Thank you, Chairman (Pat) Wood and Commissioner (Nora) Brownell. I am pleased to welcome you to our great state of Washington.

I also want to say welcome to my fellow governor, Governor Jane Dee Hull of Arizona, who is doing a great job as the new chair of the Western Governors' Association. I look forward to working with her on energy and other issues in the coming year.

And Governor, I want to say how disappointed I am that the reason you’re in town has nothing to do with the World Series.

I regret that my schedule does not allow me to stay for the entire meeting today. But I wanted to have the chance to talk with you this morning because I share your belief that ensuring that our region and our country have affordable and reliable energy is a critical task of policy makers at both the state and federal level.

You are in Seattle this week to hear about the state of energy infrastructure in the west. I will let others speak about other regions, but I would like to share some thoughts about where I think we are in Washington State and the Pacific Northwest.

The past 18 months have been a period of enormous challenges in the Pacific NW. California’s failed energy restructuring led to power plant shutdowns that reduced energy supply and drove prices sky high not only in California but throughout the west. If that weren’t enough, a near-record drought limited the amount of hydropower our region could produce.

The impact of all this on my state of Washington was – and still is – enormous. Utility rates in some areas jumped as high as 75 percent as utilities frantically shopped for power on the dysfunctional spot market. Many businesses curtailed their operations or shut down altogether. Thousands of workers were sent home, many permanently. Farmers sat out the season because they couldn’t afford to irrigate their crops. Ocean fishers wondered if they’d have affordable cold storage for their catch. And day after day we wondered if we’d have enough power to make it to tomorrow.

We got through this year because we made the necessary sacrifices and endured the necessary hardships:

· Because many utilities raised their rates.

· Because industries shut down at enormous cost to our economy and to individual families.

· Because the state temporarily loosened environmental permitting processes for diesel generators.

· Because BPA temporarily scaled back its salmon recovery efforts.

· Because our citizens voluntarily curtailed their energy use – unplugging their Christmas tree lights and turning down their heat in the dead of winter.

I am pleased that we probably don’t have to worry about blackouts this coming winter. We were blessed with moderate weather this summer and fall, and just a few weeks ago the NW Power Planning Council announced that the chance of blackouts in the Northwest this winter has dropped from 17 percent to less than 1 percent. That’s good news.

And Chairman Wood and Commissioner Brownell, I want to publicly commend you both for your leadership at FERC this year. Within weeks of your joining the Commission, you took swift and decisive action in issuing a "must-run" order that put thousands of megawatts of California generating capacity back on the grid. You approved a price mitigation plan to ensure that our utilities and ratepayers would not continue to be victims of the obscene prices we faced last winter. Your pragmatic approach helped stabilize a volatile market, and was a breath of fresh air after months of inaction that caused significant damage to our region’s economy.

I bring up the hardships we in Washington faced this past year because I want to stress a single point. Today you will be asking how federal policy can help promote infrastructure investment. Some will respond by calling for new governance structures, new market structures, and newly defined roles for FERC and the states. I want to urge a word of caution.

· To those who call for restructuring of our energy markets as a way to promote infrastructure development:

· To those who would mandate the rapid establishment of new organizations to oversee transmission infrastructure:

· To those who would alter or diminish the roles of state governments in the regulation of retail energy markets:

-- Remember that the steps you propose to take will affect the lives of real people – real families – and real communities.

In the recent past, those who proposed sweeping changes in our energy laws seemed guided more by faith than by facts, more by ideology than by information. But energy policy making is not an exercise in abstract economic theory. It is not a simple exercise in balancing constituents’ interests. It is not merely a new organizational chart to shake up a bureaucracy.

As we’ve seen only too well this year, restructuring energy markets is a grand experiment that can go terribly wrong. If it must go forward at all – and to me that’s a big "if" – it must be done right. And there must be a way and a willingness for government to step in to stop those experiments that go wrong.

As people in my state know, I am a skeptic when it comes to the benefits of energy restructuring. Almost five years ago, our state Legislature considered retail restructuring on the assumption that it would result in competitive markets that offer consumers innovation and lower prices and better service. Washington declined to restructure its retail energy markets, and the disastrous experiences since then in California, Montana, and elsewhere only serve to reinforce my skepticism.

