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I. Background
I appreciate the opportunity to testify on
the current status of energy markets under the jurisdiction of the Federal
Energy Regulatory Commission (FERC or the Commission). Today, I would like to
focus particularly on natural gas data reporting, the Alaskan Natural Gas
Transportation System, wholesale electricity markets and hydroelectric
licensing.
Dependable, affordable, competitive wholesale
energy markets require three key elements – adequate infrastructure, balanced
market rules and vigilant oversight. Weakness in any one element can harm
markets, American energy customers, and ultimately the entire U.S. economy. The
Commission is pursuing a number of initiatives to establish the framework needed
to spur investment in much-needed infrastructure, to support the most efficient
and competitive wholesale marketplace, and to adequately monitor the marketplace
so customers continue to derive benefits from energy markets. Achieving these
goals restores confidence to investors and customers by promoting greater
transparency and regulatory certainty.
This FERC’s commitment to prevent future market
abuses, and to remedy past ones, is now a firmly established part of our agency’s
mission, and we will continue to strengthen our present coordination with other
federal agencies to ensure that we effectively regulate energy industries so
that customers and investors are fully protected.
Additionally, the Commission is moving
aggressively to take steps within its authority to remedy problems in the
California and Western energy markets. The Commission has learned many lessons
from the Western energy crisis in 2000-01, which caused unacceptable harm to
ratepayers and demonstrated the consequences of poorly designed wholesale
markets. We also have learned lessons from successful wholesale market reforms
in the East. The Commission remains convinced that customers are best served by
moving forward to complete the transition of the wholesale power business to
competition. We are drawing from markets that work well to develop a national
platform for competitive wholesale energy markets.
While the Commission is taking steps within its
authority to encourage needed electric and natural gas infrastructure and to
bring stability and regulatory certainty to energy markets, there are several
actions that the Congress could take to help us do our job more effectively and
to ensure adequate protection of energy customers. In my view, the three most
important steps that Congress can take are these: first, clarify FERC’s
authority to obtain market information necessary for price discovery and
effective monitoring of natural gas and electric markets; second, increase civil
and criminal penalties for violations of the Federal Power Act (FPA) and Natural
Gas Act (NGA) or our rules and regulations thereunder; and, third, take the
steps required to make the Alaska Natural Gas Pipeline project a reality in this
decade. With respect to the Alaska Natural Gas Pipeline project, in particular,
I would observe that this enormous project is of such national significance that
Congress may want to consider focused financial support in any legislation.
Chairman Barton's proposed legislation would take a number of steps in these
areas as well as provide support for the continued evolution of strong
competitive wholesale energy markets to meet our future energy needs.
II. Initiatives in Energy Markets Generally
While the natural gas and electricity industries
differ in some ways, they share many issues. For example, both raise the issue
of how we can safeguard our energy infrastructure against terrorists. Both also
raise issues on the need for dependable, transparent accounting and the
separation of utility operations financed by captive customers from unregulated
ventures. On these issues and others, the Commission has taken a cross-industry
approach to protect the interests of our Nation’s energy customers.
Critical Energy Infrastructure Information (CEII)
- On February 21, 2003, the Commission issued a final rule to protect the
American public by safeguarding certain information about the Nation's energy
infrastructure. Within a month of the terrorist attacks of September 11, 2001,
the Commission began a public proceeding to examine its CEII policies. The final
rule defines CEII and establishes a timely procedure for the public to request
and obtain such information, which encompasses only a small portion of the
information available from the Commission.
Regional Infrastructure Conferences
- In the past 20 months, the Commission held conferences to address
infrastructure concerns across the country – California, the Northeast,
Southeast, Midwest and West. The aim of these conferences was to conduct
in-depth studies of the broad conditions of the area's energy infrastructure,
and to understand the issues in each region. These conferences featured
informative presentations on the state of each region's energy infrastructure
(electric power plants, fuel sources, hydroelectric facilities, gas pipelines,
electric transmission system, and other relevant information), demographic and
energy load forecasts, and were attended by state energy regulators as well as
industry members and concerned citizens.
