15\ http://www.pjm.com//media/committees-groups/committees/mrc/
20130829/20130829-item-13-hot-weather-operations-presentation.ashx.
Slides 8 and 9.
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Currently, PJM's three-year Base Residual Auctions are augmented
with annual incremental auctions. Demand response resources can bid
into the Base Residual Auction at one price, and buy back their own
resources in the incremental auctions at a nice profit, and never have
to perform a demand response function for reliability.\16\ PJM's
Independent Market Monitor has issued two reports on this problem.\17\
As much as 57.6 percent of demand resources have purchased replacement
capacity in the incremental auctions. The average over the seven-year
measurement period was 32.5 percent.\18\ These speculative resources
are replacing the actual physical generation we need because it is
financially more lucrative to buy back in the incremental auctions than
to deliver the capacity.\19\ Nor does demand response provide the very
important ancillary services currently provided by many of the retiring
generating units.
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\16\ Latest report is Analysis of Replacement Capacity for RPM
Commitments: June 1, 2007 to June 1, 2013.
\17\ Latest report is Analysis of Replacement Capacity for RPM
Commitments: June 1, 2007 to June 1, 2013.
\18\ Ibid., Table 8
\19\ http://www.monitoringanalytics.com/reports/Reports/2013/
IMM_Report_on_Capacity_Replacement_Activity_2_20130913.pdf. Page 35.
The Market Monitor in referring to the high percentage of replacements
being done by demand resources says, ``The result is an increasing
share of total capacity resources that are limited DR, which are
clearly not a substitute for generating capacity which is on call 8,760
hours per year.''
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Beyond the demand response issue, PJM went into 2013/14 with a 20
percent reserve margin, but called 10 emergency operations in January
2014.\20\ PJM has conducted auctions for 10 planning years and the
average clearing price has been $90/megawatt-day.\21\ This is less than
30 percent of the Net Cost of New Entry (CONE)\22\ and may not be
enough to sustain existing units, let alone entice new construction.
PJM has made several filings recently to try to eliminate the
speculative bidding that has made it more profitable to be a financial
player in PJM than offer up real generation resources. I applaud those
efforts. Although PJM is trying to correct many of these shortcomings
through FERC filings, it is not enough.
---------------------------------------------------------------------------
\20\ http://www.pjm.com//media/committees-groups/committees/mc/
20140224-webinar/20140224-item-01-winter-operations.ashx. Slide 6 on
Cold Weather Operations report.
\21\ Average taken from all 10 Base Residual Auction reports for
Rest-of-market 2007/08 through 2016/17.
\22\ Net CONE for 2016/17 was $330/MW-day.
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In the next 14 months, AEP will retire almost a quarter of our
coal-fueled generating units. We have one of the largest generation
fleets in the country, and one-fourth of our coal-fueled capacity will
be shuttered. There is no turning back for these units. In PJM, 13,000
megawatts of additional capacity will be retiring by mid-2015.\23\
Unless the market structure changes, the capacity replacements for
these assets may not provide the same level of reliability we have
experienced historically.
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\23\ Andy Ott's presentation at February 12, 2014, PJM General
Session, page 3.
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AEP believes that capacity prices should be augmented by a
reliability adder, or price floor. This would support continued
operation of base load generating units and provide incentives (and
penalties) to spur construction of new generation. We also believe a
longer-term commitment for price certainty would help all companies
with both existing and new assets to make long-term investment
decisions. Power plant investments are for 30+ years. A reliability
adder combined with a longer-term award would provide proper
incentives, ease financing, and provide longer-term price stability for
the markets, all of which will preserve and increase grid stability.
reliability impact: the dash to gas
These situations are exacerbating a dash to gas as the nation looks
for quick alternatives to our retiring base load plants. Incongruities
in the gas and electric markets create a new set of problems.
Inconsistencies in scheduling protocols between the gas and
electric industries create difficulties for many gas-fired electric
generators. These inconsistencies can make it challenging for gas-
fueled generators to purchase gas supplies and schedule pipeline
capacity.
The coordinated operation of the natural gas and the electric
industries is not impossible. In fact, in AEP's southwestern footprint,
we have been coordinating our industries fairly well for years. It is
important to realize that no one is at fault for the disconnect between
the two industries. The industries matured independently, and they
developed unique operating procedures that worked well for their
individual businesses. Now that they both have operating protocols that
have been in place for decades, we need to find a way to successfully
merge their processes.
In New England during the polar vortex, it became clear that we are
having to make a choice in the winter between committing natural gas
resources to generating electricity or to heating homes.\24\ Right now,
we cannot do both. Given the number of additional base load generating
units that will be retired in the next 14 months, we face a very real
possibility that we will have to make that choice more often in the
future.
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\24\ http://www.forbes.com/sites/jamesconca/2014/01/12/polar-
vortex-nuclear-saves-the-day/
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Many of the issues of harmonizing the gas and electric industries
revolve around scheduling. FERC currently has three open dockets
related to scheduling. RM14-2-000, the primary docket, has adopted a
unique approach to resolving the scheduling problems. FERC has offered
new scheduling procedures and steps to bring the gas and power days
closer together. FERC has charged the North American Energy Standards
Board (NAESB) with reaching full industry consensus for both industries
within six months. NAESB is the nation's only organization that reaches
across both industries and NAESB is ANSI certified for standards
development. NAESB's window to reach consensus will be followed with a
public comment period on the NAESB proposals. If NAESB cannot reach
consensus in the time allotted, the FERC proposals in RM14-2-000 will,
after notice and comment, become the new scheduling standards.
AEP is supportive of the FERC natural gas proposals in the Notice
of Proposed Rulemaking (NOPR). Currently the gas day begins at 9 a.m.
Central Clock Time (CCT), all across the country.\25\ The power day
begins at midnight in the time zone in which the energy is
generated.\26\ FERC proposes moving the start of the gas trading day to
4 a.m. CCT, which allows power traders to purchase the gas supply they
need in time to receive delivery for their morning peak load. RM14-2-
000 also proposes adding nomination cycles to the current four cycles
(two real-time cycles and two day-ahead).
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\25\ Appendix F, page 19
\26\ Appendix G, page 19
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These two changes would resolve several of the timing issues that
currently either a) require gas generators to purchase fuel for much
longer times than what they really need, increasing their costs as they
buy far more fuel than is actually required or b) force gas generators
to risk not getting a gas supply if they wait to buy gas until after
their dispatch awards. For example, under the current rules generators
have to purchase fuel for Monday on Friday afternoon, and they cannot
always predict that far ahead exactly how much gas they will need.
With the growing dependence on natural gas for electricity
generation, availability and deliverability of gas must be considered
in RTO planning and when setting generation reserve requirements. In
general, gas cannot be stored on site at an electric generation plant
in sufficient quantities to guarantee future fuel supply. Meanwhile,
gas pipelines are looking for firm transport contracts, meaning they
want a reservation fee for the full capacity of a generating station
for every hour of the year. Many of these gas plants are peakers,
generating units that only operate during peak demand periods, and only
need the gas reservation for a small portion of the year.
Most capacity markets do not require a firm contract in order for a
generator to be counted as reliable capacity. If all gas-fueled
generators were required to obtain firm transport contracts, the result
would be much higher electricity costs. This would improve reliability
somewhat, but even firm transport does not guarantee availability of
the gas supply. Discounted non-firm transport carries even more
reliability issues. Further, in many cases the location of a gas unit
precludes the ability to obtain firm gas supply because it is on a
pipeline that is already fully subscribed.
reliability impact: generation is retiring
Prior to implementation of MATS, we did not have an adequate
assessment of the impact of these environmental regulations on our
nation's base load generation. When the MATS rule was proposed, the
U.S. EPA projected that the rule would result in approximately 10,000
megawatts of coal-fueled generation being retired.\27\ More recently,
NERC's 2013 Long Term Reliability Assessment places the retirement
number at 62,800 megawatts by 2023.\28\ Not all of these retirements
are due to MATS, with lower natural gas prices, weak electric demand
and flawed markets all playing a role. But the timing of many of the
retirements will be driven by the MATS compliance deadline.
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\27\ National Emission Standards for Hazardous Air Pollutants from
Coal- and Oil-fired Electric Utility Steam Generating Units, Proposed
Rule, 76 Fed. Reg. 24975, 25073 (May 3, 2011).
\28\ 2013 Long-Term Reliability Assessment, p. 29, North American
Electric Reliability Corp
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AEP will retire an additional 6,586 megawatts (approximately 1/4 of
its coal-fueled capacity) with most retirements occurring in mid-
2015.\29\ We will not add any new capacity in the near term. The total
PJM capacity market is approximately 169,000 megawatts.\30\ According
to PJM, more than 9,827 megawatts of generation already has been shut
down since the 2007/08 delivery year and another 12,909 megawatts is
scheduled to retire in the next two years.\31\ While 8,750 megawatts of
new generation that cleared in the PJM capacity auction is supposed to
go online in 2015 and 2016, only approximately 4,500 megawatts
currently is reported as under construction.\32\ Many planned
generation plants were offered into the auction or are being built only
because they have a regulated-type of cost recovery structure (such as
in Virginia).\33\ Further, almost all of the new generation that was
offered in the market in the last several years has been natural gas-
fueled; and that is the predominant type of generation that is
currently in the planning queue.
---------------------------------------------------------------------------
\29\ Total retirements per American Electric Power 2013 Corporate
Accountability Report are 7,201MW. Of this total, 6,586MW are to be
retired between now and mid-2015.
\30\ The PJM ``2016/2017 RPM Base Residual Auction Results'' report
(page 1).
\31\ Andy Ott's presentation at February 12, 2014, PJM General
Session, page 3.
\32\ Andy Ott's presentation at February 12, 2014, PJM General
Session, page 3 for planned units. 4,280MWs under construction from the
Ventyx database monitored by AEP.
\33\ Virginia's units are Brunswick and Warren County - total
approximately 2500MW. Although the New Jersey and Maryland state-
subsidized programs were found to be in violation of the PJM Tariff
rules, the units that were awarded in those state-run auctions offered
and cleared in the RPM before the state programs were overturned. Some
of these units decided to continue to build and some are undecided or
continue to have contractual issues.
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Many times, new generation projects are permitted but never built.
The average construction time for a gas plant is 2.5 to 3.5 years,
depending on the technology used.\34\ So even if some of those
additional projects are built, I am concerned they will not be online
in time to relieve the immediate reliability challenges that stem from
the coal-fueled unit retirements.
---------------------------------------------------------------------------
\34\ AEP 2011 Integrated Resource Plan cost model for new units
---------------------------------------------------------------------------
All of these factors (capacity markets, environmental standards,
gas coordination) are significant issues impacting our power generation
fleet today. Additional environmental rules still in development could
create additional issues. The Cooling Water Intake Rule (316b), the
Coal Ash Rule and the Greenhouse Gas New Source Performance Standards
all could potentially result in additional base load generation units
being retired. The MATS rule implementation did not allow a lot of
flexibility in meeting the regulatory standards. If a rational approach
with sufficient flexibility is not taken in setting these new
environmental standards, we will face additional threats to grid
reliability.
resolving reliability threats
I am not saying we should repeal MATS. Nor am I saying we should
avoid building natural gas power plants. I am saying that we are facing
some serious reliability concerns that require quick action.
Regulators at the federal and state levels must recognize and
consider the complexity of the transitions and challenges facing the
electric grid today. The combination of capacity markets, environmental
regulations, and gas coordination issues are potentially a bigger
threat to reliability and safety than physical and cyber security
violations. Regulated utilities plan for peak usage through integrated
resource planning processes. Competitive generators depend on clear
market signals to support the investment necessary for stable
operations. Megawatts flow seamlessly across state borders. As
additional stressors impact the bulk power system in the coming years,
state and federal regulators must be vigilant to ensure that regulated
customers are not harmed by the scarcity and volatility that will
develop if competitive markets are not fixed.
Toward that end, AEP advocates for:

Significant progress on fixing the capacity markets by
January 2015. We need to return the focus of the nation's
electric grid to reliability and away from a financial scheme
that rewards speculative activity. That can be achieved through
the FERC, and I would encourage this Committee to support the
FERC in that effort.
Passage of legislation to resolve the conflict between the
authority of the Department of Energy and that of the
Environmental Protection Agency that could manifest in the DOE
ordering a unit to run even when that unit would violate
environmental requirements. Legislation is needed to clarify
the rules and expedite new construction to ensure that existing
generation will not have to face a choice between violating the
environmental rules and letting the lights go out.
Completion of the action recently begun by the FERC to
coordinate the natural gas and electric industries. I believe
FERC has taken important steps in this direction and is doing
so as rapidly as possible. We need resolution before next
winter. Nothing good comes from a scenario in which anyone has
to choose between electricity and heat. The severe weather this
winter highlighted the many challenges that are seriously
threating the reliability of our electric grid. These issues
are real and they are pressing, and we have been given an
opportunity to address them. Few things in this country are as
critical as grid reliability. We should not waste this
opportunity to ensure that we address the issues challenging
our ability to provide reliable electric service. The electric
grid powers our economy, our citizens' homes and our national
security. And the next cannon ball we see coming at us may not
be one we can dodge.

I thank you for the opportunity to address you on these issues. I
would be happy to respond to any questions.

[Note: Appendixes A-G provided with this statement have been retained
in committee files.]

The Chairman. Thank you so much. Excellent.
Mr. Hunter.

STATEMENT OF JAMES L. HUNTER, DIRECTOR, INTERNATIONAL
BROTHERHOOD OF ELECTRICAL WORKERS UTILITY DEPARTMENT

Mr. Hunter. I think Nick said everything I need to say.
Thank you.
[Laughter.]
Mr. Hunter. I appreciate the invite to come here, Chairman
Landrieu and members. My name is Jim Hunter. I'm Director of
the Utility Department for the IBEW. We have about 725,000
members nationally. 220,000 of those are directly working in
the utility industry in the U.S. and Canada.
To put the situation plainly, the U.S. is facing a crisis,
we believe, in power generation. It's caused by a conflict
between environmental regulations and demand for power and
flaws in the structure of the system.
I've worked in the industry now for over 40 years. I've
never seen our generation business in a worse position than it
is today. Many of our veteran members are telling me the same
thing.
We just had a conference with over 500 delegates from all
over the U.S. and Canada, our leaders in our industry.
Everybody is in total agreement that we are in deep trouble.
We're not seeing, not only coal retirements, but we're also now
seeing nuclear retirements.
We submitted for the record back in 2011 our estimate of 56
gigawatts of coal closing due to the MATS rule. At the time EPA
was saying 4.7. All of this came from not extensive modeling
but came from us from common sense looking at 40-year-old
plants under 400 megawatts that were not scrubbed simply would
not be capable of staying in service.
That number turned out to be pretty much right on the nose.
That translates into over 50,000 direct jobs. Those come
from rail workers, plant workers and workers in the industry.
You take a BLS number uses about 4 to one for any electrical
generation employees that we're talking about 250,000 people
losing their jobs over the next 2 years.
The impact of lost generation will be severe. We've already
talked about how many of those plants were running during this
cold Polar Vortex. We believe that next year we're going to be
in deep trouble.
We've been told that FERC can address the issue by issuing
must run orders. But we're also told that you can't be--
alleviate a civil lawsuit under the Clean Air Act. So where are
the utilities going to be?
I totally agree with Mr. Akins that we know from the inside
as you start closing a plant it's an irreversible thing. I
mean, we've got people moving to other plants. We've got people
to other parts of the industry and people getting out of the
industry as a whole.
We firmly believe that FERC, you know, needs to address
some of the issues. We also believe that Congress needs to
address this double jeopardy issue.
You know, base load power plants are the heart of the
industry. Nuclear and coal fired closing due to market
conditions, even the cleanest and most efficient, for example,
you know, we know Clinton nuclear facilities, IBEW facility,
ran at 100 percent efficiency last year and lost $30 million.
Now if that doesn't common sense tell people that there's
something wrong with the market, I don't know what does.
We have a situation right now where the only plants that
can be built are gas. I agree with Senator Manchin, putting all
our eggs in one basket, a volatile basket, I've been told that
there are no long-term contracts for gas. We saw many
situations where we are doing less maintenance. We have less
people. We weren't able to bring some of the coal units online
because of that.
Not getting gas. There was one plant that starts the unit
with gas, a coal plant. They weren't able to get gas to even
put a coal unit on.
With that, thank you.
[The prepared statement of Mr. Hunter follows:]

Prepared Statement of James L. Hunter, Director, International
Brotherhood of Electrical Workers Utility Department
Good morning Chairman Landrieu, Ranking Member Murkowski, and
members of the committee.
My name is James Hunter. I am the Director of the International
Brotherhood of Electrical Workers (IBEW) Utility Department. I have
been asked by our President, Ed Hill, to speak today on behalf of the
IBEW. Thank you for the opportunity to speak on this critical issue.
IBEW represents 725,000 members; more than 220,000 of them are
utility workers, who are covered by some 1,400 collective bargaining
agreements in the United States and Canada.
situation
To put the issue plainly: The United States is facing a crisis in
electric power generation caused by a conflict between environmental
regulations and the demand for power, and by flaws in the economic
structure of our system.
I have worked in the utility industry for over 40 years now and
have never seen our generation business in a worse position, and many
of our veteran members believe the same. The IBEW provides a view of
the utilities from the inside that we feel is unique. We do not have
multi-million dollar models for predicting plant closure, but we have
common sense and practical knowledge of the system. In 2011 the IBEW
and several other unions testified before the Environmental Protection
Agency--a copy of which has been submitted for the record--in which we
predicted that 56 gigawatts of generation would be lost dues to plant
closing under then-proposed rules. At the time, EPA predicted only 4.7
gigawatts would be lost. The EIA in their latest'' Annual Energy
Outlook'' now shows about 56GW of closing by 2016. Our experience
enabled us to see what the agency's models could not.
The 56GW of closings represents over 50,000 direct job losses.
Those losses come from mineworkers to rail workers to power plant jobs
all gone in the next 2 years. The BLS number for indirect job losses
when a plant closes is 4 outside jobs for every one electrical worker.
And many of these job losses will fall heavily on rural communities
where most of these plants are located.
The impact of this lost generation will be severe. We saw in the
recent cold winter 80% to 90% of the plants that are closing were
needed to meet demand and ensure reliability. We have been told that
PJM has not done any winter modeling in over 10 years and we believe
that we were simply lucky not to have seen blackouts this winter. Luck
is a poor substitute for proper planning.
We have been told that the Federal Energy Regulatory Commission can
address the issue by issuing a ``must run'' order if the system cannot
meet demand. However, closing a plant is a long, complex process--one
that cannot easily be reversed to meet urgent needs. Plant maintenance
is reduced and staffing levels decrease as the plant closing dates
near. Workers seek to transfer to the transmission and distribution
side of the utility, or leave the industry altogether. Contracts for
coal and other critical materials are scaled back. None of this can be
turned around in a short period of time. In fact, we saw plants that
were called on to operate during the cold spell unable to get on line
because of problems like boiler leaks and other issues caused by not
running.
Another very important issue is that a ``must run'' order from FERC
does not exempt the owner of plant from civil lawsuits or federal
penalties under the Clean Air Act. Therefore, utilities will find
themselves whipsawed between environmental regulations and the mandate
to provide adequate electrical power.
We believe that the loss of the affected plants over the next two
years will cause a severe shortage of generation, but that is only part
of the problem. The second, and potentially more disruptive, part of
the equation consists of the economic stress fractures in our
electrical system caused by the partial deregulation of the industry in
the 1990s and--ironically--the boom in domestic energy production.
I think we would all agree that the increased supply of natural gas
has been a good thing for our country. But it has driven down the price
of electricity and had an unintended consequence for the utility
industry.
We see base load plants that are at the heart of electric system,
nuclear and coal-fired, closing due to market conditions, even the
cleanest and most efficient. For example, the Clinton nuclear facility
in Illinois run at 100% efficiency last year with no down time and yet
lost 30 million dollars. We have seen perfectly good plants with
license extensions close due to the market.
This is not a matter of the market making some forms of generation
obsolete. We have a situation where the only plants that can be built
are Gas. We learned from bitter experience that an overreliance on one
source of energy is not a sound policy. An unexpected disruption in the
supply of natural gas could send prices spiraling on the spot market.
We also know that renewable energy sources such as wind and solar are
not far along enough in development to provide a major share of our
nation's power supply. We need to address these issues now or risk
destroying the heart of our great electric system.
suggested solutions
There are solutions; if we act quickly.
We need seasoned and knowledgeable Commissioners on FERC who can
and will make changes to the market to properly compensate our base
load plants for the services they provide.
We need better coordination between FERC and EPA. EPA and the NRC
must consider the cost impacts their rules have on the industry.
Specifically, the new rules EPA is considering for water in the 316b
rule and the CO-2 rule for existing plants could have a profound impact
on our coal and nuclear plants.
Congress must address the double jeopardy issue between a must run
order and the fact that plant owners can be sued under the Clean Air
Act.
The IBEW wants clean water and clean air as much as anyone and has
always supported reasonable approaches by the EPA. We understand that
EPA has done all that it can do to extend the time needed to comply
with their rule on MATS. The problem now must be solved by FERC and the
Congress.
Thank you very much for the opportunity to testify today.

The Chairman. Thank you very much.
Mr. Hill.

STATEMENT OF THAD HILL, PRESIDENT AND CHIEF OPERATING OFFICER,
CALPINE CORPORATION

Mr. Hill. Thank you.
Good morning, Chairman Landrieu and Ranking Member
Murkowski and to the rest of the committee. My name is Thad
Hill. I'm the President and COO of Calpine Corporation and next
month I'll also become the CEO.
We are an independent power producer with 29,000 megawatts
of generation with 94 plants in 20 States. So we produce enough
energy for about 30 million homes. We are the largest gas fired
generator in the United States. Ninety-five percent of our
capacity is natural gas.
In PJM we have 5,000 megawatts of generation capacity. It's
worth a note that 90 percent of those actually have fuel oil
back up. So we have the dual fuel capability at our units.
The key message is we believe that competitive electric
sector in particular and PJM is in solid shape to transition.
I'll make this transition from one of predominately coal, less
gas, to, you know, more of an equal mix between coal and gas
over the next several years. The PJM market is not perfect.
There are some changes needed that I'm going to come and I'm
going to talk about at the end. But it is working.
We strongly believe that competition free markets, you
know, are a much better way to solve problems than having
government pick winners and losers or some kind of central
planning. The market is encouraging to investment including we
actually have a power plant under construction right now in
Dover, Delaware. We're considering a pact of other investment
in PJM.
To talk about the Polar Vortex for a minute. We all know
the facts. You know, very, very strong winter weather. The grid
came close to some kind of noticeable disruption. A lot has
been talked about that I think the facts are really important
around this.
The real issue is that there were 40,000 megawatts or as
Mr. Kormos said, 22 percent of the system forced out. Of those
40,000, 30,000, 75 percent, were because of mechanical or
operational failures because of the winter weather. Of those
30,000 megawatts about 9,000 of those megawatts were natural
gas, by the way, only about 1,500 megawatts of modern combined
cycle natural gas. There were almost 15,000 megawatts of coal
units that were forced out during that winter weather.
The point being is that this isn't about over reliance on
any one fuel. It was about operational readiness this winter. I
want to make sure we understand that because the solution is a
lot different if you actually think that operational, you know,
we should have a much higher standard for how our fleet
operates in extreme weather events.
Coming out of the Polar Vortex in a go forward basis, Mr.
Kormos said this, but there are about 15,000 megawatts of coal
plants that will be retiring over the next 3 years. They'll be
replacing it with 19,000 megawatts of new resources. So we
actually will have more resources then than we do now even
after accounting for the retirements. The summer reserve margin
will be 30 percent above where it's supposed to be and in
winter we'll, you know, even be in better shape.
The gas supply issue, there's almost $3 billion of
investment in the Northeast in gas supply going forward. It
will create about 5 and a half BCF a day of new capacity.
That's two Calpines worth of gas, 60,000 megawatts.
So with all that said, you know, we think the free market
are working, but there are some changes. I'm going to mention
four.
First, the renewable production tax credit which is now
under consideration for an extension is really distorting the
market and potentially leading to premature retirements. You've
got billions of dollars of taxpayer money that are actually
subsidizing wind resources to the point they actually run at
negative prices even. They're paying somebody to take their
power so they get the production tax credit. We don't know
these resources will be on when we need them and they're
actually, because of this tax subsidy, actually threatening,
including the nuclear and coal plants that we've talked about,
the reliability of the grid.
Second, demand response has become a significant part of
the resource mix play. We're OK with demand resource competing,
just like we do. But they need to have the same rules. They
need to be available all the year round. They need to be
available when it's not just an emergency. Other than that,
it's OK.
Third is better coordination of power and gas. Given time I
won't go deeper.
Fourth is making sure that the capacity markets actually
are appropriate. If you take a capacity payment you need to be
there operationally. You need to be there with your fuel. If
you say you're going to be there you need to be there. There
needs to be a different financial outcome than there is today.
Now the first one of these is clearly Congress's.
The second through the fourth are being handled already in
a lot of ways by PJM, FERC and ongoing processes.
So with that, thank you for your time.
[The prepared statement of Mr. Hill follows:]