That is not to say that I don’t believe in markets. I do. I strongly believe that free and fair competition can bring tremendous benefits to consumers. But I am not convinced that free and fair competition is possible in the energy market the same way it may be for other commodities. Let me tell you why I take this view.

In a free market, there is elasticity of demand. When the price of a commodity goes too high, the consumers of that commodity can and will find substitutes. Yet what substitute does a farm or factory have to using electricity? Sure, it can stop purchasing electricity, but then it must curtail operations, lay off workers and hurt families, and deprive consumers of the goods it produces or the crops it grows. How do we sustain an economy without affordable power?

In a free market, there is ease of market entry and exit. When demand is high and supply is low, new providers can come into the market quickly and easily. Yet new power plants require 12 - 24 months or more to build. As we’ve seen this year, a region can suffer a lot of economic pain in a very short period.

In a free market, consumers have a choice of service providers. Yet last year, we saw a wholesale energy market in chaos, so that utilities had no choice but to buy from a handful of wholesale energy providers whose prices bore little relationship to their cost of production. This was, I believe, the improper exercise of undue market power.

So, in my view, energy restructuring itself should not be the policy goal. Deregulation itself should not be the policy goal. Competition itself should not be the policy goal. There is one and only one public policy goal – to ensure reliable and affordable energy for businesses and consumers who depend on it day in and day out.

In Washington, we have chosen to achieve this objective through locally and state regulated utilities that have a legal obligation to serve. Competitive wholesale markets can help our utilities manage a portfolio of resources and keep rates low. But I see these wholesale markets as a complement to state-regulated retail electricity service, not a substitute for it. Federal policies regarding wholesale power and transmission markets should complement state and local regulation in my state – and not supplant it.

Mr. Chairman, I know that you and I disagree on the potential for competition in electricity markets. That’s fine; we can agree to disagree.

But I think we should fully agree that policy makers should not advocate change simply for the sake of change. Instead, let’s clearly identify the problems facing our region that must be addressed – and let’s address them. But let’s be certain that we have correctly identified the problems before we impose untested solutions. And where the benefits of change are speculative or uncertain, let’s make sure that the costs of getting it wrong don’t dwarf the benefits of getting it right.

Let’s use transmission as an example. I know there is a lot of discussion about new structures for governing the transmission system. But to me the issue is not whether and how to create such new structures. The issue is much more basic:

Do we have a transmission problem in the Northwest? If so, what is the precise nature of the problem? And then and only then, how do we solve the problem we have clearly identified?

Well, our region is unlike other regions of the country. BPA owns more than 80 percent of our transmission lines, and it has eminent domain authority over the construction of new lines. As BPA will tell you today, BPA is moving forward to build new transmission. It has identified 9 projects representing 300 miles of new transmission that are needed. These projects are under development, and should be completed between 2002 and 2005.

So is there a problem? Yes, there is. The problem is that BPA needs additional borrowing authority to make these transmission upgrades. Is there a solution? Yes – urge Congress, OMB, and the administration to support increased borrowing authority. That is the number one transmission issue facing the Northwest.

Are there benefits that may come from changing the way our region manages transmission? Maybe there are, and FERC is right to conduct a thorough inquiry on the matter. But don’t assume those benefits, and don’t assume the benefits are the same in every part of the country.

Indeed, in our region, because of BPA, we already essentially have open access to wholesale transmission, coordinated scheduling and operation, regional planning, and eminent domain authority – the very benefits that some seek through creation of new organizations.

And because there is no apparent crisis in development of new transmission in our region, I see no need to rush to form new organizations or consolidate all of the western regions into one.

Rather, let the current discussions continue in the NW among people who understand the special characteristics of our region. Because, you see, our region is different:

More than half of our power is hydropower. That means that energy policy in the NW is inextricably tied to agriculture policy, environmental policy, transportation policy, state-tribal relations, nautical transportation, and recreation.