Proposed Rules on Regulation of Cash
Management Practices - In August 2002,
the Commission proposed requirements for participation by public utilities and
natural gas pipelines in cash management programs in order to prevent the abuse
of such programs. Such abuse could occur where cash from Commission-regulated
utility subsidiaries is transferred to the parent holding company and then used
to finance unregulated activities by non-utility subsidiaries. The Commission
has received comments on this proposal and I expect that we will act on this
matter very soon.
Proposed Rulemaking on Affiliate Standards of
Conduct - In September 2001, the
Commission proposed to revise its restrictions on the relationship between
regulated transmission providers and their energy affiliates. The Commission
proposed, for example, to broaden the definition of an affiliate to include
newer types of affiliates, including those operating trading platforms. The
proposed standards of conduct would rely on three principles to prevent
transmission market power from being exercised in commodity markets: (1)
separating employees engaged in transmission services from those engaged in
commodity marketing services; (2) ensuring that all transmission customers,
affiliated and non-affiliated, are treated on a non-discriminatory basis; and
(3) prohibiting a transmission provider from granting its energy affiliate
an undue preference over non-affiliates by sharing confidential or transmission
information. The Commission also proposed to eliminate the differences between
the Commission's rules for natural gas companies and electric utilities. The
Commission intends to adopt final rules soon.
Final Rule on Accounting
- In October 2002, the Commission issued a final rule on accounting and
reporting of financial instruments, comprehensive income, derivatives and
hedging activities. The final rule directs public utilities, licensees, natural
gas companies and oil pipelines to report changes in the fair value of certain
investment securities, derivatives and hedging activities. The new rules will
enhance the transparency of financial information and facilitate a better
understanding of the nature and extent to which derivatives and hedging
activities are used by regulated companies and the impact these transactions may
have on the companies' financial condition.
Industry Financial Condition Conferences -
In January and February the Commission hosted two conferences on financial
conditions in the energy markets. At these conferences, a number of factors were
cited as causing the current financial problems. FERC is continuing to explore
solutions to the financial conditions in the energy sector.
Office of Market Oversight and Investigations
(OMOI) - In order to better understand
natural gas, oil and power markets and to swiftly remedy market rule violations
and abuse of market power, the Commission created the new Office of Market
Oversight and Investigations (OMOI). In August 2002, OMOI became a formal,
functioning office within the Commission, reporting directly to the
Commissioners. OMOI serves as an early warning system to alert the Commission
when market problems develop, and allows the Commission to analyze and address
any problems more quickly. OMOI has begun an aggressive program of outreach to a
wide variety of entities including: other federal, state and provincial
regulatory agencies, state consumer advocates, industry participants, academic
institutions and think tanks, financial institutions (such as ratings agencies),
and Market Monitoring Units (MMUs) at Regional Transmission Organizations (RTOs)
and Independent System Operators.
III. Initiatives in the Electric Energy Market
The Commission has begun or continued work on
numerous efforts to improve the performance, transparency and oversight of the
wholesale electricity markets. These efforts, aimed at ensuring that electric
energy customers receive adequate supplies at reasonable prices, include the
following.
Proposed Rulemaking on Standard Market Design
- On July 31, 2002, the Commission issued proposed rules on a standard market
design for wholesale electric energy markets, including a comprehensive plan for
mitigating market power and market manipulation. The proposed rules are intended
to provide certainty to all market participants, encourage new infrastructure
investment, promote fair competition and prevent a repeat of the mistakes made
previously in California. The proposed rules would remedy remaining undue
discrimination in the use of the Nation's interstate transmission grid and also
provide a solid platform to ensure that wholesale markets produce just and
reasonable rates for customers.
Experience in the United States and abroad has
shown that successful power markets have certain core features in common. These
include an independent grid operator; a single transmission tariff; a long-term
bilateral contract market; an available short-term spot market with transparent
prices; regional transmission planning; locational price signals; transmission
rights; and, appropriate mitigation rules to protect against the exercise of
market power.
This platform of market features works in
hydro-based systems like Scandinavia, South America and New Zealand. It works in
areas where generation may be distant from population centers as well as areas
with highly networked transmission grids. It works with thermal- and
stability-limited systems. It respects treaties, contracts, and various forms of
state regulation. It is essentially what has already been developed in both the
more mature power markets in the Northeast, mid-Atlantic, Midwest and Texas, as
well as in those markets developing in the West and South.
