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United States General Accounting Office:
GAO:
Report to Congressional Requesters:
June 2002:
Energy Markets:
Concerted Actions Needed by FERC to Confront Challenges That Impede
Effective Oversight:
GAO-02-656:
Contents:
Letter:
Executive Summary:
Purpose:
Background:
Results in Brief:
Principal Findings:
Agency Comments:
Chapter 1: Introduction:
FERC Is the Principal Federal Agency Regulating and Overseeing the
Natural Gas and Electricity Industries:
The Nation’s Natural Gas and Electricity Industries Are Evolving:
Objectives, Scope, and Methodology:
Chapter 2: FERC Has Not Yet Defined and Implemented an Effective
Approach to Monitor Competitive Energy Markets:
FERC Recognizes That It Needs a New Approach for Competitive Energy
Markets:
FERC Has Struggled to Define and Implement a New Approach:
FERC’s Market Oversight Initiatives Have Been Incomplete or
Ineffective:
FERC’s Outdated Legislative Framework and Frequent Leadership Changes
Have Contributed to Its Difficulty in Developing a New Regulatory
Approach:
Conclusions:
Recommendations for Executive Action:
Matters for Congressional Consideration:
Agency Comments:
Chapter 3: FERC Faces Significant Management Challenges to Effectively
Monitor Competitive Energy Markets:
FERC Has Taken Some Steps to Address Its Human Capital Needs, but
Significant Challenges Remain:
FERC’s Organizational Structure Limits Its Effectiveness:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: FERC’s Principal Strategic Goals and Objectives for Energy
Markets:
Appendix II: GAO Survey of Current FERC Employees in Selected Offices:
Appendix III: Comments from the Federal Energy Regulatory Commission:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Major Events and Milestones in Restructuring the Natural Gas
and Electricity Industries:
Table 2: FERC’s Statement of Its Mission in the 1997, 2000, and 2001
Versions of Its Strategic Plan:
Table 3: Percentage of FERC Staff Indicating That Additional Training
Would Help Them Better Monitor and Regulate Energy Markets, by Type of
Training:
Table 4: FERC’s Principal Strategic Goals and Objectives for Energy
Markets:
Figures:
Figure 1: FERC Staff Years, 1993-2003:
Figure 2: FERC’s Organization:
Figure 3: Transmission Ownership in the United States:
Figure 4: Major Wholesale Electricity Trading Hubs and Centralized
Power Markets:
Figure 5: Percentage of Employees in Mainstream Occupations Eligible to
Retire in Fiscal Years 2002-2005:
Abbreviations:
AFMC: Air Force Materiel Command:
EPACT: Energy Policy Act:
ERCOT: Electric Reliability Council of Texas:
EWG: exempt wholesale generator:
FERC: Federal Energy Regulatory Commission:
ICE: Intercontinental Exchange:
IRS: Internal Revenue Service:
ISO: independent system operator:
MMU: market monitoring unit:
MOR: Market Observation Resource:
NYMEX: New York Mercantile Exchange:
OASIS: Open Access Same-Time Information System:
OMB: Office of Management and Budget:
OMTR: Office of Markets, Tariffs, and Rates:
OPM: Office of Personnel Management:
PJM: Pennsylvania, New Jersey, Maryland:
PUHCA: Public Utility Holding Company Act:
PURPA: Public Utilities Regulatory Policies Act:
QF: qualifying facility:
RTO: regional transmission organization:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
June 14, 2002:
The Honorable Joseph I. Lieberman:
Chairman, Committee on Governmental Affairs:
United States Senate:
The Honorable Jean Carnahan:
United States Senate:
As requested, we are reporting on the Federal Energy Regulatory
Commission’s (FERC) efforts to revise its approach to regulating and
overseeing the nation’s natural gas and electric power industries in
light of these industries’ evolution from highly regulated monopolies to
competitive energy markets. This report contains recommendations to the
Chairman of FERC on developing and implementing an effective regulatory
and oversight approach for these markets. The report also contains a
matter for congressional consideration on the need to review FERC’s
legal authorities to determine whether revisions are warranted in
view of the change to competitive energy markets.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter. We will then send copies to other
appropriate congressional committees; the Chairman, FERC; and the
Director, Office of Management and Budget. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions concerning this report, please
call me at (202) 512-3841. Key contributors to this report are listed in
appendix IV.
Signed by:
Jim Wells:
Director, Natural Resources and Environment:
[End of section]
Executive Summary:
Purpose:
Consumers in various parts of the United States have experienced
substantial fluctuations in the prices they pay for natural gas and
electricity as these industries make the transition from regulated
monopolies to competitive markets. These fluctuations—the most notable
in California during the summer of 2000—have caused some consumers
and state officials to question the wisdom of moving to competitive
energy markets. They have also raised concerns about the ability of the
federal government to adequately regulate and oversee these new
markets. The responsibility for ensuring that wholesale prices for
natural gas and electricity, sold and transported in interstate
commerce, are “just and reasonable,” generally rests with the Federal
Energy Regulatory Commission (FERC).
The Chairman of the Senate Committee on Governmental Affairs and
Senator Carnahan asked GAO to determine (1) how FERC has revised its
regulatory and oversight approach in response to the new energy markets
and (2) what management challenges FERC faces in effectively regulating
and overseeing these markets. To respond to the request, GAO reviewed
relevant legislation, regulations, studies, and documents pertaining to
FERC’s regulation and oversight of these industries. GAO also
interviewed a wide range of current and former FERC Chairmen,
Commissioners, and officials. In addition, GAO surveyed FERC staff in
the Office of Markets, Tariffs and Rates and related sections of the
Office of the General Counsel who have primary responsibility for
regulating the natural gas and electricity industries. About 71
percent, or 271, of these 384 staff responded to GAO’s survey.
Furthermore, GAO obtained information from a wide range of FERC’s
stakeholders—including state and industry representatives—and other
industry experts. For example, GAO surveyed the chairmen of the state
public utility commissions or boards. Thirty of the 49 commissions or
boards responded to GAO’s survey. (See chapter 1 for GAO’s detailed
scope and methodology and app. II for a copy of the FERC employee
survey with the quantitative results.)
Background:
FERC was established in 1977 as a successor to the Federal Power
Commission. FERC is an independent federal agency of about 1,200
employees. Five Commissioners, each appointed by the President to a
5-year term, and confirmed by the Senate, lead the agency. The President
designates one of the Commissioners as the Chairman, who is responsible
for the agency’s administrative operations. In addition to regulating
and overseeing interstate transportation and wholesale sales of natural
gas and electricity, FERC regulates transmission of oil by pipelines,
licenses hydroelectric projects, and approves site choices for
interstate pipelines and related facilities. Jurisdiction over other
aspects of the natural gas and electric industries, such as retail
sales, construction of electric power plants and transmission lines,
and intrastate transportation, belongs to state and local governments.
For nearly a century, the natural gas and electricity industries were
regulated as natural monopolies and dominated by a relatively few, large
public utilities that produced, transported, and sold natural gas and
electricity to the ultimate users.[Footnote 1] This monopoly structure
controlled the entry, prices, and profits of industry participants.
With technological, economic, and policy developments over the past 25
years, these industries have undergone a transition from this highly
regulated environment to one that places greater reliance on
competition to determine entry, prices, and profits. Natural gas was
first to make the shift, facilitated by passage of the Natural Gas
Policy Act of 1978 and subsequent FERC orders in 1985 and 1992 that
opened pipeline transportation to all on equal terms and required
pipeline companies to completely separate or “unbundle” their
transportation, storage, and sales services. As a result, natural gas
became a commodity bought and sold separately from its transportation.
The electricity industry has experienced similar developments, starting
about the same time but evolving more slowly than the natural gas
industry. The Public Utility Regulatory Policies Act in 1978 introduced
competition by requiring electric utilities to buy electricity produced
by nonutility, electric power generators. Then in 1992, the Congress
passed the Energy Policy Act, authorizing FERC to require utilities, on
a case-by-case basis, to allow competitors to use their transmission
lines for wholesale sales of electricity. In 1996, FERC ordered that
electric transmission systems be opened to all qualified wholesale
buyers and sellers of electric energy. FERC also required utilities to
“functionally unbundle” their generation and transmission businesses to
prevent discriminatory practices, such as not allowing competitors
equal access to transmission lines. One option FERC provided the
utilities to help them achieve unbundling was to transfer management of
their transmission lines to an independent system operator that would
manage the system without any special interests and for all users’
benefit. In 1999, FERC issued an order asking all utilities to transfer
control of their transmission lines to regional transmission
organizations. FERC is in the process of establishing these
organizations to cover the continental United States.
Under the traditional regulatory framework, FERC established individual
utilities’ terms, conditions, and rates for transportation and
wholesale sale of natural gas and electricity in interstate commerce.
To ensure that the rates these utilities charged were just and
reasonable, FERC based the rates on the utilities’ cost to provide the
service plus a fair return on investment, which is generally referred
to as cost-of-service regulation. With the opening of pipelines and
transmission lines, other energy producers and marketers began to
compete with the traditional utilities to the point that a complex
structure of formal and informal primary and secondary energy markets
has evolved. As competition has increased, FERC has allowed more and
more producers and marketers to sell their energy at prices determined
in the marketplace.
Results in Brief:
FERC has not yet adequately revised its regulatory and oversight
approach to respond to the transition to competitive energy markets.
The agency recognizes that the change from highly regulated monopolies
to competitive markets requires it to fundamentally change how it does
business. However, it has struggled through various strategic planning
and other efforts to define the specific strategies, processes, and
activities that it will use to regulate and oversee these markets.
Specifically, GAO found the following:
* An ambitious, 2-year reengineering effort begun in 1997 was intended
to position the agency to operate within the new market realities, but
the effort achieved little more than superficial changes to FERC’s
organizational structure.
* To date, FERC’s initiatives to monitor competitive markets have served
more to help educate FERC’s staff about the new markets than produce
effective oversight efforts. For example, the agency’s Market
Observation Resource room makes a substantial amount of market data
available to staff in a readily usable format; however, this
information has not yet been used to initiate an enforcement action or
to confirm or refute a problem identified elsewhere in the agency.
* FERC’s difficulties with developing an effective approach for
monitoring competitive markets are compounded by the need to continue
to carry out its traditional cost-of-service regulation as the industry
makes the transition to competitive markets.
* FERC is attempting to develop an approach for competitive markets
using legal authorities that were enacted primarily when the energy
industries were regulated monopolies. For example, FERC generally does
not have the authority to levy meaningful civil penalties. While this
authority may not have been necessary for cost-of-service regulation,
it is important if FERC is to pose a credible threat and deter
anticompetitive behavior or violations of market rules by market
participants.
Absent an effective regulatory and oversight approach, FERC lacks
assurance that today’s energy markets are producing interstate wholesale
natural gas and electricity prices that are just and reasonable.
Although many details remain to be decided, FERC’s current thinking is
that the regional transmission organizations will be required to
establish independent units to serve as the agency’s frontline monitors
for the new markets. However, it is likely to be several years before
these units will be fully operational. Therefore, GAO is making
recommendations to the Chairman, FERC, aimed at improving the interim
regulation and oversight of these markets until a long-term,
comprehensive approach can be established. In addition, GAO is
suggesting that the Congress may want to review and revise FERC’s
authorities in the context of competitive market structures, such as
the need to levy meaningful civil monetary penalties.
Under any future scenario, FERC must overcome significant human
capital and organizational structure challenges to effectively regulate
and oversee the evolving energy marketplace. Although its staff will
continue to do some cost-of-service regulation, FERC needs more staff
knowledgeable about competitive energy markets and skilled in regulating
and overseeing them. FERC is taking steps to transform its workforce so
that it will be able to successfully regulate in a competitive market
environment. However, GAO found that FERC:
* has had difficulty recruiting such staff, in large part, because it
has trouble competing with private sector salaries;
* faces the impending retirement of a large portion of its staff—over
one quarter of its employees will be eligible to retire by 2005;
* has used recruitment bonuses, retention allowances, tuition
reimbursement, and flexible work schedules to attract new staff and to
retain current employees, but it has not taken advantage of the full
range of personnel flexibilities and tools available to federal
agencies, such as special salary rates; and:
* has not developed a strategic human capital management plan to assess
its specific workforce needs and to develop strategies to address them.
Furthermore, FERC’s current organizational structure diffuses its market
oversight function, making it more difficult to provide the
communication, focus, and management attention needed to successfully
implement a new regulatory and oversight approach. FERC plans to
establish an Office of Market Oversight and Investigation reporting to
the Chairman to provide this communication, focus, and management
attention, although many details are yet to be resolved. GAO is making
recommendations to the Chairman, FERC, to help address the agency’s
serious human capital concerns.
In commenting on a draft of this report, FERC agreed with GAO’s
conclusions that the agency has not done all that it could to oversee
energy markets and with the report’s recommendations to improve market
oversight and to address the human capital challenges faced by FERC. The
agency also provided technical comments that GAO incorporated as
appropriate.
Principal Findings:
FERC Has Not Yet Defined and Implemented an Effective Regulatory and
Oversight Approach for Competitive Energy Markets:
As competitive energy markets started to develop in the early 1990s,
FERC recognized that it would need a new approach to ensure just and
reasonable energy prices. Its first strategic plan, which was completed
in September 1997, confirmed the need for this new approach but did not
delineate the strategies needed to put such an approach into place.
Instead FERC, in 1997, launched a 2-year, $20-million project to
reengineer itself to operate in this competitive-market environment.
One of the more significant results of this project, which is referred
to as FERC First, was to combine the agency’s staff responsible for
natural gas and electricity regulation into a new Office of Markets,
Tariffs and Rates. This new office was to be responsible for regulating
and overseeing competitive energy markets. FERC First, however, did not
bring about the fundamental changes that were anticipated and needed to
implement a new regulatory approach. For example, 74 percent of the
employees responding to GAO’s survey believed that FERC First had
improved the agency’s ability to effectively monitor or regulate energy
markets to little or no extent. The agency has subsequently continued
to struggle to define the specific strategies, processes, and
activities that it will use to regulate and oversee the emerging energy
markets. For example, although FERC made improvements to its strategic
plan in 2000 and 2001, the plan still lacks outcome-oriented goals and
objectives and important details on how FERC will monitor these
markets. The agency has yet to decide what market monitoring means in
the context of FERC’s responsibility to ensure that energy prices are
just and reasonable.
FERC has also tried various efforts to oversee energy markets,
including a staff investigation in 2000 of the nation’s wholesale
electricity markets and the development of a Market Observation
Resource room that serves as a central source of market data that FERC
staff can view electronically using various software packages. These
efforts to date, however, have served more as educational opportunities
for FERC staff than as effective oversight tools. For example, in
commenting on the staff investigation of wholesale electricity markets,
FERC management concluded that the investigation made it clear that the
agency did not have enough people who could analyze market information.
Similarly, the major products of the Market Observation Resource room
have been daily and monthly informational newsletters prepared for
FERC’s Commissioners and managers on energy market events and
conditions, such as business news, natural gas supply levels,
electricity price trends, and power plant outages.
Moreover, because FERC’s legal authorities for natural gas and
electricity are mostly derived from laws enacted when the industries
comprised highly regulated monopolies, FERC has been attempting to
develop and implement a regulatory and oversight approach for
competitive markets, with an outdated legislative framework and using
authorities that may not be adequate for today’s competitive markets.
For example, the potential for a company to engage in anticompetitive
behavior and charge excessive prices for electricity is a significant
concern when rates are determined by the marketplace instead of cost-of-
service regulation, especially when the markets are still evolving.
However, FERC’s authority to levy civil penalties if it identifies this
type of behavior is limited, because its authority is derived from laws
that were enacted in a cost-of-service environment. Without a
meaningful range of penalties, FERC lacks adequate enforcement “bite”
to deter anticompetitive behavior or other violations of market rules.
Such deterrence is an important part of an effective oversight
approach, especially because FERC will likely not be able to review all
the transactions in detail to identify such behavior or violations.
Finally, frequent changes in FERC’s leadership have been another
contributing factor to FERC’s slow progress in developing and
implementing a new approach. FERC has had four different Chairs over
the past 5 years. As the agency’s chief administrator, the Chair sets
the agenda and priorities. Making fundamental changes in an agency’s
operations, such as implementing a new regulatory and oversight
approach, can take a sustained effort over several years. This can be
difficult to achieve with significant shifts in an agency’s agenda and
priorities caused by continuous change in its top leadership.
To address these issues, GAO recommends that the Chairman, FERC, take
the following actions:
* Update the agency’s strategic plan to include outcome measures that
can be used to assess how well FERC is doing in achieving its strategic
goals and objectives for overseeing competitive energy markets. This
plan should also include specific strategies for achieving the goals and
objectives that set out explicitly how FERC will work with market
participants to provide comprehensive oversight of the markets.
* FERC should examine how the bulk power studies and the data sources
currently available through the Market Observation Resource room can be
used as effective market monitoring tools in the interim, until a more
comprehensive approach for overseeing energy markets is developed.
In addition, GAO is suggesting that the Congress may wish to convene
public hearings to review FERC’s authorizing legislation and determine,
in consultation with FERC Commissioners, whether FERC’s authorities need
to be revised in light of the changing energy markets. The Congress may
also want to consider providing FERC with the appropriate range of
authorities to levy civil penalties against market participants that
engage in anticompetitive behavior and violate market rules.
FERC Faces Significant Human Capital and Organizational Structure
Challenges to Effectively Regulate and Oversee Competitive Energy
Markets:
FERC does not currently have enough staff with the skills and knowledge
of competitive energy markets to effectively regulate and oversee these
industries. FERC’s employees were mostly recruited and trained for cost-
of-service regulation, and the agency has not yet conducted the training
and hiring necessary to adapt its workforce to a competitive market
environment. FERC has been providing its current staff with increased
training opportunities to enhance their knowledge of energy markets. For
example, the Office of Markets, Tariffs and Rates doubled its training
budget from 2000 to 2001. Despite these efforts, the general feeling
among FERC staff responsible for regulating and overseeing energy
markets is that they still need additional, focused training on how
energy markets work. Over 80 percent of the staff in the Office of
Markets, Tariffs and Rates and the related sections of the Office of
the General Counsel who responded to GAO’s survey said that they needed
more training in market functions and market structures.