It also means that our generating facilities do not so much compete as cooperate to achieve optimal efficiency. Grant County can’t count on generation from Priest Rapids Dam if BPA doesn’t move water from Chief Joseph Dam.

Moreover, most of our power generation is publicly owned and serves publicly-owned utilities. We don’t fit into a west-wide, one-size-fits-all organizational model.

Let me say, too, that I have known Bud Krogh for years, and I have great confidence in him to facilitate a thorough discussion of these issues with stakeholders in the NW. Give him – and us – the benefit of a thoughtful and thorough process that achieves a regional consensus and achieves the goals that all of us – FERC, the NW States, the utilities, and all the stakeholders – want to see.

As I said before, where the risks of getting it wrong far outweigh the benefit of getting it right, it is imperative that we do it right the first time.

I will leave it to others today to give you the details about generation, pipeline infrastructure, and demand response to price in the Northwest. But here, too, I think our infrastructure is fundamentally sound.

We are moving effectively toward needed generation and transmission infrastructure enhancement. And, we have effectively engaged the demand side in responding to drought-driven power supply concerns over the last year.

Are we seeing new generating plants in Washington? Yes, we are. There are currently six gas-fired plants under construction, bringing an additional 2,100 megawatts on line within two years. [Chehalis, Centralia, Satsop, Mint Farm, Fredrickson, and Goldendale] We are also home to the nation’s largest wind project, a 300 megawatt-capacity project along the Oregon border in southeast Washington. About 75 MW is already operational and connected to the grid.

This year, I signed a comprehensive package of energy legislation that streamlined our power plant siting procedures. We now have almost 4000 megawatts of gas-fired projects in the state and local permitting processes. [Everett Delta 1 and 2, Enron/Longview, Wallula, Starbuck, Sumas II] We also have several wind projects in the planning stages.

This doesn’t include some 750 megawatts of newly completed gas-fired capacity outside Washington, but located in the Pacific Northwest and serving Washington Utilities. [Klamath Falls, Rathdrum II] It also doesn’t include 800 megawatts currently under construction.

Are we seeing expansions in pipeline capacity necessary to transport gas to these plants? Yes, we are. Both interstate pipelines serving Washington [Williams, PG&E] have expansion "open seasons" under way. We understand they have additional expansions planned in the next two to three years.

Have we engaged the demand-side to address recent drought-related supply shortages? Yes, we have. The NW Power Planning Council estimates that regional energy demand has been reduced over the past year by as much as 4000 average megawatts – four times the electricity use of the City of Seattle – none of that through blackouts or involuntary curtailment. The shut-down of aluminum smelting load contributes the largest share: about 2,500 MW. The remaining 1,500 is made up of demand response programs managed by utilities and by customer response to conservation appeals and rate increases. The utility-managed demand response programs appear to have contributed nearly 500 average megawatts.

Washington's investor-owned utilities operated eight "energy buy-back" programs over the last 6 to 10 months. Preliminary analysis indicates these programs secured 66 MW of savings at less than $40 per megawatt/hour.

Have any obstacles been encountered to any of these activities that require FERC to make major changes in the way it regulates the energy markets? I believe the answer is no.

I believe we weathered a crisis this year that resulted largely from California’s failed restructuring efforts and the FERC’s failure to respond quickly last winter. But let’s not pursue further changes in our energy markets unless and until we know with certainty that the benefits outweigh the risks.

Rather, let’s focus on what we need to do now.

Let’s work together to ensure that BPA has increased borrowing authority.

Let’s work together on reliability legislation that ensures a proper role for both state and federal entities.

Let’s work together to rebuild confidence that the wholesale power markets are effectively policed.

And let’s acknowledge that both the states and the federal government have important roles to play in regulating energy markets. Those roles should be maintained.

Chairman Wood and Commissioner Brownell, I want to again thank both of you for coming to Washington State. I also want to thank you again for your part in bringing stability to the wholesale markets this year. I look forward to working with you on these challenging issues in the year ahead.

And Governor Hull, we’ll see you and the Diamondbacks here in Seattle next October.

Thank you all.

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Page last updated 10/10/1999