Importantly, this platform leaves plenty of room
for regional variation. In our RTO dockets, we concluded that certain functions
are needed to make wholesale power markets work, but they need not be done the
same in every part of the country. These functions include, for example,
transmission planning, resource adequacy, mitigation techniques, and RTO
governance.
A platform based on these core features includes
a strong customer protection plan. It checks generation market power through
mitigated prices when necessary. It solves transmission market power through
structural separation between transmission owners and generators. It fully
protects existing wholesale contracts and native load service. On the
infrastructure side, it encourages and eases entry of new generation into the
market, facilitates new transmission construction, and promotes demand-side
bidding as a check on supplier market power.
The Commission has engaged in extensive public
outreach both prior to the issuance of the proposal and since that time. We
continue to listen to all constituencies in developing final rules. The
Commission anticipates issuing, and obtaining public comment on, a white paper
reflecting our reaction to the over 1,000 filed comments and 300+ meetings we
have held since last August. Due to their necessary breadth, the proposed rules
have received much attention. Getting these rules right, and thus increasing the
benefits to customers from competitive bulk power markets, is a priority for the
Commission.
Proposed Policy Statement on Rate Incentives
for Transmission Independence and Expansion
- On January 15, 2003, the Commission issued a proposed policy statement to
allow a higher return on equity when a utility participates in an RTO, sells its
RTO-operated transmission asset to an independent company, or pursues additional
measures that promote efficient operation and expansion of the transmission
grid. Under the proposal, a utility's return on equity could be increased by 50
basis points for joining a Commission-approved RTO, 150 basis points for selling
RTO-operated transmission assets to an independent company and 100 basis points
for investing in new transmission facilities found appropriate pursuant to an
RTO planning process. This proposed policy would further the Commission's goal
of achieving a robust infrastructure for the future and bringing lower prices
and cost savings to all customers. The proposed policy would help encourage
needed investment in transmission infrastructure and improve grid performance.
Comments are due early this month. This policy supports, and is consistent with,
the transmission tax incentives and other language in the proposed legislation.
Information Filing Requirements
- Improving market transparency requires detailed reporting on transactions. On
April 25, 2002, the Commission issued a final rule (Order No. 2001) to enhance
public access to information on public utility services and sales by requiring
public utilities to electronically file quarterly reports. This final rule is
intended to equalize reporting requirements for traditional utilities and power
marketers, making information more easily available to the public and helping to
streamline compliance with the filing requirements of FPA section 205. The data
contained in the new Electric Quarterly Report will provide greater price
transparency, promote competition, enhance confidence in the fairness of the
markets and provide a better means to detect and discourage discriminatory
practices.
Proposed Rulemakings on Standardized Generator
Interconnections – The Commission
recently has undertaken two rulemakings to standardize agreements and procedures
for generators seeking to interconnect and participate in the wholesale market.
The first applies to large generators (i.e., those producing over 20
megawatts) and was the subject of proposed rules issued April 24, 2002. The
second applies to small generators (i.e., those producing no more than 20
megawatts), and was the subject of an advanced notice of proposed rulemaking
issued August 16, 2002. Each rulemaking will produce a set of standard generator
interconnection procedures, which describe the procedural steps for studying and
securing a requested interconnection, and a standard generator interconnection
agreement for use by interconnection providers and customers. The Commission
expects that these rulemakings will help ensure that reliability needs will be
met, provide greater certainty to generators wishing to participate in the
wholesale market, and, importantly, shorten the time needed to get a project
brought on line.
Policy on Conditioning Public Utilities'
Issuances of Securities - To prevent
public utilities from borrowing substantial amounts of money and diverting the
proceeds to finance non-utility businesses, the Commission issued an order on
February 21, 2003, announcing a policy placing conditions on all new issuances
of secured and unsecured debt authorized by the Commission under FPA section
204. These conditions state, for example, that a public utility seeking
authorization to issue debt secured by utility assets must use the proceeds of
the debt for only utility purposes. Similarly, if the assets securing such debt
are divested or "spun off," the debt must "follow" the asset
and be divested or "spun off" as well.
At its core, the policy ensures that any
encumbrance of utility assets is used for utility purposes. This policy should
ensure that future issuances of debt are compatible with the public interest and
will not impair a public utility's ability to perform its duties and provide
appropriate ratepayer protection. These concerns also lead me to believe that
FERC should have authority under the Natural Gas Act similar to FPA section 204.