Prepared Statement of Thad Hill, President and Chief Operating Officer,
Calpine Corporation
Good morning Chairman Landrieu, Ranking Member Murkowski and
members of the Committee. Thank you for inviting me to speak this
morning on ``Keeping the Lights on--Are We Doing Enough To Ensure the
Reliability and Security of the U.S. Electric Grid?'' My name is Thad
Hill. I am President and Chief Operating Officer of Calpine Corporation
and will assume the role of Chief Executive Officer this May.
Calpine is an Independent Power Producer with more than 29,000
Megawatts (MW) of generation capacity from 94 power plants in 20
states, and is the largest independent power producer measured by power
produced, almost enough to power 30 million homes. We sell our power
into competitive wholesale electricity markets, including PJM. We are
not a regulated utility receiving a guaranteed return. Rather, we
compete against other generators to sell wholesale power into markets
where the purchasers are utilities and other suppliers who then deliver
the power to their retail customers. So the economics of supply and
demand are fundamental to our business.
About 95% of the electricity generated by Calpine's fleet is from
natural gas-fired power plants. Overall, Calpine burns more than 10% of
all natural gas consumed by the power industry, making us one of the
largest consumers of natural gas in the U.S., and the largest among all
power generators. Despite our size, Calpine's fleet is the cleanest
among the major players in America's independent power generation
sector.
In the PJM market, Calpine owns approximately 5,000 MW of
generating capacity and virtually all our plants run on natural gas.
Particularly relevant to today's discussion, nearly 90% of this
capacity also has the capability to burn oil as a primary or back-up
fuel, with onsite oil tanks. This dual fuel capability was specifically
designed into the system to allow Calpine's assets to continue
generating even under extreme conditions such as we witnessed this
January.
My key message here today is that the competitive electric sector--
in particular PJM, which covers much of the mid-Atlantic and the
Midwest, and which I believe is most of the focus of this panel--is in
solid shape to transition over the next several years from one
supported by older, less efficient and more costly coal plants to one
supported by newer, more efficient, less expensive and cleaner natural
gas plants. At Calpine, we believe that competition yields the best
results--that relying on entrepreneurialism and the free market creates
more value than central planning or government picking winners and
losers. There is significant new investment occurring in the mid-
Atlantic power and gas markets--including our own brand new gas fired
power plant under construction in Dover, Delaware. These investments
are being made due to the game-changing discovery of shale natural gas,
the existence of a competitive market with a set of rules, and a
commitment by the stakeholders to seeing the market function. Although
this market is not perfect, changes to address some of the issues are
underway, and grid reliability is secure.
But before going deeper into the evolution of the mid-Atlantic grid
over the next couple of years, let me first pause and discuss the
recent extreme weather events and the lessons I think are important
regarding how the grid is managed going forward.
january extreme weather and winter preparedness
Early in January, record winter load and several unit outages
caused some risk of a reliability event in PJM--specifically on January
7. There has been much written and said about this event--but at its
core, the issue was that more than 40,000 MWs of generation was forced
off-line when load was at its highest. On that day, PJM set an all-
winter peak load record of 141,286 MW and, at the same time 22%, or
40,200 MW, of the generation fleet was unable to come online and
produce power, a term the industry calls a ``forced outage''. The
January 7th forced outage rate was two to three times higher than PJM's
typical winter forced outage rate of seven to ten percent, and together
with the very high load level, created tight system conditions.
The primary problem on January 7, and to a lesser degree later in
the month, was that generators weren't ready for the extreme cold. More
than three quarters, or 30,000 MW, of the forced outages were
associated with equipment breakdowns, startup failures, and other
problems related to operating in extremely cold temperatures. These
problems occurred across all generation types with 9,000 MW of gas and
more than 14,000 MW of coal being affected. This wasn't a fuel supply
problem; it was a winter preparedness problem.
There is already evidence that the forced outage issue has been
partly corrected due to competitive market forces: In each of the
extreme cold weather events occurring subsequent to January 7th,
generator forced outages were significantly lower and, as a result,
there was more than 10,000 additional MW available to PJM to meet the
needs of electricity consumers. There is more work to be done. An
increased focus on cold weather preparedness will inevitably bring the
forced outage rate down even further.
Indeed, in response to January's system conditions, PJM has begun
to review its market and operational rules to improve performance of
the system for next year. Some of the recommendations already emerging
from PJM and stakeholder discussions include requiring resources to
perform regular winter capability testing, improving communications,
and enhancing emergency procedures.
In addition to mechanical and other failures leading to plant
outages, there were 9,300 MW of outages because of gas curtailments--
situations in which gas-fired generation did not have a firm
contractual right to the pipeline transportation nor did they have
backup fuel like we have at most of our power plants in the PJM region.
In response, PJM is undertaking important discussions on whether and
how to define a ``firm fuel requirement'' for generators that commit to
sell capacity to the grid. This means that in order to receive payment
for providing capacity, generators must have mechanisms in place to
guarantee fuel availability for a pre-specified period of time. Whether
this concept is ultimately implemented through a ``carrot'' or a
``stick'' approach, Calpine believes all suppliers should have strong
incentives to meet capacity supply obligations they've made to PJM,
especially during times of system stress.\1\
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\1\ As noted earlier, nearly 90% Calpine's capacity in the PJM
region has the capability to burn oil as a primary or back-up fuel,
with onsite oil tanks.
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Another key learning from January is the increasing need to tighten
power and gas market coordination, especially in terms of daily
operating decision-making. Although this lack of alignment did not
create a reliability issue, it was responsible for price volatility and
constrained how gas-fired generators could respond to changing system
conditions. The Federal Energy Regulatory Commission (FERC) has opened
a proceeding to address this issue. In a Notice of Proposed Rulemaking
issued in March, FERC set a six month deadline for the natural gas and
electric industries to better align their schedules. FERC also issued a
``strawman'' proposal that Calpine believes will result in meaningful
improvements to this process. Other changes may be needed as well to
better coordinate the electric and gas markets, such as changes to
allow better coordination of gas deliveries over weekends and on
Mondays.
evolution of the electricity and gas market infrastructure
Let me turn now to the question of the electric supply mix going
forward. As noted earlier, we are in an era of tremendous change within
the electric power industry. Several older, less efficient and more
costly coal plants are retiring, while newer, more efficient, cheaper,
and cleaner gas-fired units are taking market share, supplemented by
renewable units and increasing use of demand response.
Specifically in PJM, there are approximately 15,000 MW of expected
retirements over the next three years. Most of this is coal-fired, and
a smaller portion consists of older gas and oil-fired resources. This
old, inefficient generation is being replaced by nearly 11,600 MW of
new generation capacity, mostly natural gas fired, 4,230 MW of new
imports from other markets adjacent to PJM, and a little more than
3,400 MW of new demand response and energy efficiency resources.
When we do the math, these subtractions and additions mean that by
the summer of 2017 PJM expects to have significantly more generation
capability than it needs. In industry terms, the summer reserve margin
in PJM is expected to be 21.1%, or 5.5% higher than the target.\2\
Further, Calpine estimates that the winter reserve margin will be even
higher, in the 21% to 25% range, based on winter forced outages in the
7-10% range. In other words, even including forced outages, PJM will
have plenty of supply relative to expected demand.
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\2\ http://www.pjm.com//media/markets-ops/rpm/rpm-auction-info/
2016-2017-base-residual-auction-report.ashx
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To be clear, despite this changing resource mix, coal is by no
means going away. In fact, by 2017, we expect coal generation in PJM to
represent approximately one-third of PJM capacity. This isn't a war on
coal. It is a market-driven move towards newer, more efficient, cleaner
generation.
Concurrent with the expansion of natural gas fired capacity, there
is also a significant expansion of the pipeline infrastructure
occurring in the Northeastern US. Information from the Energy
Information Administration shows that approximately $2.8 billion is
expected to be spent over the next two years on natural gas expansion
projects, representing approximately 5.5 Billion cubic feet/day of new
pipeline capacity in the Northeastern United States.\3\ Calpine burns
2.1 -2.5 billion cubic feet/day, so this new pipeline capacity is large
enough to serve more than two new companies the size of Calpine.
Finally, we note that, overall, pipeline companies have announced
approximately 25 projects scheduled to be in service over the next 3-4
years that will move approximately 15 Billion cubic feet/day from the
Marcellus Shale region to markets east of the Rockies. While it is
unlikely all of these projects will materialize, they represent total
capital expenditures of $12-$18 billion, and could fuel more than
130,000 MW of gas-fired generation.
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\3\ http://www.eia.gov/todayinenergy/detail.cfm?id=10511#capacity
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the power market
As I've described above, the market signals are broadly working to
incentivize investment in new electric and gas market infrastructure.
However, markets are not perfect and some level of ongoing optimization
is required. The very good news is that many of the tweaks needed to
remove market distortion and ensure efficient deployment of capital is
well underway.
One issue policymakers must deal with sooner rather later is that
non-market interventions, such as the wind Production Tax Credit (PTC),
may be leading to premature retirements of certain baseload resources,
potentially impacting the reliability of the future resource mix. The
current structure of the PTC subsidizes wind resources in the energy
market to the point where wind generators will pay others to take power
that is otherwise unneeded, in order to maximize their benefit from the
PTC. So, while the wind resources cannot generally be counted on to
provide energy during extreme winter or peak summer conditions, the
effect of the PTC is to take revenues from resources that can supply
the market. The PTC interferes with market forces and is no longer
necessary.
Yet another distortion to markets comes from demand response (DR),
which is provided by customers that are paid to curtail their load when
asked by PJM. DR competes against traditional supply side resources in
PJM's capacity market to commit to providing reliability when needed by
the system. As a result of a significant policy focus on growing this
segment of electricity business, DR has become an increasingly large
part of PJM's resource mix. This summer, DR will account for
approximately 8% of PJM's peak resource needs, yet PJM can not call on
the resource unless it is experiencing ``emergency'' conditions, nor is
the vast majority of it required to be available to provide reliability
during the winter.
PJM has recently proposed to FERC a package of DR rule changes that
will address some of these issues, and we're hopeful FERC will approve
them shortly. But, we think more needs to be done. To the extent DR is
counted on for providing reliability to the system, it should be
available year-round like other generators, and should be able to be
called prior to PJM declaring a system emergency.
There are also other market changes in various phases of
consideration at PJM and before FERC, including: changes to limit
imports into the region from neighbors, changes to ensure capacity that
is committed in an auction is actually built, and others.
In summary, there are three points I'd like to leave you with:
First, the bulk power electric system in PJM--while undergoing a
transition--is in great shape from a reliability stand point. PJM is
well equipped to manage the transition. While its role may be
diminished, coal will continue to play a critical role in meeting the
region's reliability needs. But cheap American gas and its associated
expanding infrastructure is poised to play a much larger role than
before--not only in power generation but more broadly in our country's
industrial efforts Second, the power market is working well--it is
incenting new investment--and in the case of older, less efficient
generation, it is sending the appropriate retirement signals. We do not
think that regulatory or governmental interference in functioning
markets can lead to better outcomes--we must continue to rely on the
free market. While some changes in market rules over time will
certainly be required, PJM and FERC have all the necessary tools to
enact these. Finally, while the events of January in the mid-Atlantic
were volatile, the system worked. There are, however, certainly some
improvements necessary, as examples: the fuel availability and
coordination issues that I discussed today. Again, PJM and FERC have
the right processes and authority to put in place these and other
changes.
Thank you again for the opportunity to testify on these important
issues.

The Chairman. Thank you. Thank you very much.
Ms. Roberto.

STATEMENT OF CHERYL L. ROBERTO, ASSOCIATE VICE PRESIDENT, EDF
CLEAN ENERGY PROGRAM, ENVIRONMENTAL DEFENSE FUND

Ms. Roberto. Good morning, Madame Chairman and
distinguished members of the committee. I am delighted to be
with you this morning. My name is Cheryl Roberto. I serve as
the Associate Vice President of the Environmental Defense
Fund's Clean Energy Program.
EDF is not your typical environmental organization. As a
former State regulator I served as a commissioner in Ohio and
an electric system executive, I likely don't fit your
stereotype of an environmental activist. At EDF we work to
solve the most critical environmental problems using market
based solutions. We are uniquely effective in that approach
drawing on science, economics, partnerships and ardent
bipartisanship.
The clear message that I want to share with you today is
that with or without new environmental regulations market based
changes are transforming our electricity system. But our
electricity system can still meet our reliability needs.
As a former regulator and a system operator no one puts a
higher premium on safety and reliability on our electric system
than I do. While the fundamental nature of our electric grid is
transforming irreversibly, I'm confident that this transition
can be accomplished without sacrificing safety and reliability
or even cost effectiveness.
Our national commitment to reliability is nonnegotiable.
But we need to recognize that the electricity system we built
in the last century and the regulations that govern them are no
longer adequate either to ensure reliability or to accommodate
the rapid changes in technology, consumer needs, environmental
standards or the changing marketplace.
You've heard from other panelists and I agree that we're
seeing a market based change in fuel choice for centralized
generation. It's marketedly shifted our energy landscape, the
change in fuel for large and utility scale electricity
generation units. However is not even the most significant part
of the transformation.
The very model of centralized utility scaled generation
itself is no longer sacrosanct. The cost of distributive
generation technologies are falling. Energy productivity is
rising. In our digital world, consumers have increased demands
for power quality and reliability, but needs for power quantity
are falling, are predicted to fall. As a result our system is
transforming from a one way power delivery network in which
customers passively receive electricity to a two way flow of
both power and information in which customers both receive and
produce electricity.
For anyone as concerned about reliability as I am it is
difficult not to notice that the power outages we suffer do not
arise from the lack of generation. They are rooted in our
transmission and our distribution systems. In fact, power
outages due to severe weather impacting our distribution system
costs between $18 billion and $33 billion per year. This grid
transformation can enhance our reliability. We have every
reason to believe that our energy system that seamlessly knits
together centralized and distributive generation is possible
and will meet our energy needs more reliably and cost
effectively.
In order to realize the benefits of this transformation we
need to unleash the innovation that we see in our States. From
a perspective as a former regulator and a system operator in
the State of Ohio I strongly support active State engagement.
Our history and experiences demonstrated that we can weather
this transition without threatening our uniform and
nonnegotiable commitment to reliability.
But to do that we need to tap all the tools at our
disposal, to ensure that robust, reliable and an integrated
energy system that is no longer dependent exclusively upon
centralized generation. Managed properly it can deliver
benefits to electricity consumers, the economy, environment
generators, innovators and workers alike.
Thank you very much.
[The prepared statement of Ms. Roberto follows:]

Prepared Statement of Cheryl L. Roberto, Associate Vice President, EDF
Clean Energy Program, Environmental Defense Fund
Madam Chairman and distinguished members of the Committee, I
appreciate the opportunity to appear before you today. My name is
Cheryl Roberto and I serve as the Associate Vice President, EDF Clean
Energy Program for the Environmental Defense Fund (EDF).
EDF is not your typical environmental organization, and--as a
former state regulator and electric system executive--I likely do not
fit your stereotype of an environmental activist. At EDF, we work to
solve the most critical environmental problems using market-based
solutions. We use a uniquely effective approach, drawing on science,
economics, partnerships and ardent bipartisanship. We have a long
history of working collaboratively with corporate partners, beginning
in 1990 when EDF worked collaboratively with McDonalds to reduce the
company's solid waste, including from those foam ``clamshell''
containers.
We recognize that technological innovations like horizontal
drilling and hydraulic fracturing have enabled us to tap vast new
reserves of natural gas in the U.S. This has been good for our economy,
and it could be good for our environment--but only if we take action to
address the very real risks to public health, the environment, and our
climate that come along with increased gas production and use. In just
the past few months, we worked closely with the administrations of
Colorado Governor John Hickenlooper, Wyoming Governor Matt Mead, and
Ohio Governor John Kasich as they formulated common-sense leak
detection and repair requirements to reduce methane emissions from
leaking valves, connectors and other equipment at oil and gas well
sites.
I lead EDF's Clean Energy Program, a national effort in which we
work with utilities, state regulatory commissions, legislatures,
governors and other stakeholders in the nine states\1\ in which more
than one half of US electricity is produced and consumed. Our goal is
to reform utility regulation and market rules so that customers can
choose clean-energy options with the same ease they currently access
traditional sources of electricity. The policies we promote include:
aligning market incentives for utilities and third-party entrepreneurs
to reward investments in clean energy; ensuring that the market values
clean resources fairly; improving consumer access to data and
information; advancing clean energy financing mechanisms that connect
customers to private capital; and optimizing electric grid efficiency.
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\1\ Texas, Pennsylvania, Ohio, North Carolina, New York, New
Jersey, Illinois, Florida, and California.
---------------------------------------------------------------------------
I am a former utility regulator and a former electric system
operator. Prior to joining EDF last summer, I served as a commissioner
on the Public Utilities Commission of Ohio, my home state and one long
dependent upon coal-fired generation. As a member of the National
Association of Regulatory Utility Commissioners (NARUC) I served as:
vice chair of the Critical Infrastructure Committee and a member of the
Electricity Committee, the board of directors for the National
Regulatory Research Institute, and Task Force for Environmental
Regulation and Generation. I was tapped by NARUC to co-chair the
National Electricity Forum 2012, a national conference addressing
cutting-edge issues and potential collaborations to successfully
modernize the nation's electricity infrastructure. I served and
continue to serve on the executive committee for a national network of
more than 200 utilities, financial service companies, energy service
companies, commissioners, and consumer advocates working toward the
goal of achieving deployment of all cost-effective energy efficiency by
2020.
I have provided testimony before the Federal Energy Regulatory
Commission's (FERC) Technical Conference on Reliability of the Bulk
Power System, in anticipation of environmental rules for mercury and
air toxics. The testimony that I prepared received the unanimous, bi-
partisan support of my colleagues on the Ohio Public Utilities
Commission. Prior to my appointment to the commission, I served for six
years as the Deputy Director and then Director of the City of Columbus,
Ohio Department of Public Utilities. My duties there included running
the City's electric distribution utility. That hands-on experience
meeting the daily needs of electricity customers while protecting the
financial integrity of the system gave me a keen appreciation for the
real-world demands of system reliability.
The clear message that I want to share with you today is that, with
or without new environmental regulations, market-based changes--
including those that are reducing the number of older, coal-fired power
plants--are transforming our electricity system but our electricity
system can still meet our reliability needs. As a former regulator and
system operator, no one puts a higher premium on the safety and
reliability of our electric system than I do. While the fundamental
nature of our electric grid is transforming irreversibly, I am
confident that this transition can be accomplished without sacrificing
either cost-effectiveness or safety and reliability. Our national
commitment to reliability is non-negotiable, but we need to recognize
that the electricity systems we built in the last century, and the
regulations that govern them, are no longer adequate--either to ensure
reliability, or to accommodate the rapid changes in technology,
consumer needs, environmental standards, and the changing marketplace.
The nation's electricity system stands at a transformative
crossroads, which was not fully apparent just six or seven years ago.
We have seen a massive and dynamic reduction in the price of natural
gas as a result of developments in horizontal drilling and hydraulic
fracturing of shale. By all appearances, abundant domestic natural gas
will be our reality for the foreseeable future, making natural gas in
many instances a cheaper alternative for electricity generation than
coal. ``Coal-fired power plants in the United States have been under
significant economic pressure in recent years because of low natural
gas prices and slow electricity growth demand,'' according to the
Energy Information Administration.\2\ Beyond the market-price advantage
of natural gas, aging coal-fired generation plants built decades ago
(75% of all coal-fired plants in the United States are more than thirty
years old with a typical useful life of forty years\3\) will require
new investments to keep up with market changes, as well as to conform
to evolving environmental rules.
---------------------------------------------------------------------------
\2\ ``AEO2014 projects more coal-fired power plant retirements by
2016 than have been scheduled,'' Today in Energy (U.S. Energy
Information Administration) http://www.eia.gov/todayinenergy/
detail.cfm?id=15031
\3\ http://www.eia.gov/energy_in_brief/article/age_of_elec_gen.cfm
---------------------------------------------------------------------------
It would be a mistake, however, to attribute the economic
challenges faced by coal plant operators solely, or even largely, to
environmental standards--as a 2012 study performed for EDF makes clear:
``The sharp decline in natural gas prices, the rising cost of coal, and
reduced demand for electricity are all contributing factors in the
decisions to retire some of the country's oldest coal-fired generating
units. These trends started well before EPA issued its new air
pollution rules.''\4\ Moreover, coal plant operators are not alone in
the challenges posed by America's abundant new gas supplies. Nuclear
power faces economic challenges from the availability of natural
gas.\5\ In short, we are seeing market-based changes in fuel choices
for centralized electricity generation that have markedly shifted our
energy landscape.
---------------------------------------------------------------------------
\4\ Tierney, Susan F. ``Why Coal Plants Retire: Power Market
Fundamentals as of 2012'' (Analysis Group, February 16 and 24, 2012)
http://www.analysisgroup.com/uploadedFiles/News_and_Events/News/
2012_Tierney_WhyCoalPlantsRetire.pdf
\5\ See generally AEO2014 Early Release Overview http://
www.eia.gov/forecasts/aeo/er/early_elecgen.cfm
---------------------------------------------------------------------------
The change in fuel for large- or utility-scale electricity
generation units, however, is not even the most significant part of the
transformation. The very model of centralized, utility-scale generation
itself is no longer sacrosanct. The costs of distributed generation
technologies such as solar photovoltaics, battery storage, fuel cells,
geothermal energy systems, wind, and micro turbines are falling with
renewable options becoming available at a level equivalent near to
where near natural gas prices were just a few years ago. And Energy
productivity is rising. In the last 40 years, the United States has
experienced a 300% increase in economic output with less than a 50%
increase in energy used to produce it.\6\
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\6\ America's Energy Resurgence: Sustaining Success, Confronting
Challenges, Bipartisan PolicyCenter's Strategic Energy Policy
Initiative, February 2013, p. 6 (``Bipartisan Policy Center
Report'')http://tinyurl.com/crp7uxm
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The U.S. Energy Information Administration (EIA) actually projects
that average energy use per person will decline between 2011 and
2040.\7\ In our digital world, consumers have demands for power quality
and reliability that have not been adequately served from electricity
cascading from centralized generation plants through miles of
transmission and distribution lines. In fact, power outages due to
severe weather impacting our distribution system (not our generation
plants) cost between $18 billion and $33 billion per year. These
figures do not include losses from major storms like Hurricane Ike or
Sandy.\8\ Falling natural gas prices reduce the operational costs of
natural gas-fueled combined heat and power systems.
---------------------------------------------------------------------------
\7\ Annual Energy Outlook 2013, released April 15-May 2, 2013
http://www.eia.gov/forecasts/aeo/chapter_market_trends.cfm
\8\ ``Economic Benefits of Increasing Electric Grid Resilience to
Weather Outages'' (Executive Office of the President, August 2013)
http://energy.gov/sites/prod/files/2013/08/f2/
Grid%20Resiliency%20Report_FINAL.pdf
---------------------------------------------------------------------------
Customers are increasingly interested in how distributed
generation, on its own or working in concert with the power from the
grid, can meet their needs. Increased integration of intermittent
renewable sources, such as wind, mean that distributed resources
including demand response have added value to the operators of the
centralized grid--also driving interest in investment and adoption of
distributed resources. The Edison Electric Institute, the association
representing all U.S. investor-owned electric companies published a
report last year acknowledging and describing this ``disruptive
challenge'' to the model upon which our electric service has been based
for the past century.\9\ Not all utilities see this disruption as only
a challenge--some utilities see this transformation as an opportunity:
``Hardly expecting the nation's grid to collapse with the advent of
more distributed generation, heads of three major U.S. utility
companies see customer interest in generating their own power as a
prime opportunity to focus on their wires business and new, potentially
profitable customer service offerings.''\10\
---------------------------------------------------------------------------
\9\ Kind, Peter Disruptive Challenges: Financial Implications and
Strategic Responses to a Changing Retail Electric Energy Business (EEI,
January 2013). http://www.eei.org/ourissues/finance/Documents/
disruptivechallenges.pdf
\10\ Cordner, Christine, ``Utility CEOs see distributed generation
as opportunity, not threat'' (SNL April 7, 2014)
---------------------------------------------------------------------------
Our system is transforming from a one-way power delivery network in
which customers passively receive electricity to a two-way flow of both
power and information in which customers both receive and produce
electricity. The utilities are becoming a platform for integration of
the full range of energy services. The two-way system is animated by
customers who are now receiving information about their usage (when and
how much they use) and price signals indicating moment-by-moment the
changed value of electricity. We see instances of distributed resource
alternatives smoothly integrated into the grid with no preference given
to the incumbent centralized generation. The proliferating diversity of
options is providing opportunities to customers to hedge risk for both
price and reliability (for example, customers may find that their
electric vehicle may be plugged back into their home to provide power
to ride out storm outages.)
Changes in the energy landscape across the nation are significant--
but not to be feared. My home state of Ohio is a prime example. Each of
the electric utilities in Ohio purchases the electricity its customers
require through auction, or it is on a pathway to do so. Ohio consumers
in the Duke Energy and AEP territories are increasingly able to
participate in a two-way relationship with their utilities through
technology platforms enabled by smart meter installation. Duke Energy
has installed 426,000 smart meters. AEP has installed 110,000\11\ and
recently filed plans\12\ with the Public Utilities Commission to add
900,000 more. Consumers with this technology platform will
progressively gain more options to choose how, when, and even if they
will use electricity--and from what source. Consumers served by Duke
Energy and AEP are already enjoying briefer outages--greater
reliability---due to a more responsive distribution system informed by
smart grid investments. Consumers are participating in energy
efficiency opportunities and enjoying savings at levels we have not
seen before.
---------------------------------------------------------------------------
\11\ http://www.puco.ohio.gov/puco/index.cfm/consumer-information/
consumer-topics/smart-grid-in-ohio/
\12\ Case No. 2013-24.
---------------------------------------------------------------------------
The transformation of the grid--both as a result of the fuel-
switching by central generators and the growth of distributed
generation--does not need to impact reliability negatively. All
indications are that, in fact, transformation will enhance reliability.
A number of factors point to continued confidence in the resilience
of our grid. The first of which is market response. The PJM regional
transmission organization holds auctions (called Reliability Pricing
Model Base Residual Auctions or RPM) looking ahead three years, in
order to secure enough generation for reliable grid operations. For the
past three years, these auctions have both confirmed impending coal-
fired plant retirements and provided reason for confidence that
alternate strategies will successfully meet reliability and
affordability needs.
In the most recent 2016/2017 PJM RPM Auction, approximately 9,000
MW of coal-fired generation offered into the auction failed to clear
it.\13\ Approximately 4,000 MW coal-fired generation failed to clear
the previous auction.\14\ These trends, shown on the first chart below,
illustrate that coal-fired plants are becoming less economically
competitive as less expensive options squeeze them out, a trend
continued during the past three years. These coal-fired plants were
replaced by a combination of gas-fired generation, renewables, energy
efficiency, and demand response. At the same time, the winning auction
prices have decreased significantly, as shown by the second chart
below. Of particular note, 23% more energy efficiency cleared the 2016/
2017 auction as compared with the prior year.\15\ Thus, a market
response alone successfully replaced the coal-fired power at a cost-
effective rate.
---------------------------------------------------------------------------
\13\ PJM, 2016/2017 RPM Base Residual Auction Results at p. 29,
Fig. 3--Offered and Cleared Quantities of Coal and Gas.
\14\ Id.
\15\ Id.
---------------------------------------------------------------------------
The second reason for confidence that the grid will remain reliable
during this on-going transition is that it has successfully managed
each prior concern precipitated by environmental requirements. Most
recently reliability concerns were raised when the Mercury and Air
Toxics Standards were adopted as well as when the Cross-State Air
Pollution Rule was adopted. Predictions by the U.S. Environmental
Protection Agency\16\ and by the U.S. Department of Energy\17\ that
reliability would not be impacted have proven accurate. Finally, during
the most recent ``polar vortex'', we saw the grid stressed by the
combination of high demand and generation plant failures (including
13,700 MW of coal-fired plants which failed to perform)\18\ and yet it
continued to perform well.
---------------------------------------------------------------------------
\16\ ``Resource Adequacy and Reliability in the IPM Projections for
the MATS Rule'' http://www.epa.gov/ttn/atw/utility/
revised_resource_adequacy_tsd.pdf
\17\ ``Resource Adequacy Implications of Forthcoming EPA Air
Quality Regulations,'' (U.S. DOE December 2011) http://energy.gov/
sites/prod/files/2011%20Air%20Quality%20Regulations%20Report_120111.pdf
\18\ In re: Winter 2013-2014 Operations and Market Performance in
RTO and ISO, Statement of Michael J. Kormos Executive Vice President--
Operations PJM Interconnection, L.L.C. (FERC Docket No. AD14-8-000,
April 1, 2014) http://www.ferc.gov/CalendarFiles/20140401084122-
Kormos,%20PJM.pdf
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Centralized generation plants will persist in an important role
within our nation's energy system. Some of these plants may continue to
be coal-fired. EDF supports a flexible compliance framework for
existing coal-fired plants to meet anticipated greenhouse gas rules
that will deploy the most cost-effective solutions available, which
include harvesting the vast amounts of widely available cost-effective
energy efficiency. In order to facilitate maximum use of this resource,
last month EDF offered concrete suggestions to U.S. EPA regarding the
opportunity to account for energy efficiency as an element of
compliance.\19\
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\19\ Hibbard, Paul J. and Andrea Okie, ``Crediting Greenhouse Gas
Emission Reductions from Energy Efficiency Investments: Recommended
Framework for Proposed Guidance on Quantifying Energy Savings and
Emission Reductions in Section 111(d) State Plans Implementing the
Carbon Pollution Standards for Existing Power Plants'' (Analysis Group
March 2014) http://www.edf.org/sites/default/files/eemv-111d-
recommended-framework.pdf
---------------------------------------------------------------------------
Utility operators are embracing energy efficiency as a solution as
well. As reported earlier this week, AEP CEO Nick Akins has urged that
energy efficiency and renewable energy additions should serve as a
pathway to greenhouse gas standards compliance for existing coal-fired
generation:

In order to not add fuel to the fire already begun by MATS
[EPA's mercury and air toxics rule] and low gas prices, . . .
EPA should acknowledge early action measures taken by utilities
to reduce their greenhouse gas emission profiles such as
renewable energy additions and energy efficiency measures. In
taking this step, the agency will be enabling utilities to move
funds from environmental compliance to wires investments aimed
at boosting reliability\20\
---------------------------------------------------------------------------
\20\ Cordner, Christine, ``AEP CEO: Polar vortex should be a `red
flag' for EPA as it crafts greenhouse gas standards'' (SNL, April 7,
2014)

We have every reason to believe that an energy system that
seamlessly knits together centralized and distributed generation is
possible and will meet our energy needs more reliably and cost-
effectively. For instance, we know from a National Renewable Energy
Laboratory study that renewable electricity generation technology
commercially available today could meet 80% of our electricity needs
every hour of every day in every region of the country by 2050, if we
adopted a more flexible electricity system and we made the
investment.\21\ Energy efficiency remains the most cost-effective means
to meet our energy needs. In a recent comprehensive analysis by
Lawrence Berkeley National Lab, the average cost of energy efficiency
over the past three years has been a mere 2.1 cents/kWh.\22\
---------------------------------------------------------------------------
\21\ National Renewable Energy Laboratory. (2012). Renewable
Electricity Futures Study. Hand, M.M.; Baldwin, S.; DeMeo, E.; Reilly,
J.M.; Mai, T.; Arent, D.; Porro, G.; Meshek, M.; Sandor, D. eds. 4
vols. NREL/TP-6A20-52409. Golden, CO: National Renewable Energy
Laboratory.http://www.nrel.gov/analysis/re_futures/
\22\ Ernest Orlando Lawrence Berkeley National Laboratory. (March
2014) The Program Administrator Cost of Saved Energy for Utility
Customer-Funded Energy Efficiency Programs. Billingsley, M.A.; Hoffman,
I.M.; Stuart, E.; Schiller, S.R.; Goldman, C.A.; LaCommare, K. http://
emp.lbl.gov/sites/all/files/cost-of-saved-energy-for-ee-programs.pdf
---------------------------------------------------------------------------
In order to realize the benefits of all of this transformation, we
need to unleash the innovation we see in the states. From my
perspective as a former regulator and system operator in the State of
Ohio, I strongly support active state engagement in the design of
compliance strategies. I do so because I know that it works.
Reliability of the grid is best protected when state utility
commissions and state air agencies are empowered with flexible
standards to work on their own or regionally to meet these
challenges.\23\
---------------------------------------------------------------------------
\23\ See Comments Submitted on Behalf of The PUCO by Cheryl
Roberto, Commissioner to the FERC Reliability Technical Conference
November 30, 2011 (Docket No. AD12-1-00) http://www.ferc.gov/
CalendarFiles/20111208072456-Roberto,%20PUCO.pdf
---------------------------------------------------------------------------
State utility regulators have long recognized and trusted that
energy efficiency and load management are effective tools for cost-
effectively managing reliability.\24\ They are leading the way in
Hawaii, Illinois, and Ohio to ensure that customers have access to
information about their energy usage and options to pay for clean
energy alternatives with private capital. In California and Texas, they
are clearing away arcane rules to ensure that their energy needs are
met by ``just-in-time'' service--only generating when the power is
needed and sending price signals to provide options to customers to
dial back their demand when electricity would be more costly.
---------------------------------------------------------------------------
\25\ See NARUC resolution, ``Energy efficiency and load management
as cost-effective approach to reliability concerns'' (July 23, 1999
concerns http://www.naruc.org/Resolutions/
Resolution%20Supporting%20Energy%20Efficiency%20and%20Load.pdf
---------------------------------------------------------------------------
Massachusetts is investigating what it takes to have the most
nimble grid that it can. Minnesota has established protocols to value
distributed solar installations in a manner both fair to the utilities
and to the home owners. Meanwhile, New Jersey and New York are
implementing the lessons learned from Superstorm Sandy, by promoting
resilient microgrids using combined heat and power and renewable
generation sources. All across the country, utility regulators,
utilities, clean-tech companies, and advocacy organization such as EDF,
are engaged in nurturing and implementing ideas for utility business
models to support a transformed grid.
There is no great disagreement that the U.S. energy system is
transforming. With or without additional environmental regulations,
this transition is occurring. Our history and experience have
demonstrated that we can weather it without threatening our uniform and
non-negotiable commitment to reliability. But to do that, we do need to
recognize that this is about far more than the relative market
advantages and disadvantages of various energy sources. It is about
tapping all of the tools at our disposal to ensure a robust, reliable
and integrated energy system that is no longer dependent exclusively
upon centralized generation. It is about a fundamental transformation
that is happening across the country, one that can deliver benefits to
electricity consumers, the economy, the environment, generators,
innovators, and workers alike.

The Chairman. Thank you very much. That was excellent.
We're under a little bit of a time constraint so I'm going
to ask one question to Mr. Hill, turn it over to Senator
Murkowski for hers and then Senator Baldwin, I will recognize
you because you have to preside at 12 o'clock. Then we'll
follow up with Senators Portman and Manchin and close out the
hearing.
Let me just submit for the record, though, the price of
electricity currently, today, from a high of 16 cents per
kilowatt/hour in New York.
New Jersey is 14 cents per kilowatt/hour approximately.
California is 14 cents per kilowatt/hour.
To the lows in the country which are in Louisiana,
Arkansas, and Wyoming.
I'd like to submit that to the record.
In addition I'd also like to submit the EPA proposed
utility air toxic rules manage and compliance and reliability
ways.*
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* Chart has been retained in committee files. [Source: Sue Tierney,
``EPA Proposed Utility Air Toxics Rule--Managing Compliance in Reliable
Ways,'' Congressional Staff Briefing, May 9, 2011, p. 10. The chart is
based on EIA Form 860 data. A similar chart produced by EIA itself can
be found at http://www.eia.gov/todayinenergy/detail.cfm?id=1830]
---------------------------------------------------------------------------
There's an EIA study, this graph** is a little frightening
to me because it doesn't show a mix of fuels which I think we
need. Although, it does show the potential of natural gas which
I'm excited about. I'd like to submit that to the record.
---------------------------------------------------------------------------
** Graph has been retained in committee files.
---------------------------------------------------------------------------
Mr. Hill, let me ask you.
Senator Manchin and I have many discussions about the role
of nuclear, coal and gas. Could you just reiterate what your
thoughts are about gas as a base load fuel for electricity
production? What is making that possible? Is it government rule
and regulation or is it just technology to market or a
combination of both?
Mr. Hill. Thank you, Madame Chairman.
The gas is perfectly capable of being a base load fuel. In
fact, is a base load fuel in many markets around the world and
increasingly in some of the markets here in the United States.
What has changed is the shale gas revolution. We, as a
country, have been blessed with the natural gas which is very
affordable. This is not about government. This is about
technology innovation, having a resource which is much cheaper
to extract than anybody ever thought possible. It's cheaper all
in to deploy natural gas plants than it is other technologies.
So it is witness to market working.
The Chairman. OK.
I'm going to come back to a question about how exports do
or don't, I think they do, but open to hear, effect the supply
issues of natural gas in the United States. But because of time
I'm going to move to Senator Murkowski.
Thank you so much.
Senator Murkowski. Thank you, Madame Chairman.
Thank you to each of you for, I think, very, very important
testimony following on our first panel here.
Commissioner Moeller, I want to recognize your leadership
in this issue. You mentioned the letter back in 2011. As you
know, I've spent a lot of time on these issues, on the issue of
reliability of the electric grid before it was, kind of, fun
and popular and generated a full committee room of interest
here.
When I had posed a series of questions back a couple years
ago that really started, I think, to prompt a more robust
dialog on these real important issues, the impact of Federal
policy on reliability. I think we're finally starting to get
some traction here. It's taken longer than I had hoped, but I
really do think that what we've heard today just goes so much
to the heart of this.
I think if there is one point of agreement amongst
everybody at the witness table this morning, Madame Chairman,
it's that we cannot be reliability neutral. That we have got to
ensure that the lights go on and that our electric sources,
whatever they may be, where ever they may be coming from, that
they're robust. They're reliable and of course, they are
affordable.
I want to ask a question. This is probably directed to you,
Mr. Akins and you, Mr. Hill.
We're talking about what is happening with the move from
coal fired plants to gas fired plants. I think you spoke, Mr.
Hill, to really what is online in terms of investment out
there. But how confident are we that we're going to have the
gas pipeline infrastructure that can be placed in service in
time to allow these new gas facilities to enter when we need
them for reliability?
I'm concerned about how this all knits together. I'm not
convinced that we've got a real good handle on what the
investors are doing with great opportunities to move to gas.
But how do we get it from here to there?
Mr. Akins. I'll certainly try to address that and then,
obviously, Thad, you can take over.
But as we've been retiring generation we put in 5,000
megawatts of natural gas facilities. It's very clear that when
you go through that process it has to be done in a very
measured way because you're not only looking at the resource
itself, you're looking at the deliverability.
Certainly from a natural gas perspective, if we're going to
depend more on natural gas as even a base load type of fuel, we
need to make sure that that underlying grid of the natural gas
infrastructure is just as reliable as the electric
infrastructure because we'll be only as good at delivering
electricity as that lowest common denominator.
Senator Murkowski. Do you think that we're talking enough
about the reliability of those systems, though?
Mr. Akins. Oh, I don't think so. I think there's a lot of
work being done through the Federal Energy Regulatory
Commission, not only on terms of their nomination cycles and
things like that relative to natural gas, but the pipeline
activities are also being looked at from a reliability
perspective. So we need to continue that process.
The issue is and I think you hit on the point, is the
timing of that transition. Because naturally there are parts of
the country and our Midwestern part of the country, natural gas
wasn't very prevalent until recently. So there's a lot of
activity there in our south central part of the U.S. with
Louisiana, Texas, Oklahoma and Arkansas, it's been prevalent
for years.
So it takes time to get that kind of infrastructure in
place.
Senator Murkowski. Mr. Hill, your comments?
Mr. Hill. As I mentioned in my prepared remarks there are
billions of dollars of capital being spent on this problem
right now. I mentioned $3 billion in the Northeast alone.
What's driving that is that the producers want to get their
fuel out. Again, it's the market working.
You've got, you know, during the Polar Vortex you had gas
at a very low, single digit price trapped behind a constraint
in Pennsylvania. You had gas that priced, as we know, at $100
per BTU just miles down the road. You know, there are a lot of
gas producers who care a lot about that. They will spend
heavily and encourage investment as contractors on the pipeline
expansion.
So, I think, for the time period we're talking about which
is the next two or 3 years, the investment will follow.
Certainly, longer term we need to pay very close attention to
this.
Senator Murkowski. Thank you.
I'll defer, Madame Chairman.
The Chairman. Thank you.
Senator Baldwin, thank you so much for your presence this
morning.
Senator Baldwin. Thank you. Thank you for convening this
incredibly important hearing. I want to also thank my
colleagues for letting me jump the line before I head over to
preside.
Madame Chair, I was not able to be present for the
questioning of panel one. I just want to let you know that I
had intended to ask some questions about large power
transformers and will be submitting those for the record that
hopefully we can hear back from panel one.
But jumping to panel two and thank you all for being here
and your testimony.
Commissioner Moeller, I think I walked in just as you were
concluding your comments about capacity markets. I know that
FERC has taken some time to really look a little bit more
deeply at capacity markets.
Given that examination, and the performance of those
markets during this past winter, I'd like to hear whether you
believe that capacity markets are performing as they should?
Are you considering any changes to current capacity market
constructs?
Also are you planning, is FERC planning, to receive any
additional stakeholder comments on capacity markets following
the challenges that were witnessed this past winter?
Mr. Moeller. Thank you, Senator Baldwin.
That question also could be relevant to our Acting Chair
LaFleur. We did have a technical conference in September on
capacity markets and extended the comment deadline at least
once. We, I think, have the staff analyzing that. It's an
ongoing proceeding. It's one that has a lot of interest.
Can't tell you where we're going because I'm not even sure
what the options are right now. But at least some of the
discussion has been should we assign a higher value to those
generating resources that have onsite fuel whether that be oil,
fuel rods or coal. Is there greater value there that's not
being recognized now? That's one of the concepts that's out
there.
Did they work as intended?
The system worked, but the prices were very, very high. A
lot of that though was, as referenced before, to pipeline
capacity constraints. You would have gas 100 miles away trading
at the national levels, but then 20 times that where there's
constraint.
So that goes to a little bit different subject. I'd be
happy to talk in more detail so I don't take up all your time.
Senator Baldwin. OK.
I'll just close with a quick comment before I have to
leave, but as many of you know Wisconsin is no stranger to
extreme weather and extreme cold. In fact this past winter we
had pretty fierce conditions. The community of Antigo had
negative 30 degrees. I wanted to say that things actually
worked pretty well in the State during this extreme weather
with regard to electricity. The Chair and I have talked a lot
about our challenges with propane.
But American Transmission Company and MISO operate in
Wisconsin. Their transmission lines and other facilities, I
think, faired quite well. So I'm wondering if Wisconsin's
success and experience during this really extreme weather can
serve as lessons for other regions. I certainly would suggest
you reach out to hear about our best practices.
The Chairman. Thank you, Senator.
In future hearings which Senator Murkowski and I are
talking about doing, we want to hear from different parts of
the country because we do think that we can pick up best
practices. I know that there's a lot of that conversation going
on. But I think getting more of that on the record here in
Washington would be very helpful.
Alright, Senator Manchin, we're going to give you the last
word.
Senator Manchin. Oh, thank you.
The Chairman. Now we're limiting him to 1 hour.
[Laughter.]
The Chairman. Now he's got 10 minutes or less.
Senator Manchin. OK.
The Chairman. Alright.
Senator Manchin. First of all I want to thank you again.
This has been extremely interesting. It's something we've been
looking forward for a long time.
Commissioner Moeller, I'll start with you.
There's been some Senators who believe that basically
FERC's--FERC does not play a policy role, as far as in energy
reliability, only oversees rates. Do you want to correct or
basically, for the record, tell us what FERC does and how much
input they may have?
Mr. Moeller. Senator, thanks for the question.
We essentially create policy almost daily in terms of the
precedent that is set through the variety of----
Senator Manchin. How? Is that basically how energy will be
produced or delivered or a little bit of everything?
Mr. Moeller. We do not have a role in really generation
outside of our role as a regulator of hydropower production.
That is primarily a safety and environmental role.
Senator Manchin. The question I asked earlier was with PJM
since they are in the area that I live in. If they're not able
to and you see that they're not able to produce because they
don't have that power or the reliability of the power are you
able to step in and give them ability to keep running something
that they might have?
Mr. Moeller. Typically we call those reliability must run
contracts.
Senator Manchin. Yes.
Mr. Moeller. We have several that we've approved in the
last few years. We probably anticipate some more. That was kind
of the essence of my testimony. I think we need a deeper dive
into exactly what's going on.
Senator Manchin. So it wouldn't be accurate for any of us
to believe that you do not have any input whatsoever in the
policy or directly of generation. You entwined at all of it,
correct?
Mr. Moeller. We're entwined, yeah.
Senator Manchin. OK.
If I can go to Mr. Akins, if I may?
Could you reverse the closures if FERC or PJM, you know,
determined and this is what we just talked about now that the
system could not be maintained or relied upon and not to be
guaranteed to give us the power as needed, could you reverse
any of the closures you have underway?
Mr. Akins. Yes, there may be areas where it's a
possibility. But we'd have to look at each individual
circumstance because, you know, we've known these units were
going to shut down for years when the rules came out. So, you
know, like investing in the bottom of boilers, for example.
Senator Manchin. Sure.
Mr. Akins. To keep those running.
You'd have to put a substantial amount of investment back
into units which would take time itself.
Then second, you'd have to staff up again. They're running
with skeleton crews at this point in time just so that we can--
--
Senator Manchin. Are all the units? Mr. Akins, all the
units that you're taking offline, are they, all the older units
that weren't scrubbed or didn't have low NOX bowlers
or hadn't met the Clean Air Act?
Mr. Akins. Yes, typically they were the small, subcritical,
200 megawatt units. But there are larger units----
Senator Manchin. Have you taken anything offline or
predicted to take something offline that doesn't meet the clean
air standard as we've had in the past which is SOx and
NOX?
Mr. Akins. All the units that we're taking offline do not
have scrubbers. I think one of them has selective catalytic
production devices. So it's a matter of making investment
decisions based upon, you know, the rules and what's required
verses the other options available. But that takes time.
Senator Manchin. Mr. Kormos, were you concerned when First
Energy took off super critical units?
Mr. Kormos. I mean, obviously we're concerned when anybody
retires a unit.
Senator Manchin. But this unit here met the clean air
standards.
Mr. Kormos. Excuse me?
Senator Manchin. This unit met the clean air standard.
Mr. Kormos. That is our understanding.
Senator Manchin. They made a decision because of
reimbursement that they couldn't recoup the cost.
Mr. Kormos. They felt that economically the unit wasn't
viable going forward.
Senator Manchin. Is that because of you alls pricing or
your policies?
Mr. Kormos. It's based on the prediction of what they
thought the future market revenues would be. It was a business
choice made by them.
Senator Manchin. You didn't encourage or involve because of
reliability factor? You didn't get involved?
Mr. Kormos. No, very much like FERC. I know, from
reliability analysis we absolutely got involved to make sure
the grid would be reliable should the unit choose to retire
from a business perspective, very much like Commissioner
Moeller, we're still neutral.
Senator Manchin. What was the average increase of the bills
of the people are going to get hit with in your system this
year, I mean, this past winter and this vortex?
Do they have any idea how much they went up?
Mr. Kormos. That is very dependent on what kind of rate
they have settled with with their supplier. For those on a
fixed----
Senator Manchin. What kind of prices were you paying for
what period of time? What kind of prices were you paying and
you're going to be passing on that? I mean, you have to, that
charge.
Mr. Kormos. The average price was probably well over $100
dollars per megawatt/hour or whatever dollar/kilowatt.
Senator Manchin. That possibly could double a person's bill
very easily, right?
Mr. Kormos. If you were on a variable rate contract, yes,
if you're on a fixed rate, obviously not.
Senator Manchin. Mr. Hill, should we open the gates? I
think that Senator Landrieu, kind of, addressed this, but right
now we have an awful lot of people wanting to export LNG and we
thought we were going to need to import LNG.
Should we open the gates unfettered on LNG exports?
Mr. Hill. Senator, you know, our view is in most things
that our free market should be allowed to work. You know,
obviously there are questions if you were to export LNG or
anything else for that matter whether prices go up.
Senator Manchin. Knowing the pricing volatility of gas
right now and setting in our policy seats, do you think that
would be a good policy decision for us to vote to open an
unfettered matter when we're going to be needing so much more
of this product at a competitive price?
Mr. Hill. I won't comment on it, but I will say this about
natural gas. There is lots of it. There's a long, flat, what
economists would call a supply curve.
Senator Manchin. They've told me that before, but then it
didn't turn out to be what we thought it would be. I hope it is
because West Virginia has been blessed. I just hope there's as
much as you tell me.
I knew how much coal was there because I could see it. I
can't see the other. OK? I'm just taking your word for it.
So you want us to open an unfettered market. I'm a
marketeer. I think that's the concern we have right now that we
could get ourselves in one heck of a bind putting our eggs in
one basket. We made AEP and everybody else shift because of the
policies. That was the question I was asking.
Now if I could ask anybody who wants to chime in on this
one, please do.
Do any of you believe that this government or this
Administration's energy policy and regulatory agenda is in sync
with reality or ahead of the curve?
[Laughter.]
The Chairman. I knew it. I knew I should have cut him off
before this last question.
Senator Manchin. I still have 1 minute.
The Chairman. You have 1 minute.
Senator Manchin. One minute.
The Chairman. We do have two other Senators that have to
go.
Senator Manchin. We're ahead of the practibility of what
can be done.
[Laughter.]
Senator Manchin. Are you being put in a bind in your
shorts? You're really tight right now.
Go ahead, Nick, take it.
Mr. Akins. I'll take a crack at it.
[Laughter.]
Mr. Akins. So here's the issue. I think there needs to be a
lot more thorough analysis and thoughtful analysis. If I were
to encourage anything for the existing Administration it's for
the EPA, the Federal Energy Regulatory Commission and the
Department of Energy to get together and have substantial
discussions about, not only the environmental policy, but in
the framework of the other activities that are occurring around
reliability and grid resiliency. That's what needs to be done.
Yes, we were in a box. But I think it's because of the
aggressive timelines that were put in place. We are adjusting
to that. Mike Kormos is doing everything that he can from a PJM
perspective. The markets are trying to respond.
Senator Manchin. The citizens will be vulnerable in the
price, right? The citizens?
Mr. Akins. They'll be vulnerable for a period of time
because it is a transition, a substantial transition, that's
occurring. That takes time in our industry.
Senator Manchin. Anyone else want to jump in real quick?
The Chairman. Yes, OK.
Mr. Hill. Senator, if I could?
You know, the rule that we've talked the most about, the
MATS rule, you know, there are lots of other debates out there
including climate change and other topics. But there is no
debate about the fact that mercury is bad for human health.
Senator Manchin. Sure.
Mr. Hill. That SO2 causes acid rain. That
NOX causes smog and respiratory issues, right?
That's what that rule is about.
The technology for controlling these units--commercial
technology from one of these units is 40 years old. The 89
percent of the units that were talked about in Mr. Akins fleet
that are retiring are on average over 50 years old.
So I think maybe there's a question about how you implement
it. But there's no doubt about, you know, the rules.
Senator Manchin. Needs to be retrofitted?
Mr. Hill. Yes, sir.
The Chairman. Thank you so much.
Senator Portman and then Senator Barrasso and then we're
going to have to bring this kvery interesting hearing to a
close.
Senator Portman.
Senator Portman. Thank you, Senator Landrieu.
I appreciated being here earlier to hear the testimony from
both panels. The questions I was asking earlier about grid
reliability of the first panel I really wanted to, kind of, tee
up for you all. So if you have comments on those, jump in.
But let me just, if I could, go to this issue of how do you
have an EPA coordination with FERC and Mr. Akins just talked
about, but also adding DOE to that mix. But really with the
private sector too, to figure out, you know, and you know, with
the utilities in particular, to figure out how are we going to
have this reliability that all of us want to see.
I mean, we came really dangerously close this winter. My
understanding is we came so close that people almost found
themselves in a situation where their lives, you know, were
going to be at stake because people do lose their lives when
the electricity grid is going down in a cold winter, partly
because people rely on it for heat, partly because of other
reasons. You've got to have electricity.
So, you know, we are in a situation where you guys are in a
box. We've got this huge problem with consumers having to pay
more and not having the reliability that we should have. Yet
EPA just seems to be continuing on without any concern about
that.
So I understand that we need to have regulations and to Mr.
Hill's point, some of these plants are old, it's true. A lot of
these plants also, although, had upgraded equipment on
specifically on dealing with some of the environmental
concerns.
So I guess my question would be, you know, the cumulative
effect of these regulations, it seems to me, is not being
analyzed. There is no cost benefit analysis about that. There's
not dis-coordination, you know, with the utilities, with the
new regulatory model which in, as we talked about earlier is,
you know, no longer with a historic regulator model where the
States in conjunction with the utilities are responsible for
it. In our area it's PJM.
What should we be doing about that?
So who wants to jump in on that about better coordination
and how do we ensure that we're not going to run into the same
problem this summer should we have a heat wave and next winter
if we have another Polar Vortex?
Mr. Hunter.
Mr. Hunter. Thank you. I think it's a great question, great
point.
These two hearings really are very much alike. As we're
closing down more and more of these plants we're depending more
and more upon transmission grid. We're talking about cyber
security/physical security, looking at the grid and
transformers. I came from a substation here at Pepco.
You know, we've got a very vulnerable grid. We're making it
more vulnerable the more generation that we close down.
These EPA rules, 316B water rule, will affect the nuclear
as well as it will coal. We're, you know, we're beyond now
talking about 60,000 or 56, 60 or however it's going to be in
coal plants. We're now talking about possibility of closing
down nuclear and super critical coal.
It's an issue that needs to be addressed. I had in my
comments that I didn't get to that the coordination and the
cost of these new rules and NRC also needs to come in to that
picture. We've got regulatory rules coming from the NRC that
have significant cost impacts. We're not looking at those cost
impacts from EPA or NRC.
Senator Portman. Nick, do you have a comment?
Mr. Kormos. Nick's going to let me go first.
I probably just offer one thing. In the METS rule we asked
for and got what was called the Reliability Safety Valve. I
really think it's important going forward, particularly any of
the future EPA rules that allow that analysis to happen, allows
some, hopefully, some people to look at it. If we do see the
reliability problems we will be the first to speak up.
Again, I think Nick is right. A lot of this is about time.
We need to make the time. We need the time to make the
transition.
If you give us that time, this industry is very robust and
resilient. We'll make the transition. It's more about the time
of it, the time it takes.
Senator Portman. The problem with that is we've got all
these plants shutting down. By 2015, I mean, you know, in
Nick's comments earlier, that 89 percent of that power would
have been needed. So we're, you know, as Mr. Hunter said
earlier, when you shut these things down and people leave and
they're dismantled. You can't bring it right back up.
I understand and I appreciate what Ms. Roberto said about
the fact that there is more distributive power that's coming. I
understand there's a fuel mix changing. I understand that
there's some changes.
But in the meantime, 2015 is right around the corner. So my
question is what can we do right now? Commissioner you talked
about that a little bit earlier, but if you guys could comment
on that as well and Ms. Roberto too.
Mr. Akins. I think certainly we should take the time to get
this right. Now I don't know what that means in terms of
legislation or other activities that can ensure that the right
parties are coming together to make the situation better.
But there's clearly and certainly it was hit on earlier,
this notion of capacity markets, environmental regulations,
grid security around physical and cyber security, all of those
come together in the same framework. It is a national security
issue and one that we need to be very thoughtful about.
I think that when you think about some of the issues that
can occur, certainly that we talk about first contingency
outages in our business a lot. When the system is stressed we
plan the system around those stressful events, first and second
contingency outages.
When we're taking away resources that, not only provide
power, but this is sort of a larger focus is the reactive power
that many of these facilities provide that maintain voltage on
the system. Those are key components that maintain the
integrity of the grid that many people don't talk about. Solar
rooftop and those kinds of renewable supplies do not provide
that kind of resource.
So it's incredibly important to not only think about the
power that's needed to serve customers, but also the ancillary
services that are used to really facilitate the grid operating
properly with the base load.
The Chairman. Thank you, Senators.
I'm sorry. Can we hold that for just a minute?
OK.
Senator Barrasso.
Senator Barrasso. Thank you very much, Madame Chairman.
Commissioner Moeller, in your testimony you explained that
your main concern, the EPA has ``Greatly underestimated the
amount of power production that would be retired due its
rules.'' So August 2011 you've been calling for a formal
analysis of the cumulative impact of EPA's regulations on the
reliability of the electric grid. You have proposed that FERC,
EPA, Department of Energy, others participate in this analysis.
You also explained that as far as you know this formal
analysis has never commenced.
Can you shed a little light onto why you think the analysis
hasn't taken place?
Mr. Moeller. Thank you, Senator.
I've wondered that many times myself because I think what's
the downside? They are not our rules that are driving this.
Again, they're EPA rules. So we've been in a little bit of an
awkward situation.
There are informal communications that have gone on. I know
that EPA calls the RTOs or the RTOs call EPA every month if
they have something to talk about. But I think we just need a
little more transparency and accountability in this because, as
you mentioned, the cumulative--it's not just the rule that's
coming into effect in April 2015, but it's accumulation of the
rules and the reliability consequences have to be talked about.
People have disagreements on this.
Senator Barrasso. That's my question. Does the
Administration have the head in the sand or are they just
actively opposed to conducting the analysis because they don't
want to see intentionally wanting to not see what the results
are?
Mr. Moeller. I don't know their motivation.
Senator Barrasso. Mr. Hunter, in 2011 you union and several
other unions testified before EPA about the cumulative impact
of the agency's then proposed regulations. I understand the
unions predicted that the EPA's regulations would result in the
retirement, I think you said, of 56 gigawatts of electric
generation. You said that the 56 gigawatts of closing
represents over 50,000 direct jobs in all in the next couple of
years, that the job losses come from mine workers, rail
workers, power plants.
Finally you stated that these job losses will fall heavily
on rural communities where most of the plants are located.
Why do you think the EPA is ignoring the concerns of your
union and several other unions when issuing the new
regulations?
Mr. Hunter. Senator, we have asked that question numerous
times. We met with the EPA Director. We met with staff.
Originally they sat with their 4.7 number and said that,
you know, we were going to be fine. It's not that big of a
deal.
Now it's come true that it is a big deal. They're still
furthering more regulations, the CO2 regulation, the
coal ash rule. I mean it's just multiple.
Every one of those have a cost to it. Every time there's
more cost we see more plants closing.
Senator Barrasso. So do you think the EPA takes this issue
that we are very concerned about, of job loss. Do you think
they take it seriously when they issue regulations?
Mr. Hunter. I don't think they've taken into consideration
the cost of their rules, no.
Senator Barrasso. In your testimony you explain that steps
can be taken to ensure reliability of the electric grid. You
explain the power plants may be directed to operate under
what's known as the must run orders to ensure electric grid
meets electric demand.
But you also note that a must run order doesn't exempt the
power plant from civil lawsuits or Federal penalties under the
Clean Air Act. For that reason you stated that Congress must
address the double jeopardy issue between a must run order and
the fact that the plant owners can be sued under the Clean Air
Act. So it's double jeopardy.
So generally speaking would your union support legislation
exempting power plants subject to the must run order from
lawsuits and penalties under the Clean Air Act?
Mr. Hunter. Absolutely.
Senator Barrasso. Thank you.
Thank you, Madame Chairman.
The Chairman. Thank you very much.
Again, it's really been an extraordinary hearing. Thank you
all for your participation.
The record of this committee will stay open for another
week. I really encourage anyone to submit additional
information.
Ms. Roberto, thank you for your patience. I know you have
some additional things to add to the record.
The meeting is adjourned.
[Whereupon, at 12:10 p.m. the hearing was adjourned.]
APPENDIXES