Moreover, successfully recruiting staff at the mid- and upper-levels who
already have knowledge and experience with competitive markets is
critical to FERC’s efforts to quickly adapt its workforce. However, FERC
has had limited success with hiring these types of employees. According
to FERC, the salary differentials between government positions and
those in the private sector have made it difficult for the agency to
attract highly skilled and knowledgeable professionals away from the
private sector. For example, FERC has advertised an “Energy Industry
Analyst—(Energy Trader)” position at the GS-15, step 10, level—which
currently pays about $120,000—three different times with little success
in finding a qualified candidate.
In addition, over one-quarter of FERC’s employees will be eligible to
retire by 2005, creating an opportunity for FERC to refocus its
workforce competencies to those more geared toward regulating and
overseeing competitive markets. However, this large-scale retirement
will also create a dearth of institutional knowledge, because FERC will
continue to perform some traditional cost-of-service regulatory work as
the industries transition to competitive markets, and for some time it
will continue to need highly qualified and experienced staff to perform
these functions.
Nonetheless, FERC has not taken full advantage of the personnel
flexibilities and tools available to federal agencies to help it address
recruitment and employee retention challenges. Although FERC has used
recruitment bonuses, retention allowances, tuition reimbursement, and
alternative work schedules, it has not yet used other available tools,
such as special pay rates, to help it address its human capital
challenges.
FERC’s efforts to address its human capital issues have also been
hampered by its lack of a strategic human capital management plan. FERC
has not yet undertaken a systematic strategic human capital planning
process to identify the specific staff competencies it needs and develop
the strategies that it will use to meet these needs. For example, FERC
has not completed a detailed assessment and plan that will help the
agency address its potential loss of leadership continuity,
institutional knowledge, and expertise from the impending retirement of
many of its employees.
Furthermore, FERC’s market oversight function currently is dispersed
across various parts of the agency. This organizational structure makes
it more difficult for this function to receive the priority and
attention that is needed to bring about fundamental change. FERC’s
recently announced plans to create a new Office of Market Oversight and
Investigation, which will focus on analyzing and monitoring energy
markets, may address this issue. For example, this new office is
expected to report directly to the Chairman, thereby elevating the
attention of the market oversight function within the agency. However,
many details about the office and how it will carry out its
responsibilities have not yet been determined.
To address its serious human capital challenges, GAO is recommending
that the Chairman, FERC, in the short term, identify and formally assess
the personnel tools, flexibilities, and strategies available to federal
agencies to recruit and retain employees. The Chairman should also
develop an action plan to identify and target additional training and
development opportunities for current staff involved or potentially
involved in carrying out FERC’s market oversight functions.
In the longer term, GAO recommends that the Chairman, FERC, develop a
comprehensive strategic human capital management plan to guide FERC’s
efforts to recruit, develop, train, and retain staff knowledgeable in
regulating competitive markets. The plan should be linked to FERC’s
strategic and business plans.
Agency Comments:
We provided FERC with a draft of this report for review and comment.
FERC agreed with GAO’s conclusions, noting that its internal
restructuring to support its new market oversight role has not kept
pace with the speed of the energy industry’s restructuring. The agency
also commented that GAO’s recommendations are consistent with its
current direction. FERC said that its recent aggressive measures to
address its key challenges are paying off. According to FERC, it has
developed preliminary plans on how its new Office of Market Oversight
and Investigation will work and the office will be operational in
August 2002. FERC also said that it has recently made significant
progress in hiring new employees and will explore all of the hiring
flexibility available to it as it focuses on the skill sets needed for
market oversight and investigation. FERC further said that it is
reviewing existing budget allocations across the agency for additional
resources and working to craft more focused training programs to build
its staff’s technical and leadership capabilities. FERC also agreed
that its ability to develop, regulate, and oversee competitive energy
markets could be enhanced with additional statutory authority,
particularly for assessing civil penalties, and with guidance from the
Congress on the agency’s appropriate role in these markets.
FERC’s written comments are presented in appendix III. The comments
contain an attachment summarizing the agency’s current efforts to
address issues of energy market oversight and human capital, and the
need for additional legislative authority. FERC also provided a draft
of the mission and function statement and organizational design for its
new Office of Market Oversight and Investigation, and a list of the
services and products the office is to provide. In addition, FERC
provided us with some technical changes, which we incorporated into the
report as appropriate.
[End of section]
Chapter 1: Introduction:
Consumers in various parts of the United States have recently
experienced large fluctuations in energy prices as the natural gas and
electric power industries undergo a major restructuring from regulated
monopolies to competitive markets. The price spikes and supply
disruptions that occurred in California and other parts of the West
during 2000 and into 2001 are examples of the complications that have
arisen for these industries and government regulatory agencies during
this shift from regulated prices based on utilities’ cost of providing
service to market-based prices. The Federal Energy Regulatory
Commission (FERC) has both prompted and reacted to the fundamental
changes that the energy industries are undergoing. Established to
regulate energy monopolies, FERC first encouraged the restructuring of
the natural gas industry and today is doing the same for electricity.
The price spikes in California and elsewhere have fueled debate about
the wisdom of restructuring these industries and have drawn wider
attention than ever before to FERC and its ability to carry out its
legislative responsibilities for ensuring that natural gas and
electricity prices are just and reasonable. In response to these
concerns, the Congress is currently debating comprehensive energy
legislation.
FERC Is the Principal Federal Agency Regulating and Overseeing the
Natural Gas and Electricity Industries:
The natural gas and electricity industries perform three primary
functions in delivering energy to consumers: (1) producing the basic
energy commodity, (2) transporting the commodity through pipelines or
over power lines, and (3) distributing the commodity to the final
consumer. A range of federal, state, and local entities regulate
different aspects of these functions. While generation siting,
intrastate transportation, and retail sales are generally regulated by
state or local entities, wholesale sales and interstate transportation
generally fall under federal regulation, primarily by FERC. Under
federal law, FERC is responsible for regulating the terms, conditions,
and rates for the interstate transportation and sale for resale of
natural gas and electricity. FERC is charged with ensuring that the
terms, conditions, and rates are just and reasonable.
FERC was established in 1977 as a successor to the Federal Power
Commission and is an independent regulatory agency. In addition to
regulating and overseeing the interstate transmission and interstate
wholesale sales of natural gas and electricity, FERC regulates the
interstate transmission of oil by pipeline; licenses and inspects
private, municipal, and state hydroelectric projects; and approves site
choices as well as decisions to abandon interstate pipelines and
related facilities no longer in use.
FERC’s Resources and Organizational Structure:
FERC’s estimated budget for fiscal year 2002 is about $192 million and
provides funding for 1,200 staff years.[Footnote 2] For fiscal year
2003, FERC has requested a budget of about $200 million and 1,250 staff
years. While FERC has requested an increase for fiscal year 2003, its
staffing levels have generally decreased over the last decade. For
example, the 1,250 staff years requested for next fiscal year are 238
fewer than FERC had in fiscal year 1993 (see figure 1). According to
FERC managers, these staff reductions have occurred while the agency’s
workload has increased in both volume and complexity. Although the
Congress sets FERC’s budget, FERC recovers the full cost of operations
through annual charges and filing fees assessed on the industries it
regulates.
Figure 1: FERC Staff Years, 1993-2003:
[Refer to PDF for image]
This figure is a vertical bar graph depicting the following data:
FERC Staff Years, 1993-2003:
Year: 1993;
Number of full-time employees: 1,488.
Year: 1994;
Number of full-time employees: 1,434.
Year: 1995;
Number of full-time employees: 1,410.
Year: 1996;
Number of full-time employees: 1,374.
Year: 1997;
Number of full-time employees: 1,335.
Year: 1998;
Number of full-time employees: 1,318.
Year: 1999;
Number of full-time employees: 1,299.
Year: 2000;
Number of full-time employees: 1,217.
Year: 2001;
Number of full-time employees: 1,169.
Year: 2002;
Number of full-time employees: 1,200.
Year: 2003;
Number of full-time employees: 1,250.
Note: 1993-2001 staff years are actual figures. The 2002 and 2003
figures are estimates based on the budget requests for those years.
Source: GAO’s analysis of FERC budget data.
[End of figure]
Five Commissioners, each appointed to a 5-year term by the President,
and confirmed by the Senate, lead FERC. The President designates one of
the five Commissioners as the Chair, who also serves as the
administrative head of the agency and directs its staff. FERC’s staff
are currently organized around the agency’s two major program or
responsibility areas—energy markets and energy projects—with their
supporting administrative and management functions. About 35 percent of
FERC’s staff focus on energy markets. These staff are predominantly
located in the Office of Markets, Tariffs and Rates (OMTR) and the
Office of the General Counsel. OMTR was created in 1998 to integrate
the agency’s regulation of the electric, natural gas, and oil pipeline
industries. It plays a lead role in monitoring, promoting, and
maintaining competitive natural gas and electricity markets, while
regulating and overseeing the terms and conditions for energy
transactions that continue to be regulated on the traditional cost-of-
service basis. The Office of the General Counsel provides legal
services and is responsible for the legal phases of the Commission’s
activities.
Forty percent of FERC’s staff focus on energy projects, an area that
includes the physical infrastructure of pipelines, dams, and related
facilities. These staff are primarily located in the Office of the
General Counsel and the Office of Energy Projects. The Office of Energy
Projects authorizes nonfederal hydroelectric projects and ensures that
dams under its jurisdiction are properly constructed, operated, and
maintained. This office also certifies the construction and operation
of natural gas pipelines and approves the abandonment of pipelines no
longer being used. In addition, the office reviews hydropower and
natural gas projects to ensure their compliance with environmental
laws.
The remaining 25 percent of FERC’s staff are located mostly in
administrative and management support offices. These offices are
responsible for the agency’s planning, budgeting, human capital,
information technology, financial management, and related processes.
(See figure 2.)
Figure 2: FERC’s Organization:
[Refer to PDF for image]
This figure is an illustration of FERC’s Organization, as follows:
Chairman:
- Commissioner (4);
* Office of Administrative Law Judge;
* Office of the Secretary;
* Office of External Affairs;
* Office of the Chief Information Officer;
* Office of the Executive Director;
* Office of the General Counsel;
* Office of Markets, Tariffs, and Rates;
* Office of Energy Projects.
Source: FERC.
[End of figure]
FERC’s Legislative Authorities for Natural Gas Regulation:
Natural gas companies were initially locally franchised monopolies, many
of which manufactured natural gas locally from coal. With the discovery
of large natural gas reserves in the Southwest in the early 1900s, large
interstate pipeline companies soon became a major sector of the natural
gas industry, which nonetheless retained strong features of a natural
monopoly.[Footnote 3] In 1938, the Congress passed the Natural Gas Act,
which gave the Federal Power Commission (and now FERC) jurisdiction over
interstate transportation and sales for resale of natural gas. The act
also gave the agency jurisdiction over new construction and abandonment
of natural gas pipelines and related facilities.
Under this regulatory scheme, producers located natural gas reserves,
drilled wells, gathered the gas, and put it in marketable condition for
sale to interstate pipeline companies. After purchasing the natural
gas, pipeline companies generally transported and sold the gas to local
distribution companies for final sale and distribution to the ultimate
consumers, such as homeowners. The interstate pipeline companies also
sold some natural gas directly to consumers. FERC regulated the
pipeline companies’ terms, conditions, and rates for interstate
transportation and sale for resale of the natural gas to ensure that
they were just and reasonable. State and local authorities generally
set the transportation rates that the local distribution companies
charged consumers. FERC and the state and local governments generally
set rates on the basis of the companies’ cost of providing these
services, plus a reasonable rate of return on their investment.
A 1954 Supreme Court decision interpreted the Natural Gas Act as also
requiring the Federal Power Commission to regulate the prices that
producers charged to pipeline companies in the production area
(wellhead) for the natural gas sold in interstate commerce.[Footnote 4]
However, comprehensive regulation of natural gas wellhead prices proved
a failure. By the mid-1970s, severe gas shortages occurred as a result
of artificially low prices. During cold winters, such as 1976-77, these
shortages translated into delivery curtailments for many customers in
the northern United States. Responding to these supply problems, the
Congress passed the Natural Gas Policy Act of 1978 to begin the phased
deregulation of wellhead prices. For the phase-out period, the act
established a pricing scheme that encouraged increased natural gas
production. Producer price deregulation was completed with the Natural
Gas Wellhead Decontrol Act of 1989, which mandated that federal
controls over natural gas producer prices end by 1993, when prices
would be freely set in the marketplace.
In response to the Natural Gas Policy Act of 1978, FERC reduced
regulation of natural gas supplies transported between intrastate and
interstate pipeline systems. According to FERC, this breaking down of
barriers between the intrastate and interstate markets accelerated a
fundamental change in the natural gas industry, leading to marketing
natural gas as a commodity distinct from its transportation. Additional
changes have occurred in the restructured natural gas marketplace as a
result of FERC regulatory action and other developments that are
discussed later in this chapter.
FERC’s Legislative Authorities for Electricity Regulation:
The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal
Power Act of 1935 established the basic framework for electric utility
regulation for over 40 years.[Footnote 5] PUHCA was enacted to
eliminate unfair practices by large interstate electricity and natural
gas holding companies, which evolved and dominated the industry in the
1910s and 1920s, by requiring federal control and regulation of these
companies. In 1935, the Federal Power Act created the Federal Power
Commission, FERC’s predecessor, and charged it with overseeing the
rates, terms, and conditions of wholesale sales and transmission of
electric energy in interstate commerce by public utilities.
This basic legislative framework for electricity went largely unchanged
until 1978 when, primarily in response to the oil embargoes and higher
energy prices of that time, the Congress passed laws to encourage the
development of alternative sources of power and energy efficiency. The
Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted, in
part, to augment electric utility generation with more efficiently
produced electricity and conserve natural gas. The act required all
utilities to buy electricity produced by nonutility power production
facilities, known as “qualifying facilities.” To facilitate entry of
these entities into the electric generating market, the Congress
exempted them from most regulation under the Federal Power Act and
PUHCA, but they had to meet specific ownership and operating
requirements.[Footnote 6] More significantly, by opening wholesale
power markets to nonutility producers of electricity, PURPA laid the
groundwork for increased competition and a shift in the way that
wholesale electricity rates were set. Before implementation of PURPA,
wholesale interstate electricity prices were set by FERC on the basis
of the seller’s costs to generate and transmit the power—known as cost-
of-service pricing. Subsequently, under PURPA, states set rates,
pursuant to general regulations enacted by FERC, for nonutility
qualifying facilities (QF) based on the buyer’s “avoided” cost.
[Footnote 7] PURPA allowed these facilities to sell at avoided cost
rates because, unlike the utilities, these QFs did not have a large
enough market presence to be able to unduly influence prices.
Electricity regulation was significantly changed again with the passage
of the Energy Policy Act of 1992 (EPACT). EPACT created a new category
of power sellers called exempt wholesale generators (EWG) that are
exempt from FERC regulation under PUHCA. In addition, EPACT authorized
FERC to require utilities, on a case-by-case basis, to allow
competitors to use their transmission lines to sell wholesale
electricity, setting the stage for the open-access transmission that
exists today. Unlike QFs, these EWGs did not have to meet the same
operating requirements, such as having to meet cogeneration and
renewable fuel limitations. In addition, utilities are not required to
purchase power from EWGs, as they are with QFs. By making it easier for
nonutility generators to enter the wholesale market for electricity,
EPACT not only expanded competition but also facilitated the shift in
how electricity prices were set, since utilities could purchase
electricity from EWGs at market-based rates, traditional cost-of-service
prices, or a combination of both.
For the electric power industry, FERC does not have legislative
authority over electricity generation, construction of transmission
lines, intrastate transmission, or retail sales, all of which fall
under state or local jurisdiction. FERC also has no direct authority
over system reliability—that is, ensuring that consumers can obtain
electricity from the system when, and in the amount, they want. This
reliability has largely been the responsibility of electric utilities,
and, since its creation in 1965, of the North American Electric
Reliability Council and member organizations. Currently, an estimated
30 voluntary utility groups are working to improve reliability.
Adherence to the standards established by these groups is largely
voluntary and therefore subject to the willingness of the utilities to
comply.
Furthermore, FERC’s jurisdiction extends primarily to investor-owned
utilities. FERC does not have jurisdiction over federally owned
utilities,[Footnote 8] publicly owned utilities, or most cooperatively
owned utilities.[Footnote 9] These nonjurisdictional utilities own 27
percent of the U.S. electric transmission system (see figure 3).
Figure 3: Transmission Ownership in the United States:
[Refer to PDF for image]
This figure is a pie-chart depicting the following data:
Transmission Ownership in the United States:
Investor-owned utilities: 73%;
Federally owned utilities: 13%;
Publicly owned utilities: 8%;
Cooperative utilities: 6%.
Source: Energy Information Administration, The Changing Structure of
the Electric Power Industry 2000: An Update, DOE/EIA-0562(00)
(Washington, D.C.: October 2000).
[End of figure]
The Nation’s Natural Gas and Electricity Industries Are Evolving:
For almost a century, the energy industries were regulated as natural
monopolies and the entry, prices, and profits of industry participants
were controlled. However, during the last 25 years, because of
technological and economic developments, these industries, along with
other regulated industries such as telecommunications, airlines, and
banking, have come under pressure to restructure and move toward
greater reliance on competition rather than regulation. A key
expectation for restructuring these industries from a regulated
environment to competition-based markets was that it would result in
improved efficiencies that, in turn, would lead to lower costs and
ultimately lower prices for consumers. About two decades ago, the
natural gas industry began restructuring. Currently, the focus is on
the electricity industry.
The Natural Gas Industry Has Substantially Restructured:
The U.S. natural gas industry has evolved from a collection of regulated
monopolies to a national system of producers; pipeline, storage, and
local distribution companies; marketers; and consumers. In the past two
decades since the Congress passed the Natural Gas Policy Act of 1978 to
deregulate federal controls over wellhead prices, FERC has issued
orders to encourage further competition in the industry. The result of
these orders is that the natural gas industry’s restructuring is
several years ahead of that of the electricity industry.
FERC issued a series of orders during the 1980s and early 1990s to
address what it believed was the biggest obstacle to competitive
natural gas markets: the inability of natural gas users to gain access
through the pipeline systems to competitive natural gas suppliers.