IV. Pending California-Related Proceedings
In addition to the initiatives described above,
there are several proceedings related to the Western energy crisis in 2000-01
currently pending before the Commission. These proceedings are discussed below.
On February 13, 2002, in Docket No. PA02-2-000,
the Commission formally announced a fact-finding investigation into whether any
entity had manipulated electric energy or natural gas prices in the West since
January 1, 2000. In conducting this investigation, Commission staff has
coordinated closely with staff from the Department of Justice, the Securities
and Exchange Commission, the Commodity Futures Trading Commission, and the
Department of Labor. On August 13, 2002, Commission staff released an initial
report of its investigation. Based on the staff report, the Commission initiated
formal enforcement proceedings under FPA Section 206 regarding possible
misconduct by a number of utilities. These proceedings are pending before
administrative law judges.
A public written report dealing with all aspects
of this staff investigation is on schedule to be released later this month. The
Commission will consider all relevant evidence from this investigation once we
receive the final report. The Commission also has set up a process which has
allowed the parties in the California proceedings to conduct discovery on market
manipulation in the same time period. Parties submitted additional evidence and
proposed new and/or modified findings of fact on March 3, 2003. Reply
submissions are due on March 20, 2003.
With respect to the California refund proceeding
for calculating the amount of overcharges from October 2000 through June 2001,
the Administrative Law Judge (ALJ) issued his proposed findings in December
2002. The Commission is currently reviewing the ALJ's proposed findings.
The Commission is also currently reviewing the
recommendations and proposed findings issued by an ALJ regarding whether rates
charged for spot market bilateral sales in the Pacific Northwest for the period
December 2000 through June 2001 were unjust and unreasonable. Also, in recent
weeks, the Commission has received several decisions by ALJs on complaints
seeking to modify long-term contracts for the sale of wholesale power in
California or the West. Finally, the Commission is reviewing an ALJ's decision
on whether El Paso Natural Gas Company and its affiliates exercised market power
in order to drive up natural gas prices at the California border in 2000-01.
The Commission will act on all of these matters
soon. Then, customers can receive all appropriate refunds, utilities can have
regulatory certainty and all of us can focus on the important goal of preventing
this from ever happening again.
V. Initiatives in the Natural Gas Market
As with the electric energy markets, the
Commission has launched numerous initiatives designed to improve the
performance, transparency and oversight of the natural gas markets. These
initiatives include the following.
Liquified Natural Gas (LNG) Facilities
- To help meet the Nation's increasing demand for natural gas, the Commission in
December 2002 charted a new course for the treatment of LNG facilities. The
Commission allowed the Hackberry LNG facility in Lake Charles, Louisiana, to
provide terminalling services without a FERC tariff and rate schedules, similar
to the approach used for natural gas production facilities. The Commission
retains authority over all siting and environmental aspects of onshore LNG
facilities. We anticipate that the new policy will stimulate the development of
new LNG terminals by accommodating various business models and will ultimately
result in increased gas supplies in the United States. Since issuing the
Hackberry decision, the Commission has been in various stages of discussions and
application processing with about ten companies pursuing some 20 different LNG
import terminal locations with a total potential daily send-out of about 12 Bcf.
This amount is at least twice the projected capacity of an Alaskan gas pipeline.
Emergency Reconstruction of Pipelines
- The Commission has proposed rules on emergency reconstruction of interstate
natural gas facilities when immediate action is required to restore natural gas
service due to a sudden, unanticipated natural event or a deliberate effort to
disrupt natural gas service. The Commission is currently reviewing comments
received in February 2003.
Reporting on Natural Gas Data
- As part of its fact-finding investigation on electric energy and natural gas
prices in the West since January 1, 2000, Commission staff gathered information
that raised doubts about the accuracy of information reported in many wholesale
natural gas price indices. Current industry practice is for the trade press to
gather price information by polling traders. The markets cannot function
efficiently without accurate wholesale price information. Although the industry
and the trade press are now taking steps to improve the dependability of the
natural gas price indices, it is unclear whether these steps are sufficient to
restore customer, investor and counterparty confidence.
