FERC Nominees Get Warm but Serious Welcome by Senators

The two nominees to the Federal Energy Regulatory Commission, Nora Mead Brownell and Pat Henry Wood III, received a relatively warm but serious welcome by the Senate Energy and Natural Resources Committee last week, during a hearing on their nominations. A committee staff member said a positive vote on the nominees was likely at the regularly scheduled business meeting this Wednesday.

To illustrate the gravity of the country's energy situation, Sen. Gordon Smith (R-OR) told the nominees that one in 1,000 Americans knows what FERC stands for today, but by the end of the summer nearly everyone will know. Several senators clearly tested Brownell's and Wood's resolve to tackle the energy crisis taking place in the West and probed their potential approaches to the situation.

"California stands at a precipice," Sen. Dianne Feinstein (D-CA) said, noting that no two appointments this year to any federal panel are more important to her state. "You can make a difference between life and death," she said. "That sounds overly dramatic, but it isn't."

As an example of the market problem out West, Feinstein explained that last week power prices in California hit a peak of $1,900/MWh despite peak power demand that was nearly 15,000 MW less than what is normal for a summer peak. "How do you explain that, and how can FERC address it?" she asked.

Wood dodged the question. "I'm not sure I know how to explain that...," he said. "I think if confirmed I'll have the opportunity to address that and explain it. I think it's important to get to the bottom of the full story there and find out if a $1,900/MWh sale fits under the `just-and-reasonable' rubric."

Brownell, however, tackled the issue head on. "It's clear there is something very broken," she said. "In addition to the serious supply problems there are other factors at work that are not fully understood by us because we're not in possession of all the facts. We need to be aggressive and we need to act with a sense of urgency to gain transparency to the transactions that are going on throughout the West. Other steps are necessary to respond to things that we find that may in fact not be appropriate. We appreciate the risk that your constituents find themselves [taking] and commit to moving as quickly as we possibly can. We need to end the uncertainty and the tragedy that's occurring to all the constituents of California and indeed throughout the West."

When asked by Sen. Byron Dorgan (D-ND) to critique the actions of the current Commission, however, Brownell said she was unwilling to be a "Monday morning quarterback." Wood said, "It's difficult to criticize someone without walking in their shoes."

Feinstein also noted that natural gas was selling for $11.50/MMBtu at the Southern California border while gas in the San Juan Basin was selling for $3.31 last week. She said that before FERC issued Order 637 in February 2000, the transportation cost to move gas from San Juan to the Southern California border could not exceed 70 cents. "At one point last December, the differential was more than $40. What accounts for that in your view?"

"You've found an ingredient in the disfunctionality that we do not fully understand," said Brownell. "Although Pat and I have asked a lot of questions, we've been unable to get answers that are satisfactory to us. I can't explain that. It really doesn't make sense, and without being in full possession of the facts I can assure you that is one aspect that will not go ignored."

Wood said he thinks the blown-out basis situation is a "big piece to the puzzle" in the Western power market. "The lack of generation facilities is indeed a very big concern...but the fuel that runs those plants and how it actually gets to California [is very important as well]. There are some constraints on the system; I've been made aware of those, but...the math doesn't add up" when combining the costs of regulated transportation with unregulated commodity prices in the basins, he noted. "We've been asking excessively, not excessively but a lot, of different players in the market: `where's the money going; which pocket is it in; who's got it.' I'm not sure I've got the right answers to those questions, but I think those are the very questions I would look to get answers on pretty quick if confirmed."

Feinstein claims the basis blowout between border and basin prices occurred as a direct result of FERC removing the price caps in the secondary market. "How would you address the issue of bundled transactions in the gray market? Would you support greater transparency of these transactions?" she asked the nominees. Wood said he would support an unbundled bill to the wholesale gas customer, while Brownell said transparency is key to a fully functioning competitive market.

Sen. Larry Craig (R-ID) asked if the nominees think FERC's jurisdiction is adequate to address the energy crisis in the West. "There are significant holes in the Swiss cheese," Wood conceded. "It is a challenge to make the just and reasonable mandate [for FERC] for the whole market work... Clear authority is always welcome." But he indicated FERC's current authority is adequate, and Brownell agreed.

Committee Chairman Sen. Frank Murkowski (R-AK) brought up the issue of price caps in the wholesale power market, noting that both Brownell and Wood installed $1,000/MWh caps while serving on regulatory commissions in their states. Brownell is a commissioner on the Pennsylvania Public Utility Commission. Wood is currently chairman of the Texas Public Utility Commission. "How can we protect Californians from price gouging, which has occurred," while at the same time ensuring that price caps don't discourage investment in new generation and transmission? Murkowski asked.

"Complicated issues don't lend themselves to simple answers," Brownell responded. But she added, "We need to do everything we can to expedite the development of infrastructure in California and throughout the country. We need to move expeditiously at FERC and we need to send the assurances to the financial community that there will be an adequate rate of return. Rate caps are one of many things that need to be considered, but need to be considered, as you've indicated, in an extremely cautious way. We don't want to do anything to upset the balance in the investment community, whose capital is critically needed to move forward with infrastructure, power plants and a number of other additions."

Murkowski asked why cost-of-service rates might not be reimposed on California generators. Both Wood and Brownell responded that the situation in the West requires a more rapid approach and that it would take too long to determine a fair cost-of-service rate. Brownell said the reality is that it is more important to "develop new tools to respond to market-development issues." She lauded the approach of the current FERC commissioners, particularly the increase in market monitoring. She also noted that "no regulation can replace the supply or develop the supply that we need in the very short-term future. What we can do is make sure that we're sending the signals that get that supply to the market as quickly as possible."

The FERC nominees received a somewhat warmer welcome than J. Steven Griles, the nominee for deputy secretary of the Interior. Lee Sarah Liberman Otis, the nominee for general counsel of the Department of Energy, and Jessie Hill Roberson, the nominee for assistant secretary for environmental management of the Department of Energy hardly took any questions. And while the FERC nominees fielded the most, Griles clearly faced the toughest.

A Washington Post story on Wednesday criticized Griles as anti-environmentalist and part of a new team at the Interior Department designed to dismantle environmental regulations and maximize development opportunities of all kinds. As an official in the Interior Department under James G. Watt, Griles supported drilling offshore California and in the Arctic National Wildlife Refuge, and he argued to cut rates and reduce environmental restrictions on coal producers operating on federal lands. The Post article also noted that on leaving government, Griles went to work for the mining industry he once regulated.

Sen. Ron Wyden (D-OR) was particularly critical of Griles' record, referring to the Post article, which quoted several of Griles former co-workers as saying his methods and ideology helped weaken the department's oversight in many respects. Griles disputed the assertions. He did say, however, that his approach to Interior Department oversight has become more balanced with perhaps a greater interest in environmental concerns than in the past. Wyden pressed Griles for details on this change of heart and said he would vote for the nominee only after he was convinced the change was sincere. He requested that Griles explain this change of heart and position on the issues in writing, and Griles agreed.

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