These orders—the most notable of which were Orders 436 and 636—opened
pipeline transportation to natural gas producers, suppliers, and users
on equal terms and eventually resulted in interstate pipeline companies
relinquishing their traditional merchant function. FERC issued Order 436
in 1985 to institute open-access, nondiscriminatory pipeline
transportation. As a result, natural gas users could buy directly from
natural gas merchants in the production area and ship that gas via the
interstate pipelines. The pipeline companies could still make bundled
sales of the natural gas and its transportation and storage to local
distribution companies. Order 636, which was issued in 1992, required
the pipeline companies to completely separate or “unbundle” their
transportation, storage, and sales services. As a result, natural gas
as a commodity was decoupled from gas transportation. Pipeline
companies were required to treat other parties wishing to use the
pipeline to transport natural gas the same as they would their own
affiliated sales services, if they continued to have any. Order 636
also allowed shippers to release to other shippers unneeded pipeline
transportation capacity, on either a temporary or a permanent basis,
leading to the creation of a secondary capacity market designed to
compete with the primary pipeline market.
As a result of this restructuring, producers sell natural gas to a
variety of consumers, as well as to brokers/traders and resellers of
natural gas. With the removal of federal price controls, producers’
prices are determined in the marketplace. In addition, natural gas that
is ultimately sold to consumers moves via the pipelines under a variety
of contractual arrangements. Natural gas may be sold under contract or
on the spot market, where an owner auctions a package of natural gas at
a specific location for the price prevailing at that time and place.
Buyers and sellers arrange for pipeline capacity to transport their
natural gas to market. The purchaser pays the pipeline company for
transportation and may also contract for ancillary services, such as
storage, en route. In some transactions, pipeline companies deliver
natural gas to customers located directly along the pipeline right-of-
way or near enough to a customer-owned pipeline. In other cases,
natural gas is delivered to a local distribution company from the
pipeline drop-off point, often referred to as the “city gate.” The
local distribution company operates an intrastate utility regulated by
the state public utility commission that delivers natural gas from the
city gate to residential, commercial, and industrial users along its
route. For residential users, the local distribution company usually
purchases the natural gas for resale to them. For commercial and
industrial users, the local distribution company is usually delivering
natural gas that the users have purchased directly from producers.
However, generally speaking, commercial and industrial customers may
also choose to buy natural gas from the local distribution company.
For competitive markets, the wholesale price of natural gas sold in
interstate commerce is generally determined by the marketplace, subject
to FERC’s review to ensure that the rates are just and reasonable. For
pipelines without competition, FERC sets the rates using the traditional
cost-of-service regulatory format.
Natural gas pricing is becoming increasingly complex. One outgrowth of
FERC’s orders was the creation of new market centers to provide central
pipeline interconnections where individuals and companies could come
together to buy and sell natural gas. Today, natural gas prices are set
at dozens of distribution “hubs” and at 16 city gates. For example,
spot-market prices are set for the Henry Hub, a distribution center for
natural gas, in Louisiana. In 1990, futures contracts for natural gas
delivered at the Henry Hub were first traded on the New York Mercantile
Exchange (NYMEX).[Footnote 10] Since then, NYMEX has created contracts
for swapping natural gas at other hubs with gas priced at the Henry
Hub. Options contracts are traded on the price spread of Henry Hub gas
between different delivery dates.[Footnote 11]
Another development is the natural gas industry’s increasing convergence
with the electricity industry. As restructuring of the electricity
industry takes place and natural gas has become a major fuel for
generating electricity, electric power producers are buying interests
in natural gas reserves and/or pipelines as a way to ensure gas
supplies for electricity generation. In addition, natural gas
producers, pipeline companies, and marketers are also buying interests
in the electricity industry, such as in electric power generating
plants. The growing complexity and intertwining of these industries
further complicates the regulation and oversight of these markets.
The Electricity Industry Is Changing Significantly:
When the Federal Power Act was enacted in 1935, the fundamental
structure of the electricity industry was based on “vertically
integrated” electric utilities, which were single entities that owned
generation, transmission, and distribution facilities and sold
electricity as part of a “bundled” service to wholesale and retail
customers within their geographic area. Most electric utilities built
their own power plants and transmission systems, entering into
interconnection arrangements with neighboring utilities. Because the
utilities operated as monopolies, wholesale and retail electricity
pricing was regulated. Rates were derived from a utility’s costs plus a
fair rate of return on the utility’s investment.
As previously described, this industry arrangement of tightly regulated,
vertically integrated monopolies and cost-of-service pricing continued
relatively unaffected until the late 1970s when the enactment of PURPA
began the transition to a more competitive format in which generators of
electricity compete for customers and prices are established by the
market. In the 1970s, rapid price increases in some parts of the country
and significant technological changes in power generation led the
Congress to pass PURPA, which requires utilities to purchase power from
qualifying facilities and to sell them backup power. As nontraditional
power producers, such as qualifying facilities, began to compete in
electricity markets, FERC encouraged these new entities by authorizing
market-based rates for their electric power sales on a case-by-case
basis.
The Energy Policy Act of 1992 authorized FERC to require utilities, on a
case-by-case basis, to provide other wholesale buyers and sellers
access to their transmission lines and created exempt wholesale
generators to further compete with the utilities. FERC began to require
utilities to open access to their transmission lines as a condition of
approving utility mergers or market-based rates for their power sales.
Since the late 1980s, FERC has approved more than 850 applications to
sell power competitively in wholesale markets.
In April 1996, FERC issued Orders 888 and 889, opening the transmission
systems of public utilities to all qualified wholesale buyers and
sellers of electricity. Commonly known as the “open access rule,” Order
888 required that transmission line owners offer other transmission
users point-to-point and network transmission services under comparable
terms and conditions that they provide for themselves. The vertically
integrated nature of utilities in the past had not allowed independent
power suppliers equal access to transmission systems. By limiting the
extent to which independent power suppliers could provide service to
electricity customers, growth of competitive power generation markets
had been hindered. Order 888 also required that utilities “functionally
unbundle” their generation and transmission businesses to prevent
favoritism and discriminatory practices in providing transmission
services, such as not allowing competitors equal access to transmission
lines. This was accomplished by requiring utilities to separate their
transmission service functions from other business activities. Order
888 also encouraged utilities to form independent system operators
(ISO),[Footnote 12] to which they could transfer operating control (but
not ownership) of their transmission facilities. This could be one
solution to the unbundling requirement contained in the order. Since
Order 888 was issued, six ISOs have been formed and are now operating.
[Footnote 13]
To effectively ensure nondiscriminatory access to the transmission
system, up-to-date information about transmission must be unrestricted
and public to all transmission users. To meet this need, FERC issued
Order 889 requiring all investor-owned utilities to participate in the
Open Access Same-Time Information System (OASIS). OASIS is an
interactive Internet-based database containing information on available
transmission capacity, capacity reservations, and transmission prices.
By providing timely access to all qualified users regarding
transmission market information, the goal of OASIS was to facilitate
the functioning of competitive electricity markets.
In December 1999, FERC issued Order 2000, which asked all transmission-
owning utilities, including nonpublic utilities, to voluntarily place
their transmission facilities under the control of an appropriate
regional transmission organization (RTO). ISOs created under Order 888
would be supplanted by larger RTOs covering the entire nation. FERC’s
thinking underlying RTOs is that the nation’s transmission systems
should be brought under regional control in order to eliminate the
remaining discriminatory practices in use, better meet the increasing
demands placed on the transmission system, improve management of system
congestion and reliability, and achieve fully competitive wholesale
power markets. Order 2000 does not specifically require RTO
participation; however, if a utility opts not to join an RTO, it is
required to prove why doing so would harm it.
Since issuing Order 2000, FERC has taken a more aggressive stance on
developing RTOs. For example, on July 12, 2001, FERC issued several
orders requiring utilities to enter into discussions to form four large
RTOs covering the continental United States. FERC subsequently issued an
order on November 7, 2001, that reiterated FERC’s goals and process for
creating RTOs. FERC approved the formation of the first RTO—to include
the Midwest ISO—on December 20, 2001. This RTO will operate in some
20 states, stretching from New Mexico to the Canadian province of
Manitoba. FERC also encouraged another group, the Alliance Companies,
to explore joining the Midwest RTO, potentially expanding its scope even
further. To address state and industry concerns regarding the merits of
forming RTOs, FERC commissioned a study to examine their potential
economic costs and benefits. This study, released on February 26, 2002,
found that substantial economic benefits, from $1 billion to $10
billion per year, could result from instituting RTOs. However, the
study found only minor differences in savings between larger and
smaller RTOs.
FERC is also developing a notice of proposed rulemaking to provide a
standardized market design for all electric transmission providers. In
October 2001, FERC held workshops to discuss core issues related to RTO
development, including market monitoring, reliability standards, and
market design and structure. FERC subsequently held technical
conferences relating to market design for wholesale electric power
markets, as well as how responsibility for performing wholesale market
functions would be allocated within an RTO region.
With the restructuring that has taken place and FERC’s approval of
market-based rates for electricity sales, the industry has experienced a
significant change in the way power is sold across state lines. Four
ISOs—California; Pennsylvania, New Jersey, Maryland; New York; and New
England—are currently operating centralized power markets where
electricity suppliers submit bids to sell power in regional markets. In
these markets, the ISO evaluates the bids and selects the most
economical bid to meet energy demand in the region. Another recent
development outside of these markets is electricity trading hubs. A hub
is a location on the power grid representing a delivery point where
power is sold and ownership changes hands. Although each control area
on the power grid could become a trading hub, only a few hubs account
for the bulk of power trading. Development of electricity futures
contracts at NYMEX and the Chicago Board of Trade has contributed to
the emergence of these hubs. (See figure 4 for these major hubs and
centralized power markets.)
Figure 4: Major Wholesale Electricity Trading Hubs and Centralized
Power Markets:
[Refer to PDF for image]
This figure is a map of the continental United States depicting the
location of the following:
Major wholesale electricity trading hubs:
Mid Columbia (Washington);
California Oregon Border (California/Oregon);
Mead (Nevada);
Palo Verde (Arizona);
Four Corners (Utah/Colorado/Arizona/New Mexico);
Entergy (Arkansas);
Tennessee Valley Authority (Tennessee);
Cinergy (Illinois/Indiana);
Commonwealth Edison (ConEd) (Illinois);
Pennsylvania, New Jersey, Maryland (PJM) ISO and Trading Hub.
Centralized power market (unlike trading hubs, centralized power
markets cover an entire region, and are not restricted to one
location):
Pennsylvania, New Jersey, Maryland (PJM) ISO and Trading Hub;
New York ISO;
New England ISO.
Note: Power trading also occurs at locations not indicated on the map.
NYMEX has established electricity futures contracts for the Cinergy,
COB, Entergy, Palo Verde, and PJM trading hubs. The Chicago Board of
Trade has established electricity futures contracts for the ComEd and
TVA trading hubs.
Source: Energy Information Administration, The Changing Structure of
the Electric Power Industry 2000: An Update, DOE/EIA-0562(00)
(Washington, D.C.: October 2000).
[End of figure]
Finally, development of Internet-based trading systems, such as
EnronOnline, Dynegydirect, and Intercontinental Exchange, has further
changed the way in which electric power is sold. These systems provide a
platform for both physical energy (electricity and natural gas products)
and energy derivatives to be bought and sold.[Footnote 14]
Table 1 describes the major events and milestones that have occurred
during the restructuring of the natural gas and electricity industries.
Table 1: Major Events and Milestones in Restructuring the Natural Gas
and Electricity Industries:
Event: Early steps toward competition;
Natural gas industry: Some large consumers in the interstate market
started purchasing gas and pipeline transportation separately—mid 1970s.
Electric industry: Utilities file FERC rates with “up to” cost based
formulas—early 1980s. Public Utility Regulatory Policies Act mandates
purchases from qualifying facilities—1978.
Event: Exceptions to cost-of-services rates;
Natural gas industry: Natural Gas Policy Act gradually removes some
natural gas price ceilings—1978.
Electric industry: PURPA exempted qualifying facilities from
cost-of-service regulation. FERC recognizes competitive bidding for
new capacity—1988.
Event: Transmission access proposed to dampen anticompetitive behavior
and encourage competition;
Natural gas industry: FERC encourages pipelines to provide open-access
transportation—1985.
Electric industry: FERC initiates transmission access conditions for
market-priced power sales—1990. Energy Policy Act authorizes FERC to
order transmission access to encourage competition—1992.
Event: Standards to mitigate monopoly control in transmission
announced;
Natural gas industry: Order 636 issued in 1992:
* Comparable transmission and storage open-access required.
* Functional unbundling of product and transportation sales required.
* Pipeline companies allowed to make market-priced gas sales through
affiliates.
* Firm transportation customers get flexible receipt and delivery
points.
Electric industry: Orders 888 and 889 issued in 1996:
* Nondiscriminatory, comparable open access required.
* Functional unbundling generation and transmission businesses.
* Investor-owned utilities required to participate in OASIS.
Order 2000 issued in 1999:
* Transmission owning utilities encouraged to place transmission
facilities under the control of RTO.
Event: Access to information to support market functions;
Natural gas industry: Trade press publishes spot gas prices—1989.
FERC mandates individual pipeline electronic bulletin boards—1992.
FERC mandates standardized Internet communication protocol—1997.
Electric industry: Market-based pricing includes requirements for
electronic bulletin boards—1992. Energy Policy Act requires public
capacity reporting—1992. FERC orders OASIS—1996.
Event: Market characteristics evolve;
Natural gas industry: Company consolidation starts—mid 1980s. Product
markets active; prices transparent—1987. Gas marketing evolves as an
unregulated industry—1987. NYMEX futures contract for Henry Hub
gas—1990. Robust market centers/hubs for physical trade—1993. Futures
markets mature with large consumer access to transportation available
in most states—1994. Internet trading of gas and transmission
rights—1999.
Electric industry: Company consolidation starts—late 1980s. Spot and
forward markets still largely restricted to utilities—1995. Neither
transportation nor product prices are transparent yet—1995. Development
of a futures market hindered by a lack of a standardized spot market for
benchmarking. New entrants are trying to find/produce niches.
Innovators hope to combine gas and electric market instruments for
added value—1995.
Source: Adapted by GAO from Energy Information Administration,
Restructuring Energy Industries: Lessons from Natural Gas, Natural Gas
Monthly (Washington, D.C.: May 1997).
[End of table]
Objectives, Scope, and Methodology:
The Chairman of the Senate Committee on Governmental Affairs and
Senator Carnahan asked us to determine how FERC has revised its
approach to regulating and overseeing the natural gas and electricity
industries in response to the transition to more competitive markets and
identify the major management challenges that FERC faces to effectively
regulate and oversee these competitive markets.
To address both these objectives, we reviewed pertinent documents and
obtained information and views from a wide range of FERC officials and
stakeholder representatives. We obtained information and views from
FERC and stakeholder representatives through a variety of means,
including interviews and surveys. We interviewed the Chairman of FERC
and the other current Commissioners, as well as three former
Commissioners/Chairs who served at FERC within the past 5 years. In
OMTR, we interviewed all the managers at the division head level and
above, including the director and deputy director of the office. We also
interviewed the group managers of the office’s Divisions of Market
Development and Market Information. For the Office of the General
Counsel, we interviewed the general counsel, deputy general counsel, and
the lead counsels for the Market Oversight and Enforcement section and
the Markets, Tariffs, and Rates section. The two sections directed by
these lead councils advise OMTR and the Commissioners on regulation of
the natural gas and electric industries. In addition, we interviewed
the team leaders and various members of the joint OMTR and Office of
the General Counsel teams that FERC formed in 2000 to review the
nation’s wholesale electricity (bulk power) markets. Furthermore, we
interviewed the deputy director for FERC’s Office of Strategy and
Organizational Management and the agency’s director for human resources
management.
In addition to our interviews, we conducted a survey of the staff in
OMTR, and staff in the Office of the General Counsel’s sections for
Markets, Tariffs, and Rates and Market Oversight and Enforcement, up to
and including those at the division or section director level. The
survey was conducted using a self-administered electronic questionnaire
posted on the World Wide Web. We sent e-mail notifications to 384 FERC
staff beginning on December 14, 2001. We then sent each employee who was
surveyed a unique password by e-mail to ensure that only members of the
target population could participate in our survey. We closed the survey
on February 8, 2002, having received a total of 271 responses, for an
overall response rate of 71 percent. A copy of this survey with the
quantitative results can be found in appendix II.
The practical difficulties of conducting surveys may introduce errors
into the results. Although we administered our survey to all known
members of the population of employees, and thus our results are not
subject to sampling error, nonresponse to the entire survey or
individual questions can introduce a similar type of variability or
bias into our results—to the extent that those not responding differ
from those who do respond in how they would have answered our survey
questions. We took steps in the design, data collection, and analysis
phases of our survey to minimize population coverage, measurement, and
data-processing errors, such as checking our population lists against
known totals of employees, pretesting and expert review of
questionnaire questions, and follow-up with those not reachable at
original addresses or otherwise not immediately responding.
We also spoke with representatives of a wide range of FERC stakeholders,
including the National Energy Marketers Association, the National
Association of Regulatory Utility Commissioners, the Electric Power
Supply Association, and the American Public Gas Association. In
addition, we interviewed representatives, primarily from the market
monitoring units, of the New York ISO, ISO New England, the California
ISO, and PJM ISO. We did not interview representatives of the Midwest
ISO because it had just begun operations toward the end of our review.
Furthermore, we visited three major energy trading companies to discuss
the information they use in making energy trades.
We also surveyed the chairs of the state regulatory commissions or
boards from 48 states and the District of Columbia via e-mail to ask
them for comments, from their states’ perspective, on FERC’s regulation
and oversight of the natural gas and electricity industries.[Footnote
15] The initial e-mail was sent on November 15, 2001, with a follow-up
reminder sent on December 10, 2001. The final deadline for submissions
was December 21, 2001. We received responses from 30 of the 49 state
commissions or boards surveyed.
In addition, we reviewed laws and regulations pertaining to FERC’s
responsibilities for regulating and overseeing the natural gas and
electricity industries. We reviewed pertinent FERC documents, including
annual reports; budget requests; strategic and annual performance
plans; orders; case filings; studies; reports; human capital analyses;
speeches and congressional testimony by FERC Chairmen, Commissioners,
and other officials; and staff research papers. We also reviewed
appropriate documents from outside sources, including the Department of
Energy’s Energy Information Administration, the North American Electric
Reliability Council, the Congressional Research Service, ISOs, academia,
and other natural gas and electricity industry experts. Furthermore, we
drew on our prior work in the areas of electricity, natural gas, and
human capital management.
We conducted our work from June 2001 through April 2002 in accordance
with generally accepted government auditing standards.