----------

Appendix I

Responses to Additional Questions

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Responses of Philip D. Moeller to Questions From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. Congress can certainly encourage the manufacture of more
transformers in the United States. In particular, Congress may want to
consider whether we should increase the ``surge capacity'' of American
companies to build a significant number of transformers in a short time
frame. Private companies do not typically have an incentive to maintain
unused factory capacity, but the public interest may benefit from such
capacity in an emergency.
Question 2. Do you agree with Chairman LaFleur's recommendations
that Congress:

designate an agency with the authority to direct action in
the event of an emergency; and
exempt FERC and NERC from Freedom of Information Act for
some third party-related communications?

Answer. I agree that one agency should be in charge of directing
appropriate action in an emergency. Yet the critical questions will be
the proper scope of that agency's emergency authority and the proper
definition of an ``emergency'' when that agency action can be taken. I
also agree that the law should be clarified to exempt certain FERC and
NERC communications from disclosure under FOIA.
Question 3. You have recommended a comprehensive report on electric
reliability going forward. Is this comprehensive look something that
could be accomplished by the Quadrennial Energy Review, currently
underway? Can you tell us how FERC is feeding into the Quadrennial
Energy Review process?
Answer. By definition, a quadrennial review happens only once every
four years, yet the decisions being made to close coal and other power
plants are being made on a continuous basis. I have been told the
quadrennial review will be ready in January, 2015 at the earliest. Yet
the electricity sector is going through its most fundamental
transformation in its history, and this is happening in a very short
time frame. For these reasons, the quadrennial process would not be
expected to capture important developments that occur after the process
is completed. A comprehensive review will be better if performed
continuously and cooperatively among the various agencies in the
federal government, with assistance from the electric industry and
other stakeholders. I am extremely concerned about electric system
reliability in the next three to four years, and the need to have a
formal and transparent process is urgent.
Regarding how the FERC is ``feeding into'' the quadrennial process,
I have been told by FERC staff that there are several individuals who
are involved at this point, including providing updates on FERC action
related to natural gas and electricity coordination and also with the
upcoming public meetings on the quadrennial review. I would expect more
FERC staff involvement later in the process. Reportedly there are
approximately 20 federal agencies involved in the quadrennial review.
Responses of Philip D. Moeller to Questions From Senator Murkowski
Question 1. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. While I am not certain that I have seen the referenced GAO
report, I absolutely believe that at least NERC and FERC should have an
ongoing formal and documented role in EPA's rulemaking process, because
EPA is developing regulations that impact grid stability and
reliability. A formal and documented role would be subject to rigor and
transparency, as compared to vague claims that EPA is talking to
individuals at FERC, NERC, and others about the topic.
Question 2. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. No. As evidenced by the recent lack of actual investment, I
do not believe that market prices for energy and capacity are
sufficient at this time to attract investors to risk their capital in a
new coal facility. Although there is one plant--in a very unique
situation where captured carbon can be sold for enhanced oil recovery
and where most of its costs will be borne by retail ratepayers--nearing
operation, that plant has had significant financial and construction
challenges.
______

Responses of Michael J. Kormos to Questions From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. As early as 2006, PJM proactively began analyzing and
taking action on the need to ensure the availability of an adequate
supply of spare critical transformers. Specifically, PJM undertook a
detailed probabilistic risk analysis of the existing fleet of critical
transformers in use throughout the PJM 13-state footprint. That
analysis looked at both the reliability impacts as well as the price
impact to customers of the failure of specific transformers in order to
analyze, from a cost/benefit viewpoint, where best to invest ratepayer
dollars to procure spare transformers, Moreover, in working with its
transmission owners, PJM utilized that analysis to develop standardized
specifications for the procurement of transformers and formally,
through PJM Board action, ordered the procurement of a number of spare
transformers at key locations throughout its footprint consistent with
PJM's cost/benefit analysis. Based on this analysis, seven spare
transformers have been purchased, in addition to the existing number of
spares located throughout the PJM system. Also based on this PJM
analysis, Transmission Owners replaced 103 transformers identified as
being a risk based on the age of the transformer. Currently, PJM has
spare transformers at 38 of 49 substations (note: Those substations
that do not have spares either do not have adequate risk to justify
placing a spare transformer at the location, or have sharing
arrangements with another location).
The type of focused analysis that PJM undertook could be helpful to
promote the manufacture of transformers and allow for more
standardization than currently exists in transformer design and
utilization. Each substation and each transmission owner will need to
adapt transformers to their individual systems but the more
standardization that can occur over a larger regional footprint, the
more incentives will exist to promote additional manufacture of
transformers as some of the inefficiencies associated with the need for
individualized design and construction can be removed. Nevertheless,
transformers will never become a true ``shelf product'' and the demand
for transformers will be uniquely affected by grid topology, the level
of demand for electricity and the overall age of the existing fleet.
Transformers are utilized in electricity grids throughout the world.
Factors such as grid topology, the demand for electricity and the age
of the existing fleet of transformers vary widely around the globe
making the pace of manufacturing as well as the location of
manufacturers of transformers uniquely affected by worldwide demand
rather than just US demand.
At FERC's direction, the industry is undertaking an intensive
effort at addressing security issues around critical substations.
Moreover, federal as well as private dollars have been pledged toward
efforts to ``harden'' the grid as a result of extreme weather events
such as Hurricane Sandy. Although we do not believe that additional
legal authority or federal funding is necessarily needed at this time,
a focus on promoting the type of holistic analysis such as what PJM has
undertaken in analyzing both reliability and market impacts from
transformer failure could be helpful in determining the right level of
spare transformers to have available for use. PJM stands ready to
participate in industry discussions on utilizing the kind of regional
analysis that PJM has already taken or exploring alternatives to ensure
the right mix of this critical component of the electric grid going
forward.
Question 2. Please clarify the 22 percent loss of generation
capacity during the polar vortex. How much of this lost generation was
attributable to coal, natural gas, and nuclear power, separately? I
would like to better understand the extent to which coal generation
was, or was not, more reliable than other kinds of base load power
generation.
Answer. During the Polar Vortex the 22 percent loss of generation
capacity (forced outages) totaled 40,200 MW. These unavailable
megawatts were due to either the entire generator being unavailable or
a limitation of megawatts the generator can supply to the system. The
primary fuel types that were unavailable during the peak, comprising
this forced outage amount, were natural gas, coal, and nuclear. Of the
total forced outage amount, 19,000 MW (47 percent) were natural gas,
13,700 MW (34 percent) were coal, and 1,400 MW (3 percent) were nuclear
(the remaining 6,100 MW was a combination of other fuel types such as
oil, wind, hydro, waste, etc.).
Forced outages experienced by coal units during the Polar Vortex
were primarily due to multiple effects of the extreme cold weather on
various components of coal handling and processing facilities. Frozen
coal or wet coal, frozen limestone, frozen condensate lines, frozen fly
ash transfer equipment, cooling tower basin freezing, and freezing of
injection water systems for emissions control equipment were among the
numerous causes of coal unit forced outages.
Regarding overall reliability of coal generation compared to other
kinds of base load generation, the magnitude of gas related forced
outages during the Polar Vortex exceeded that of coal related forced
outages, but the coal related forced outages comprised approximately
one-third of the overall forced outage total.
PJM analyzed the performance of approximately 14000 MW of
generation pending retirement during the Polar Vortex peak. PJM
determined that the generators pending retirement were producing at a
level of approximately 52% of their capability.
Responses of Michael J. Kormos to Questions From Senator Murkowski
Question 1. What winter, summer, or shoulder period modeling, if
any, has PJM done in the past 10 years?
Answer. PJM models a range of seasons, including winter, summer and
shoulder in a variety of timelines from the present time through a 15
year planning horizon. The two major timeframes are the operating and
planning horizons. The modeling in the operating horizon encompasses
the present day up to one year into the future. The planning horizon
models the longer term anticipated system from one year through the 15
year planning horizon.
In the operating horizon, PJM completes summer and winter pre-
seasonal studies that are conducted by the PJM Operations Analysis Task
Force (OATF). In addition, near-term studies are performed on models
that reflect the anticipated next day configuration and demand in
advance of every operating day. These operating analyses evaluate the
system considering existing transmission system topology and resources,
planned transmission outages, planned generation outages, forced
transmission outages, and forced topology outages.
In the planning horizon, PJM conducts extensive modeling and
assessment of the system as part of the Regional Transmission Expansion
Plan (RTEP). PJM completes exhaustive studies of the transmission
system throughout a 15-year planning horizon as part of the RTEP. These
studies include analyses of the system at various load levels and
consider generation outages and conditions consistent with the period
under study. Following is a link to the recent studies that have been
completed pursuant to the RTEP.
Regional Transmission Expansion Plan (RTEP) Documentation
http://pjm.com/documents/reports/rtep-documents.aspx
In addition to the RTEP studies, PJM also completes seasonal
assessments of the transmission system as part of the OATF. Links to
these studies can be found at the following locations:

2014 OATF Summer Study Summary

http://www.pjm.com/?/media/committees-groups/committees/oc/
20140506/20140506-item-08-oc-presentation-2014-summer-oatf.ashx
2013-14 OATF Winter Study

Summary

http://www.pjm.com/?/media/committees-groups/committees/oc/
20131209/20131209-item-08-oc-pesentation-2013-14-winter-
oatf.ashx

In addition to the modeling requirements for PJM operating and
planning activities, PJM also participates in the development of
modeling by the Multiregional Modeling Working Group (MMWG), a group
responsible for developing a library of solved power flow models and
associated dynamics simulation models of the Eastern Interconnection.
The models are developed for use by the Regional Reliability
Organizations and their member systems in planning future performance
and evaluating current operating conditions of the interconnected Bulk
Electric System. The annual MMWG case builds typically include fourteen
(14) cases that include a variety of future system model years and also
a variety of system demands including light load, spring, summer,
summer shoulder, fall and winter. This process has existed for more
than 10 years and PJM has participated during that time. PJM annually
uses several of the MMWG models for the Regional Transmission Expansion
Planning (RTEP) assessment.
Question 2. If modeling has been done, how is it used and is it
distributed beyond PJM?
Answer. PJM's models that are used for the RTEP assessment are
available on www.pjm.com pursuant to CEII handling procedures. http://
pjm.com/planning/rtep-development/powerflow-cases.aspx
In addition, MMWG modeling is available directly from the MMWG
pursuant to CEII and modeling release procedures. https://rfirst.org/
reliability/easterninterconnectionreliabilityassessmentgroup/mmwg/
Documents/ERAG%20Base%20Case%20Release%20Procedure.pdf
PJM is also very transparent in sharing the results of the
assessments that are performed on the various models. The PJM RTEP is
the transmission enhancement plan that results from analysis of the
future models. This plan is reviewed extensively with stakeholders. In
addition, the MMWG models are used by Transmission Owners, Generation
Developers, Load Developers, Transmission Planners, Planning
Coordinators, economists, et al. for thousands of annual studies of the
Eastern Interconnection to examine system reliability.
Studies are also shared and reviewed with neighboring balancing
authorities including Midcontinent ISO, New York ISO, TVA, Duke
Carolinas and VACAR through a variety of forums. The study forums
include the Inter-Regional Stakeholder Advisory Committee (IPSAC) where
targeted studies coordinated by PJM and neighboring entities.
Additionally, PJM also participates in a variety of studies coordinated
by our NERC Regional Reliability Entities. These studies include
analysis coordinated with the entities in both the ReliabilityFirst
(RFC) and the SouthEast Electric Reliability Council (SERC) footprints.
Question 3. In your written testimony, you state that ``the
reliability cushion we [PJM] previously enjoyed with the large fleet of
coal-fired generation has substantially diminished.'' You further note
that demand response resources are only available to the RTO when you
are in ``pre-emergency'' conditions as you define the term. In fact,
you say ``we will potentially have to run the system closer to its
limit than we have previously in order to be able to call on demand
response resources.'' Please elaborate. Does this concern you?
Answer. PJM's emergency procedures call for PJM to deploy long and
short lead time demand response resources during hours when the system
is actually in emergency condition. This action is taken by PJM to
deploy demand response resources in order to avoid PJM invoking further
emergency procedures. Calling on these demand response resources to be
available to reduce their demand is one of the earliest stages in PJM's
multi-layered emergency procedures. To date, demand response resources
have performed well in response to PJM's call in these circumstances.
It should also be noted that within the requirements of the PJM tariff
and their obligations as capacity resources, DR capacity resources face
substantial penalties should they fail to reduce when called upon by
PJM to do so.
Nevertheless while allowed and encouraged, demand response
resources have not been willing to also participate in PJM's energy
market through the submission of an economic bid that would allow the
load reducing benefits to be available earlier to PJM and prior to PJM
having to invoke emergency procedures to reach these resources. In
addition, demand response resources face a much higher bid cap
(presently set at $1,800/MWh) as compared to generation which must
submit a bid in the energy market at $1,000/MWh. The issue as to
whether demand response should be required to submit a bid in the
energy market is presently pending before the Federal Energy Regulatory
Commission (FERC).
The fact that PJM cannot reach demand response resources until PJM
has moved into emergency conditions is the basis for our statement in
Mr. Kormos' testimony that ``we will potentially have to run the system
closer to its limit than we have previously in order to be able to call
on demand response resources.'' We have recently tried to somewhat
mitigate this concern by proposing to FERC a ``pre-emergency'' category
that allows PJM to call upon demand response resources immediately
prior to entering emergency conditions and by proposing to shorten some
of the notification periods prior to our being able to call upon demand
response resources. That proposal is also pending before the FERC and
was not in effect during the Polar Vortex.
Nevertheless, because of the advent of demand response resources
and their growing role in serving as capacity resources in PJM, we will
be required to run the system closer to emergency conditions than we
have before. Moreover, with the loss of a sizable portion of the coal
fleet, the resource mix, although more diverse than it has been before,
is made up of a portfolio that potentially has less flexibility than
existed previously.
This changing nature of the resources is certainly a concern. It
does not cause reliability issues for PJM---we procure reserves above
our installed reserve margin to address these very type of
contingencies but does increase complexities for PJM system operations
and will result in greater price volatility for customers. PJM has been
proactively addressing these challenges through a variety of filings
before FERC incentivizing the clearing of year-round demand response
products and more flexibility in PJM operations' ability to call upon
and dispatch these demand response resources. FERC's rulings have so
far been very helpful in addressing PJM's concerns. Additional issues
such as whether demand response should have a ``must offer'' energy bid
as well as some of our operational reforms, are pending before the
Commission in active proceedings.
Question 4. Your written testimony notes that during the Polar
Vortex, the ``system was indeed very tight, [but] we were never--as
some accounts have portrayed--700 megawatts away from rolling
blackouts.'' How close was the PJM system to a rolling blackout? You
further noted that PJM's next step would have been to implement a small
voltage reduction. Is it typical to implement voltage reductions to
manage the system or is that something the grid operators would prefer
to avoid if possible?
Answer. While the system's Synchronized Reserves (reserves that are
supplied to the system from resources that are synchronized/connected
to the grid and able to load within 10 minutes) fell to a low of
approximately 500 MW for a brief 5 minute period of time and averaged
around 700 MW for that hour, they are not the only reserves PJM has
that can be deploy prior to requiring rolling blackout. PJM had an
additional 1,167 MW of primary reserves (reserves available in 10
minutes but not synchronized) for a total of 1,667--1,997 MW ten minute
reserves in the lowest hour. As well PJM could have deployed a 5
percent voltage reduction to further reduce load and create reserves as
we had done the previous night and is a specific step in our emergency
procedures. PJM would expect about 1,100-2,000 MW of relief from this
step. PJM also has reserve sharing agreements with our neighbors that
could have been called upon if needed. PJM's agreement with NPCC allows
up to 50 percent of the contingent loss to be requested and PJM's VACAR
agreement allows up to 1,263 MW to be requested. All or part of all
available resources would have be deployed prior to requesting rolling
blackouts. We would estimate we had between 2,500-4,000 MW of reserves
remaining.
While PJM always attempts to avoid emergency procedures when
possible, they are designed and expected to be deployed in extreme
situations such as the one we faced during the polar vortex.
Question 5. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. PJM believes that reliability issues must be considered in
the context of EPA's rulemaking process. Reliability analyses should be
conducted during the formulation of EPA's policy proposals. In
addition, PJM believes that appropriate ``safety valves'' be built into
final EPA rules so that there is a means to address reliability impacts
that may arise from a specific rule's implementation. It is for this
reason that the ISO/RTO Council proposed a ``Reliability Safety Valve''
which was eventually incorporated into the EPA Mercury and Air Toxics
rule. The ISO/RTO Council has proposed a similar ``Reliability Safety
Valve'' for incorporation into EPA's impending greenhouse gas rule.
PJM believes that the entities responsible for system operations as
well as planning are in the best position to conduct the majority of
``on the ground'' reliability analyses of the impacts of various
proposals. Nevertheless, both NERC and FERC can play a valuable role in
this process and as a result, FERC and NERC should have the formal
documented role in any EPA rulemaking process with RTOs/ISOs and other
system operators providing input to all of these entities, including
EPA. NERC provides a national view of bulk electric system reliability
and can provide an independent verification of the reliability analysis
undertaken by system operators. Moreover, there remains an important
question of legal authority to address reliability. Congress has given
that role to FERC and although there seems to be some concern as to
EPA's ability to address these issues under the Clean Air Act, there is
no question that Congress sought federal regulatory oversight of bulk
power reliability by assigning that task to FERC through the Energy
Policy Act of 2005. Accordingly, both FERC and NERC as well as the
RTOs/ISOs have an important role in this process. The ``formal and
documented'' role should be limited to those entities that Congress has
specifically recognized in this area-namely FERC and NERC (the latter
acting as the Energy Reliability Organization appointed by FERC
pursuant to EPACT 2005). The RTO/ISO role and other system operator
roles' should not necessarily be ``hard-wired'' into the rule but
clearly are an integral input that should be sought by EPA, FERC and
NERC through the rulemaking process.
Question 6. Do you believe current market prices for energy and
capacity are sufficient to attract investors to invest their capital in
a new coal facility even though EPA standards would require the use of
CCS technology that is not commercially viable?
Answer. The independent PJM Market Monitor has determined that over
the last several years, the overall revenues being received from the
various PJM markets have been less than needed to recover the overall
fixed and operating costs of a new coal plant. Specifically in his 2013
State of the Market Report, the IMM stated:

In 2013, a new CP (``coal plant'') would not have received
sufficient net revenue to cover levelized fixed costs in any
zone. The results for CPs are relatively uniform. A new CP
would not have received sufficient net revenue to cover more
than 30 percent of levelized fixed costs in any zone. However,
the results for coal plants in 2013 are better than they were
in 2012 based on higher energy market net revenues in all but
one zone and higher capacity market revenues in ten zones.
These are the same ten eastern zones that increased the net
revenue results for both CTs and CCs. All but two zones showed
increases in the coverage of fixed costs by CPs in 2013

PJM's markets are designed to be resource-neutral. As a result, our
capacity market clears resources at the cost of new entry of the most
efficient new technology available to supply the needed MW's--presently
represented as a gas combined cycle unit. But the capacity markets only
make up approximately 30 percent on average of the total revenue stream
for a given generator. Coal units receive revenues above their marginal
costs in many hours in the PJM energy market which clears in many peak
hours at the cost of producing energy from natural gas which often is
more expensive than production of energy from coal. As a result, the
total revenue picture from the combination of the PJM markets is
examined by the PJM Market Monitor..
PJM has not undertaken a specific analysis, but given the
observations of the independent market monitor as to the net revenue
position of new coal plants without CCS, we believe that a requirement
for mandatory CCS technology would further exacerbate the strain on the
viability of new coal technology from being developed.
Response of Michael J. Kormos to Question From Senator Barrasso
Question 1. You explain that EPA's regulations will cause utilities
to rely to a greater degree on demand response programs. Through demand
response programs, utilities compensate customers who voluntarily agree
to curtail their use of electricity during emergencies. You suggest
that demand response programs will help utilities make up for the loss
of coal-fired electric generation resulting from EPA's regulations.
Earlier this week, Tony Alexander, President and CEO of First
Energy, explained that: ``Many businesses are now considering whether
they can continue to interrupt their ability to manufacture the product
they sell in order to accommodate the changes being made in the
electric system.''
He went on to say that: ``If [these businesses] change their minds,
all customers could be left with inadequate power supplies.''
Do you believe Mr. Alexander has correctly characterized what is at
risk with utilities relying on demand response programs?
Answer. PJM believes that Mr. Alexander's statement has validity
but does not represent the entirety of the picture. For one, a decision
of a business customer to simply renege on its prior demand response
forward commitment to the PJM market is not without substantial cost.
That business, acting through its curtailment service provider, is
required to either replace its promised reductions with another
capacity resource or face substantial penalties for not being available
to PJM despite its prior commitment. Thus, the problem of industrial
customers simply ``changing their minds'' in the short term is not
without substantial cost that works to disincent such sudden reversals.
Moreover, every year PJM procures megawatts above its forecasted
reserve margin (which itself is designed to account for the
unavailability of specific resources at the time of the system peak).
PJM's required reserve margin currently is 16.2 percent; however, PJM's
forward capacity auction has procured up to a 21.1 percent reserve
margin on a 3-year forward basis. PJM will continue to procure these
additional supplies in order to address the type of concern raised by
Mr. Alexander.
Beyond the three year forward commitment period, PJM believes that
businesses could stop providing demand response if the cost of
producing the business' product could exceed the cost of curtailing
that production when called upon by PJM. From a reliability
perspective, PJM's market structure is designed to attract new
resources that would substitute for this loss of demand response
resources should there be an exit from the market. In essence, capacity
prices would rise should there be an exit of the market by demand
response resources which would then incent the development of new short
term resources to substitute for those exiting resources. Moreover, as
gas generation can generally be developed in a relatively short time
period (particularly in the PJM region which sits on top of the
substantial Marcellus and Utica shale supplies), the market should work
to produce substitute resources. Nevertheless, PJM has the authority to
procure additional resources should the market, for some reason, not
produce the amount of megawatts needed to meet our projected peak
demand.
______

Response of Nicholas K. Akins to Question From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. Based upon our current large power transformer spare
inventory, and concerted industry attention to the issue of grid
resiliency, we do not see the need for Congressional action at this
time to directly promote manufacturing capacity.
The cycle time for producing a new large power transformer is
typically a year or more. As a result, electric utilities maintain
spare transformers on hand to ensure reliable continued operation based
upon risk assessments. Aside from company specific spare programs, EEI
has developed a Spare Transformer Equipment Program (STEP) to share
spare equipment in event of a declared emergency.
Moreover, the industry is currently working collaboratively on a
new standard for physical security in response to FERC's recent
directive regarding Reliability Standards for Physical Security
Measures. Among the mitigation measures, it is anticipated that
utilities will refresh their strategy and assessments of availability
and placement of spare equipment.
Responses of Nicholas K. Akins to Questions From Senator Murkowski
Question 1. After a power outage, ``blackstart'' power plants are
needed to re-start the grid. How should ``blackstart'' power plants be
treated to ensure reliability?
Answer. AEP believes that black start responsibility is a shared
obligation between the regional transmission organization (RTO) and the
Transmission Owner. The issue of who is ultimately responsible to
provide black start service and how it should be compensated has been,
and still is, being debated throughout the industry. This ongoing
debate has been compounded with the industry retiring (in mid-2015) a
record amount of traditional ``steel in the ground'' generation, much
of which provides black start services.
AEP alone will be retiring approximately 2,000 MWs which provide
black start capability. PJM has issued multiple request for proposal
(RFPs) to replace black start service within the AEP zone and
throughout the PJM footprint and still has areas that are in need of
black start replacement. These retirements (black start and non-black
start) coupled with PJM's capacity market flaws (volatility and
suppressed clearing prices) point to a perfect ``reliability storm''
brewing, especially when extreme weather events like the polar vortex
hit.
Efforts need to continue to focus on ensuring that the PJM black
start tariff compensation is compensatory of the associated risk in
providing this critical service. Additionally, FERC needs to support
PJM and the industry's efforts in ensuring that any capacity market
construct flaws are mitigated. Generator owners need to be able to rely
on a stable market to know when to build, invest or retire a unit.
Absent these measures, additional unplanned ``steel in the ground''
generating units will retire, along with their capability to provide
ancillary services such as black start.
Question 2. You previously indicated in January as a result of the
weather conditions, you ran 89 percent of the coal capacity that is
slated for retirement next year, in order to meet demand. What if we
fast forward two years, and another polar vortex occurred, where will
the power come from to meet the demand and what will it cost?
Answer. If no new generation (or the right mix of generation)
materializes over the next several years, after these units retire it
is quite possible that we could experience rolling blackouts or regular
voltage reductions. PJM has indicated that much of the retired capacity
will be replaced by demand response and new gas units that have cleared
in the capacity auctions. What PJM does not say is that some of the
units that have cleared in the auction for 2015/16 have not made any
significant progress on construction and may ``buy out'' of their
obligation in one of the incremental auctions to be held before the
2015/16 delivery year.
This is substantiated in two reports by the PJM Market Monitor. The
reports show that historically a large percentage of capacity offered
into the base auction bought itself out in the incremental auction.
PJM acknowledges that this speculative bidding is a problem. PJM
recently filed to change some of the incremental auction (Docket ER14-
1461) rules to reduce the amount of speculative bidding taking place.
At this point FERC has not ruled on these proposed changes.
AEP supported the proposed fixes to the incremental auctions.
However even if FERC accepts all of the recommendations, it will not
alleviate the concerns we have about real capacity being available for
the 2015/16 delivery year. For example, 14,000MWs of demand response
cleared the market for 2015/16. Almost all of it was summer only. That
will not help in a polar vortex situation.
Question 3. As investors are planning to replace coal plants with
gas-powered plants, how confident are you that gas pipeline
infrastructure can be placed in service in time to allow new gas plants
to enter service when needed for reliability?
Answer. AEP is concerned. There is a lot to be done within the
industry to ensure we have adequate replacement capacity moving
forward. AEP is concerned that the RTO and gas trading days are not
aligned and that there may not be sufficient pipeline capability, that
is ``steel pipe in the ground'' to meet future needs. FERC has issued a
notice of proposed rulemaking (NOPR) to address the coordination of
scheduling. This is just a start. There is major disagreement between
the electric and gas industry and consensus will be difficult to obtain
on a common set of scheduling procedures.
On April 29 ICF International hosted a webinar discussion where
they agreed with our concerns about gas pipeline infrastructure being
insufficient to meet the future demand of additional gas units. Other
parties, including PJM, argue that the pipeline infrastructure is
sufficient, and it is only the gas/electric trading day that needs to
be fixed.
From a reliability standpoint, any assumptions with regard to
pipeline capability need to err on the side of reliability. We highly
support the discussions between the gas and electric industries with
regard to the trading day and scheduling. But no amount of alignment of
the industries can keep the lights on and the homes heated if there is
not sufficient actual physical capacity available to meet load.
Question 4. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. Yes. Our recent experience with EPA's rulemaking process
has revealed several limitations on the ability to meaningfully
coordinate interagency reviews and properly evaluate potential impacts
on grid stability. We are currently facing imminent deadlines to comply
with stringent new limitations on emissions under the Mercury and Air
Toxics Standards (MATS). These are limitations that will, for certain
units, require substantial capital investments in order to achieve
compliance. There are no alternative compliance options for older units
where there is inadequate time to recover that type of investment. We,
along with many other utilities, will be retiring substantial portions
of our coal-fueled fleet. We have worked closely with Department of
Energy, FERC, NERC, the regional reliability organizations, and our
states, to assure that impacts on grid reliability were considered, and
that mitigation measures will be taken to preserve the stability and
reliability of the grid.
However, at the same time EPA was finalizing MATS, we were also
facing immediate implementation of:

Cross-State Air Pollution Rule (CSAPR)
Revised standards for cooling water intakes under Section
316 (b) of the Clean Water Act
New requirements for coal combustion residuals (CCR)
management under the Solid Waste Disposal Act.

No comprehensive analysis of the potential impacts of these
combined requirements was performed. The GAO and others endorsed the
value of a more formalized process for such evaluations as an aide to
informed rule development. CSAPR was not implemented as scheduled, but
the U.S. Supreme Court has reversed the decision of the D.C. Circuit
which vacated the rule. Neither the 316(b) rule nor the CCR rule has
been issued in final form. These rules and the proposal of New Source
Performance Standard (NSPS) guidelines for existing fossil-fueled
electric generating units and combustion turbines may all have
unintended consequences that could compromise grid stability and
reliability, and should be the subject of careful, coordinated,
comprehensive analyses.
Question 5. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. No. Although we saw a significant price spike in January
due to the polar vortex, it was just that--a price spike. Both the
capacity and energy markets have been extremely volatile over the last
several years. And the prospects going forward do not look any
different. AEP will not commit to building any unit, let alone a
baseload CCS unit, without some very long term economics in place to
assure us that this is a sound investment.
PJM's capacity market does not help with this planning. The
reliability pricing model (RPM) is designed around a one-year clearing
mechanism. Even if a new generator receives sufficient revenues in its
first year of operation, there are no guarantees that this capacity
revenue stream will continue.
The only scenario where new baseload CCS units would be feasible is
if a state regulatory agency allowed full cost recovery in rate base.
PJM has already seen that in certain states in their footprint, and we
may see even more state activity if the reliability of needed gas units
prove insufficient after the 2015 retirements.
Response of Nicholas K. Akins to Question From Senator Barrasso
Question 1. You advocate for the: ``Passage of legislation to
resolve the conflict between the authority of the Department of Energy
and that of the Environmental Protection Agency that could manifest in
the DOE ordering a unit to run even when that unit would violate
environmental requirements.'' You explain that: ``Legislation is needed
to clarify the rules and expedite new construction to ensure that
existing generation will not have to face a choice between violating
the environmental rules and letting the lights go out.'' Would you
please expand upon the importance of passing such legislation?
Answer. As our MATS compliance planning was underway, we
encountered several instances where retiring units could have created
serious reliability concerns unless significant transmission
reinforcement or other actions were undertaken prior to their
retirement. We have been diligently working to ensure that all of these
conditions are fully addressed, and anticipate that AEP's system will
complete the transition without any serious reliability issues.
However, we do not know whether or how EPA will respond to the
recent CSAPR decision, or whether additional de-ratings, changes in
duty, or retirements may be triggered by other actions that have not
been finalized. The 316(b) rule, new effluent limitation guidelines,
coal combustion residual rules, or greenhouse gas requirements could
all potentially impact reliability. It is possible that a regional
transmission operator or regional reliability organization could need
the operation of a unit not in compliance with MATS or these other
requirements due to reliability concerns. Operators should not be faced
with a Hobson's choice of either operating in violation of an
applicable environmental requirement, or compromising grid reliability.
In situations of this nature, legislation should clarify that an
operator, responding to an order by the Department of Energy to operate
a unit for reliability reasons, would be relieved of any liability for
exceeding any applicable environmental limits.
______

Response of Gerry Cauley to Question From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. It is important to acknowledge ongoing government and
industry efforts, and build upon those efforts, while recognizing that
more can be done.
One option to consider would be to allow utilities to recover costs
to procure additional spare transformers, including modular spare
transformers, and to maintain retired transformers as spares. Measures
to determine the appropriate level of additional spares should be based
on ongoing utility and RTO reliability reviews, as well as security
scenarios and assessments assuming concurrent attacks. Participation in
NERC's Grid Security Exercise (GridEx) and Grid Security Conference
provide opportunities for this type of review and assessment, in
addition to individual utility efforts.
With respect to domestic manufacture of transformers, the
Department of Energy (DOE) has undertaken several efforts to encourage
the domestic production of large transformers; further discussion with
the Department about the range of potential incentives, including tax
incentives that may benefit this effort, would be worthwhile. Finally,
government funding of a modular spare transformer reserve would be
helpful. Any effort along these lines would send a clear signal of the
value the government places on spare transformers, which could also
help support cost recovery.
Responses of Gerry Cauley to Questions From Senator Baldwin
Question 1. According to the International Trade Commission, in
2010 the US demand for Large Power Transformers was valued at over $1
billion, and we have an increasing number of manufacturing facilities
able to produce the largest scale transformers. Despite projections
that domestic demand and production capacity are growing we imported
around 500 large power transformers (LPTs) in 2013 alone.
Restoring grid functionality requires the ability to repair and
replace transformers in a short time frame. How are supply chain issues
accounted for when calculating the time and resources necessary to
recover from outages and attacks?
Answer. Replacing high-value equipment that is limited in
availability is addressed in transmission system designs and
engineering plans to increase reliability and resiliency of the grid.
Strategic placement of spare transformers and mutual aid agreements
serve as a safety net in regional and national recovery plans to reduce
long term outages. The time and resources needed for recovery from
severe events, including supply chain factors and logistics of moving
large transformer equipment, are important aspects to establishing
sound recovery plans.
Supply chain issues are primarily addressed through spare equipment
programs at individual utilities and within RTO/ISOs, as well as broad
programs such as NERC's Spare Equipment Database (SED), the Edison
Electric Institute's Spare Transformer Equipment Program (STEP), and
the Department of Homeland Security's Recovery Transformer program.
These are valuable programs that complement individual utility and RTO/
ISO efforts.
Challenges involved in the replacement of high-voltage transformers
were discussed during NERC's GridEx II, held in November 2013.The
extreme challenges posed by the Severe Event scenario provided an
opportunity for participants to discuss how the electricity industry's
mutual aid arrangements and inventories of critical spare equipment may
need to be enhanced. A key lesson learned was to further evaluate and
potentially increase participation in recovery programs like STEP or
SED. This issue is discussed further in the GridEx II report (http://
www.nerc.com/news/Pages/GridEx-II-Report-Highlights-Recommendations,-
Lessons-Learned-from-Grid-Security-Exercise.aspx). These lessons are
being further discussed with the Electricity Sub-sector Coordinating
Council (ESCC).
Question 2. Transformers are a critical and vulnerable part of our
grid. In the discussion about access to spare transformers, we often
hear about two important initiatives: the Edison Electric Institute's
Spare Transformer Equipment Program (STEP), and NERC's Spare Equipment
Database.
Are these planning strategies adequate to ensure stability of the
Bulk Power System in rare high-impact events? What additional tools
would assist NERC, grid managers, and utilities to improve grid
recovery?
Answer. As discussed in response to Question 1, the STEP program
and NERC's SED program are important initiatives to address the
availability of transformers, complementing the inventory of utility
and RTO/ISO spare transformers. Currently, nearly 25 utilities
participate in the SED program, with over 130 large power transformers
representing nearly 29,000 MVA of capacity. Expanding the supply of
spare transformers may benefit from government funding or provisions
for recovering the costs incurred by utilities in procuring and
maintaining spare transformers. While transformer availability is
needed to ensure the stability of the BPS in the event of rare, high-
impact events, as well as improve grid recovery, it is not the only
necessity. Other aspects are addressed in response to Question 3.
Question 3. Low frequency, high-impact events could seriously
impact the Bulk Power System for a long period of time because
transformers take so long to build and a large portion of our supply
comes from abroad.

a) In the event of supply disruptions in the global shipping
system, from geopolitical events, or from other disasters, how
does our current domestic production capacity position us to
respond?
b) What reserve capacity ought we have in order to be able to
respond to a severe grid failure?
c) How does this capacity compare with our current capacity?
d) What domestic production capacity would we need in order
to respond to severe grid failures?

Answer. In 2010, six large power transformer (typically with a
maximum capacity rating greater and or equal to 100 MVA) manufacturing
facilities existed in the United States. According to a DOE study, at
that time, these facilities provided approximately 15 percent of US
demand for transformers.
Since then, domestic production capacity has been improving with
the addition or expansion of several new US-based facilities: (1)
EFACEC transformer plant (Rincon, Georgia, April 2010); (2) the Hyundai
Heavy Industries' facility, opened in Montgomery, Alabama, in November
2011; (3) the SPX Corporation transformer plant expansion, unveiled in
Waukesha, Wisconsin, in April 2012; and (4) the Mitsubishi Electric
Transformer Factory, which began operations in Memphis, Tennessee, in
April 2013.
While global procurement remains a common practice for many
utilities to obtain transformers, the potential impacts of geopolitical
events, global shipping interruptions, and other risks are reduced as
domestic production grows.
NERC has also developed an online spare equipment database to track
the inventory of spare equipment (particularly transformers). This
database will be a helpful industry resource should a high-impact, low-
frequency event result in damaged equipment. Providing information to
the database is voluntary and meant to complement existing transformer
sharing and mutual assistance agreements. The database is populated and
managed by participating organizations bound by a mutual
confidentiality agreement. NERC's initial focus is on high-voltage
transmission and generator step-up transformers, which are vital for
operation of the integrated bulk power system (BPS).
By ``reserve capacity,'' we assume this to mean spare transformer
capacity. Ultimately, the amount of spare transformer capacity deemed
necessary involves a judgment similar to that made in procuring
insurance: How likely is there to be an event that causes ``severe grid
failure,'' and what are the costs that customers are willing to pay to
protect against that event?
DOE, NERC, the Federal Energy Regulatory Commission (FERC), State
commissions, and industry continue to assess the best way to prepare
for and protect against high-impact, low-frequency events. Ultimately,
the necessary amount of domestic production capacity depends on the
severity and duration of a given event and the availability of spare
transformers.
Responses of Gerry Cauley to Questions From Senator Murkowski
Question 1. You testified that ``information sharing through the
ES-ISAC is the greatest asset we have to combat emerging threats to
cybersecurity and help ensure the reliability of the Bulk Power
System.'' Do you believe there are any barriers to information sharing
right now? If so, how can these barriers be overcome?
Answer. As we learned with Aurora, it can take a great deal of time
for industry to be provided actionable threat information from the
government. Government agencies, through communication with the
Electricity Sector Information Sharing and Analysis Center (ES-ISAC),
are increasing their outreach and communication efforts. Forums like
the ESCC and the Energy Government Coordinating Council (EGCC) allow
for more open conversations about barriers and steps needed to remove
them. The ESCC and the EGCC, communicating and coordinating through the
ES-ISAC, are key components to improved information sharing. Another
solution is developing methods and procedures for addressing sensitive
information so that it can be useful and made available to the broad
range of private sector decision-makers who must take action to protect
against the threat or vulnerability. The government should enhance its
approach to sharing the information it has with the very people who are
expected to defend their systems. A key effort would be for government
agencies to identify the ES-ISAC as their primary coordination tool for
the Electricity Sub-sector.
Additional security clearances for industry members are beneficial.
NERC has over 1900 entities on its Compliance Registry, some have just
a few employees and some have many thousands. It is important to be
realistic about the number of clearances that are made available, but
obtaining security clearances for utility personnel remains a
cumbersome process.
Question 2. In your judgment is the grid more or less vulnerable as
a result of the disclosure of non-public critical energy infrastructure
information and the resulting news reports?
Answer. I issued a statement indicating my great concern about the
public discussion of specific vulnerabilities of critical grid assets.
As I mentioned in my statement, articles like that do little to improve
security; rather they jeopardize it. This raises serious national
security concerns and undermines the ongoing work that NERC, industry,
and government are doing.
The government's ability to secure critical grid information is
important for several reasons, including to encourage exchange of
information with industry. Preparing a list identifying critical
locations, itself, creates a risk that such a list will fall into the
wrong hands. If a list is prepared, it should be properly classified.
All federal agencies, including FERC, have the ability to designate
information as Protected Critical Infrastructure Information. Proper
classification should be accompanied by a distribution plan that limits
access to this information to those who need to know or have legitimate
need for this information and are prepared to honor the conditions
imposed on access to that information.
NERC works hard to protect grid-related critical, sensitive, and
classified information. Our ES-ISAC has a secure portal, which protects
the information shared to and from industry. The ES-ISAC abides by a
NERC Board of Trustees approved ``Firewall'' policy and ES-ISAC
personnel use strict controls when working with asset owner
information. Attributable information is treated as confidential and
not shared outside of the ES-ISAC personnel consistent with the NERC
Code of conduct. Because NERC is not a government agency, FOIA is not
applicable.
Question 3. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. NERC has a long practice of undertaking comprehensive
reliability assessments to evaluate current or proposed major
regulatory or legislative changes that could impact reliability of the
BPS and advising policy decision-makers and industry of our
conclusions. NERC continues to stand ready to assist our federal
partners to ensure that the reliability of the grid is properly
considered as regulations are developed.
______

Response of Thad Hill to Question From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. As a power generator, the transformers that Calpine uses at
its power plants are different than the transformers used by
transmission and distribution companies. Calpine has not, in fact,
experienced any kind of shortage for the types of transformers used in
our business. Because of this lack of first-hand experience, this
question is much better directed at a transmission or distribution
company. We would note, however, that Calpine maintains an inventory of
spares to cover the majority our transformer fleet in order to avoid
waiting 7-12 months for a newly ordered replacement to arrive.
Responses of Thad Hill to Questions From Senator Murkowski
Question 1. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. FERC and NERC already have the ability to participate in
EPA's rulemaking processes and Calpine encourages them to do so where
appropriate. However, discretion should be left to those agencies to
determine when it is necessary to participate, and they should not be
subjected to a mandated formal and documented role.
In addition, it is clear that EPA already recognizes the importance
and expertise of FERC and NERC and has demonstrated its willingness to
rely on their advice and counsel when making decisions that could
affect the reliability of the power grid. For example, in December,
2011, EPA issued a policy memorandum regarding how it will handle a
power generator's request for an administrative order authorizing it to
operate in noncompliance with MATS for a one-year period in order to
address a specific reliability concern. In that memorandum, EPA stated
that it will rely on FERC, RTOs, ISOs, Planning Authorities, NERC and
its affiliated regional entities, and state public service commissions
to identify and analyze the reliability risks associated with a power
facility that may be required to retire unless EPA permits the facility
to operate in noncompliance. This type of interaction among all
interested entities should be encouraged, but not mandated.
Question 2. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. No. Based on current forward energy and capacity prices in
different competitive markets throughout the United States, and using
capital expenditure and operational cost estimates for a new coal plant
from EIA, investment in a new coal facility, either with our without
CCS, is not economic at this time.
______