Quicker Processing of Proposals to Build or
Expand Pipelines - The Commission has
improved the efficiency of its pipeline certificate process, and we have a
number of initiatives underway to achieve even greater streamlining. During the
period beginning in January 2001, the Commission authorized just under 16
Billion cubic feet per day (Bcfd) of new pipeline capacity, raising total daily
deliverability to 131 Bcfd. Of these additions, over 50 percent is earmarked for
electric generation, with the greatest growth in that sector occurring in the
Southeast and West. On average, these certificate applications took about 200
days to process, a marked improvement over the average turn-around time of
nearly 300 days some years ago.
While our current inventory of pending projects
is relatively low compared to the recent past, we anticipate increasing activity
in the future. In preparation, we are pursuing several streamlining initiatives
that combine early identification and resolution of issues, concurrent
consideration by other agencies and increased opportunities for stakeholder
involvement. One such initiative is the National Environmental Policy Act (NEPA)
Pre-Filing Process, which entails a more interactive NEPA process well in
advance of the application being filed, with earlier, more direct involvement by
FERC staff, other agencies and landowners, resulting in an overall time savings
to obtain a certificate.
Also, in accordance with the President's National
Energy Policy, which among other things calls for actions to expedite
energy-related projects, the Commission and nine other federal agencies (the
Departments of the Army, Agriculture, Commerce, Energy, the Interior,
Transportation, the Environmental Protection Agency, the Advisory Council on
Historic Preservation, and the Council on Environmental Quality) in August 2002
signed an interagency agreement, providing that the Commission will be the lead
agency for environmental review of interstate natural gas pipelines under the
Natural Gas Act, that there will be early interagency communication to determine
schedules, identify issues, and share information, that alternative routes and
mitigation measures will be developed jointly, and that necessary permits will
be issued jointly. The agencies completed an implementation plan for the
agreement in November 2002, and have established a working group, chaired by the
Commission, to oversee implementation.
VI. Initiatives Regarding Hydroelectric Licensing
The licensing of non-federal hydroelectric
projects under Part I of the FPA is the Commission's original mission, and still
a vital aspect of the Commission's efforts to ensure workable, competitive
energy markets. My fellow Commissioners and I are well aware of the need to
ensure that our licensing processes are in tune with the need of today's markets
for regulatory certainty and more efficient decisionmaking on this important
part of the Nation's energy mix. In keeping with these considerations, the
Commission on February 20, 2003, issued a notice of proposed rulemaking
presenting a comprehensive plan that will result in more efficient and timely
processing of hydroelectric licenses while also balancing stakeholder interests
and improving the quality of decisionmaking.
The proposal, referred to as the
"integrated" process, would become the Commission's primary licensing
process, with the existing alternative licensing process (ALP) and the
traditional process remaining as options for applicants in certain situations.
The highlights of the proposed rule are:
• increased assistance by Commission staff to
potential applicants and stakeholders during the development of license
applications;
• greater coordination among the
Commission and federal and state agencies with mandatory conditioning
authority;
• carrying out the Commission's
environmental scoping process in conjunction with the applicant's
pre-filing consultation;
• increased public participation in the
pre-filing consultation process;
• establishing schedules and deadlines
for all participants, including Commission staff;
• development of a Commission-approved
study plan by the applicant, with informal resolution to study
disagreements, followed by mandatory, binding study dispute resolution,
if necessary;
• elimination of the need for
post-application study requests; and
• creation of a new Commission Tribal Liaison,
to be the point of contact for Native Americans' concerns regardless of the
proceeding or issue.
In addition, the traditional licensing process
would be modified by increasing public participation, and by establishing
mandatory, binding dispute resolution for necessary studies.
Before issuing the proposed rule, Commission
staff held regional forums around the country, as well as drafting sessions in
Washington, D.C., to discuss the licensing process with stakeholders and to
collaboratively draft regulatory language. We plan to obtain further public
input through regional workshops to be held around the country in March and
April 2003 to discuss stakeholder reaction to the proposed rule. A four-day
drafting session is scheduled in April in Washington to draft language for the
final rule.
VII. Comments on the Draft Legislation
The draft legislation addresses a wide range of
energy issues confronting our Nation. I will focus on the issues affecting FERC’s
responsibilities. On these issues, the draft legislation takes a good approach.