[End of section]
Chapter 2: FERC Has Not Yet Defined and Implemented an Effective
Approach to Monitor Competitive Energy Markets:
FERC has recognized, since the early 1990s, that it needs to change its
approach for regulating and overseeing the natural gas and electricity
industries in response to their evolution from regulated monopolies to
competitive markets. However, FERC has struggled to define and
implement a comprehensive regulatory and oversight approach, and its
efforts to monitor these markets, to date, have been incomplete or of
limited effectiveness. Moreover, the agency’s outdated legislative
framework and frequent leadership changes over the last few years have
contributed to further limiting its progress in developing and
implementing an effective approach.
FERC Recognizes That It Needs a New Approach for Competitive Energy
Markets:
For nearly a decade, FERC has recognized that it needs a new approach
for regulating and overseeing the emerging competitive energy markets.
With the evolution to market-based rates for natural gas and
electricity, FERC has concluded that its approach to ensuring just and
reasonable prices needs to change: from one of reviewing individual
companies’ rate requests and supporting cost data to one of proactively
monitoring energy markets to ensure that they are working well to
produce competitive prices. From 1994 to the present, the need for this
change has been a reoccurring theme in a variety of key FERC documents,
such as its annual budget requests, strategic plans, and performance
reports.
For example, we found that as early as February 1994, in its fiscal year
1995 budget request to the Congress, FERC stated that the centerpiece of
its strategy for the natural gas and electricity industries was to
encourage competitive market processes wherever appropriate. In this
document FERC noted that while competitive forces could benefit energy
customers all over the country, harnessing the benefits of competition
without allowing abuses of market power required many regulatory
innovations, including many new approaches to oversight. FERC concluded
that the electricity industry would see significant changes under the
Energy Policy Act of 1992, largely through increasing competition among
electric power producers and more open transmission access, and that
these changes would inevitably require new long-term policy development
as well.
The need for a new regulatory and oversight approach has been reiterated
by FERC throughout the last several years in a variety of other key
documents, such as the following:
* In its fiscal year 1996 budget request, dated February 1995, FERC
stated that its goal was to find ways to regulate natural gas and
electric utilities effectively in order to protect consumers while
working with competitive commodity markets. FERC stated that it
expected to continue the shift in emphasis away from its traditional
routine casework of reviewing companies’ rate filings and more toward
monitoring and compliance. It stated that increasingly, its approach to
regulation would be to monitor the industries it regulates and act only
when there is a clear need to do so.
* In its first strategic plan for fiscal years 1997 through 2002,
issued in September 1997, FERC again stated that, at the most basic
level, the agency was moving away from a traditional command and control
approach of setting individual companies’ rates to economic regulation.
[Footnote 16] The plan anticipated the need to respond to the evolving
natural gas and electric power industries with increased flexibility
and speed. FERC placed particular importance on the convergence of the
natural gas and electric industries and on the need to coordinate with
other federal agencies and states. The plan also noted that as the need
for regulation in the industries changed, the agency must change to
respond in “real time” to these needs.
* In its State of the Agency report for fiscal year 2000,[Footnote 17]
FERC noted that like all regulatory agencies, it faced uncertainty
about its resources and its future mission. The report concluded that
to ensure consumer confidence in competitive energy markets, FERC must
adapt the way it does business to address the real-time needs of market
participants and changing market dynamics, while still maintaining the
integrity of its regulatory functions.
* In its most recent budget request for fiscal year 2003, dated
February 2002, FERC again stated that it needs a much stronger ability
to recognize and respond to problems in the markets. FERC further
stated that it needs to recognize problems when or before they happen
and craft solutions quickly and also be able to police individual
behavior in markets much more effectively than in the past.
FERC Has Struggled to Define and Implement a New Approach:
Despite its long-standing awareness of the need for a new regulatory
approach, FERC has struggled to define the specific strategies,
information, processes, and activities that it will use to regulate and
oversee competitive energy markets. Various planning and reengineering
initiatives that FERC has recently undertaken have not been successful
in defining and implementing a comprehensive approach for these markets.
Moreover, while California’s energy problems in 2000 provided a “wake up
call” for the agency and the impetus for a greater focus on market
oversight functions, they also delayed the agency’s efforts to
establish an effective market oversight program by diverting
substantial management attention and resources.
FERC’s Strategic Planning Process Has Not Provided the Goals,
Strategies, and Milestones to Implement a New Approach:
FERC’s strategic planning process helped lay the groundwork for the
agency to begin revising its regulatory and oversight approach. However,
the process has not produced the specific goals, strategies, and
milestones to effectively make the change. FERC first issued its
strategic plan in September 1997, and has since revised it twice, once
in September 2000 and again in September 2001. The overall direction of
the strategic or general goals and objectives set out for natural gas
and electricity in these versions has essentially remained the same.
Although the 2001 version of the plan provides greater and more
explicit focus on FERC’s oversight and monitoring of the markets than
earlier versions, it still lacks key details on how the strategic goals
and objectives will be accomplished and how progress in achieving them
will be assessed.
FERC Has Been Slow to Explicitly Incorporate Energy Market Oversight
into Its Mission Statement:
An agency’s statement of its mission is a critical element of its
strategic plan. It is intended to bring the agency into focus, explain
why the agency exists, and tell what it does. FERC’s mission statement
has only very recently explicitly recognized oversight of the energy
industries as an important part of its mission. The mission statement
in FERC’s 1997 version of its strategic plan essentially stated that
the agency regulates the energy industries to ensure that the rates,
terms, and conditions of service for the industries are just and
reasonable. The 2000 version of the mission statement provided a more
direct focus on markets by stating that the agency, in regulating key
interstate aspects of the energy industries, chooses regulatory
approaches that foster competitive markets whenever possible and
ensures access to reliable service at a reasonable price. However, it
did not explicitly mention oversight of the industries or markets. The
2001 version does not refer to competitive markets but instead states
that FERC’s mission is to regulate and oversee the energy industries in
the economic and environmental interest of the American public. (See
table 2.) According to FERC, “[t]he California crisis showed that the
need for good oversight and investigation is not only important but
also far more urgent than we (or most others) had fully understood.”
Table 2: FERC’s Statement of Its Mission in the 1997, 2000, and 2001
Versions of Its Strategic Plan:
Version: 1997;
Mission statement: The Commission regulates, in the public interest,
essential aspects of four of the nation’s critical energy industries:
electric power transmission and sales for resale, natural gas
transportation and sales for resale, oil pipeline transportation, and
nonfederal hydroelectric power. The Commission ensures that the rates,
terms, and conditions of service for the electric power, natural gas,
and oil industries are just and reasonable and not unduly discriminatory
or preferential, and that licensing, administration, and safety actions
for the hydropower industry and other approvals for all four industries
are consistent with the public interest.
Version: 2000;
Mission statement: The Commission regulates key interstate aspects of
the electric power, natural gas, oil pipeline and hydroelectric
industries. The Commission chooses regulatory approaches that foster
competitive markets whenever possible, assures access to reliable
service at a reasonable price, and gives full and fair consideration to
environmental and community impacts in assessing the public interest of
energy projects.
Version: 2001;
Mission statement: The Federal Energy Regulatory Commission regulates
and oversees energy industries in the economic and environmental
interest of the American public.
[End of table]
FERC’s Strategic Goals and Objectives Have Focused More on Market
Development Than Market Oversight:
The goals and objectives that FERC has set out in the initial versions
of its strategic plan have focused more on efforts to foster the
development of competitive markets than on their oversight. For
example, the 1997 version of the plan contained no strategic goals and
one strategic objective specifically addressing oversight of market
rules and behavior. (See app. I for FERC’s principal strategic goals
and objectives relating to energy markets.) That objective—for
constraining market power—states that market participants will have
confidence that natural gas markets, electric markets, and all
transportation services are working efficiently and fairly and that
market participants are not subject to abuses of market power. The plan
stated that FERC would monitor the electric utilities and assess
whether they can exercise market power that could adversely affect
wholesale electric prices. In addition, FERC would respond appropriately
to market power issues in the context of market-based pricing and in
reviewing the effects of mergers on competition. However, the plan
offered no details about how FERC would monitor energy markets beyond
its approval of individual companies to sell electricity at market-based
rates and review of proposed mergers of energy companies.
Similarly, FERC’s 2000 version of its strategic plan contained one goal
for energy markets. That goal—to benefit consumers by providing a fair,
open, and efficient regulatory foundation for competition—had four
objectives. As with the 1997 version of the plan, one objective was to
constrain market power. In addition, monitoring energy markets was
included as a subobjective under the general objective to nurture
competitive market institutions. FERC stated that it must be able to
monitor markets so that it can follow events, such as significant price
spikes, and react appropriately. To fulfill its market monitoring
strategy, the plan stated that FERC would (1) develop up-to-date,
flexible information systems, (2) use investigations and audits as
valuable market monitoring tools, and (3) begin to publish an annual
report on the state of the markets. According to the plan, to constrain
market power, FERC would detect and respond to all forms of market
power and use enforcement and litigation as necessary to remedy
anticompetitive behavior. The plan also stated that market monitoring
could help FERC detect potential or actual market power abuse and that
FERC would try to limit operations of existing and emerging entities
that may possess market power. Although the 2000 version provides more
results-oriented goals and objectives and a greater elaboration of
strategies than the 1997 version, it does not provide the details and
measures to allow the agency and the Congress to assess whether the
goals and objectives were achieved and the strategies were effective.
Only recently, in its 2001 revision, has FERC increased the strategic
plan’s emphasis on market oversight and improved its description of the
strategies that will be used to achieve the goals and objectives.
[Footnote 18] The Chairman of FERC told us that making competitive
energy markets work well depends on (1) an adequate delivery or
transmission infrastructure to ensure that sufficient supplies of
energy are available to create an environment where competition can
succeed, (2) a market structure and market rules that ensure
competition, and (3) effective oversight to identify market structures
and rules that do not work well and market participants that engage in
anticompetitive actions. The Chairman said that when he arrived at FERC
in the summer of 2001, he found that FERC had been working on the first
two items—the infrastructure and the market structure and rules—but was
doing little in the way of effective market oversight. As a result, he
revised the strategic plan to provide a balanced approach that covers
all three factors.
While the 2001 version provides more information than earlier versions
on the strategies to be used to achieve the agency’s goals and
objectives, the plan still provides few details on how FERC will work
with market participants to accomplish the goals and objectives. The
plan also does not have quantifiable outcome measures that can be used
to assess FERC’s progress in achieving the goals and objectives over
the period of the plan. For example, to protect consumers, the plan
states that FERC will detect abuses of market power quickly. To do
this, FERC will pay close attention to complaints as it receives them
and will also develop its analytical capabilities. However, there is no
information on what new actions FERC will take to pay close attention
to the complaints or what actions it will take to develop its
analytical capabilities. There are also no quantifiable outcome
measures to evaluate FERC’s success in achieving this goal and
its related objectives.
FERC’s Major Reengineering Project Did Not Address Fundamental
Oversight Issues:
In December 1997, FERC launched a major management review and
reengineering project, referred to as “FERC First.” According to FERC
documents, the project was undertaken as a result of the 1997 strategic
planning process, during which the agency concluded that it would have
to move away from traditional command and control approaches and move
toward economic regulation of the evolving energy markets. The project
was to assess the external influences affecting the agency’s
operations, as well as the adequacy of the agency’s processes, employee
development practices, information technology infrastructure,
communication, and other business practices. According to FERC, the
project’s costs from February 2, 1998, to March 31, 2000, totaled $20.1
million, including about $7.5 million in agency personnel costs and
about $7.7 million for the two principal consulting firms that it used.
FERC First resulted in a number of changes, including the following:
* a new organizational structure for the agency, including the creation
of the Office of Markets, Tariffs and Rates (OMTR) to focus on energy
markets;
* a formal process for strategic planning and management with a focus on
energy markets, energy projects, and the management services needed to
support them;
* the combination of responsibilities and personnel for natural gas and
electricity to reflect the convergence under way in these industries;
* the modification of work processes to minimize hand-offs from one
person to another and one office to another, reduce the number of
reviews, and integrate them with information technology;
* the increased use of teaming of staff, within and across groups, to
perform the agency’s work; and;
* new criteria for selecting and training managers that emphasized
leadership qualities over technical expertise.
Although well intentioned, FERC First is generally considered by most
FERC employees that we contacted to have failed in achieving its
objectives. For example, 74 percent of the employees responding to our
survey believed that FERC First had improved the agency’s ability to
effectively monitor or regulate energy markets to little or no extent.
In contrast, 4 percent of those responding said that it improved FERC’s
ability to a great or very great extent. Furthermore, 80 percent of them
believed that FERC First had improved their ability to perform their job
duties to little or no extent. In contrast, 6 percent of those
responding said it improved their ability to a great or very great
extent. While many employees that we contacted told us that overall
FERC First was a failure, several stated that it was a “disaster.”
Common concerns cited by employees included (1) the project took too
long and diverted too many agency resources for the limited number of
changes that resulted and (2) it made the agency less effective rather
than more effective.
Moreover, FERC First did not bring about the fundamental changes needed
to implement a new regulatory and oversight approach for competitive
energy markets. For example, although FERC First established OMTR to
give more priority to developing and monitoring competitive energy
markets, OMTR has had difficulty defining the specific strategies,
information, processes, and activities that it will use to oversee
these markets. In October 1999, the director of OMTR said “we have to
decide what we want to do with markets, how much resources we want to
devote to the different views, what information will we need from
outside the building to do our job, what type of IT [information
technology] hardware and software will we need to do that, what type of
skill sets of people will we need.” In August 2000, when FERC hired a
director for OMTR’s Division of Energy Markets, these details had still
not been determined. At that time, the California energy problem had
occurred and, according to FERC officials, the Markets Division devoted
most of its attention and resources to responding to the California
problem over the next year.
California’s energy problems in 2000 forcefully demonstrated what could
result when markets do not work as intended. Ironically, while the
California problem was, in the words of several FERC officials, a “wake
up call” for the agency, it also delayed the agency’s efforts to
establish an effective market oversight program by diverting
substantial management attention and resources away from this task. The
California problem was shortly followed by the bankruptcy of the Enron
Corporation, again causing OMTR and its Markets Division staff to
become involved in addressing concerns related to this new crisis.
Consequently, although it has been almost 4 years since the creation of
OMTR was announced, FERC has not been able to devote the time and
attention needed to resolve the fundamental issues relating to its
market oversight function. FERC currently has two task forces working to
determine its information needs for market oversight and is still in the
process of developing a working definition for market power. According
to industry experts that we spoke to, FERC’s lack of progress in clearly
defining its market oversight function has eroded their confidence in
the ability of the agency to provide the level of regulation and
oversight needed for the emerging energy markets.
FERC’s Market Oversight Initiatives Have Been Incomplete or
Ineffective:
FERC has initiated several actions to enhance its oversight of
competitive energy markets; however, most of these actions have been
incomplete or limited in their effectiveness. Recent FERC oversight
initiatives have included (1) creating a Market Observation Resource
(MOR) room to collate information on energy markets in a user-friendly
format, (2) conducting a series of studies to assess the state of the
wholesale electricity (bulk power) markets, and (3) requiring
independent system operators (ISO) to establish market monitoring
units. However, to date, the MOR room and the bulk power studies have
had limited results beyond increasing FERC staff’s knowledge about
competitive markets, and the ISOs’ market monitoring units provide only
limited coverage of the nation’s energy markets.
The Market Observation Resource Room Has Yet to Fulfill Its Potential:
To more effectively monitor increasingly competitive energy markets, in
mid-2001 FERC established the MOR room at its Washington, D.C.,
headquarters. This room, which was patterned after market operation
centers or rooms of ISOs and major energy trading companies, uses
computers and various software packages to make large amounts of data
on natural gas and electricity markets available in a useable format.
FERC created the MOR room to serve as a central data source, an
education center for the agency’s staff, and a regulatory and oversight
tool. Since establishing the room, FERC has been acquiring and testing
market reporting services and software programs while building an easily
retrievable database. However, FERC has not yet been able to use the
MOR room to its full regulatory and oversight potential because (1) the
data available through the facility are mainly limited to those that are
available free of charge, (2) additional data needs for the agency have
not yet been determined, and (3) an overall regulatory approach has not
been developed. Instead, the MOR room serves principally as a technical
learning resource for data analysts in OMTR and as a convenient market
information resource for the agency’s staff.
The MOR Room Is Becoming a Central Data Source but Currently Lacks Data
on Critical Aspects of Energy Markets:
While the MOR room is becoming a central data source for FERC, the
information that it contains is limited for effective monitoring and
oversight of energy markets. Currently, the MOR room provides FERC
staff with both commercial and proprietary information services, ranging
from Bloomberg Professional Energy service to the PJM E-Data for the
Pennsylvania, New Jersey, Maryland (PJM) ISO’s mid-Atlantic electricity
markets. Electricity market data provided by these services include
prices on the spot market and for futures contracts, plant outage
information, business news, and historical data for trend analysis. For
example, FERC subscribes to FriedWire, which tracks supply, demand,
price, and transmission data. Natural gas market data include spot and
futures prices and market commentary, storage levels, imports and
exports, and supply/demand statistics. The MOR room receives detailed
and timely reports about energy prices on regulated exchanges, such as
natural gas futures contracts for the Henry Hub traded on the New York
Mercantile Exchange (NYMEX). In addition, several weather services are
available to monitor changing conditions nationwide, as weather and
climate affect energy supply and demand in both spot and futures
markets.
However, the MOR data do not yet include detailed information about
energy prices on “exempt” commercial markets, such as the UBS-Warburg,
Dynegydirect, and Intercontinental Exchange (ICE).[Footnote 19]
Although FERC staff can view natural gas and electricity prices free of
charge from the UBSWarburg, Dynegydirect, and ICE Web sites to track
general market behavior, FERC would need to become a paying subscriber
for these services to routinely obtain the names and other details of
the parties trading in these exempt markets. This information would be
necessary, for example, if FERC needed to identify instances of power
companies or traders exercising excessive market power. Similarly, the
MOR room does not receive timely information about over-the-counter
markets—where informal dealings that are not federally regulated occur.
Some over-the-counter sales in which two parties buy and sell natural
gas contracts privately, and offsetting trades known as “swaps,” are
aggregated and reported the next day in the energy trade press; others
are aggregated from a NYMEX report. In commenting on a draft of our
report, FERC said it may not have jurisdictions over these trades and,
therefore, may not have access to this information. However, we believe
that unless FERC staff can regularly track these reports and then
compare them to simultaneous behaviors by participants in other
markets, it would be difficult to identify instances of market
manipulation.