Responses of Colette D. Honorable to Questions From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. It is our opinion that this question would be better posed
to the transformer manufacturers themselves as they would be better
able to articulate the specific proposals necessary for that sector of
the industry. However, in more general terms we would respectfully
request that Congress, should it decide to consider legislation
regarding this issue, carefully consider the costs that would be borne
by the ratepayer depending upon the policy approach. I am presuming
that the equipment contemplated in the question is for bulk power
system substations and facilities. This equipment is extremely
expensive to build, transport and store. As I mentioned in my
testimony, these costs will ultimately be passed on to the end use
consumers through rates. A collaborative process where the transformer
manufacturers, electric utilities (investor, cooperative, municipal),
and State regulators are involved is necessary to explore the policy
options that are available so that we can produce a risk-based process
that uses resources efficiently, thereby holding costs down while
making the system more resilient.
Question 2. At a Bipartisan Policy Center event, you said: ``We
have demonstrated, proven cleaner energy offerings. It would be a shame
not to acknowledge [these solutions].'' What kinds of solutions were
you talking about? Would these ``cleaner'' solutions be good for grid
security?
Answer. This statement comes from an April 7 panel discussion with
Environmental Protection Agency Administrator Gina McCarthy. We
discussed the agency's upcoming proposal to reduce carbon emissions
from existing power plants. My comment reflected the numerous efforts
States have undertaken to promote energy efficiency and renewable
energy well in advance of the EPA proposal. These efforts make clear
the regional and local differences that exist in each of our States.
We've asked EPA to ensure its rules are flexible and account for these
regional differences and the actions already taken. Although NARUC has
no position on the EPA proposal, we believe it should allow States to
use these clean-energy programs in fashioning solutions to the EPA
proposal. These comments were not made in response to the physical
security of the grid.
Responses of Colette D. Honorable to Questions From Senator Murkowski
Question 1a. In your written testimony you discuss how State
Commissions determine who pays, how much they pay, and for what they
are paying. After all, it is the consumer who must pay the electric
bill at the end of the month and, as you noted in your testimony, some
people must decide whether to pay that electric bill or buy medicine
instead.
Is it feasible then to secure every inch of the transmission/
distribution system?
Answer. No, it is not feasible, practical, economical, efficient,
or even possible to secure ``every inch'' of the transmission/
distribution system. We must use a risk-based approach to determine how
and where to deploy the resources that we have at our disposal.
Unfortunately, we will never be able to completely eliminate every
vulnerability. But what we can do is to target our resources based upon
the known risk factors and limit the number (and severity) of
actionable threats that evolve from the known vulnerabilities.
Question 1b. How do you suggest that proposed security upgrades to
the grid should be prioritized to maximize benefits?
Answer. Again, I believe resource allocation ought to be based upon
risk: What/where are the most critical facilities? Are these facilities
sufficiently hardened? Where would a compromised facility do the most
harm to the grid as a whole? Which part of a particular facility, if
compromised, would do the most extended harm? These are just examples
of the questions that the owners and operators of the systems that make
up ``the grid'' are asking, and frankly these owners and operators are
the ones who should know the questions, as well as the answers,
regarding their systems better than anyone. State regulators rely upon
the owners and operators to tell us what is expected for the levels of
resiliency and security that are required. From there, our job is to
determine whether these costs and investments are prudent and in the
public interest.
Question 2. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. NARUC has not taken a position on this specific question,
but personally speaking, yes. Although it may be unusual to include
entities from outside the federal government in the initial rulemaking
process, in the case of reliability/grid stability I would advocate the
inclusion of State utility Commissioners as well.
Question 3. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. Given other market and regulatory pressures, I believe that
it would be difficult to attract investors to new coal generation at
this time, notwithstanding CCS technology levels.
Question 4. In your judgment, is the grid is more or less
vulnerable as a result of the disclosure of non-public critical energy
infrastructure information and the resulting news reports?
Answer. We prefer that this kind of information be kept internally
because we do not know who could use it for nefarious reasons. The
release of sensitive information regarding critical infrastructure at
any level could be exploited. Therefore, the key question is whether
the knowledge of this vulnerability could potentially threaten the
reliability of the grid or one of its component systems. The owners and
operators of the grid expend many resources every time a vulnerability
is disclosed or identified. Some of these vulnerabilities will need
additional resources to ensure that the likelihood of an actionable
threat developing is reduced or eliminated.
______

Response of James L. Hunter to Question From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. The U.S. has lost most of its capability to manufacture
large power transformers over the last 30 years. Congress needs to help
the revitalization of the industry by adding the ``Made in America
Provision'' to any transformers purchased by the Federal Government.
The IBEW represents several U.S. transformer manufactures and we
believe that any action by Congress that supports and strengthens the
United States capability to produce our own equipment is vital to our
economy, job growth and most importantly, the creation and maintenance
of grid security. Second, being that the industry has many different
voltages and configurations of transformers, a wise approach would be
that our government manufactures specifically designed units that can
be designed in several different configurations in order to be placed
anywhere at any given time when eventually needed. If we rely on
foreign manufacturing, we will be leaving our systems extremely
vulnerable to extended outages by having long transport times and
possible security issues, not to mention taking away jobs from our
citizens. It should be noted that many of our existing transformers are
already beyond their useful life expectancy. EPRI has done some
research in this area and have issued reports that summarize the age of
the units. We believe it is likely that once we start losing
transformers due to catastrophic failures we could lose several within
a short period of time. This issue should be studied and minimum levels
of replacement transformers should be built and made available to the
industry.
Responses of James L. Hunter to Questions From Senator Murkowski
Question 1. Thank you for providing an important perspective to the
grid reliability debate. Your testimony outlines how over 50,000 direct
jobs would be lost if there are 56 gigawatts of closings. Please
elaborate on the jobs that will be lost, and the salaries that are
associated with these positions.
Answer. I am attaching our analysis of job losses and the
background information (see Analysis of units at risk EPA MATS Rule 2).
I am also attaching an average IBEW wage for power plants workers that
conservatively place the average wage at $72,552 per year.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Question 2. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. Yes. EPA's role is to look at pollution not reliability of
the electric system. NERC and FERC have the responsibility for
reliability but not pollution. It only makes sense that both groups
need to coordinate their areas of responsibility so that we can reduce
pollution while not causing massive outages of large price spikes.
Question 3. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. In my testimony I spoke about the market as it exists
today. The market is not providing adequate price signals to our
existing base load plants. When we have nuclear plants that run 24/7
for an entire year and lose money, it would seem obvious that the
market is flawed. The price of electricity on the market is not
sufficient to incentivize building gas plants let alone coal with CCS.
EPA estimates show an 80% increase in the price of a coal plant when
you add CCS.
______

Response of Sue Kelly to Question From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. To date, including as a result of hurricanes such as Sandy
and Katrina, or man-made events such as the 2013 Metcalf substation
attack, the industry has not experienced an insurmountable shortage in
transformer supply. The utility industry has concentrated on resiliency
for decades, and a variety of transformer replacement strategies are
employed throughout the United States. Redundancy of units at
individual utilities, contractual, legally binding transformer sharing
agreement programs such as the Edison Electric Institute's STEP
program, transformer databases such as NERC's Spare Equipment Database,
or other web-based programs, are employed to ensure transformers are
available in the event of an emergency. Furthermore, many public power
utilities have the capability to request and receive spare transformers
from other utilities, using resources provided by APPA, if needed.
However, given that some manufacturers have chosen to build large
transformer units outside of the U.S., Congress could consider
incentives for increased production of such units within the U.S.
APPA is also encouraged by the work being done by the Department of
Homeland Security, the Electric Power Research Institute, and others on
the Recovery Transformer (RecX) project. This program is dedicated to
developing a recovery transformer that will allow for more speedy
replacement and deployment of transformers and quicker recovery and
restoration of electrical power.
Responses of Sue Kelly to Questions From Senator Murkowski
Question 1. In your judgment is the grid more or less vulnerable as
a result of the disclosure of non-public critical energy infrastructure
information and the resulting news reports?
Answer. The specificity of the information and the diagrams that
appeared in some of the press reports following the Metcalf substation
attack were very troubling. Should would-be attackers take interest in
these reports and disclosures, they could potentially be used as
inspiration or fodder for ``copycat'' attacks.
DOE's General Counsel has noted that some of the information that
was apparently disclosed should have been classified and protected
appropriately. APPA believes that FERC will act to address these
disclosures promptly and to prevent future disclosures. However, this
episode underscores the need for Congress to clarify roles and
responsibilities involving sensitive or classified information related
to critical infrastructure.
Question 2. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. APPA believes the Federal Energy Regulatory Commission
(FERC) and North American Electric Reliability Corporation (NERC)
should have a formal and documented role in all Environmental
Protection Agency (EPA) rulemakings that could impact electric
reliability. The electric utility industry is facing numerous EPA
regulations that have been recently finalized, are proposed, or are
expected to be proposed in the near future, including the Mercury and
Air Toxics Standards, coal ash management and disposal, New Source
Performance Standards for greenhouse gas emissions from new and
existing power plants, and cooling water intake structures (316(b)),
among others. Individually, these major regulations are likely to cost
the electric utility industry billions of dollars--a significant
challenge in and of itself. Combined, they will impose unprecedented
cost and management challenges and lead to the retirement of
significant numbers of coal-fired power plants. EPA is imposing these
regulations without any statutory requirement to assess the cumulative
impact of these rules on the industry, electricity prices, and/or the
economy.
Given the impact that EPA's regulations could potentially have on
electric reliability due to plant retirements, shutdowns for retrofits,
and shifting resource portfolios, FERC and NERC should have a formal
role in these rulemakings. Both organizations work closely with the
electric industry to ensure electric reliability and should share their
subject matter expertise on the operation of the electric grid. EPA
lacks this knowledge and should be required to formally work with FERC
and NERC to evaluate how its rules could impact reliability before they
are proposed, as well as the cumulative impact of existing rules with
ones expected to be finalized in the next five years. Informal
interagency communications are insufficient to satisfy this role.
Congress should consider enacting legislation that would require the
EPA to consult with FERC and NERC on its regulations for the electric
utility industry, and would also require the agency to assess the
cumulative impacts of these rules.
Question 3. Do you believe market prices for energy and capacity
are sufficient at this time to attract investors to invest their
capital in a new coal facility even though EPA standards would require
the use of CCS technology that is not commercially viable?
Answer. There are two issues raised in this question. The first is
whether it is possible to attract investors to a new coal plant
required to use CCS. Regardless of the market prices or regulatory
regime, it will be nearly impossible to finance a new coal plant under
the CCS requirement. It is unlikely that the current CCS projects
serving as the basis for EPA's decision to mandate CCS will be
commercially viable soon, given the myriad of financial, technical and
regulatory hurdles impeding the sequestration of CO2 in the country.
Moreover, all of these projects are tied to enhanced oil and gas
recovery, which will not be an option for most new coal-fired power
plant locations. Therefore, by inappropriately mandating CCS, EPA's re-
proposed rule effectively precludes coal as a resource for new
electricity generation.
An example of the difficulties of using CCS is illustrated by the
Kemper County Energy facility, a coal plant under construction by
Southern Company that will incorporate coal gasification and carbon
capture. The Kemper facility is currently estimated to cost $5.5
billion. It has been subject to frequent delays and cost overruns. As
the Wall Street Journal reported on April 29, total shareholder losses
from the plant so far total about $1.6 billion and Southern Company
recently announced that because the coal gasifier will not be in
working condition this year, it will have to forfeit federal tax
benefits valued at between $120 million to $150 million.
There is another important issue raised by this question, however--
whether needed new generation resources of any type can be financed
given current electricity (energy and capacity) prices. Given the high
levels of expected coal plant retirements and the inability to build
new coal plants with CCS, other resources will certainly be needed. But
the ability to finance such resources largely depends upon the
wholesale and retail electricity market structure in the affected
region. Where the wholesale electricity markets have been restructured
and are operated by Regional Transmission Organizations (RTOs) or
Independent System Operators (ISOs), collectively referred to as RTOs,
such financing will be difficult. Securing financing will be
particularly difficult in those states that have implemented retail
access legislation.
In retail access states within RTO regions, investor-owned
utilities generally cannot own generation resources. Hence most new
central station generating capacity is built by merchant owners, which
determine whether to build based upon expected revenues from the RTO-
operated capacity and energy markets. But the prices in these markets
are highly volatile and do not necessarily reflect the costs of
constructing a new plant. Many plants over-recover their costs in some
years and under-recover them in others, and there is very substantial
price volatility in both energy and capacity markets. Even in years
when energy and capacity prices rise to a sufficient level for a new
plant to recover its costs in the short-term, those clearing prices are
earned by all power plants clearing the energy or capacity auctions,
regardless of their actual costs. Therefore, consumers pay not only for
the new plant, but also for windfall earnings for lower-cost existing
plants. Moreover, it would still be difficult for a new plant to
attract investors because of the dramatic volatility of prices in these
markets. A number of banks have publicly stated that they cannot lend
to a new generation facility based on a highly volatile revenue stream.
Instead, they require the stable revenue provided by a long-term
contract of at least 15 years, or by direct utility ownership (self-
supply).
For non-merchant power plant owners within retail access states,
primarily public power and cooperative utilities, the capacity markets
themselves directly impede contracting for or ownership of new
facilities. The PJM Interconnection, the New York ISO and ISO New
England all have what are known as ``mandatory'' capacity markets. In
these markets, entities such as public power utilities cannot build or
contract for new resources without such resources first clearing the
RTO-run mandatory capacity auctions. Under rules approved by the
Federal Energy Regulatory Commission, new resources within these
mandatory capacity markets must offer into the auctions under
restrictive minimum pricing rules, potentially preventing such
resources from clearing the auctions. This raises the risk that public
power utilities and their consumers may have to pay twice--once for the
resource and a second time to purchase capacity from the market because
their own resources have not ``cleared.'' Such regulatory uncertainty
further exacerbates the difficulty of financing new resources.
In a state or region where the utilities are vertically integrated,
the cost of a new resource can be recovered from the regulated rates
charged to a utility's customers, subject to either state commission or
local governing authority approval. Such rates cover only the cost of
the new plant. Investors would likely be more willing to lend money at
a reasonable interest rate for such projects, because the cost recovery
would be guaranteed, and in the case of a public power utility, the
plant could be financed at a lower cost through the use of tax-exempt
bonds.
______

Responses of Cheryl A. LaFleur to Questions From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Answer. I agree that the adequacy of transformer supply is
important to the resiliency of the electric grid. In considering action
with respect to that issue, Congress may wish to examine potential
security and economic benefits of increased domestic capacity to
manufacture transformers, as well as whether such benefits warrant
additional Federal support. Such additional support could include
direct financial assistance from the Department of Energy and tax
incentives to promote increased transformer manufacturing and
inventories.
With respect to transformer manufacturing in general, I note that
DOE recently updated its 2012 study of transformer manufacturing and
inventory issues.\1\ DOE reports that, in 2010, domestic manufacturers
met approximately 15 percent of the Nation's demand for transformers
greater than or equal to 60 megavolt-amperes (MVA), and that domestic
production may have been even less for extra-high voltage transformers
at or above 345 kilovolts. However, DOE reports that, since 2010,
manufacturers have added or expanded four domestic facilities for large
power transformers (LPTs). DOE states that LPT imports peaked in 2009
at 610 units valued at more than a billion dollars, and that imports in
2013 remained relatively high, with 496 units totaling $676 million.
---------------------------------------------------------------------------
\1\ http://energy.gov/sites/prod/files/2014/04/f15/LPTStudyUpdate-
040914.pdf
---------------------------------------------------------------------------
In addressing supply chain and appropriate inventory levels, it is
important to have a clear understanding of which assets are the most
critical in terms of how their loss would impact operation of the bulk
power system. The version of cybersecurity reliability standards
recently approved by FERC (CIP version 5) expressly requires utilities
to determine the criticality of cyber assets and tailor protections
accordingly. The FERC directive that NERC develop a physical security
standard also requires identification of the most critical facilities.
Finally, FERC's final rule on geomagnetic disturbance standards also
required identification of the assets most important to protect and
explicitly identified inventory management as a possible mitigation
strategy to be used under the standards.
Question 2a. You have stated that, ``Congress should consider
designating a federal department or agency. . .with clear and direct
authority to require actions in the event of an emergency involving a
physical or cyber threat to the bulk power system.''
Is there no one who has the authority to direct the agencies
involved to take action?
Answer. Currently there is no Federal agency with the express and
comprehensive authority to direct the industry to take action in the
event of an emergency involving a physical or cyber threat to the bulk
power system. The Department of Energy has authority under section
202(c) of the Federal Power Act (FPA) to require temporary connections
of facilities, and generation, delivery, interchange, or transmission
of electricity in certain emergency circumstances (including war or
shortages of electric energy or facilities). I believe that this
authority is not well-suited to proactively address an imminent
physical or cyber threat to the bulk power system.
Question 2b. Currently, how is a response coordinated?
Answer. DOE is the energy sector specific agency in these types of
situations. As such, DOE receives reports from industry and shares
alerts with other government agencies. Additionally, the North American
Electric Reliability Corporation (NERC) is the Electricity Sector
Information Sharing and Analysis Center. In this role, NERC collects
threat information from industry, collaborates with government
agencies, and issues alerts and advisories to help industry respond to
adverse conditions and events.
In addition, industry and the government officials at many levels
participate in exercises to practice coordinating responses to major
power system events. For example, Grid Ex II was a two-day exercise,
coordinated by NERC, to evaluate the readiness of government and
industry to respond to a coordinated cyber and physical attack against
the power infrastructure and to provide suggestions for improvement.
The exercise specifically focused on formalizing paths for information
sharing and the roles of participants in the event of an emergency.
Over 234 organizations from both private and government sectors,
including FERC staff, participated in the exercise, which demonstrated
industry's and government's commitment to this effort.
Question 2c. What could be improved if a single actor were the
designated with the authority to be ``Chief Responder''?
Answer. Providing clear authority to one Federal agency to require
actions in the event of an emergency involving a physical or cyber
threat to the bulk power system would allow the Federal government to
take action more quickly once a threat was known, perhaps even before
an incident has occurred. In addition, establishing such authority
would provide affected entities and relevant agencies with a single
point of contact after an incident, which would promote efficient
preparation and response coordination.
Question 3. You have recommended a targeted exemption from the
Freedom of Information Act, in order to improve FERC and NERC's ability
to coordinate with outside parties about threat information.
Can you give us an example of how a targeted FOIA exemption could
improve our ability to protect the grid?
Answer. A targeted exemption from the Freedom of Information Act
(FOIA) would help FERC, NERC, and industry more effectively coordinate
and exchange information regarding potential threats. At present, such
coordination and information exchange may be chilled by concerns that
sensitive energy infrastructure security information provided to FERC
could be subject to disclosure under FOIA. In addition, a targeted
exemption from FOIA could reduce the risk that sensitive information
shared by FERC with industry on potential security risks or
vulnerabilities could be subject to disclosure under FOIA, thereby
revealing information that could be used to harm the grid.
Responses of Cheryl A. LaFleur to Questions From Senator Baldwin
Question 1. According to the International Trade Commission, in
2010 the US demand for Large Power Transformers was valued at over $1
billion, and we have an increasing number of manufacturing facilities
able to produce the largest scale transformers. Despite projections
that domestic demand and production capacity are growing we imported
around 500 large power transformers (LPTs) in 2013 alone.
Restoring grid functionality requires the ability to repair and
replace transformers in a short time frame. How are supply chain issues
accounted for when calculating the time and resources necessary to
recover from outages and attacks?
Answer. Planning for availability of long lead-time items is an
important part of companies' reliability and recovery plans. Each
utility develops those plans based on its system configuration,
regional needs, and reliability standards.
FERC's reliability standards under FPA section 215 govern
reliability performance; in general, each utility must determine the
actions it will take to meet the required level of performance.
Maintaining adequate inventory of parts is one way in which utilities
manage their operations in order to meet their performance obligations.
Question 2. Transformers are a critical and vulnerable part of our
grid. In the discussion about access to spare transformers, we often
hear about two important initiatives: the Edison Electric Institute's
Spare Transformer Equipment Program (STEP), and NERC's Spare Equipment
Database.
Are these planning strategies adequate to ensure stability of the
Bulk Power System in rare high-impact events? What additional tools
would assist NERC, grid managers, and utilities to improve grid
recovery?
Answer. The Edison Electric Institute's STEP program and NERC's
Spare Equipment database program are valuable voluntary initiatives
that promote readiness and flexibility within the industry. I believe,
however, that more can and should be done to alleviate possible
limitations of these programs. For example, the STEP program is based
on the aggregated needs of the voltage class, and the number of
transformers maintained across a voltage class is calculated to provide
sufficient spares to restore service to a Participating Utility whose
transformers are disabled. As such, the ability of this program to
provide adequate resources to multiple Participating Utilities in the
event of an extreme event is unclear. As discussed in my response to
your next question, Federal agencies are exploring what further steps
can be taken to build on this foundation. Congress also could promote
increased availability of spare transformers through a variety of
means, such as direct financial assistance from the Department of
Energy and tax incentives to promote increased transformer
manufacturing and inventories.
Question 3. Low frequency, high-impact events could seriously
impact the Bulk Power System for a long period of time because
transformers take so long to build and a large portion of our supply
comes from abroad.

a) In the event of supply disruptions in the global shipping
system, from geopolitical events, or from other disasters, how
does our current domestic production capacity position us to
respond?

Answer. I agree that the adequacy of transformer supply is
important to the resiliency of the electric grid. In considering action
with respect to that issue, Congress may wish to examine potential
security and economic benefits of increased domestic capacity to
manufacture transformers, as well as whether such benefits warrant
additional Federal support. It is important to note, however, that the
response to supply disruptions is not necessarily a matter of whether
the transformers are produced domestically or internationally, but more
generally is a matter of the available inventory.
With respect to domestic transformer manufacturing, DOE recently
updated its 2012 study of transformer manufacturing and inventory
issues.\2\
---------------------------------------------------------------------------
\2\ http://energy.gov/sites/prod/files/2014/04/f15/LPTStudyUpdate-
040914.pdf
---------------------------------------------------------------------------
DOE reports that, in 2010, domestic manufacturers met approximately
15 percent of the Nation's demand for transformers greater than or
equal to 60 megavolt-amperes (MVA), and that domestic production may
have been even less for extra-high voltage transformers at or above 345
kilovolts. However, DOE reports that, since 2010, manufacturers have
added or expanded four domestic facilities for large power transformers
(LPTs). DOE states that LPT imports peaked in 2009 at 610 units valued
at more than a billion dollars, and that imports in 2013 remained
relatively high, with 496 units totaling $676 million.
In addressing supply chain and appropriate inventory levels, it is
important to have a clear understanding of which assets are the most
critical in terms of how their loss would impact operation of the bulk
power system. The version of cybersecurity reliability standards
recently approved by FERC (CIP version 5) expressly requires utilities
to determine the criticality of cyber assets and tailor protections
accordingly. The FERC directive that NERC develop a physical security
standard also requires identification of the most critical facilities.
Finally, FERC's final rule on geomagnetic disturbance standards also
required identification of the assets most important to protect and
explicitly identified inventory management as a possible mitigation
strategy to be used under the standards.

b) What reserve capacity ought we have in order to be able to
respond to a severe grid failure?
c) How does this capacity compare with our current capacity?
d) What domestic production capacity would we need in order
to respond to severe grid failures?

Answers. b-d: I do not have the necessary information to respond to
these questions in detail. In general, the amount of reserve capacity
needed to address a ``severe grid failure'' depends on the severity of
the circumstances anticipated. In sufficiently severe circumstances,
the short-term need for transformers could exceed available inventory
and domestic production capacity.
As discussed in the response to the previous question, FERC has
issued rules requiring jurisdictional entities to determine their most
critical facilities with respect to physical and cyber security and
geomagnetic disturbances. A goal of these actions is to prioritize grid
security efforts on facilities that, if damaged or destroyed, could
cause blackouts or similar disruptions of electricity supply.
Responses of Cheryl A. LaFleur to Questions From Senator Murkowski
Question 1. I commend you for observing that ``the publication of
sensitive information about the grid undermines the careful work done
by professionals who dedicate their careers to providing the American
peoples with a reliability grid.'' How might we strengthen the culture
that supports the work of these professionals now that the damage is
done?
Answer. As I stated at the April 10, 2014 hearing, I believe that
our actions should be guided by two things. First, we should be guided
by protecting the reliability and security of the grid for customers--
through both our formal actions, such as orders and rulemakings, and
our informal actions, such as speeches and outreach. Second, we must
maintain FERC's integrity so people can have confidence in the
Commission and in the security of information shared with us.
I believe that one important component of that perspective is
leading a culture that respects the security of information. FERC
carefully guards confidential information in our dockets, such as
upcoming action on a merger application or other matters with
potentially significant economic consequences.
However, we certainly can learn from recent events. I believe that
culture starts at the top, and the culture of respect for the security
of information must start at the top, as well. I have personally asked
the Department of Energy's Inspector General to provide recommendations
on ways in which FERC can improve its approach to information security,
and I look forward to receiving his advice.
Question 2. Do you agree with GAO that NERC and FERC should have a
formal and documented role in EPA's rulemaking process when EPA is
developing regulations that impact grid stability?
Answer. FERC's formal role in reviewing EPA rules is during the
Office of Management and Budget interagency review process. I believe
it is also valuable for FERC and NERC to have an informal role in EPA's
rule development. The GAO Report recommended that FERC, DOE and the EPA
develop and document a formal, joint process to monitor industry's
progress in responding to recent EPA regulations that address air
pollution, disposal of coal combustion residuals, and water withdrawal
for use for cooling at certain electricity generating units until at
least 2017. I agree that FERC should be involved in monitoring
industry's progress in responding to rules that potentially impact
electric reliability, and helping assure that energy infrastructure and
markets support environmental compliance.
I note that in issuing its Mercury and Air Toxins Standards (MATS)
rule, the EPA did include a formal role for both FERC and NERC in
identifying reliability risks. In a Policy Memorandum that EPA issued
concurrently with the MATS rule, EPA stated that it would rely on
advice and counsel of reliability experts, including, among others,
FERC and NERC, for identification and/or analysis of reliability risks.
The Policy Memorandum described its intended approach of using
Administrative Orders to address sources that must operate in
noncompliance with the MATS for up to an additional year to address a
specific and documented reliability concern (i.e., for a total of five
years).
Response of Cheryl A. LaFleur to Question From Senator Barrasso
Question 1. On November 7, 2013, I wrote then Chairman Jon
Wellinghoff expressing my concern about his decision to remain Chairman
of FERC following his acceptance of employment at the law firm, Stoel
Rives, L.L.P.
In my letter, I explained that it was unclear whether Chairman
Wellinghoff had recused himself or would recuse himself from FERC
actions, such as rulemakings, which apply generally. I noted that, as
Chairman, he would be in an ideal position to influence such actions as
rulemakings for the benefit of specific parties or sectors. I requested
that Chairman Wellinghoff explain, in detail, all the matters from
which he had recused himself or would recuse himself as well as his
reasoning for not recusing himself from any matters that would affect
Stoel Rives' current or future clients.
On November 21st, Chairman Wellinghoff responded to my letter
indicating that he had recused himself ``from all matters having a
direct and predictable effect on the financial interests of Stoel
Rives'' including ``any matter having a direct and predictable effect
on the financial interests of the firm's clients if they are actually
represented by Stoel Rives as to such matters before the Commission.''
I interpreted Chairman Wellinghoff's response to my letter to mean
that he participated in FERC rulemakings (and other FERC actions which
apply generally) throughout his tenure as Chairman which ended on
November 24, 2013.
Would FERC confirm for the record that Chairman Wellinghoff did not
recuse himself from FERC rulemakings (and other FERC actions which
apply generally) after entering into employment discussions with Stoel
Rives on July 3, 2013?
If Chairman Wellinghoff did recuse himself from FERC rulemakings
(and other FERC actions which apply generally) on or after July 3,
2013, please describe the full extent of his recusal.
Answer. The Commission's Designated Agency Ethics Official (DAEO)
has informed me that that former Chairman Wellinghoff: (1) recused
himself from all matters having a direct and predicable effect on the
financial interests of Stoel Rives during the time period in question;
and (2) did not recuse himself from any rulemakings during that time
period because Stoel Rives did not represent any commenters or submit
any comments in any rulemakings during that time period.
Responses of Cheryl A. LaFleur to Questions From Senator Scott
Question 1. Can you please provide an update as to where in the
process the Commission is on the relicensing application for the
Catawba-Wateree Hydro facility in South Carolina?
Answer. The Commission cannot act on the license application
without a water quality certification from the state of South Carolina,
which it has not yet received. Pursuant to section 401(a) of the Clean
Water Act,\3\ the Commission cannot issue a license for a project, such
as the Catawba-Wateree project, that may result in a discharge into the
navigable waters of the United States unless the state or states in
which a discharge originates has either issued a water quality
certification that the discharge will comply with specified portions of
the act or has waived certification.
---------------------------------------------------------------------------
\3\ 33 U.S.C. Sec. 1341(a) (2012).
---------------------------------------------------------------------------
The most recent Commission action on the project was an April 17,
2014, denial of a Duke Energy petition asking that the Commission deem
water quality certification by the State of South Carolina waived. In
that order, the Commission determined that South Carolina had timely
acted on Duke Energy's water quality certification, and that it had
ultimately denied certification by written order on August 6, 2009.\4\
---------------------------------------------------------------------------
\4\ Duke Energy Carolinas, LLC, 147 FERC Sec. 61,037.
---------------------------------------------------------------------------
Question 2. Do you expect the Commission to act on this application
any time soon? If yes, can you provide a timeline?
Answer. Once it receives the required water quality certification,
the Commission will have all information necessary to act on the
application. Currently, Duke Energy is pursuing remedies at the state
level regarding the water quality certification issue. On January 13,
2013, Duke Energy filed a petition for rehearing of a South Carolina
Court of Appeals opinion that held the state had not waived the
certification. That petition is pending. Consequently, it is uncertain
as to when a valid water quality certification will be issued for the
project and when Commission will be able to act on the relicense
application.
______