I would suggest a few modifications and some additional provisions, as described
below. If the Committee wishes, I would be happy to provide, in writing after
the hearing, a detailed technical analysis of the legislative language.
Section 7081, Market Transparency Rules -
This section would require FERC to issue rules establishing an electronic
information system, accessible by the public, specifying the availability and
price of wholesale power and transmission services. I support this section
because more transparency is needed in energy markets and customers should have
access to the broadest range of useful market information.
I note that this section refers to "markets
subject to the Commission’s jurisdiction," but does not explicitly
mention natural gas markets. I suggest modifying this section to clarify the
Commission’s authority to obtain information on natural gas prices (since
these are an important factor in wholesale power prices), or that a separate
section be added to the legislation clarifying FERC’s authority under the NGA
to obtain such information for purposes of price discovery.
Section 7084, Enforcement - This section
would significantly increase the penalties available under the FPA. I have long
supported increasing these penalties, and believe the increases proposed here
are appropriate. I recommend including similar penalties under the NGA.
Section 7091, Refund Effective Date - This
section would eliminate the 60-day wait at the beginning of the refund period
under the FPA, so that refunds would be allowed from the date a complaint is
filed, instead of only 60 days later. I support this change, and also recommend
including a similar provision in the NGA.
Section 7101, Mergers and Other Dispositions
- This section would repeal FPA section 203, which requires Commission
approval of most mergers and other dispositions involving public utilities. In
light of the proposed PUHCA repeal, repealing section 203 without including the
public interest review standard in another agency’s specific duties may not be
good policy. The Commission deals with the electric industry on a daily basis
and much more closely than do the federal antitrust agencies. Thus, the
Commission is better able to identify and remedy any harmful effects of mergers
and other dispositions and to ensure that customers' rates are not adversely
affected. Our efforts do not duplicate those actually being performed today by
other merger reviewing agencies. The Commission has used its section 203
authority as intended by Congress, and appropriately, to ensure that mergers and
other dispositions are consistent with the public interest.
Sections 2001-14, Alaska Natural Gas Pipeline
- Over the last several years, there has been much renewed interest, in both the
private and public sectors, in the development of the transportation
infrastructure needed to bring Alaskan natural gas, including supplies from
Alaska's North Slope, to markets in the Lower 48 states. The importance of
Alaskan natural gas supplies is obvious; indeed, it is impossible to envision
the 30-35 Tcf annual domestic market that the Department of Energy has estimated
may exist by 2020 without Alaskan natural gas. Although there are currently no
applications before the Commission regarding an Alaska natural gas
transportation project, the need for Alaskan natural gas in the Lower 48 market
is only going to increase.
We will make every effort to process and act upon
any applications for Alaska gas transportation projects as efficiently as
possible, working with the applicants, other federal and state agencies, Native
Americans, shippers, end users, and other interested parties, to ensure timely,
reasonable decisions. Over the past two years, the Commission staff has
participated in the Interagency Alaska Natural Gas Task Force, along with
representatives of the Departments of Energy, State, Interior, and
Transportation, in order to prepare, to the extent possible, for streamlined
government action on an application for an Alaska gas pipeline.
I strongly support the goals of this legislation,
which provides a statutory framework for the expedited approval, construction,
and initial operation of an Alaska natural gas transportation project. The bill
helpfully resolves some significant questions with respect to potential
projects. There are some matters that may benefit from additional clarification,
such as the extent to which the Commission would need to interact with the
proposed Federal Coordinator as it reviews and acts on any certificate
application. I would be happy to provide the Committee with more detailed
comments on this and other provisions of this Subtitle.
I can assure you that any application ultimately
filed with the Commission, will be reviewed thoroughly, promptly, and fairly,
with the public interest firmly in mind, and with a clear understanding of how
important Alaska natural gas is to our Nation's long-term energy security. With
respect to the Alaska Natural Gas Pipeline project, in particular, I would
observe that this enormous project is of such national significance that
Congress may want to consider focused financial support in any legislation.
VIII. Conclusion
Events of the past three years have demonstrated
the critical role that energy plays in our Nation’s economic well-being. I
appreciate the opportunity to contribute to your debate on the best ways to
ensure that this crucial industry continues to support the many demands placed
on it by our citizens, and I will be happy to answer any questions you may have.
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