FERC Is Identifying Additional Market Information Needs, but Its
Progress Has Been Slow:
Since the summer of 2001, FERC has established two teams—the Review
of Information Collection Team and the Comprehensive Information
Assessment Team—to take stock of the agency’s current and future
market information needs. These teams were tasked to identify
information that FERC currently collects and additional information
that it might need. To date, neither team has completed its work,
although their initial findings highlight some of the difficulties FERC
faces in obtaining additional data.
For example, the Review of Information Collection Team is seeking to
learn precisely what data the agency now collects. As of January 31,
2002, the team has determined that FERC has more than 50 active
information collection and reporting requirements for the energy
companies it regulates and oversees, and that FERC receives about
33,600 industry responses annually.[Footnote 20] According to the
team’s supervisor, the team’s effort has not been considered a high
priority within FERC. He predicts that it may be several more months
until the team completes its detailed assessments of the data, and more
than a year until proposed regulations to collect these data can be
developed.
Similarly, the Comprehensive Information Assessment Team is identifying
the information that the agency will need in order to more effectively
regulate and oversee emerging energy markets. The team has already
identified about 80 information “needs” for FERC. A critical challenge,
according to FERC officials, is to transform this list of needs into a
practical set of data requirements. To do this, FERC must first decide
how aggressively it will be monitoring energy markets; however, this
decision has yet to be made by the agency.
A key feature of FERC’s data collection plans is to have other
organizations such as federal and state agencies, commercial sources,
trade associations, and regional transmission organizations provide FERC
access to much of the information needed to monitor energy markets.
However, at this point, it is unclear how FERC will ensure that these
data are accurate and reliable. Nor is it clear how FERC and its data
sources will standardize the data and pay for their collection. Another
issue to be addressed is how FERC will integrate these new data
requirements with the data already available in the MOR room.
FERC plans to review the results of the two information teams later this
spring, and then hold meetings and workshops with market participants.
More than likely, any new data identified as important to FERC’s market
monitoring efforts will not be formally required from market
participants until 2003. Moreover, as required by the Office of
Management and Budget, FERC will have to offset any new information
requests from the industry by eliminating existing ones. One FERC
official told us the agency can fulfill this requirement by eliminating
certain filings required under the cost-of-service regulation that may
no longer be relevant.
The MOR Room’s Use as a Regulatory and Oversight Tool Is Largely
Undecided:
When first created, the MOR room was expected to showcase “the
important function of monitoring and assessing the energy market.”
However, because FERC has not determined how it will regulate and
oversee competitive energy markets, the MOR room’s use, as a regulatory
and oversight tool, remains largely undecided and untapped. For example,
FERC officials that we spoke with were not aware of any enforcement
actions that had been initiated through use of the MOR room or any
market problems detected elsewhere in the agency that had been
confirmed or refuted with MOR room data. Currently, the MOR room serves
principally as a technical learning resource for data analysts in
OMTR and as a convenient resource for the agency staff who prepare the
daily Energy Market Report and monthly Energy Markets Review. These
publications keep FERC Commissioners and senior staff aware of news
and market events, such as energy trading companies’ financial problems,
power-plant outages, and energy supply and price trends.
Nonetheless, one energy data analyst who helped design and now operates
the MOR room told us that it is likely to become an integral part of
FERC’s proposed new Office of Market Oversight and Investigation, which
is intended to concentrate FERC’s market-monitoring resources in one
work group (see chapter 3 for more detailed information on this new
office). But just how the MOR room will assist the new office has yet
to be decided. The extent to which the MOR room can contribute to
FERC’s regulation and oversight of energy markets also depends on how
FERC decides to divide market monitoring responsibilities with other
entities, such as the regional transmission organizations. These
decisions also have yet to be made.
FERC’s Bulk Power Studies Were Not an Effective Oversight Tool:
As another oversight initiative, on July 26, 2000, FERC issued an order
directing its staff to undertake an investigation of the nation’s
wholesale electricity (bulk power) markets and report the results by
November 1, 2000. The investigation was ordered because the nation’s
bulk power markets were in different stages of transition, and some
areas of the country had experienced extreme price fluctuations. By
reviewing technical or operational factors, federal or state regulatory
prohibitions or rules, market or behavioral rules, and other factors
affecting the reliability or competitive pricing of electricity in
these markets, the investigation was to determine whether the nation’s
bulk power markets were working efficiently.
FERC assigned a study team for each of the five regions covering the
continental United States: the northeast, southeast, midwest, west, and
Electric Reliability Council of Texas (ERCOT) regions.[Footnote 21] The
teams took about 2 to 3 months to conduct the investigations and write
their reports. They reviewed publicly available data and reports and,
with the exception of the ERCOT study, obtained input from market
participants and others, such as ISOs and state public utility
commissions, and also requested specific market information, such as
market participants’ data on bids during the period.
The final reports from each team generally included data on electricity
supply and demand, transmission systems, the regulatory and
institutional environment, market design, prices during the summer of
2000, factors affecting these prices, and issues relating to
inefficiencies or improvements needed in the markets’ design or
operations.[Footnote 22] In addition, the reports generally provided
policy options for the Commission, such as potential ways to correct
the conditions that led to price spikes, improve market rules, or
improve access to the transmission systems to increase competition.
Instead of serving as an effective oversight tool, however, these
studies mostly provided FERC staff an opportunity to learn about
electricity markets. The study teams were not allocated much time and
lacked the expertise and data to provide the depth of investigation
needed. According to many of the study team leaders that we talked to,
when the studies started the teams knew little about the markets they
were examining and they had only about 3 months to complete the work
and prepare the reports. Most of the team leaders and members said that
more time, more data, and/or staff with different skills or expertise
would have been needed to perform in-depth studies. The types of staff
skills or expertise cited as being needed included more knowledge of
economics and market operations and skills in compiling and analyzing
large amounts of data. According to FERC management, it became clear
during these investigations, that the agency did not have enough staff
who could analyze the relevant market information. This shortage
related both to skills in finding, manipulating, and analyzing large
data sets and to economic and other expertise in focusing information
analyses on critical market questions and interpreting the results.
Most of the study team leaders and members we spoke to indicated that
periodic bulk power studies could be a useful oversight tool for FERC if
they were done in more depth. While the studies provide some important
baseline data on these markets, FERC has no plans to update the bulk
power studies. As an alternative, it proposes to conduct periodic
assessments of market performance, supplemented by other reports. In its
fiscal year 2003 budget request to the Congress, FERC stated that it
plans to publish semiannual seasonal market assessments of major
regional markets for both natural gas and electric power. These
assessments are to report on a series of objective measurements for
each market, such as basic supply-demand balances and the degree of
market concentration. They are to also report on the markets’
experience with current market rules and on major vulnerabilities, if
any, that might threaten to disrupt the markets in the future. FERC
plans to supplement these assessments with other periodic reports,
including bulletins that analyze fast-breaking market developments.
According to FERC, information will come from its MOR room, industry
contacts, and close coordination with the market monitoring units (MMU)
of the yet-to-be formed regional transmission organizations. These
supplemental reports will also include analyses of apparent market
anomalies—for example, instances of high prices seen in unexpected
places or apparently abnormal volumes of trading transactions.
However, it is likely to be some time before FERC can fully implement
these plans. FERC anticipates that the market performance measurements
to be used for the seasonal assessments will be finalized during 2003.
In addition, the MMUs of the regional transmission organizations (RTO)
may not be operational for up to 3 years. FERC is depending on these
units to provide much of the data and analysis that it will use for the
seasonal assessments and the other reports. As a result, until these
new analyses are available, it appears that FERC will not be conducting
detailed evaluations of the markets.
ISOs’ Market Monitoring Units Provide Oversight Support but Do Not Cover
All the Markets:
The formation of ISOs provided FERC additional market monitoring
support for certain energy markets. Under Order 888, FERC gave public
utilities the option to create ISOs to independently operate their
electric transmission systems and thereby meet the requirement for
separating, or unbundling, interstate wholesale power service from
transmission. In approving their formation and use, FERC required ISOs
to, among other things, establish a market monitoring unit. MMUs are
required to develop market monitoring plans, which must be approved by
FERC, and periodically report on their monitoring activities.
Although MMUs play an important market oversight function, their
coverage of the nation’s electricity markets is limited. Because FERC
made the formation of ISOs voluntary, most of the nation is not covered
by an ISO, and therefore is not subject to monitoring by an MMU.
Currently, FERC has approved five ISOs that cover only parts of the
United States. These include the New York ISO; ISO New England; and PJM
ISO in the Northeast and the California ISO in the West. The Midwest
ISO, covering at least parts of several states in the Midwest from
Canada to Kentucky, began selling transmission service in February 2002
but had not yet established an MMU. There are no ISOs operating in the
Southeast, the West outside of California, and much of the Midwest.
Therefore, market monitoring responsibilities for these areas fall to
FERC.
Moreover, the MMUs we contacted—California, New York, New England,
and PJM—primarily focused their monitoring activities on reviewing
market transactions for abuses of market power by market participants
and for market design problems within their particular markets.
According to these MMU officials, the strength and value of an MMU’s
market monitoring activity is in its ability to review minute-by-minute
transactions looking for anomalies in market behavior. They believe
that FERC’s market monitoring role is better suited to evaluating
overall market performance at the national or regional level. According
to an official from PJM’s MMU, FERC has the luxury to look at the
overall market picture from a policy perspective, whereas MMUs are down
in the trenches dealing with detailed information. The MMUs told us
that FERC should leave the responsibility for monitoring daily market
transactions to MMUs and concentrate on the larger policy issues.
Finally, MMUs employ different strategies and techniques in reviewing
market transactions, which may limit the usefulness of the information
they provide to FERC. FERC requires that the MMUs independently and
objectively monitor and report on the markets operated by ISOs and that
the MMUs’ market monitoring plans be designed to ensure competition,
prevent any undue influence by market participants, and correct any
design flaws. FERC allows MMUs flexibility with respect to the scope of
their monitoring and how it is carried out. As a result, the four MMUs
we contacted varied in their size, operations, and focus. For example,
the MMUs of the New York and PJM ISOs take different avenues to
identifying and mitigating or correcting market power abuse.[Footnote
23]
Because of these differences in operation, the information provided to
FERC by MMUs may not be comparable and may make it significantly more
difficult for the agency to develop a comprehensive nationwide analysis
of energy markets. This issue will become more important as FERC
approves the creation of the larger RTOs under Order 2000 to replace
ISOs. FERC is currently developing a standardized design for the RTOs’
market monitoring function and the types of market monitoring
information that they will be required to provide the agency.
FERC’s Outdated Legislative Framework and Frequent Leadership Changes
Have Contributed to Its Difficulty in Developing a New Regulatory
Approach:
FERC’s legislative framework of regulatory and oversight authorities has
remained essentially the same, even as the energy industries have
undergone substantial restructuring. As a result, FERC is struggling to
develop and implement a new regulatory and oversight approach for these
emerging markets because it is using authorities that were designed when
the industries operated as regulated monopolies and their rates were
based on the cost of service. In recent years, FERC has also been
subjected to frequent changes in its leadership. These changes have
caused the agency to experience substantial shifts in policy direction
and priorities, which may have directly affected its progress in
developing a new regulatory approach.
Transition to Competitive Markets Has Been Occurring Without
Substantial Changes to FERC’s Regulatory and Oversight Authorities:
To some extent, FERC’s lack of specific legislative authority for
competitive energy markets, and especially for electricity markets, may
have delayed development of its new regulatory approach. This is because
FERC derives much of its legislative authority, for electricity, from
mandates that were enacted almost 75 years ago, when the industry was
structured as a regulated monopoly and rates were based on the cost of
service. As a result, FERC has had to force fit changes that it would
like to accomplish within the framework of these outdated statutes.
This has led market participants to contest FERC’s legal authority to
direct change in these industries.
For example, in Order 888, FERC invoked its authority under section 206
of the Federal Power Act when it ordered “functional unbundling” of
wholesale generation and transmission services, imposed a similar open
access requirement on unbundled retail transmissions in interstate
commerce, and declined to extend the open access requirement to the
transmission component of bundled retail sales. Market participants,
however, challenged FERC’s authority to order these changes. In response
to a number of review petitions, in 2001, the District of Columbia
Circuit Court upheld most of FERC’s jurisdiction to issue Order 888.
[Footnote 24] That decision was appealed in the Supreme Court. Last
year the Court agreed to hear argument on two issues: FERC’s
jurisdiction over unbundled retail transmissions and its refusal to
assert jurisdiction over bundled retail transmissions.[Footnote 25] The
Supreme Court agreed with FERC on both issues. Specifically, the Court
stated that because the Federal Power Act unambiguously gives FERC
jurisdiction over the “transmission of electric energy in interstate
commerce,” without regard to whether the transmissions are sold to a
reseller or directly to a consumer, FERC’s exercise of this power is
valid. Similarly, FERC’s decision not to regulate bundled retail
transmissions was accepted as a statutorily permissible policy choice
by the Supreme Court.
FERC’s efforts to guide or direct restructuring of the electricity
industry without legislation explicitly mandating the change have also
resulted in debate, within and outside the agency, about its specific
authorities over these new competitive markets. In some instances, this
uncertainty may have contributed to FERC’s hesitation in clearly
defining how it would apply its authorities to the emerging electricity
markets. An example of this is FERC’s recent attempts to create RTOs.
Questions about FERC’s authority to require the formation of RTOs led
the agency to initially make participation in RTOs voluntary, as it had
done in the past for ISOs. Despite outreach efforts to convince the
industry about the advantages of participating in RTOs, FERC made
little progress in getting RTOs formed. Although its legislative
authorities did not change, FERC recently determined that it did have
adequate authority to require RTO formation, and there was a
significant policy shift within the agency to require participation in
RTOs by the industry. Industry participants not joining an RTO now have
to prove to FERC why doing so would harm them. Although the Chairman of
FERC believes that the agency has the general authority to take this
new course of action, he has stated that it would be helpful if the
Congress gave FERC the explicit authority to create RTOs.
Moreover, some of FERC’s legislative authorities with regard to refunds
of excessive rates and penalties for violations of market rules may not
be adequate for regulating in a competitive environment, where there is
greater potential for market power abuse. Under its current legislative
framework, FERC is limited by the extent to which it can order refunds,
and it does not have adequate authority to levy meaningful penalties for
market violations. As a result, it is difficult for FERC to curb and
respond effectively and firmly to anticompetitive behavior,
particularly for electricity markets. For example, under sections 205
and 206 of the Federal Power Act, FERC has the authority to review
whether new or existing electricity rates filed with the agency are
just and reasonable. If an existing rate is found to be unjust or
unreasonable, FERC may set a new rate and may order a refund for the
amount charged in excess of the just and reasonable rate. However,
refunds may only be ordered for the period following the refund
“effective” date. The earliest the refund effective date can be is 60
days after a complaint is filed with FERC or after a notice of
Commission-initiated investigation is issued. As a result, this
limitation provides no remedy for instances where market participants
have charged unjust or unreasonable rates during the period before the
refund effective date. In addition, under the Natural Gas Act, FERC is
even more limited in ordering refunds than it is under the Federal
Power Act. For example, under section 5 of the Natural Gas Act, FERC
cannot set a refund effective date but can only change rates
prospectively from the date that the Commission finds an existing rate
to be unjust and unreasonable.
In addition, FERC does not have a meaningful range of penalties to levy
against violators of energy market rules. The Federal Power Act provides
FERC with the authority to assess civil penalties for violations of
certain regulated activities but not for violation of the just and
reasonable rate requirement. For example, section 31(c) of the Federal
Power Act authorizes penalties for violations relating to hydropower
generation, and section 316A provides FERC with the authority to levy
penalties for violations relating to the transmission of electricity
and sales by exempt wholesale generators.[Footnote 26] No section of
the act allows FERC to levy monetary penalties against market
participants who charge unjust or unreasonable rates for electricity.
Although the Natural Gas Policy Act of 1978 gave FERC some authority to
levy civil penalties, this authority applies only to a limited number
of natural gas transactions in interstate commerce.
In today’s competitive energy markets, the lack of adequate refund and
penalty authorities may be a significant handicap to FERC’s ability to
fulfill its regulatory mandate because market participants have the
opportunity to profit by millions of dollars within a very short time
through exercising market power and engaging in other anticompetitive
behavior. For example, in response to filings made after the recent
electricity price spikes in California, FERC determined that it had no
authority to order refunds for unjust and unreasonable rates charged
prior to the refund effective date. If FERC does not have the authority
to curb anticompetitive behavior by ordering refunds or levying
meaningful penalties against market violators, the risk of engaging in
this type of behavior for market participants is severely diminished.
Many FERC officials that we spoke to believe that FERC’s credibility as
an effective regulator of competitive electricity markets is limited
without the authority to levy meaningful penalties. They believe that
industry participants do not perceive FERC as a forceful regulator
because it does not have adequate “bite” to go after market abusers and
therefore cannot deter future violations.
FERC Has Experienced Frequent Leadership Changes as It Has Attempted to
Develop a New Approach:
Over the past 5 years, FERC has had four different Chairs. Such a high
level of leadership turnover may have had a significant impact on the
ability of the agency to develop a new regulatory approach for emerging
energy markets because the Chair of the Commission also serves as the
agency’s leader and as the chief administrator of FERC’s staff. The
Chair, in effect, sets the agency’s agenda and controls its strategic
plan and outcomes.
Our reviews of high-performing public and private sector organizations
have shown that fundamental changes in operations and culture can take
years to achieve and usually require long-term commitment on the part of
agency leaders. When agencies such as FERC experience a high level of
turnover in their top leadership, their efforts to effect change are
often hampered. For example, the Health Care Financing Administration,
which administered the multibillion-dollar Medicare program, had 19
administrators or acting administrators in its 24 years of existence. We
found that this high rate of leadership turnover was an inhibiting
factor in the implementation of long-term Medicare initiatives and the
pursuit of a consistent management strategy for this agency.[Footnote
27]
Similarly, the lack of continuity in FERC’s top leadership may have
directly contributed to the agency’s lack of progress in developing and
implementing a new regulatory approach for competitive energy markets,
especially over the last 5 years. Some senior FERC staff told us that
the seemingly constant transition caused by recent changes in FERC
leadership, coupled with the intense pressure created by the California
energy crisis and the bankruptcy of the Enron Corporation, has resulted
in a lack of consistent management and direction for the agency. Several
agency officials told us that every new Chair brings a different
direction to the agency and that when there is a change in the
chairmanship, the progress made under a past Chair often becomes
irrelevant as everyone’s attention shifts to the new Chair’s priorities
and agenda. Consequently, steps taken to develop a new organizational
structure or regulatory approach under a past Chair are often
jettisoned, and the staff start the process all over again under the
direction of the new leader.