[A response to the following question was not received at
the time the hearing went to press:]

Question for Cheryl L. Roberto From Senator Cantwell
Question 1. A shortage of transformers has been identified as a
resiliency problem for the grid. What options should Congress consider
to promote the manufacture of transformers?
Appendix II

Additional Material Submitted for the Record

----------

Statement of the American Wind Energy Association
Thank you for the opportunity to provide written comments for the
record. We would like to explain how wind energy is making important
contributions to electric reliability today, and also respond to some
of the concerns that were expressed in the testimony at the April 10,
2014, hearing.
Grid operators are reliably integrating large amounts of wind
energy today

U.S. wind energy provides enough electricity to power the
equivalent of over 15 million homes. Iowa and South Dakota
produced more than 25% of their electricity from wind last
year, with a total of nine states above 12% and 17 states at
more than 5%. At times, wind has supplied more than 60% of the
electricity on the main utility system in Colorado without any
reliability problems.
More than a dozen utility and independent grid operator
studies have found wind can reliably provide an even larger
share of our electricity. PJM just studied the impacts of
increasing its use of wind energy by a factor of 15, and found
the ``PJM system, with adequate transmission and ancillary
services in the form of Regulation, will not have any
significant issue absorbing the higher levels of renewable
energy penetration considered in the study.''\1\
---------------------------------------------------------------------------
\1\ http://www.pjm.com//media/committees-groups/committees/mic/
20140303/20140303-pjm-pris-final-project-review.ashx, page 12
---------------------------------------------------------------------------
The ERCOT (Texas) and MISO (Upper Midwest) grid operators
each reliably accommodate more than 10,000 MW of wind energy on
their power systems. ERCOT has found that amount of wind is
reliably accommodated with less than 100 MW of additional fast-
acting reserves,\2\ while MISO explains that the incremental
need for those reserves due to wind is ``little to none.''\3\
---------------------------------------------------------------------------
\2\ http://variablegen.org/wp-content/uploads/2012/12/Maggio-
Reserve_Calculation_Methodology_Discussion.pdf
\3\ http://variablegen.org/wp-content/uploads/2012/12/Navid-
Reserve_Calculation.pdf
---------------------------------------------------------------------------
By a large margin, the most expensive challenge for grid
operators is accommodating the abrupt failures of large
conventional power plants. PJM currently holds 3,350 MW of
expensive, fast-acting reserves 24/7 in case a large fossil or
nuclear power plant unexpectedly breaks down. For comparison,
PJM's renewable study found that adding 28,000 MW of wind would
only increase the need for fast-acting reserves by 340 MW.\4\
In addition, the largest hourly changes in electricity demand
are 10 times larger than the largest hourly changes in wind
energy output for PJM.\5\
---------------------------------------------------------------------------
\4\ http://www.pjm.com//media/committees-groups/committees/mic/
20140303/20140303-pjm-pris-final-project-review.ashx, page 111
\5\ http://www.pjm.com//media/committees-groups/task-forces/irtf/
20130417/20130417-item-05-wind-report.ashx, and http://www.pjm.com/
markets-and-operations/energy/real-time/loadhryr.aspx

During this winter's cold snaps, wind energy provided large amounts
---------------------------------------------------------------------------
of very valuable power when grid operators needed it most.

Early on January 6, the Nebraska Public Power District met
record winter electricity demand with wind providing about 13%
of its electricity. The utility explained that ``Nebraskans
benefit from NPPD's diverse portfolio of generating resources.
Using a combination of fuels means we deliver electricity using
the lowest cost resources while maintaining high reliability
for our customers.'' The utility also noted that ``NPPD did not
operate its natural gas generation because the fuel costs were
up more than 300 percent over typical prices.''\6\
---------------------------------------------------------------------------
\6\ http://www.nppd.com/2014/nebraska-customers-set-time-winter-
peak-nppd/
---------------------------------------------------------------------------
Later that day, PJM's wind output was around 3,000 MW when
the grid operator faced challenges due to the unexpected
failure of 20% of its conventional generation across all fuel
types.\7\
---------------------------------------------------------------------------
\7\ http://www.pjm.com//media/documents/reports/20140113-pjm-
response-to-data-request-for-january%202014-weather-events.ashx
---------------------------------------------------------------------------
On January 7, wind output was very high when the New York
grid operator faced record winter demand.\8\
---------------------------------------------------------------------------
\8\ http://www.nyiso.com/public/webdocs/media_room/press_releases/
2014/
NYISO%20-%20 Frigid%20Temperatures%20from%20
Polar%20Vortex%20Drive%20Record%20 Winter%20Demand%20-%2001_09_14%20-
%20FINAL.pdf
---------------------------------------------------------------------------
On January 22 and 23, PJM electricity and natural gas prices
skyrocketed to 10-50 times normal due to extreme cold. Wind
output was again above 3,000 MW, saving consumers millions.
As ``a shortage of natural gas triggered by extreme cold
weather'' affected California on February 6, wind energy
provided the state with around 2,000 MW at the time of peak
demand, with wind output above 2,500 MW for most of the rest of
the evening.\9\ The state grid operator noted that this wind
output allowed it to avoid calling an energy emergency
alert.\10\
---------------------------------------------------------------------------
\9\ http://www.caiso.com/Documents/ISOissuesStatewideFlexAlert.pdf
\10\ SNL Energy article, Christine Cordner, ``CAISO: Wind, demand
response helped avoid February emergency alert,'' March 21, 2014

These events illustrate that all energy sources experience
failures, so a diverse mix of resources is critical for reliability.
Thanks to its zero fuel cost, wind energy is uniquely well-positioned
to protect consumers from energy price spikes.
Wind energy helps ensure a reliable and risk-averse energy mix

Thanks to wind turbines' sophisticated power electronics,
they provide many electric reliability services as well as or
better than conventional power plants.\11\ Xcel Energy
sometimes uses its wind plants' exceedingly fast response to
meet its total system need for dispatchable resources.\12\
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\11\ http://www.nerc.com/files/ivgtf_report_041609.pdf, page 17
\12\ http://www.nrel.gov/electricity/transmission/pdfs/
wind_workshop2_13bartlett.pdf, http://www.nrel.gov/news/press/2014/
7301.html
---------------------------------------------------------------------------
Wind energy directly displaces the most expensive power
plants, saving consumers money and protecting against fuel
price increases. A May 2013 Synapse Energy Economics report
found that doubling the use of wind energy in the PJM states
would save consumers $6.9 billion per year.\13\
---------------------------------------------------------------------------
\13\ http://cleanenergytransmission.org/library/detail.php?id=178
---------------------------------------------------------------------------
responses to witness testimony at the hearing on april 10, 2014
We would like to first respond to the claim in Mr. Hill's testimony
that the renewable production tax credit is significantly affecting the
economics of other generators. In reality, the renewable Production Tax
Credit is almost never factored into the electricity market prices that
other power plants receive, any instances of negative prices are
extremely rare, isolated to remote pockets of the grid where they have
little to impact on other power plants, and regardless instances of
negative prices are being eliminated anyway. For more information on
this topic, please see the appended AWEA report and one-page fact sheet
that were released last month.
We would also like to respond to Mr. Cauley's concerns about the
provision of essential reliability services in a future with an
extremely large amount of renewable energy. Wind plant technology has
matured significantly over the last decade so that modern wind turbines
can provide many power system reliability needs as well as or better
than conventional power plants. As explained by NERC, modern wind
turbines ``may provide voltage regulation and reactive power control
capabilities comparable to that of conventional generation.''\14\ Wind
plants meet a higher standard and far exceed the ability of
conventional power plants to ``ride-through'' power system
disturbances, which is essential for maintaining reliability when large
conventional power plants break down.\15\
---------------------------------------------------------------------------
\14\ NERC, ``Accommodating High Levels of Variable Generation,''
April 2009, available at http://www.nerc.com/docs/pc/ivgtf/
IVGTF_Report_041609.pdf, page 22
\15\ http://www.ferc.gov/whats-new/comm-meet/052505/E-1.pdf
---------------------------------------------------------------------------
All modern wind turbines have sophisticated power electronics that
allow the turbine to provide significant voltage and reactive power
control at all times, even when the wind turbine is not producing
electricity. As compellingly illustrated by the actual power system
data\16\ presented in the chart below, wind turbines can significantly
improve power system voltage stability, indicated by the fact that
power system voltage is much better regulated when wind turbine
generators (WTGs) are online than when they are not.
---------------------------------------------------------------------------
\16\ Miller, N., GE Presentation, June 2008
---------------------------------------------------------------------------
Recent analysis by WECC, the entity responsible for power system
reliability in the Western U.S., found that in a scenario with very
high renewable penetration across the West, ``the system results did
not identify any adverse impacts due to the lower system inertia or
differently stressed paths due to the higher penetration of variable
generation resources.''\17\ Analysis conducted for the California grid
operator identified no major concerns for frequency response in a
transition to a high renewable future, finding that ``None of the
credible conditions examined, even cases with significantly high levels
of wind and solar generation (up to 50% penetration in California),
resulted in under-frequency load shedding (ULFS) or other stability
problems.''\18\ Adding wind generation can increase total power system
frequency response by causing conventional power plants to have their
output reduced, which provides them with more range to increase their
output and provide frequency response.\19\
---------------------------------------------------------------------------
\17\ Available at http://www.wecc.biz/committees/
StandingCommittees/PCC/RS/RPEWG%20-%20RS%20Meetings8-21-13/Lists/
Minutes/1/VGSStudy7-15-13.doc
\18\ Available at http://www.caiso.com/Documents/Report-
FrequencyResponseStudy.pdf
\19\ http://web.mit.edu/windenergy/windweek/Presentations/
GE%20Impact%20of%20Frequency%20Responsive%20Wind%
20Plant%20Controls%20Pres%20and%20Paper.pdf
---------------------------------------------------------------------------
In addition, new techniques employing wind plants' sophisticated
controls and power electronics enable wind plants themselves to provide
fast-acting frequency response. The National Renewable Energy
Laboratory recently released in-depth analysis that concluded ``wind
power can act in an equal or superior manner to conventional generation
when providing active power control, supporting the system frequency
response and improving reliability.''\20\ The report further documented
how major utilities like Xcel Energy are using this capability of wind
plants in some hours to provide all of the frequency response and
regulation needed to maintain power system reliability, which has
enabled Xcel's Colorado power system to at times reliably obtain more
than 60% of its electricity from wind energy.
---------------------------------------------------------------------------
\20\ Available at http://www.nrel.gov/news/press/2014/7301.html
---------------------------------------------------------------------------
background: what is frequency response?
A major challenge and expense faced by grid operators is how to
keep the lights on when individual power plants break down, as all
power plants do from time to time. The challenge is particularly great
for failures at large fossil and nuclear power plants, which because of
their size can take offline in a fraction of a second enough
electricity to supply a large city.
Over the last century, power grid operators have perfected tools
for combining hundreds of power plants that are each individually
unreliable into a power system that is very reliable. By using most
power plants to ``back up'' all other power plants, grid operators
ensure that the lights stay on when even the largest power plant on the
grid breaks down. This process works so well that most people are not
aware that it occurs, even though the expense of maintaining that
backup 24/7 for the unpredictable failure of conventional power plants
is quite large, far larger than the expense of accommodating
predictable changes in wind energy output.
It is this process of ``backing up'' conventional power plants that
is called ``frequency response.'' Because large conventional power
plant failures occur so abruptly, often in a fraction of a second, the
response from other power plants must also occur in a fraction of a
second. Through frequency response, many power plants are programmed to
immediately increase their output when they automatically sense that a
large conventional power plant has failed. While wind energy output
does change over time, these changes occur far too gradually (over many
minutes or hours) to cause an increased need for frequency response,
which is designed to accommodate losses of generation that occur in a
matter of seconds or less.
As a side note, in recent years many of the conventional power
plants that are supposed to be providing frequency response have
reduced or eliminated that response due to cost-cutting measures by
their owners. Fortunately, NERC and other entities responsible for
maintaining electric reliability are proposing market-based solutions
to ensure that sufficient frequency response is maintained.
the facts about wind energy's impact on electricity markets
Exelon, the largest owner of merchant fossil and nuclear power
plants in the U.S., has been leading a campaign to undermine the broad
support for wind energy with the argument that the lower electricity
prices brought about by wind energy are somehow a bad thing. The crux
of Exelon's campaign against wind energy has been to conflate two very
different phenomena:

1. The real economic savings wind energy provides to
consumers by displacing more expensive forms of energy, and
2. The exceedingly rare and isolated occurrences of negative
prices, which do not significantly affect other energy sources
and are being eliminated by long-needed grid upgrades.

Wind energy does have an impact on markets by displacing more
expensive forms of energy. However, this impact is entirely market-
driven, is widely seen as beneficial, and occurs for all low-fuel-cost
sources of energy, including nuclear. In fact, Exelon has touted this
impact as a benefit when it occurs at its nuclear plants. This real
story of wind energy successfully competing against more expensive
forms of energy in the market doesn't make for a compelling argument
against wind energy.
Instead, Exelon has developed an alternate story about wind's
market impact, built around the claim that the wind Production Tax
Credit is distorting markets by causing frequent occurrences of
negative electricity prices at Exelon's nuclear power plants. That
claim is false for a number of reasons:

Negative electricity prices at Exelon's nuclear plants are extremely
rare, occurring at a fraction of the rate claimed by Exelon
Grid operator data document that Exelon has repeatedly overstated
the frequency of negative prices at its nuclear plants by a factor of
10-20 times the actual frequency.

--------------------------------------------------------------------------------------------------------------------------------------------------------
Exelon Plant LaSalle Dresden Braidwood Byron Quad Cities Clinton Fleet-wide
--------------------------------------------------------------------------------------------------------------------------------------------------------
Share of day-ahead prices below $0 in 2013 0.10% 0.01% 0.42% 0.78% 1.15% 1.31% 0.63%
--------------------------------------------------------------------------------------------------------------------------------------------------------
What Exelon claimed Enough to cancel uprate NA NA 16% 14-15% of off- 14.00% 14.00%
peak hours
--------------------------------------------------------------------------------------------------------------------------------------------------------

The majority of those negative prices are not caused by wind, with many
apparently caused by Exelon's own nuclear plants
The vast majority of these negative price occurrences occurred when
wind output was very low. Instead, the data show most of these negative
prices were caused by the inability of Exelon's nuclear plants to
reduce their output in response to periods of low electricity demand or
localized transmission outages.
The wind Production Tax Credit is almost never factored into the
electricity market prices that other power plants receive
For the PTC to be reflected in electricity market prices and cause
negative prices, wind energy would have to set the market clearing
price. That almost never happens because wind energy has no fuel cost
and a much lower marginal operating cost than other resources that have
fuel costs. Regardless of whether a wind plant receives the PTC, the
wind plant does not have the highest operating cost and therefore does
not set the market price.
The real threats to Exelon, and the economics of nuclear generation in
general, come from cheap natural gas and low electricity demand
Numerous utility industry experts, and even Exelon's own statements
and reports, show that declining natural gas prices and flat
electricity demand are by far the largest challenges to the sector.
Nationwide, occurrences of negative prices are rapidly being eliminated
as long-needed transmission upgrades are completed to solve bottlenecks
on the electric power grid.
______

U.S. Department of Energy,
Office of Inspector General,
Office of Audits and Inspections,
Washington, DC, April 9, 2014.

Management Alert.--Review of Internal Controls for Protecting Non-
Public Information at the Federal Energy Regulatory Commission
memorandum for the acting chairman, federal energy regulatory
commission
FROM: Gregory H. Friedman, Inspector General
SUBJECT: Management Alert: Review of Internal Controls for Protecting
Non-Public Information at the Federal Energy Regulatory Commission
BACKGROUND
In March 2014, the Department of Energy (Department) Office of
Inspector General initiated a review of internal controls for
protecting non-public information at the Federal Energy Regulatory
Commission (Commission). The review was initiated in response to an
alleged leak of modeling studies exposing certain power grid
vulnerabilities and of non-public information relating to the
investigation of the April 2013 attack on the Pacific Gas and Electric
Company's Metcalf substation located just south of San Jose,
California. Information regarding the alleged leak was communicated to
us by the Commission's Designated Agency Ethics Official. Further, we
received a letter from the Chairwoman and Ranking Member of the Senate
Energy and Natural Resources Committee requesting that we review the
same matter.
IMMEDIATE CONCERN
The Department's subject matter experts have confirmed that at
least one electric grid-related presentation created by Commission
staff should have been classified and protected from release at the
time it was created. Based on preliminary information, we determined
that the presentation was accessible to, and in specific instances, was
viewed and handled by Commission employees who may not have had
personnel security clearances and thus, were not fully aware of their
obligation to protect the information. Similarly, the document was
reported to have been maintained on portable electronic equipment and
transmitted via unsecured means. Finally, the document, and/or the
essence of its contents, may, in whole or in part, have been provided
to both Federal and industry officials in unclassified settings. The
methods used in creating and distributing this document led us to the
preliminary conclusion that the Commission may not possess adequate
controls for identifying and handling classified national security
information.
As you are aware, the materials in question raise concerns with the
security and integrity of our Nation's critical energy infrastructure,
including the Nation's power grid. We are especially concerned with
reports that the document that was not properly classified and may
currently be stored on unclassified Commission servers, as well as on
current and former Commission employees' desktop computers, laptops,
portable electronic devices, and copiers. These are the main reasons
for the urgency of this management alert.
RECOMMENDATIONS
Although the analysis on which this alert is based is preliminary,
we have concluded that the Commission should take immediate action to
ensure that the information referred to in this management alert is
afforded maximum protection. Consequently, we recommend that the Acting
Commission Chairman:

1. Move immediately to protect the information in question by
identifying and securing any/all source data, studies and
modeling material, including supporting reports and
presentations. The search for such information should be
comprehensive, including hard copy data and information stored
or transmitted via email and all electronic systems which
contain relevant information. In the case of electronic data,
all systems (to include copiers, client computers, handheld
and/or tablets as well as email and other servers) containing
data related to or supporting the information should be taken
out of service and segregated from unclassified networks until
the actions taken in Recommendation 2 are complete.
2. Immediately seek assistance from appropriate program/staff
offices within the Department of Energy, or any other Federal
entity with appropriate original classification authority in
this matter, to ensure that the information in question and any
associated source material, reports and/or presentations are
properly classified and secured. As necessary, assistance
should also be obtained to ensure that any required remedial
action is completed expeditiously (i.e. computer/electronic
device sanitizing, secure storage of any information deemed to
be classified, etc.).
3. Ensure that all current and former handlers of the
material are fully apprised and acknowledge their duty to
protect all classified information.
4. Segregate and secure all classified information discovered
during the searches conducted pursuant to Recommendation 1 in
an approved classified repository. Such data should also be
made available to Office of Inspector General employees engaged
in the on-going review.

PATH FORWARD
Please advise us of the actions the Commission plans to take with
regard to the recommendations. The Office of Inspector General's review
is ongoing.
We appreciate your cooperation in this matter.
MANAGEMENT REACTION
Federal Energy Regulatory Commission (Commission) Acting Chairman
LaFleur indicated to us that she has reviewed the management alert and
has instructed Commission staff to implement its recommendations
promptly, and to give them top priority.
______

Foundation for Resilient Societies,
Nashua, NH, April 7, 2014.
Hon. Mary L. Landrieu,
Chairman, Senate Energy and Natural Resources Committee, 304 Dirksen
Office Building, Washington, DC,
Hon. Lisa Murkowski,
Ranking Member, Senate Energy and Natural Resources Committee, 304
Dirksen Office Building, Washington, DC.
Dear Chairman Landrieu and Ranking Member Murkowski:

Our organization is writing in regard to the upcoming April 10th
hearing of the Senate Energy and Natural Resources Committee on
``Keeping the lights on--Are we doing enough to ensure the reliability
and security of the US electric grid?''
Our short answer is that if the current regulatory system for
electric grid reliability is allowed to persist, the United States grid
will continue to be vulnerable to physical attack and other threats,
risking the lives of millions of Americans and putting national
security at risk. Below is our analysis supporting this assertion and
recommended questions for your April 10th hearing.
who we are
Our non-profit group, the Foundation for Resilient Societies, has
the mission of scientific study and education on critical
infrastructures such as the electric grid. We have spent extensive time
participating in the regulatory system for electric grid reliability.
We are a member of the ballot body at the North American Electric
Reliability Corporation (NERC) for the physical security standard
currently under development, as well as the ballot body for standards
on protection of the grid against solar storms. Since 2011 we have
actively participated in the Geomagnetic Disturbance Task Force at
NERC. Resilient Societies is a frequent commenter on Federal Energy
Regulatory Commission (FERC) dockets for electric reliability; our work
is well-known to FERC staff and Commissioners. Our docket filings are
available on our website: www.resilientsocieties.org.
specific considerations and analysis
NERC, the designated Electric Reliability Organization under
Section 215 of the Federal Power Act, is an organization dominated and
effectively controlled by electric utility interests. Seventy percent
of NERC members are electric utilities. NERC members regularly vote to
place representatives from large investor-owned utilities in key
committee positions. While the NERC Board of Trustees is nominally
independent, their election is also controlled by NERC members. With
this membership and governance structure it should be no surprise that
NERC acts to further the goals of for-profit electric utilities.
From our perspective as an advocate for the public, NERC has the
apparent goal of limiting financial liability of utilities for
cascading outages or long-term regional blackouts; this leads NERC to
propose reliability standards that will protect its utility members but
not protect the public interest.
How does NERC bury a standards project that has become
inconvenient? Twenty-three days after a sophisticated assault on 17
transformers at the Metcalf substation in April 2013, a key NERC
committee recommended to eliminate the physical security standard in
development, with the rationale ``No longer needed: EOP-004-2 addressed
FERC's directives for sabotage and reporting of physical threats, while
CIP version 5 addressed cyber security.'' The NERC Standards Committee
then unanimously ratified this action 50 days after the Metcalf attack
by vote on June 5, 2013. The NERC Board of Trustees, also unanimously,
ratified the cancellation of the physical security project in October
2013. But for press accounts in year 2014 and a 90-day FERC reliability
directive in March 2014, there would be no physical security standard
under development now.
What recourse does the public have when NERC approves a defective
``reliability standard,'' such as the standard for protection against
solar storms that is currently in rulemaking at FERC? Under Section 215
of the Federal Power Act, FERC has no authority to correct defects or
substitute a better standard. FERC can accept the inadequate standard.
FERC can reject the inadequate standard. Or FERC can remand the
inadequate standard to NERC for revisions. When FERC remands a
standard, delays for revisions at NERC can take years.
NERC makes no bones about its desire to block legislative
improvement to the standard-setting system it now controls. For
example, NERC CEO Gerry Cauley testified during the May 5, 2011 hearing
of your committee:

FERC has the authority now under FPA Sec. 215(d)(5) to direct
NERC to prepare a proposed standard to address a specific
vulnerability or other matter, and to do so by a certain date.
Thus, it is not clear to NERC that the vulnerability section
(proposed new FPA Section 224(b)) is needed.

During the May 31, 2011 hearing of the House Energy and Commerce
Committee, ``Protecting the Electric Grid: The Grid Reliability and
Infrastructure Defense Act,'' Mr. Cauley testified:

Additional authority to address grid security vulnerabilities
is not necessary. FERC already has authority under FPA Sec.
215(d)(5) to direct NERC to prepare a standard to address a
specific vulnerability. Proposed new FPA Section 215A(c) is not
needed.