Conclusions:
The longer FERC struggles to define and implement an effective approach
for the emerging energy markets, the longer these markets will continue
to develop and operate without adequate oversight and, potentially,
without adequate regulation. At the current time, FERC is not adequately
performing the oversight that is needed to ensure that the prices
produced by these markets are just and reasonable and therefore, it is
not fulfilling its regulatory mandate. While FERC has taken some
tentative steps in the right direction, more decisive action must be
taken to define and implement an effective regulatory and oversight
approach. To accomplish the mammoth undertaking posed by the rapidly
evolving and increasingly complex energy markets, FERC will have to
place the highest priority on developing its oversight function and
devote significant management attention and adequate resources to this
task.
FERC has not yet developed a detailed oversight approach for competitive
energy markets. Market participants need this specificity if they are to
view FERC as an effective market monitor and regulator. Although FERC
has recently revised its strategic plan to place more emphasis on its
oversight of competitive energy markets, the plan still lacks specifics
about how the agency will monitor these markets. The revised plan does
not include outcome measures for its goals and objectives so that the
agency’s progress in achieving them can be assessed. The plan also does
not clearly and explicitly state how FERC will work with market
participants to comprehensively oversee the markets. For example, it
appears that FERC plans to rely on the RTOs’ MMUs to serve as its
frontline for monitoring wholesale electricity markets. The agency,
however, has not yet set out expectations for how these units will
monitor the markets and how FERC will evaluate their effectiveness.
Moreover, FERC needs to recognize that a new regulatory and oversight
approach will require both interim and long-term measures. The agency
cannot continue its current policy of waiting for the market structures
to be fully in place before developing monitoring actions. For example,
FERC does not have the luxury to wait for the RTO structures to be in
place, which may take several more years, before detailed monitoring of
the markets begins. As the California energy crisis has made adequately
clear, FERC simply cannot let the markets continue to go unmonitored
for this length of time. Nonetheless, FERC does not have an action plan
for oversight of the markets for the interim period before the RTOs’
market monitoring units are functioning and the agency can put a
comprehensive market oversight approach into place.
Finally, FERC’s difficulties in developing and implementing a
comprehensive regulatory and oversight approach for competitive energy
markets can be attributed, at least in part, to its attempts to help
create and to regulate and oversee these markets without explicit
direction and guidance from the Congress as to the agency’s appropriate
role in these markets. FERC has been attempting to design a regulatory
and oversight approach for these markets around legal authorities, such
as those for ordering refunds and assessing penalties, which were
generally enacted when the natural gas and electric industries were
subject to cost-of-service regulation. As part of its current debate in
formulating the Energy Policy Act of 2002, the Congress has started to
review FERC’s legislative framework.
Recommendations for Executive Action:
To help ensure that FERC can effectively carry out its responsibilities
for overseeing interstate wholesale natural gas and electricity
markets, we recommend that the Chairman, FERC, take the following
actions:
* Update the agency’s strategic plan to include outcome measures that
can be used to assess how well FERC is doing in achieving its strategic
goals and objectives for overseeing competitive energy markets. This
plan should also include specific strategies for achieving the goals and
objectives that set out explicitly how FERC will work with market
participants to provide comprehensive oversight of the markets. Because
of their significant role in FERC’s oversight approach, the plan should
set out clear expectations for how transmission organizations will
monitor energy markets and how FERC will evaluate the effectiveness of
their MMUs. These expectations should be made part of FERC’s approval
of these transmission organizations.
* Develop an action plan for overseeing energy markets, in particular
for electricity, until the transmission organizations’ market
monitoring units become fully operational and FERC can implement a
comprehensive oversight approach for these markets. In developing the
action plan, FERC should examine how it can use the bulk power studies
and the data sources currently available through the MOR room as more
effective market monitoring tools.
Matters for Congressional Consideration:
To help ensure that FERC can effectively carry out its oversight role
with respect to energy markets, the Congress may wish to convene public
hearings to review FERC’s authorizing legislation and determine, in
consultation with FERC Commissioners, whether FERC’s authorities need
to be revised in light of the changing energy markets. In addition, to
help FERC deter improper market behavior, the Congress may want to
consider providing FERC with the appropriate range of authorities to
levy civil penalties against market participants that engage in
anticompetitive behavior and violate market rules.
Agency Comments:
In its written comments on a draft of this report, FERC agreed that it
had not yet done all that it could to oversee energy markets. The
agency stated that, despite a long-standing recognition that it needed
to develop the information, procedures, and staffing to oversee energy
markets, it had not previously focused its efforts clearly enough to
succeed. According to FERC, this situation is now changing with the
launching, in January 2002, of the new Office of Market Oversight and
Investigation to oversee and assess the fair and efficient operations
of electric and natural gas markets. The new office, according to FERC,
will be up and running in August 2002. FERC stated that the office’s
job will be to understand energy markets and risk management, measure
market performance and analyze market data with an eye to recommending
market improvements, investigating compliance violations, and, where
necessary, pursuing enforcement actions. FERC also stated that the
office will report to the Chairman and other Commissioners, bring
together all of the staff devoted to oversight and enforcement in one
place, and receive the resources it needs to restore and maintain the
integrity of the nation’s energy markets. FERC further stated that the
agency has developed preliminary plans on how the office will work,
including a draft mission and function statement, an organizational
design, and a comprehensive list of the services and products the
office will provide.
We are encouraged and hopeful that FERC’s creation of this new office
will provide the focus needed to succeed where prior efforts, as
described in our report, have not. However, we do not believe that a
reorganization alone will be enough to bring about the fundamental
changes needed in FERC’s regulation and oversight of energy markets.
Sustained leadership and top management attention will be necessary to
guide and direct the agency through these changes. Many details of the
new office’s operations are yet to be worked out, and FERC still needs
to overcome significant challenges to provide the office with the
information, tools, and staff with the skills and knowledge to
effectively oversee competitive energy markets.
FERC also agreed with our conclusion that its ability to develop,
regulate, and oversee competitive energy markets could be enhanced with
new statutory authority and guidance from the Congress on the agency’s
appropriate role in these markets. FERC agreed that it has often
struggled to find market solutions while operating under legislative
authority designed for regulated monopolies with cost-of-service rates.
The agency noted that additional statutory authority is needed,
particularly in providing FERC with the ability to assess civil
penalties for violations of the law or FERC rules. FERC further said
that the Congress could strengthen the agency’s ability to create
competitive wholesale energy markets by clarifying the Commission’s
authority to order the formation of RTOs. As pointed out in our report,
FERC has currently approved the formation of only one RTO.
Separately from its written comments, FERC provided us with some
technical changes, which we incorporated into the report where
appropriate. FERC’s written comments are presented in appendix III.
[End of section]
Chapter 3: FERC Faces Significant Management Challenges to Effectively
Monitor Competitive Energy Markets:
As FERC develops a new regulatory approach to respond to the
restructured energy industry, it will have to overcome significant human
capital and organizational challenges. FERC’s workforce, which was
largely recruited and trained for cost-of-service regulation, currently
lacks the knowledge and mix of skills needed to effectively regulate
and oversee competitive markets. Although FERC has taken steps to train
its current staff and recruit new staff, it has made limited progress
in adapting its workforce to the new regulatory environment. In
addition, FERC has not fully explored all the personnel tools and
flexibilities—such as establishing special pay rates—that are available
to federal agencies for responding to workforce recruitment and
retention challenges. FERC also has not conducted systematic strategic
human capital planning to recruit, develop, train, and retain the type
of workforce that can effectively regulate and oversee competitive
energy markets. Moreover, FERC’s current organizational structure
diffuses its market monitoring responsibilities and does not provide
the focus and attention that this function needs in the changing
regulatory environment.
FERC Has Taken Some Steps to Address Its Human Capital Needs, but
Significant Challenges Remain:
FERC has been unable to adapt its workforce to meet the challenges of
the new competitive markets. Its current staff skill mix is inadequate
and training of current staff and recruitment of new staff have not yet
occurred at a level that would alleviate gaps in the staff’s skill mix.
In addition, many experienced and highly trained FERC staff will soon
be eligible for retirement and could depart from the agency over the
next 3 years. While these retirements provide FERC the opportunity to
bring in new staff to fill gaps in its skill mix, the departures will
also result in the loss of traditional skills and knowledge that the
agency continues to need. Although FERC management has been aware of
these issues and has taken some steps to address them, its progress has
been limited. Moreover, FERC has not fully explored the use of all the
personnel tools and flexibilities available to federal agencies to help
them attract, motivate, and retain employees, and FERC has not
performed the systematic and comprehensive planning that is needed to
resolve its human capital challenges.
FERC Faces Daunting Human Capital Challenges:
FERC’s current workforce will need to undergo a substantial and rapid
transformation if it is to effectively meet the challenges of
regulating and overseeing competitive energy markets. Historically,
FERC staff operated in a highly regulated environment, setting rates
for wholesale electricity sales based on a utility’s cost to provide
the service. The competencies required to perform this task are
markedly different from the competencies needed to effectively monitor
dynamic energy markets. For example, to perform cost-of-service rate
setting, FERC traditionally employed staff with knowledge and skills in
finance, economics, engineering, and the operations of regulated
industries. However, to support its responsibilities for regulating and
monitoring competitive markets, correcting anticompetitive situations,
and promoting fair and open competition, the Commission needs employees
with knowledge and skills in the collection and analysis of market
data; information technology; and market operations, including
expertise in market rules and structures, competitive pricing,
commodity trading, and risk management. According to senior FERC
officials, the agency lacks adequate numbers of staff with these
competencies and has had trouble attracting and retaining such staff.
Energy market participants and state regulators told us that they are
also concerned that FERC staff do not have the depth of knowledge and
understanding of competitive markets that are needed to effectively
regulate and oversee the evolving energy industry. For example, one
former FERC Commissioner now working in the energy industry said the
skills of FERC staff have fallen behind those of the companies that
they regulate. Additionally, many of the state regulatory bodies that
we surveyed expressed a lack of confidence in FERC staff’s ability to
fully understand the complexities of the markets it regulates.
In an effort to increase its staff’s knowledge of energy market issues,
FERC has been providing additional training opportunities. For example,
FERC more than doubled the training budget for the Office of Markets,
Tariffs and Rates (OMTR) from fiscal year 2000 to fiscal year 2001 and
has used contractors to provide staff training on market-related
subjects, such as derivatives. Despite this increased emphasis on
training, the general feeling among the staff that we surveyed in OMTR
and the Office of the General Counsel is that additional, focused
training is needed. Our survey found that over 80 percent of FERC
employees responsible for regulating and overseeing energy markets
expressed a need for more training in market functions and market
structures—in particular, they need a better understanding of how
financial markets interact with energy markets and of such issues as
trading, hedging, derivatives, and financial instruments. In addition,
over half of these staff stated that additional training in basic
economic principles and definitions, economic theory and models, and
regulatory theory would help them perform their duties (see table 3).
Table 3: Percentage of FERC Staff Indicating That Additional Training
Would Help Them Better Monitor and Regulate Energy Markets, by Type of
Training:
Type of training: How financial markets interact with energy markets
(including trading, hedging, derivatives, and financial instruments);
Additional training would assist me: 86%;
Already proficient in this area: 3%;
Does not apply or no basis to judge: 11%.
Type of training: Market structures;
Additional training would assist me: 84%;
Already proficient in this area: 9%;
Does not apply or no basis to judge: 7%.
Type of training: Market functions;
Additional training would assist me: 81%;
Already proficient in this area: 12%;
Does not apply or no basis to judge: 7%.
Type of training: Economic theory/models;
Additional training would assist me: 60%;
Already proficient in this area: 25%;
Does not apply or no basis to judge: 16%.
Type of training: Regulatory theory;
Additional training would assist me: 55%;
Already proficient in this area: 40%;
Does not apply or no basis to judge: 6%.
Type of training: Basic economic principles/definitions;
Additional training would assist me: 52%;
Already proficient in this area: 39%;
Does not apply or no basis to judge: 9%.
Type of training: Statistical software packages;
Additional training would assist me: 41;
Already proficient in this area: 7%;
Does not apply or no basis to judge: 52%.
Note: Some rows do not total 100 percent because of rounding.
Source: GAO’s survey of FERC employees.
[End of table]
FERC has also tried to fill the gaps in its workforce skills by
recruiting new employees. However, it has been largely unsuccessful in
recruiting and retaining the highly skilled staff it needs. For
example, over the last 2 years, FERC has tried to fill a total of 49
nonadministrative positions in OMTR. However, FERC was only able to
fill 25, or 51 percent, of these 49 positions, and of the positions
filled, the majority represented reassignments of employees within
FERC. There were only 10 new hires from outside the agency. Most of
these were at the GS-11 level or lower. Several higher level positions
remained unfilled.
According to FERC officials and energy industry experts, the Commission
is unable to recruit the qualified employees it needs mainly because of
the significant difference between government pay scales and
compensation in the private sector. Consequently, FERC has historically
had trouble getting qualified individuals to apply for jobs and
subsequently hiring them into key market regulation and oversight
positions at the mid- and upper levels. For example, in fiscal year
2001, FERC advertised an “Energy Industry Analyst–(Energy Trader)”
position at the GS-15, step 10, level, which is the highest pay grade
and step level available under civil service rules and currently pays
about $120,000. The position was first listed from October 31 to
November 30, 2000, but garnered only three applicants meeting initial
qualifications, and FERC hiring officials did not find any of these
applicants suitable to meet the agency’s needs. When the position was
re-listed from December 11, 2000, to January 11, 2001, only one
qualified person applied, who was also considered unsuitable for the
agency’s needs. After listing the position a third time from January 22
to February 20, 2001, advertising heavily in key markets such as
Houston, New York, and Washington, D.C., and accepting electronic
applications, FERC received information from 16 qualified applicants.
However, as of February 12, 2002, the position remained unfilled
because, according to FERC’s human resource staff, after the interview
process the hiring officials determined that none of the interviewed
applicants met the needs of the position. This example clearly
illustrates the difficulty that FERC has had in hiring people with
“real world” experience in competitive energy markets, particularly
former energy traders.
To help address its recruitment challenges, FERC has started various
initiatives to enhance entry-level recruitment. One such initiative is
FERC’s summer intern program, which began in fiscal year 2001. Of a
total of 27 interns who participated in the program, 5 were offered
permanent positions and 4 had accepted as of February 2002. FERC plans
to expand participation in the program to 40 interns and increase to 12
the number of interns hired into permanent positions for fiscal year
2003. While these positions will help build a future FERC workforce,
they do not address the immediate and compelling need that the agency
has for experienced and trained market regulation and oversight staff
at mid- and upper levels.
FERC is taking extra steps to retain its newly hired staff by helping
them to more quickly become familiar with their duties and
responsibilities and the agency’s operations. Recently, FERC
implemented a mentoring program designed to guide new employees in
their career development and enable them to more quickly gain
institutional knowledge from more experienced staff. Additionally, new
employees in several offices participate in a series of orientation
sessions, offered first by human resources staff and later by their
program office. These sessions help new employees understand how FERC
functions, what its regulatory priorities are, and what is expected of
them.
FERC is also challenged in retaining its highly skilled and experienced
employees. Although FERC has an overall low rate of attrition (an
average of 7 percent per year since 1995), some managers said that key
employees are leaving to join private sector energy firms. They said
that FERC employees are attractive to the industry because of their
knowledge of the regulatory process. In fiscal years 2000 and 2001,
OMTR had 15 separations, 13 of which were in upper level positions; of
these, 7 staff listed “taking a job in the private sector” as the
reason for their resignation. Of the remaining six employees, three
said that they were relocating or transferring to other federal
agencies, and three did not give a reason for leaving.
Another human capital challenge for FERC is the impending retirement of
a large portion of its staff (see figure 5). Over one-quarter of FERC’s
employees will be eligible for retirement by 2005. Many of the employees
who will be eligible to retire by 2005 have 20 years or more of
government service; are highly educated and trained; and are
knowledgeable about the Commission’s policies, procedures, and
workload. While the departure of so many staff creates opportunities
for FERC to realign its workforce skills to better match its needs for
the future, it also poses a significant loss of institutional
knowledge. FERC has to fulfill a dual responsibility: It must monitor
the emerging competitive energy markets while it continues to provide
traditional cost-of-service regulation for those areas of the country
that are not undergoing energy industry restructuring. According to
FERC, this en masse departure of highly qualified and experienced staff
may adversely affect the agency’s ability to continue to perform high-
quality traditional regulatory work.
Figure 5: Percentage of Employees in Mainstream Occupations Eligible to
Retire in Fiscal Years 2002-200:
[Refer to PDF for image]
This figure is a vertical bar graph depicting the following data:
Percentage of Employees in Mainstream Occupations Eligible to Retire in
Fiscal Years 2002-200:
Year: 2002;
Percentage of employees eligible: 14%.
Year: 2003;
Percentage of employees eligible: 17%.
Year: 2004;
Percentage of employees eligible: 23%.
Year: 2005;
Percentage of employees eligible: 28%.
Source: FERC.
Note: Chart reflects retirement eligibility of mainstream occupations
as categorized by FERC and includes biologists, accountants/auditors,
attorneys, energy industry analysts, and engineers. The percentages for
any given year reflect staff that became eligible to retire in prior
years, as well as those newly eligible in the year listed.
[End of figure]
FERC Has Not Explored the Use of All Available Civil Service
Flexibilities:
All federal agencies, including FERC, have flexibilities and tools
available to them to help overcome workforce recruitment and retention
issues, including flexibilities and tools that (1) can be initiated by
federal agencies on their own, such as the use of signing and retention
bonuses and alternative work schedules; (2) require approval from the
Office of Personnel Management (OPM) or the Office of Management and
Budget (OMB), such as special salary rates; and (3) require legislative
approval, such as excepted service positions.[Footnote 28] Of these
special tools, FERC has used recruitment bonuses, retention allowances,
tuition reimbursement, and alternative work schedules to help resolve
some of its human capital challenges. For example, according to a
senior official in FERC’s Office of the General Counsel, FERC has had
recent success in offering recruitment bonuses and tuition
reimbursement to attract new attorneys. FERC may be able to further
expand the use of these flexibilities by reviewing the experiences of
other agencies. For example, the State Department is using retention
allowances to create incentives for learning. It pays retention
allowances ranging from 5 to 15 percent to certain information
technology workers who obtain job-related degrees and certifications.
OPM reported that after 1 year of operation, these retention allowances
have helped to significantly reduce turnover and increase the skills
base of the State Department’s information technology workforce.
According to FERC’s human resource manager, the agency has not yet
requested any of the other flexibilities and tools available from OPM,
OMB, or the Congress. For example, FERC has not requested OPM approval
to establish special pay rates for critical occupations. Special pay
rates allow an agency to offer rates that may be higher than basic pay
rates for an occupation or group of occupations. These rates can be
established nationwide or in specific local areas if it is determined
that the government’s recruitment or retention efforts would be
significantly handicapped without these higher rates. Similarly, FERC
has not asked OMB to establish critical pay authority for its staff.
This authority can increase the rate of basic pay for a specific
position and may be authorized for positions that require extremely
high-level expertise in a scientific, technical, professional, or
administrative field or one that is critical to the agency’s successful
accomplishment of an important mission.[Footnote 29] However, critical
pay may be granted only to the extent necessary to recruit or retain
an individual exceptionally well qualified for the position.
As a final option, federal agencies may also request legislative
approval to create excepted service positions, which are exempt from
the provisions of general civil service requirements. However, FERC has
not yet fully examined the need for excepted service positions and is
still in the early stages of developing the supporting documentation
for this authority. Excepted service authority allows agencies to hire
staff through a noncompetitive selection process and provides greater
flexibility in setting compensation rates. Exceptions may be granted
for entire agencies, such as the Federal Bureau of Investigation, or
for specific positions, such as members of the State Department’s
Foreign Service. Some agencies, such as the Internal Revenue Service,
have used flexibilities available within the existing personnel system
in concert with excepted service authority to better tailor their human
capital policies and practices to their needs. [Footnote 30]
To better determine how to apply these tools and flexibilities to
resolve their workforce issues, some agencies have undertaken formal
internal assessments. For example, the U.S. Mint’s Office of the Chief
Financial Officer formed a Human Resources Flexibilities Team and
conducted a two-phase study of the various flexibilities and tools
available to, and used by, the agency. Phase one of the study included
an extensive review of all human capital flexibilities available to the
U.S. Mint under existing laws and regulations. Phase two included an
analysis of the U.S. Mint’s use of these flexibilities and the
development of recommendations to agency leadership for increasing the
effective use of these flexibilities as recruitment and retention
tools. FERC management has yet to conduct such an assessment for the
Commission.
FERC Lacks a Plan for Addressing Its Substantial, but Not Unique, Human
Capital Challenges:
While FERC’s human capital problems appear to be overwhelming, they
are not unique and are, in fact, quite similar to issues affecting other
federal agencies. As we recently reported in our Performance and
Accountability Series, serious human capital shortfalls are eroding the
ability of many federal agencies, and threatening the ability of
others, to economically, efficiently, and effectively perform their
missions.[Footnote 31] Our past work has shown that agencies such as
the Department of Defense, the National Aeronautics and Space
Administration, and the Nuclear Regulatory Commission are struggling as
FERC is to maintain the workforce skills that they need to fulfill
their regulatory responsibilities and missions. These struggles are due
to problems such as recruiting qualified employees, downsizing, and
pending retirements by many current employees. Given the seriousness of
the human capital problem facing agencies throughout the federal
government, we added this issue to our list of federal programs and
operations that are at high risk in 2001.
Some agencies with human capital challenges comparable to FERC’s are
beginning to take steps to resolve these issues, and an important first
step is the development of a comprehensive strategic human capital
management plan that is linked to the organization’s strategic and
business plans. For example, the Air Force Materiel Command (AFMC) has
taken steps toward improving its human capital situation by developing
comprehensive plans to reshape its workforce and meet its future
business needs. In light of this detailed effort, AFMC gained a better
understanding of current and potential workforce gaps and was better
able to successfully transform its workforce. However, FERC has yet to
undertake a systematic strategic human capital management planning
process that can help guide its efforts to recruit, develop, train, and
retain the type of workforce that can effectively regulate competitive
energy markets.
We have also found that high-performing organizations in the public and
private sectors identify their current and future human capital needs—
including the appropriate number of employees, the key competencies for
mission accomplishment, and the appropriate deployment of staff across
the organization—and then create strategies for filling any gaps that
are identified from this process. Moreover, high-performing agencies
aggressively pursue comprehensive succession planning and executive
development actions to address the potential loss of leadership
continuity, institutional knowledge, and expertise. This kind of
systematic planning process is essential to address the breadth and
complexity of human capital challenges and succession planning issues
that are looming at FERC. Although FERC senior managers have begun to
discuss the issue, to date, FERC has not embarked on such systematic
planning efforts. The only related analysis that FERC has conducted is
its June 2001 Workforce Analysis, prepared in response to a request
from OMB (OMB Bulletin 01-07). While this analysis provides both a
“snapshot” of FERC’s current workforce and some observations on future
issues of concern to FERC management, it falls short of the detailed
planning and assessment that effective strategic human capital planning
entails.
As we have recently reported,[Footnote 32] many needed improvements in
human capital management can be achieved if federal agencies take a more
strategic and performance-based approach to managing their workforce.
Such an approach would include performing effective workforce planning,
developing performance goals and measures to address workforce
challenges, and linking employee performance to results. We recently
developed a model of strategic human capital management to help federal
agency leaders better manage their organizations’ most important asset—
their people. The model is designed to help agency leaders effectively
use their people and determine how well they integrate human capital
considerations into daily decision-making and planning for the program
results they seek to achieve.
Because the transition to modern performance management will require
changes in management systems and organizational cultures that often
take years to implement, it will also require long-term commitment on
the part of agency leaders and managers. To accomplish this, agency
leaders need to commit their organizations to valuing and investing in
their employees, empowering and providing the employees with the tools
to do their best, and implementing modern performance management and
incentive systems to focus their efforts on achieving agency missions
and goals. However, we have found that the lack of continuity in
leadership often hampers these efforts at many agencies. As discussed
earlier in this report, FERC has had four different Chairs in the past
5 years. This constant change in leadership, coupled with the demands
for management attention to resolve other issues such as the California
energy crisis, has diverted FERC’s attention from aggressively
addressing its human capital challenges.
FERC’s Organizational Structure Limits Its Effectiveness:
FERC’s current organizational structure cannot ensure that the emerging
energy markets are adequately monitored, because the structure does not
give adequate priority and attention to FERC’s market monitoring
function. At FERC, the market monitoring function is currently assigned
to two of the nine divisions within OMTR. These two divisions—Market
Development and Market Information—compete for resources and management
attention with the other seven, which are mostly responsible for
analyzing case filings and applications from the electricity and natural
gas industries. This casework has historically been, and continues to
be, FERC’s principal mechanism for regulating the activities of energy
industry participants. FERC is required to complete its work on most of
these cases within legislatively set time frames, such as 30 or 60 days.
Consequently, casework demands may receive a higher priority than
general market monitoring activities.
In addition, having the market monitoring and casework functions within
the same office hampers effective communication between FERC’s market
monitoring staff and industry participants. Under FERC’s rules to ensure
independence of its process for resolving cases before the agency (known
as ex parte rules), staff are prohibited from private discussions with
parties involved in a case pending before FERC. However, many companies
or organizations (such as ISOs) from which the market monitoring staff
need to obtain information are likely to have cases before FERC at any
given time. Consequently, the market monitoring staff may be limited in
their ability to hold discussions with these companies or
organizations, as well as with other FERC staff who may be involved in
case resolution. For example, the Director of Market Analysis for the
California ISO told us that because of ex parte rules and FERC’s
organizational structure it was very difficult for her office to
communicate directly with FERC’s market monitoring staff during the
California energy crisis. Instead, she was forced to communicate with
FERC staff in other offices and hope that they would accurately relay
her concerns to the appropriate parties within the agency. A former
Commissioner also noted this barrier, commenting that ex parte concerns
hindered information flow at FERC and inhibited the agency’s ability to
gather market monitoring data.
FERC has recently created a new Office of Market Oversight and
Investigation that will report directly to the Chairman and will be
staffed by a multidisciplinary team. The functions of the new office
will include understanding energy markets and risk management issues,
measuring market performance, investigating compliance violations, and
analyzing market data. According to FERC, the new office will have a
total of about 100 staff. About 50 staff members will be transferred to
this new office from OMTR and the Office of the General Counsel. FERC
is requesting funding in its fiscal year 2003 budget proposal to hire
the other 50 staff members. FERC stated that many functions of the new
Office of Market Oversight and Investigation require expertise that is
currently limited at the agency. FERC further stated that in order to
fulfill its responsibilities, the new office will need to augment the
agency’s capabilities in several areas, including conducting intensive
market investigations and performing sophisticated market information
analysis. However, according to a FERC manager, many details about the
office and how it will carry out its responsibilities have not yet been
determined.
Conclusions:
As the energy industry has evolved, the resources and structures that
FERC has in place are no longer adequate to fulfill the agency’s new
responsibilities for regulating and overseeing competitive markets. The
challenge for FERC is further complicated by the fact that while the
agency needs to transform its workforce rapidly and revamp its
organizational structure decisively to meet the needs of the new energy
markets, it must also maintain the ability to fulfill some traditional
regulatory responsibilities. Having staff in place with the requisite
competencies to regulate and oversee traditional and emerging
competitive markets is essential for FERC to be able to detect and head
off service disruptions, price spikes, and market abuses similar to
those that occurred in California and other parts of the West in 2000
and 2001. While FERC has taken steps to address its organizational
challenges by creating a new Office of Market Oversight and
Investigation, much remains to be done to address the agency’s
persistent human capital challenges.
FERC has struggled to recruit and retain highly qualified and
experienced employees in order to be able to regulate and oversee
evolving competitive energy markets. However, without having explored
the full range of personnel tools and flexibilities that could help
address these issues, FERC cannot determine which of the available
tools may be best suited to help it achieve its staffing goals.
Furthermore, without enhanced training, FERC cannot ensure that its
staff will have the knowledge and skills required to understand and
adequately regulate and oversee the increasingly complex energy
markets. Because of the impending loss of institutional knowledge
possessed by the large number of staff soon eligible to retire, it is
also questionable whether FERC will be able to effectively provide the
traditional regulatory work for which the agency is still responsible.
On a broader scale, without a comprehensive and systematic strategic
human capital planning process to guide the agency’s efforts to recruit,
develop, train, and retain staff, FERC will be unable to effectively
regulate and oversee competitive markets. Although this type of
planning takes a substantial amount of time and commitment from any
agency’s top leadership and management, without this high level of
attention and commitment, FERC will be unable to effectively resolve
its human capital problems. Our model of strategic human capital
management should prove helpful to FERC as it moves forward in its
planning efforts.
Recommendations for Executive Action:
To help ensure that FERC has the mix of staff skills and expertise that
it needs to effectively carry out its regulatory and oversight
responsibilities for emerging competitive energy markets, we recommend
that the Chairman, FERC, identify the personnel tools, flexibilities,
and strategies, other than those already in use by FERC, available to
federal agencies to recruit and retain employees. A formal internal
assessment of the effectiveness and applicability of these to FERC,
especially for the new Office of Market Oversight and Investigation,
should be conducted. On the basis of this analysis, the Chairman should
develop an action plan to use the appropriate tools, flexibilities, and
strategies to begin to recruit and hire needed expertise. The Chairman
should also develop an action plan to identify and target additional
training and development opportunities for current staff involved or
potentially involved in carrying out FERC’s market oversight functions.
In the longer term, we recommend that the Chairman, FERC, develop a
comprehensive strategic human capital management plan to guide FERC’s
efforts to recruit, develop, train, and retain staff knowledgeable in
regulating competitive markets. The plan should be linked to FERC’s
strategic and business plans and should include the following:
* a skills assessment program that would identify gaps in skills
currently held by the workforce that are necessary to carry out the
agency’s evolving regulatory and oversight responsibilities;
* a recruitment and retention initiative, based on priorities for
meeting future regulatory and oversight staffing needs, which addresses
filling skill gaps in the current workforce;
* a training effort targeted at increasing staff knowledge in the areas
of market functions and market structures, so that FERC staff will be
better prepared to regulate and oversee competitive energy markets;
and;
* a comprehensive succession plan for solving challenges posed by the
large number of impending retirements within the agency, including
reliable projections of the number of eligible staff who may actually
retire.
Agency Comments:
In its written comments on a draft of this report, FERC stated that the
report accurately addresses the human capital challenges that the agency
faces. It noted that its staff today is better suited to regulate cost-
of-service rates rather than market-based rates. The agency stated that
how it replaces the large number of its employees retiring in the near
future will have a profound effect on its future capabilities. FERC
also stated that it has made significant progress recently in hiring
new employees through an aggressive recruitment program and is focusing
on the skill sets needed for market oversight and investigation. The
agency further stated that it will explore all the hiring flexibility
available to the agency to build a world-class oversight staff, drawing
ideas from agencies with similar regulatory responsibilities over
complex and rapidly evolving markets. According to FERC, it has already
received congressional authorization to hire five new senior positions
for market oversight and investigation and has requested congressional
authorization for 50 new positions and $5 million in additional
funding. FERC said that it is presently reviewing existing budget
allocations across the agency for further resources. Finally, FERC
stated that the agency has implemented training programs for existing
staff and is working to craft more focused training programs to build
technical and leadership capabilities. While all of these steps will
help FERC address some of its human capital challenges, we believe that
it is important for the Commission to have a comprehensive human capital
management plan to guide these efforts over the longer term.
[End of section]
Appendix I: FERC’s Principal Strategic Goals and Objectives for Energy
Markets:
Table 4 shows the Federal Energy Regulatory Commission’s (FERC)
principal goals and objectives relating to its regulation and oversight
of energy markets, as contained in the 1997, 2000, and 2001 versions of
its strategic plan.
Table 4: FERC’s Principal Strategic Goals and Objectives for Energy
Markets:
Version: 1997;
Strategic goals: Regulate electric transmission and bulk power markets
to:
* foster the growth of efficient, competitive commodity markets and;
* protect customers from excessive transmission rates and service
discrimination.
Regulate natural gas pipelines to:
* ensure that pipeline transportation service supports efficient,
competitive commodity markets and;
* protect consumers from excessive transportation rates and service
discrimination.
Strategic objectives:
Efficient, competitive markets: Customers will have more new products
and a reasonable range of suppliers from which to choose in both the
electric and natural gas industries.
Efficient, competitive markets: Natural gas and electric power prices
will become more responsive to market conditions—that is, prices will
reflect changing supply and demand conditions more clearly and more
quickly.
Efficient, competitive markets: Natural gas prices within each trading
region will tend to converge, except to the extent that there are
demonstrable transportation constraints or costs. Wholesale electricity
price differences will also tend to narrow.
Efficient, competitive markets: It will be less costly,
administratively, to transact business on the interstate natural gas
transportation grid.
Constraining market power: Market participants will have confidence
that natural gas markets, electric markets, and all transportation
services are working efficiently and fairly and that market
participants are not subject to abuses of market power.
Version: 2000;
Strategic goals: Benefit consumers by providing a fair, open, and
efficient regulatory foundation for competition.
Strategic objectives: Increase pricing efficiency.
* Promote innovative, efficiently priced services.
* Promote reliability by using market pricing to encourage capacity
expansion.
Nurture competitive market institutions.
* Increase transportation system integration through regulatory reform.
* Increase transparency of Commission policies and availability of
market-related information.
* Monitor energy markets.
Constrain market power.
* Detect and respond to all forms of market power.
* Use enforcement and litigation as necessary to remedy anti-
competitive behavior.
Resolve disputes quickly and fairly.
* Promote informal procedures to resolve issues, especially the use of
alternative dispute resolution.
* Target litigation for those cases where it makes sense.
Version: 2001;
Strategic goals: Promote a secure, high-quality, environmentally-
responsive energy infrastructure through consistent policies.
Strategic goals: Remove roadblocks impeding market investment.
Provide clarity of cost recovery to infrastructure investors.
Proactively address landowner, safety and environmental concerns.
Stimulate use of new technology.
Promote measures which improve the security and reliability of the
energy infrastructure.
Version: 2001;
Strategic goals: Foster nationwide competitive energy markets as a
substitute for traditional regulation.
Strategic goals: Advance competitive market institutions across the
entire country.
Establish balanced, self-enforcing market rules.
Version: 2001;
Strategic goals: Protect customers and market participants through
vigilant and fair oversight of the transitioning energy markets.
Strategic goals: Improve our understanding of energy market operations.
Assure pro-competitive market structures.
Remedy individual market participant behavior as needed to ensure just
and reasonable market outcomes.
Version: 2001;
Strategic goals: Efficiently administer the agency’s resources to
accomplish the agency’s goals.
Strategic goals: Attract, train, and retain staff to fulfill the
strategic plan.
Manage information technology to better serve the public and streamline
work processes.
Communicate our activities more clearly with customers, elected
officials, and industry.
Integrate agency business planning and budgeting processes.
Build strong partnerships with all stakeholders, particularly with
governors and states.
[End of table]
[End of section]
Appendix II: GAO Survey of Current FERC Employees in Selected Offices:
This appendix contains the questions and responses from our survey of
FERC employees in the Office of Markets, Tariffs and Rates and staff in
the Office of the General Counsel’s sections for Markets, Tariffs, and
Rates and Market Oversight and Enforcement. Responses are expressed as
a percentage of those responding to the survey.
United States General Accounting Office:
Survey of Federal Energy Regulatory Commission Employees:
Introduction:
The U.S. General Accounting Office (GAO), an independent agency of
Congress, is conducting a review of management issues at the Federal
Energy Regulatory Commission (FERC). As part of our study, we are
soliciting the views of the FERC staff in the Office of Markets,
Tariffs, and Rates and related sections of the Office of General
Counsel to obtain their opinions about a variety of topics relating to
the work of the FERC.
Most of the questions in this questionnaire can be answered by checking
boxes or filling in blanks. Space has been provided at the end of the
survey for any additional comments. The survey should take about 30
minutes to complete.
GAO will take steps to prevent the disclosure of individually
identified data from this survey. Only GAO staff assigned to this study
can access and view your responses. No one at the FERC will see your
individual responses. The PIN number associated with the survey is
included only to allow you to access the survey and enter your
responses, and to aid us in our follow-up efforts. Survey results will
be reported in summary form. If individual answers are discussed in our
report, no information will be included that could be used to identify
individual respondents.