NERC operations are funded by fees imposed on electric utilities,
which are in turn funded by ratepayers. Via Section 215 of the Federal
Power Act the Congress has created the ironic situation of American
ratepayers being forced to pay for lobbying against laws which could
improve electric grid reliability and better protect the public.
As a balloting participant, we have directly observed how NERC
turns the standard-setting process on its head, providing liability
protection for electric utilities while providing little protection for
the American public. Characteristics of the NERC standards setting
process include:

1. Minimization of entities subject to mandatory standards.--
For example, for standard setting on physical security, the
draft standard would leave out operators of grid control rooms,
despite a specific provision in the FERC Reliability
Directive.\1\ As another example, generator operators, who have
the greatest ability to detect and quickly minimize harmful
currents during solar storms, are exempted from mandatory
participation in the NERC standard for solar storm ``operating
procedures.''\2\
---------------------------------------------------------------------------
\1\ See the FERC Order of March 7, 2014 in Docket RD14-6-000. For
NERC's current standard setting on physical security, the toothless
nature of the draft standard has been too much even for some electric
utilities to accept. For example, Southwest Power Pool Standards Review
Group said in its comment to the NERC standard drafting team, ``. .
.Balancing Authorities and Reliability Coordinators are not listed as
applicable entities. Shouldn't they be included also? Will FERC accept
a standard without these entities being included?''
\2\ On March 24, 2014 the Foundation for Resilient Societies
petitioned FERC to remand the NERC proposed ``operating procedure''
standard for solar storms (EOP-010-1) to include generator operators
and other improvements. See comments filed in FERC Docket RM14-1-000.
---------------------------------------------------------------------------
2. Self-directed plans by utilities as a substitute for
specific requirements and measures.--As an example, no specific
measures would be required in the draft NERC standard for
physical security, only self-directed security plans. As
another example, under the NERC-approved standard for operating
procedures during solar storms there are no specific
requirements for mitigative steps during storms, only self-
directed plans and studies.
3. Exemption of large portions of the Bulk Electric System.--
For example, the approved standards on vegetation management
and transmission relay loadability can exempt transmission
lines operating between 100 kV and 200 kV, despite the
inclusion of these lines in the FERC-approved definition of the
Bulk Electric System.
4. Cancellation of projects where the standard-setting
process might result in real requirements upon utilities or
cause public scrutiny.--We again give the example of the NERC
Standards Committee cancelling in June 2013 the standards
project for physical protection of critical grid facilities,
including transmission substations. At the same June 2013
meeting, the Standards Committee voted to cancel a standards
project for monitoring of critical equipment, including
monitoring transformers for overheating, despite the important
role of equipment monitoring in mitigating the Metcalf attack.
5. Rubber-stamping of standards by the NERC Board of
Trustees.--In support of its defectively drafted standards,
from time to time NERC authors pseudo-scientific studies and
white papers. Characteristics of NERC studies and white papers
include non-collection of real-world data and omission of bulk
power system operating data inconsistent with the NERC policy
position.

It appears that avoidance of legal liability and transfer of risks
onto the public are core components of NERC's standard-setting process.
NERC's April 1, 2014 Physical Security Standard Technical Conference
revealed that the draft NERC standard for physical security will
provide a liability shield for utilities through use of security
consultants that are ``certified'' but not necessarily familiar with
grid operations. The standard as currently drafted will not require
protection of control rooms, generation facilities, and other critical
grid assets.
recommended questions
We urge your committee to conduct a diligent inquiry into the
fundamental regulatory deficiencies that have caused longstanding grid
vulnerability--including vulnerability to physical attack--during your
upcoming April 10th hearing. Attached are suggested questions for
witnesses before the committee. We ask that this letter and attachments
be made part of the official record for the hearing.
Should your committee staff require additional information before
the April 10th hearing, please do not hesitate to contact me by email
at [email protected] or at the number below.
Sincerely,
Thomas S. Popik,
Chairman.
Attachment.--Suggested Questions for Witnesses at April 10, 2014
Hearing of Senate Energy and Natural Resources Committee
questions for nerc
On the Metcalf Attack and Subsequent Cancellation of Relevant NERC
Standards Projects
Is it correct at the time of the Metcalf substation attack in April
2013 that NERC had a standard in process for physical protection of
critical grid facilities, including transformer substations, designated
as ``Project 2012-2 Physical Protection''?
Is it also correct that the NERC RISC Committee on May 9 and the
NERC Standards Committee on June 5, 2013 voted to cancel this standards
project, giving the rationale ``No longer needed: EOP-004-2 addressed
FERC's directives for sabotage and reporting of physical threats, while
CIP version 5 addressed cyber security'' and that this cancellation was
later approved by the NERC Board of Trustees?
Can you please explain why the NERC Standards Committee cancelled
its project for physical security 50 days after the Metcalf attack?
Can you please explain the role of transformer temperature and oil
level monitoring in preventing overheating and complete destruction of
the 17 transformers whose radiators were shot out during the Metcalf
Attack? Had the transformers overheated and catastrophically failed,
could it have caused a cascading blackout? How long do high voltage
transformers take to replace?
Is it correct that at the time of the Metcalf attack NERC had a
standard in process for automated monitoring of substation transformers
and other critical grid equipment?
Is it also correct that the NERC Standards Committee voted to
cancel this standards project, designated as ``Project 2012-01
Equipment Monitoring and Diagnostic Devices,'' at their June 5, 2013
meeting and this cancellation was later approved by the NERC Board of
Trustees? Can you please explain why NERC cancelled this standards
project?
On Communications with Congress
Is it correct that in written response to a letter from Senators
Feinstein, Franken, Wyden, and Reid that NERC CEO Gerry Cauley failed
to disclose that NERC standards projects for physical security and
equipment monitoring were canceled shortly after the Metcalf substation
attack? Can you please explain why this information was omitted from
the NERC letter to Congress?
In his February 7, 2014 reply letter to Senator Feinstein and
others, NERC CEO Gerry Cauley highlighted the GridEx II grid security
conference held in November 2013. This security conference simulated
cyber and physical attacks on the United States electric grid.
Are you aware of a 2006 report titled ``NSTAC Report to the
President on Telecommunications and Electric Power Interdependencies--
The Implications of Long-Term Outages'' by the President's National
Security Telecommunications Advisory Committee?
Did the NERC GridEx II grid security exercise assume that all
commercial telecommunications would work perfectly despite the
dependence of commercial telecommunications on power from the electric
grid?
Can you please comment on whether GridEx II was a realistic
exercise in its assumptions about the full operability of commercial
telecommunications?
Can you please comment on any mistaken impression Mr. Cauley's
letter may have created about the value of the GridEx II exercise,
especially since the exercise did not address arguably one of the most
critical grid vulnerabilities--telecommunications interdependency--
during Long-Term Outage?
On NERC Opposition to a Mandatory Physical Security Standard
In NERC's February 7, 2014 letter to Senator Feinstein and others
regarding physical security for electric grid assets, CEO Gerry Cauley
stated:

I do not believe it makes sense to move to mandatory
standards at this time. There are more than 55,000 substations
of 100 kV or higher across North America, and not all those
assets can be 100% protected against all threats. I am
concerned that a rule-based approach for physical security
would not provide the flexibility needed to deal with the
widely varying risk profiles and circumstances across the North
American grid and would instead create unnecessary and
inefficient regulatory burdens and compliance obligations.

Do you still believe the NERC position opposing a physical security
standard to be appropriate? If the NERC position opposing a physical
security standard has changed, can you explain why?
Is it correct that the FERC Reliability Directive on physical
security of the electric grid specifically requires protection of grid
control rooms?
Is it further correct that the NERC standard for physical security
as currently drafted leaves out protection for control rooms?
Can you explain why NERC is developing a standard that is
apparently not in compliance with the express scope of the FERC
directive?
On Compliance with Section 215 of the Federal Power Act
Is it correct that Section 215 of the Federal Power Act requires
that NERC conduct a public standard-setting process?
Is it correct that a draft physical security standard was completed
by the April 1, 2014 NERC technical conference, yet the standard was
not posted on the NERC website nor otherwise made public, despite the
standard being reviewed at the technical conference?
Why was the draft standard not promptly posted? Does this kind of
non-disclosure put the public at a disadvantage in reviewing draft
standards?
Is it correct that NERC has a pattern and practice of withholding
its technical reports from public view for periods of time after
approval by the NERC Board of Trustees and that during this time NERC
technical reports are circulated to selected parties in Washington,
D.C.?
Is it further correct that the NERC bylaws specifically state that
NERC technical reports shall be made public 24 hours before the report
is presented at the NERC Board of Trustees meeting?
Why does NERC appear to operate in a manner noncompliant with its
own bylaws and Section 215 of the Federal Power Act?
On Lobbying Activities of NERC
Is it correct that NERC maintains an office in Washington DC for
the purpose of coordinating with Congress and federal officials?
Is it further correct that NERC has prepared talking points in
opposition to legislation that would enable FERC to impose FERC-
initiated regulations and that NERC may have coordinated its talking
points with industry lobbyists?
Is it correct that the operations of NERC are financed by fees
assessed on regional entities and furthermore that the ultimate sources
of NERC's funding are the nation's electricity ratepayers?
Is it appropriate for NERC to lobby for or against legislation when
that lobbying is financed by electricity ratepayers?
On the Independent NERC Board of Trustees
Is it correct that NERC has an independent Board of Trustees, per
the FERC-approved bylaws of NERC?
How many standards have been approved by the NERC Board of Trustees
since NERC's designation by FERC as the designated Electric Reliability
Organization?
How many standards voted on by the NERC ballot body and sent to the
NERC Board of Trustees for approval have been sent back for rework or
otherwise disapproved before submission to FERC?
Of the 10 independent trustees on NERC's board, how many were
previously employed in the electric utility industry or otherwise have
ties to that industry?
Of the current voting NERC membership, how many are representatives
of the electric utility industry? Is it correct that the NERC
membership elects the NERC Board of Trustees?
On Protection of the Electric Grid from Solar Storms
Is it correct that the March 1989 blackout in Quebec, Canada
conclusively proved that solar storms can cause widespread cascading
outage?
Why in the intervening 25 years did NERC not introduce a standard
to protect electric grids against solar storms on its own initiative?
Is it correct that in its technical report dated March 2012 that
NERC downplayed the risk of solar storms to the electric grid, saying
that a grid collapse resulting from a solar storm could be recovered in
only hours or days?
Do you view a widespread grid outage of ``hours or days'' as being
acceptable to the American public?
questions for ferc
On Interdependency between the Electric Grid and the Natural Gas
Distribution System
Has FERC conducted any studies or technical conferences on the
interdependence of the electric grid and natural gas supply and
distribution system?
Does FERC have any initiatives to assure reliable natural gas
supplies for electricity generation?
Are states with electrically powered pumps on their gas pipelines
more vulnerable to long-term grid outage?
Have utilities in the State of California predominantly installed
electrically powered pumps on their gas pipelines?

Some generation facilities have significant fuel reserves
stored on-site while others rely on energy sources that are
immediately transported or intermittent. For example, gas-fired
generation plants rely on fuel delivered by pipeline and not
stored on-site. Wind and solar generation operates only when
the wind is blowing or sun is shining. In contrast, coal-fired
plants store significant quantities of fuel on-site, enhancing
grid reliability. In past years, coal-fired plants typically
had 30 to 60 days of fuel stored on-site, providing a
substantial degree of ``fuel resilience.'' In a March 13, 2014
article in the Wall Street Journal titled ``Surge in Rail
Shipments of Oil Sidetracks Other Industries,'' an executive
close to big utility companies said, ``The railroads tell us
they aren't serving power plants until their inventories are in
single-digit days.''

Has FERC conducted any studies or technical conferences on the
impact of retirement of coal-fired plants on grid reliability and also
on the impact of less coal now stored on-site at power plants?
Has FERC considered any policies to take into consideration the
resilience of natural gas-fired electric generation plants as this fuel
source now supplies nearly 30% of US electric power and is expanding
significantly further?
On Vulnerability of Long-Distance Electricity Transmission
Some states lack local generation and as a result must import
electricity over long-distance transmission lines that may be
vulnerable to terrorist attack or solar storms. For example, the State
of California imports 25% of its electricity.
Has FERC performed state-by-state studies of the vulnerability of
electricity transmission to terrorist attack or other disruption?
What policy initiatives could mitigate the dependence of individual
states and their populations on long-distance electricity transmission?
Are you aware that a representative of the Department of Homeland
Security disclosed in September 2012 in a public industry forum that an
attack on only six transformer substations in the Eastern
interconnection could bring down the electric grid east of the
Mississippi river for a period of months?
Do you believe that the locations of transmission ``choke points''
are commonly known in the electric utility industry? What should be
done to protect these choke points?
On the NERC Standard Setting Process
How long did NERC take to set a standard on so-called ``vegetation
management'' around transmission lines, otherwise called tree-trimming,
after the 2003 Northeast Blackout affecting 50 million people,
initiated by a tree limb contacting a transmission line?
How long did NERC take to set standards for cyber security?
When NERC proposes a technically defective standard, what options
does FERC have?
When a technically defective standard is remanded by FERC to NERC,
what is the range of delay that can be expected before finally setting
a corrected standard?
In the NERC document, ``Reliability Standards for the Bulk Electric
Systems of North America, Updated April 3, 2014,'' NERC has placed the
text of Standard ``EOP-010-1--Geomagnetic Disturbance Operations.''
FERC opened a rulemaking docket on this standard, with comments due by
March 24, 2014, and significant public comments in opposition to the
proposed standard were placed on the docket. Is promulgation of NERC
standards ``approved'' by the NERC Board of Trustees, without formal
approval by FERC via the federal administrative rulemaking process,
consistent with federal law?
questions for pacific gas & electric
On the Metcalf Attack
Why did PG&E initially characterize the well-planned and
coordinated Metcalf Substation attack of April 2013 as mere
``vandalism''?
Is it correct that the Metcalf substation attackers shot through a
chain-link fence that gave clear view to transformers within the yard?
Is it correct that in the intervening year between the Metcalf
substation attack and the FERC Physical Security order of March 2014,
PG&E had not installed opaque fencing for the Metcalf substation?
On Reliability of Electric Power for Silicon Valley
Is it correct that the Metcalf substation is one of only three
500kV substations serving the San Francisco metropolitan area?
Is it correct that the Metcalf substation is the only major
substation serving Silicon Valley and its dense concentration of
internet companies?
Is it correct that an analysis by the California Public Utilities
Commission has concluded that the Metcalf substation is already
overloaded on hot summer days, resulting in voltage sags for customers
in Silicon Valley? Has PG&E proposed plans for a backup substation to
support Silicon Valley?
Have major internet firms in Silicon Valley complained to Pacific
Gas & Electric about the reliability and quality of their grid power?
How does PG&E intend to address any complaints?
questions for trade groups
On Effectiveness of Self-Regulation
Is it correct that trade groups often advocate for the ability of
electric utilities to develop their own plans for grid protection
instead of relying on mandatory ``one size fits all'' solutions?
Every car and driver is different, yet speed limits apply to all
equally. Aren't speed limits a ``one size fits all'' solution?
When a utility develops its own plan for grid protection, what
assurance does the public have that this plan will be effective?
As a general matter, should electric utilities be allowed to manage
the protection of their own facilities rather than having mandatory
regulations written and imposed by governmental entities?
Did self-regulation result in significant protection for the
Metcalf substation?
Do you support inclusion of control rooms in the physical security
standard now under development at NERC?
______

Foundation for Resilient Societies,
Nashua, NH, April 10, 2014.
Hon. Mary L. Landrieu, Chairman,
Hon. Lisa Murkowski, Ranking Member,
Senate Energy and Natural Resources Committee, 304 Dirksen Office
Building, Washington, DC.
Dear Chairman Landrieu and Ranking Member Murkowski:

In regard to today's 9:30am hearing on increasing the security of
the nation's electric grid from cyber and physical attacks, NERC first
made public the text of its draft physical security standard last night
at 6:57 PM. The draft standard had been reviewed in a public NERC
meeting held on April 1st, but this is the first time the public has
been afforded a copy of the standard.
Section 215 of the Federal Power Act requires that NERC ``provide
for reasonable notice and opportunity for public comment, due process,
openness, and balance of interests in developing reliability
standards.'' Releasing the text of a draft standard eight days after it
is reviewed in a public meeting does not appear to meet the
requirements of the law.
The late release of this document places the public and your
Committee at disadvantage, because the standard is a subject of today's
hearing. We have previously had similar issues with NERC.
Now that we have documented confirmation that control centers for
some Reliability Coordinators will not be covered in the NERC physical
security standard, we suggest that your Committee members ask Mr.
Cauley of NERC about this apparent omission. Peak Reliability,
Midcontinent Independent System Operator, and Southwest Power Pool
provide the highest level of grid supervision for 141 million Americans
altogether and operate regional control centers.
Suggested questions for Mr. Cauley are in the attachment to this
letter.
We ask that this letter and attachment be made part of the official
record for the hearing.
Sincerely,
Thomas S. Popik,
Chairman.
attachment.--suggested questions for nerc ceo gerry cauley at april 10,
2014 hearing of senate energy and natural resources committee
On FERC Reliability Directive RD14-6-000
Is it correct that the draft NERC physical security standard, first
published last night at 6:57pm, would only require control centers at
Transmission Owners and Operators to meet physical security
requirements, but would not necessarily require protection of control
centers at all Reliability Coordinators?
How would you reconcile this apparent gap in the draft standard
with footnote 6 of the FERC Reliability Directive, which states,
``However, the Commission expects that critical facilities generally
will include, but not be limited to, critical substations and critical
control centers''?
In regard to existing standards for physical security of critical
cyber assets which apply to Reliability Coordinators, is it correct
that these standards pertain to physical access security and would not
give the range of protection contemplated in the standard ordered under
FERC Reliability Directive RD14-6-000?
On Peak Reliability
Peak Reliability is the regional Reliability Coordinator for the
Western Interconnection, providing the highest level of grid
supervision for the eleven states of Arizona, California, Colorado,
Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and
Wyoming with population covered of 78 million. Is it correct that the
control centers for Peak Reliability located in Loveland, Colorado and
Vancouver, Washington would not be covered under the draft NERC
physical security standard? Can you please comment on how this apparent
omission could affect public safety in these states?
On Midcontinent Independent System Operator
Midcontinent Independent System Operator is the regional
Reliability Coordinator for the upper Midwest, providing the highest
level of grid supervision for the all or part of Michigan, Minnesota,
Wisconsin, Iowa, Missouri, Illinois, Indiana, Kentucky, North Dakota,
South Dakota, Montana, Texas, Louisiana, Arkansas and Mississippi with
population covered of 48 million. Is it correct that the control center
for Midcontinent ISO located in Eagan, Minnesota would not be covered
under the draft NERC physical security standard? Can you please comment
on how this apparent omission could affect public safety in these
states?
On Southwest Power Pool
Southwest Power Pool is the regional Reliability Coordinator for
the southern Midwest, providing the highest level of grid supervision
for all or part of Nebraska, Missouri, Texas, Kansas, New Mexico,
Arkansas, Louisiana, and Oklahoma with population covered of 15
million. Is it correct that the control centers for Southwest Power
Pool would not be covered under the draft NERC physical security
standard? Can you please comment on how this apparent omission could
affect public safety in these states?
______

February 7, 2014.

Hon. Cheryl LaFleur,
Acting Chairman, Federal Energy Regulatory Commission, 888 1st Street
NE, Washington, DC,
Mr. Gerry Cauley,
President & CEO, North American Electric Reliability Corporation, 3353
Peachtree Rd., NE, Suite North Tower, Atlanta, GA.
Dear Chairman Lafleur and Mr. Cauley:

We are writing to respectfully request that the Federal Energy
Regulatory Commission (FERC) and the North American Electric
Reliability Corporation (NERC) utilize their authorities under the
electricity reliability provisions of Section 1211 of the Energy Policy
Act of 2005 (EPAct 2005) to determine whether additional minimum
standards regarding physical security at critical substations and other
essential facilities are needed to assure the reliable operation of the
bulk power system.
We are confident that both FERC and NERC share our concerns
regarding the threat of physical attacks on critical substations and
other key facets of our nation's bulk power electricity system. Last
year's sophisticated attack on the Metcalf substation in California's
Silicon Valley was a wake-up call to the risk of physical attacks on
the grid. This incident came uncomfortably close to causing a shutdown
of a critical substation which could have resulted in a massive
blackout in California and elsewhere in the West.
Last week, we met with key electricity industry and government
officials involved in developing and implementing the response to the
physical threat, including NERC and FERC. We came away from the meeting
understanding that progress has been made by industry and government to
minimize the risk of physical attacks on the electricity system through
voluntary means, including information sharing, the installation of
fencing, and cameras that monitor property outside substation fences.
However, we are concerned that voluntary measures may not be
sufficient to constitute a reasonable response to the risk of physical
attack on the electricity system. While it appears that many utilities
have a firm grasp on the problem, we simply do not know if there arc
substantial numbers of utilities or others that have not taken adequate
measures to protect against and minimize the harm from a physical
attack. A chain is only as strong as its weakest link. Therefore, we
need assurance that all entities that play a significant role in
running our bulk power electricity system are taking appropriate steps
to protect against and are well prepared to respond to a physical
attack.
We believe that Section 1211 of EPAct 2005 provides FERC and NERC
with authority to address this matter. Prior to enactment of Section
1211 in 2005 electric reliability standards were voluntary rather than
mandatory. We believe that Congress did the right thing in 2005 to
transition from a voluntary reliability system to one that relies a
great deal on mandatory standards developed in close consultation with
industry.
FERC and NERC's authority to act on the physical threat to critical
substations and other essential facilities is clear and unmistakable.
EPAct 2005 authorizes FERC and NERC to develop standards ``to provide
for reliable operation of the bulk power system.'' Reliable operation
is broadly defined to mean operating the bulk power system ``so that
instability, uncontrolled separation, or cascading failures of such
system will not occur as a result of a sudden disturbance...'' A
physical attack on the bulk power system certainly falls comfortably
within that definition.
Finally, we understand that any FERC/NERC regulatory process must
maintain the confidentiality of certain data regarding threats and
vulnerabilities. NERC and FERC already face this challenge in carrying
out their overall reliability mission under EPAct 2005, and we believe
they can do so in this instance as well.
Thank you for your consideration of this request. We would
appreciate receiving responses no later than March 3, 2014.
Sincerely,
Ron Wyden,
U.S. Senator,
Harry Reid,
U.S. Senator,
Dianne Feinstein,
U.S. Senator,
Al Franken,
U.S. Senator.
______

Federal Energy Regulatory Commission,
Washington. DC, February 11, 2014.
Hon. Ron Wyden,
U.S. Senate, Washington, DC.
Dear Senator Wyden:

Thank you for your letter of February 7, 2014, asking the Federal
Energy Regulatory Commission and the North American Electric
Reliability Corporation (NERC) to determine whether federal regulations
are needed to address the risk of physical attacks on our Nation's bulk
power system. I agree that protecting the bulk power system against
such attacks is an issue of critical importance.
Since the attack on the Metcalf facility in April 2013, the
Commission's staff has taken responsive action together with NERC,
other federal and state agencies, and transmission and generation asset
owners and operators. The other federal agencies include the Department
of Homeland Security, the Department of Energy and the Federal Bureau
of Investigation, among others. Working together, we have explained to
utilities the specific facts of the attack on Metcalf and the need for
asset owners to increase the physical protection of key facilities. We
have also conducted detailed grid modeling to identify the most
critical facilities and helped identify protective measures that would
be appropriate for particular types of facilities and locations.
For example, FERC representatives have briefed the chief executive
officers of many large investor-owned utilities, cooperative utilities,
and municipal utilities, as well as of the Independent System Operators
and Regional Transmission Organizations, which together serve nearly
three...quarters of our nation's population. We have also briefed the
National Association of Regulatory Utility Commissioners (NARUC) and
various State commissioners, in addition to the leadership of major
electric industry trade associations such as the Edison Electric
Institute and, National Rural Electric Cooperative Association the
Large Public Power Council, and the North American Transmission Forum.
And currently, we are participating with NERC, DHS, DOE, and FBI in a
13-city physical security campaign (including a detailed briefing about
the Metcalf incident) intended to reach out to utilities, states, and
law enforcement agencies in the United States and Canada.
To date, our efforts have focused on strongly encouraging utilities
to make improvements to their physical security, by explaining why and
where they should be made. This approach has resulted in improvements
being implemented more quickly and more confidentially than a mandatory
regulation could have accomplished under our existing authority, as
explained below. Also, the measures taken were uniquely suited to the
types of facilities and locations, in a way that might be more
difficult to accomplish through broad-based regulation.
Nonetheless, I agree that it is appropriate to consider whether
federal regulation is needed to ensure the risk of physical attacks on
our electrical infrastructure is addressed adequately. Thus, I have
asked Commission staff to evaluate this issue with NERC under the
authority of section 215 of the Federal Power Act. In doing so, we will
make every effort to ensure the confidentiality of sensitive security
information, recognizing, however, that the Commission is still subject
to the Freedom of Information Act even in this area of its authority.
As Commission members and representatives have stated previously,
section 215 is a reasonable approach for developing traditional
reliability standards, as it uses the technical knowledge of industry
through an inclusive stakeholder process to carefully develop standards
that truly address long-term reliability issues. However, in the
context of national security concerns, the confidentiality of sensitive
security information, and the timeliness and certainty of the process,
are appropriate concerns. Congress could improve the Commission's and
NERC's ability to address the risks related to physical and cyber
attacks by enhancing the confidentiality of sensitive security
information concerning physical or cyber threats to, or vulnerabilities
of, the bulk power system.
A properly-defined exemption from the Freedom of Information Act
would be very helpful. Also, I believe Congress should consider
designating a federal department or agency (not necessarily FERC) with
clear and direct authority to require actions in the event of an
emergency involving a physical or cyber threat to the bulk power
system. This authority should include the ability to require action
before a physical or cyber national security incident has occurred.
This authority should not impede FERC's existing authority under
section 215 of the Federal Power Act to approve reliability standards
developed by NERC through its current processes.
Thank you very much for your interest in this matter. If you have
any further questions or concerns, please feel free to contact me.
Sincerely,
Cheryl A. LaFleur,
Acting Chairman.