If you have any questions, please call Elizabeth Erdmann at (202) 512-
8113 or send e-mail to erdmanne@gao.gov.
Your participation is very important and we urge you to complete this
survey. We cannot provide meaningful information to the Congress on
these issues without your frank and honest answers.
Thank you for your time and assistance.
Please refer to the following definitions when completing this survey:
FERC - Refers to the agency as a whole, not any particular office,
division, group, or team, or the Office of General Counsel.
Office - Refers to the Office of Markets, Tariffs, and Rates (OMTR) or
the Office of General Counsel (OGC).
Division/Section - Refers to a division within the Office of Markets,
Tariffs, and Rates, such as the Division of Tariffs and Rates, the
Division of Market Information, or the Division of Market Development
or a section within the Office of General Counsel such as Markets,
Tariffs, and Rates or Market Oversight and Enforcement.
Group - Refers to the group within a single division of the Office of
Markets, Tariffs, and Rates, such as the West Group 1, the Market
Development Group, or the Information Analysis Group.
Background Information:
The objective of this section is to obtain general information about
your current position with FERC.
1. How long have you been employed by FERC, including its predecessor,
the Federal Power Commission? (enter number of years. If less than 6
months, enter 0.)
Mean = 14.91 years.
2. In which division in OMTR or section in OGC do you work now? (Check
one.)
43%: Division of Tariffs and Rates;
9%: Division of Market Development;
6%: Division of Market Information;
10%: Division of Litigation;
6%: Division of Policy, Innovation, and Communication 3% Office of the
Chief Economic Advisor;
3%: Division of Issue Identification and Resolution Management;
6%: OGC Section of Market Oversight and Enforcement;
14% OGC Section of Markets, Tariffs, and rates.
3. In which office did you work before the FERC First reorganization,
which occurred in 1998? (Check one.)
36%: Office of Electric Power Regulation;
25%: Office of Pipeline Regulation 7% Office of Economic Policy;
3%: Office of the Chief Accountant 2% Office of Enforcement;
13%: Office of General Council;
5%: Other (please specify);
9%: Was not employed by FERC prior to the 1998 reorganization.
4. Which of the following generally describes your current area of
work? (Check one.)
4%: Accountant/Auditor;
8%: Economist (Industry, Financial, etc.);
5%: Engineer (Electrical, Mechanical, Petroleum, etc.);
55%: Energy Industry Analyst;
3%: Other Analyst (Financial, Budget, Operations Research, Program,
etc.);
2%: Information Technology Specialist;
20%: Attorney;
3%: None of the above (please specify).
Organizational Effectiveness:
The objective of this section is to obtain information about FERC's
effectiveness in meeting its mission, goals, and objectives.
5. In general, how clear or unclear to you are each of the following?
(Check one box in each row.)
a) FERC's overall mission/goals and objectives:
Very clear: 40%;
Somewhat clear: 45%;
Somewhat unclear: 9%;
Very unclear: 5%;
No basis to judge: 2%.
b) Your office's goals and objectives:
Very clear: 31%;
Somewhat clear: 40%;
Somewhat unclear: 21%;
Very unclear: 7%;
No basis to judge: 2%.
c) Your division's goals and objectives:
Very clear: 38%;
Somewhat clear: 34%;
Somewhat unclear: 17%;
Very unclear: 9%;
No basis to judge: 2%.
d) Your group's goals and objectives:
Very clear: 40%;
Somewhat clear: 31%;
Somewhat unclear: 14%;
Very unclear: 10%;
No basis to judge: 5%.
e) Your current duties and responsibilities:
Very clear: 52%;
Somewhat clear: 29%;
Somewhat unclear: 13%;
Very unclear: 5%;
0.
6. In general, how effective or ineffective is FERC in doing the
following? (Check one box in each row.)
a) Promoting sufficient electricity supply and delivery (transmission)
infrastructure:
Very effective: 9%;
Somewhat effective: 34%;
Neither effective nor ineffective: 15%;
Somewhat ineffective: 11%;
Very ineffective: 7%;
No basis to judge: 23%.
b) Promoting competition in electricity markets:
Very effective: 13%;
Somewhat effective: 40%;
Neither effective nor ineffective: 10%;
Somewhat ineffective: 10%;
Very ineffective: 7%;
No basis to judge: 19%.
c) Regulating wholesale electricity transmission in interstate
commerce:
Very effective: 20%;
Somewhat effective: 40%;
Neither effective nor ineffective: 8%;
Somewhat ineffective: 8%;
Very ineffective: 5%;
No basis to judge: 19%.
d) Regulating wholesale electricity sales in interstate commerce:
Very effective: 13%;
Somewhat effective: 42%;
Neither effective nor ineffective: 10%;
Somewhat ineffective: 10%;
Very ineffective: 6%;
No basis to judge: 19%.
e) Monitoring wholesale electricity markets:
Very effective: 5%;
Somewhat effective: 27%;
Neither effective nor ineffective: 16%;
Somewhat ineffective: 16%;
Very ineffective: 12%;
No basis to judge: 23%.
f) Promoting sufficient natural gas supply and delivery infrastructure:
Very effective: 19%;
Somewhat effective: 27%;
Neither effective nor ineffective: 11%;
Somewhat ineffective: 6%;
Very ineffective: 3%;
No basis to judge: 35%.
g) Promoting competition in natural gas markets:
Very effective: 21%;
Somewhat effective: 32%;
Neither effective nor ineffective: 8%;
Somewhat ineffective: 4%;
Very ineffective: 4%;
No basis to judge: 33%.
h) Regulating interstate natural gas transportation:
Very effective: 24%;
Somewhat effective: 34%;
Neither effective nor ineffective: 6%;
Somewhat ineffective: 3%;
Very ineffective: 3%;
No basis to judge: 30%.
i) Monitoring natural gas markets:
Very effective: 8%;
Somewhat effective: 24%;
Neither effective nor ineffective: 15%;
Somewhat ineffective: 8%;
Very ineffective: 7%;
No basis to judge: 38%.
j) Other - Please
specify:
7. More specifically, with regard to regulation and oversight of
wholesale electricity markets, overall, how effective or ineffective is
FERC in doing the following? (Check one box in each row)
Cost-of-Service Rates:
a) Establishing just and reasonable cost-of-service wholesale
electricity prices:
Very effective: 26%;
Somewhat effective: 33%;
Neither effective nor ineffective: 4%;
Somewhat ineffective: 8%;
Very ineffective: 3%;
No basis to judge: 27%.
b) Gathering data to establish just and reasonable cost-of-service
wholesale electricity prices:
Very effective: 21%;
Somewhat effective: 31%;
Neither effective nor ineffective: 10%;
Somewhat ineffective: 8%;
Very ineffective: 4%;
No basis to judge: 27%.
c) Analyzing data to establish just and reasonable cost-of-service
wholesale electricity prices:
Very effective: 24%;
Somewhat effective: 30%;
Neither effective nor ineffective: 8%;
Somewhat ineffective: 7%;
Very ineffective: 4%;
No basis to judge: 27.
Market-Based Rates:
a) Establishing market structure and rules to provide competitive, well-
functioning wholesale electricity markets that produce just and
reasonable rates:
Very effective: 9%;
Somewhat effective: 30%;
Neither effective nor ineffective: 15%;
Somewhat ineffective: 15%;
Very ineffective: 9%;
No basis to judge: 23%.
b) Gathering data to determine whether market-based wholesale
electricity rates are just and reasonable:
Very effective: 6%;
Somewhat effective: 21%;
Neither effective nor ineffective: 15%;
Somewhat ineffective: 19%;
Very ineffective: 14%;
No basis to judge: 24%.
c) Analyzing data to determine whether market-based wholesale
electricity rates are just and reasonable:
Very effective: 5%;
Somewhat effective: 23%;
Neither effective nor ineffective: 13%;
Somewhat ineffective: 17%;
Very ineffective: 16%;
No basis to judge: 26.
Other Market Issues:
a) Detecting market power abuses in wholesale electricity markets:
Very effective: 5%;
Somewhat effective: 21%;
Neither effective nor ineffective: 16%;
Somewhat ineffective: 21%;
Very ineffective: 16%;
No basis to judge: 22%.
b) Correcting detected market power abuses in wholesale electricity
markets:
Very effective: 8%;
Somewhat effective: 27%;
Neither effective nor ineffective: 13%;
Somewhat ineffective: 17%;
Very ineffective: 14%;
No basis to judge: 21%.
c) Identifying problems concerning wholesale electricity market
structure and rules:
Very effective: 10%;
Somewhat effective: 31%;
Neither effective nor ineffective: 13%;
Somewhat ineffective: 16%;
Very ineffective: 11%;
No basis to judge: 19%.
d) Remedying problems concerning wholesale electricity market structure
and rules:
Very effective: 7%;
Somewhat effective: 29%;
Neither effective nor ineffective: 17%;
Somewhat ineffective: 17%;
Very ineffective: 11%;
No basis to judge: 19%.
e) Resolving complaints and disputes among electricity market
participants quickly and fairly:
Very effective: 13%;
Somewhat effective: 36%;
Neither effective nor ineffective: 12%;
Somewhat ineffective: 13%;
Very ineffective: 6%;
No basis to judge: 21%.
f) Enforcing violations of FERC's requirements relating to wholesale
electricity sales:
Very effective: 6%;
Somewhat effective: 26%;
Neither effective nor ineffective: 15%;
Somewhat ineffective: 12%;
Very ineffective: 10%;
No basis to judge: 30.
g) Other - Please specify:
8. More specifically with regard to regulation and oversight of
interstate natural gas transportation, overall, how effective or
ineffective is FERC in doing the following? (Check one box in each
row.)
Cost-of-Service Rates:
a) Establishing just and reasonable cost-of-service natural gas prices:
Very effective: 27%;
Somewhat effective: 23%;
Neither effective nor ineffective: 6%;
Somewhat ineffective: 2%;
Very ineffective: 1%;
No basis to judge: 42%.
b) Gathering data to establish just and reasonable cost-of-service
rates for interstate natural gas transportation:
Very effective: 23%;
Somewhat effective: 26%;
Neither effective nor ineffective: 5%;
Somewhat ineffective: 5%;
Very ineffective: 1%;
No basis to judge: 41%.
c) Analyzing data to establish just and reasonable cost-of-service
natural gas prices:
Very effective: 27%;
Somewhat effective: 23%;
Neither effective nor ineffective: 3%;
Somewhat ineffective: 4%;
Very ineffective: 1%;
No basis to judge: 42.
Market-Based Rates:
a) Establishing market structure and rules to provide competitive, well-
functioning natural gas markets:
Very effective: 16%;
Somewhat effective: 32%;
Neither effective nor ineffective: 7%;
Somewhat ineffective: 4%;
Very ineffective: 3%;
No basis to judge: 38%.
b) Gathering data to determine whether market-based rates for
interstate natural gas transportation are just and reasonable:
Very effective: 9%;
Somewhat effective: 31%;
Neither effective nor ineffective: 8%;
Somewhat ineffective: 6%;
Very ineffective: 5%;
No basis to judge: 41%.
c) Analyzing data to determine whether market-based rates for
interstate natural gas transportation are just and reasonable:
Very effective: 12%;
Somewhat effective: 27%;
Neither effective nor ineffective: 11%;
Somewhat ineffective: 5%;
Very ineffective: 5%;
No basis to judge: 41%.
Other Market Issues:
a) Detecting market power abuses in natural gas markets:
Very effective: 5%;
Somewhat effective: 30%;
Neither effective nor ineffective: 10%;
Somewhat ineffective: 9%;
Very ineffective: 6%;
No basis to judge: 39%.
b) Correcting detected market power abuses through changes in market
rules:
Very effective: 7%;
Somewhat effective: 31%;
Neither effective nor ineffective: 9%;
Somewhat ineffective: 8%;
Very ineffective: 5%;
No basis to judge: 40%.
c) Identifying problems concerning natural gas market structure and
rules:
Very effective: 10%;
Somewhat effective: 33%;
Neither effective nor ineffective: 7%;
Somewhat ineffective: 9%;
Very ineffective: 3%;
No basis to judge: 38%.
d) Remedying problems concerning natural gas market structure and
rules:
Very effective: 11%;
Somewhat effective: 33%;
Neither effective nor ineffective: 5%;
Somewhat ineffective: 9%;
Very ineffective: 4%;
No basis to judge: 39%.
e) Resolving complaints and disputes among natural gas market
participants quickly and fairly:
Very effective: 16%;
Somewhat effective: 29%;
Neither effective nor ineffective: 10%;
Somewhat ineffective: 3%;
Very ineffective: 2%;
No basis to judge: 40%.
f) Enforcing violations of FERC's requirements relating to natural gas
transmission:
Very effective: 13%;
Somewhat effective: 28%;
Neither effective nor ineffective: 6%;
Somewhat ineffective: 8%;
Very ineffective: 4%;
No basis to judge: 42%.
g) Other - Please
specify:
9. Would you agree or disagree with the following statements as they
relate to various issues in FERC? (Check one box in each row.)
Teamwork/External Cooperation:
a) Teamwork with others outside my office is encouraged.:
Strongly agree: 24%;
Agree: 43%;
Neither agree nor disagree: 16%;
Disagree: 12%;
Strongly disagree: 5%;
No basis to judge: 0%.
b) Teamwork within my office is encouraged:
Strongly agree: 35%;
Agree: 37%;
Neither agree nor disagree: 15%;
Disagree: 11%;
Strongly disagree: 2%;
No basis to judge: 0%.
c) Teamwork within my division/section is encouraged:
Strongly agree: 42%;
Agree: 37%;
Neither agree nor disagree: 9%;
Disagree: 11%;
Strongly disagree: 2%;
No basis to judge: 0%.
d) Coordination and cooperation with state regulators is adequate:
Strongly agree: 8%;
Agree: 23%;
Neither agree nor disagree: 24%;
Disagree: 14%;
Strongly disagree: 5%;
No basis to judge: 25%.
e) Coordination and cooperation with Independent System Operators
(ISO's) is adequate:
Strongly agree: 6%;
Agree: 22%;
Neither agree nor disagree: 18%;
Disagree: 13%;
Strongly disagree: 5%;
No basis to judge: 36%.
Management/Resources:
a) FERC top management (the Commissioners and office directors)
provides clear and concise direction:
Strongly agree: 5%;
Agree: 33%;
Neither agree nor disagree: 21%;
Disagree: 24%;
Strongly disagree: 15%;
No basis to judge: 2%.
b) My immediate managers provide clear and concise direction:
Strongly agree: 25%;
Agree: 38%;
Neither agree nor disagree: 14%;
Disagree: 15%;
Strongly disagree: 7%;
No basis to judge: 0%.
c) Top management has clearly defined what role FERC is going to play
in monitoring markets:
Strongly agree: 5%;
Agree: 19%;
Neither agree nor disagree: 24%;
Disagree: 27%;
Strongly disagree: 17%;
No basis to judge: 8%.
d) Staffing levels in FERC are satisfactory:
Strongly agree: 2%;
Agree: 20%;
Neither agree nor disagree: 18%;
Disagree: 31%;
Strongly disagree: 21%;
No basis to judge: 8%.
e) The employee skill mix in FERC is adequate:
Strongly agree: 4%;
Agree: 25%;
Neither agree nor disagree: 18%;
Disagree: 30%;
Strongly disagree: 18%;
No basis to judge: 6%.
f) Information technology support and services are satisfactory:
Strongly agree: 9%;
Agree: 43%;
Neither agree nor disagree: 16%;
Disagree: 21%;
Strongly disagree: 12%;
No basis to judge: 0%.
g) My office maintains a strong focus on achieving the agency's
mission:
Strongly agree: 18%;
Agree: 37%;
Neither agree nor disagree: 27%;
Disagree: 10%;
Strongly disagree: 5%;
No basis to judge: 3%.
Data/Knowledge Requirements:
a) Staff understands what data are required to effectively monitor and
regulate natural gas markets:
Strongly agree: 5%;;
Agree: 29%;
Neither agree nor disagree: 13%;
Disagree: 15%;
Strongly disagree: 6%;
No basis to judge: 32%.
b) Staff understands what data are required to effectively monitor and
regulate wholesale electricity markets:
Strongly agree: 4%;
Agree: 30%;
Neither agree nor disagree: 18%;
Disagree: 24%;
Strongly disagree: 9%;
No basis to judge: 16%.
c) Staff has adequate access to data on electricity market performance:
Strongly agree: 3%;
Agree: 19%;
Neither agree nor disagree: 17%;
Disagree: 27%;
Strongly disagree: 12%;
No basis to judge: 22%.
d) Staff has adequate access to data on natural gas market performance:
Strongly agree: 3%;
Agree: 25%;
Neither agree nor disagree: 13%;
Disagree: 17%;
Strongly disagree: 4%;
No basis to judge: 37%.
e) Staff has adequate knowledge of, or experience with regulating
competitive electricity markets:
Strongly agree: 5%;
Agree: 20%;
Neither agree nor disagree: 25%;
Disagree: 21%;
Strongly disagree: 12%;
No basis to judge: 17%.
f) Staff has adequate knowledge of, or experience with regulating
competitive natural gas markets:
Strongly agree: 8%;
Agree: 33%;
Neither agree nor disagree: 12%;
Disagree: 11%;
Strongly disagree: 4%;
No basis to judge: 33%.
g) Staff understands the integration of gas and electrical markets:
Strongly agree: 6%;
Agree: 32%;
Neither agree nor disagree: 22%;
Disagree: 20%;
Strongly disagree: 7%;
No basis to judge: 14%.
Authority:
a) FERC should have authority over new generation siting:
Strongly agree: 17%;
Agree: 27%;
Neither agree nor disagree: 15%;
Disagree: 19%;
Strongly disagree: 9%;
No basis to judge: 12%.
b) FERC should have authority over electrical transmission line siting:
Strongly agree: 33%;
Agree: 36%;
Neither agree nor disagree: 9%;
Disagree: 5%;
Strongly disagree: 5%;
No basis to judge: 12%.
c) FERC should have authority to enforce reliability rules for
electricity:
Strongly agree: 42%;
Agree: 36%;
Neither agree nor disagree: 9%;
Disagree: 2%;
Strongly disagree: 1%;
No basis to judge: 10%.
d) FERC should have additional authority to require submission/sharing
of data from ISO's:
Strongly agree: 45%;
Agree: 33%;
Neither agree nor disagree: 8%;
Disagree: 2%;
Strongly disagree: 1%;
No basis to judge: 12%.
e) FERC should have additional authority to levy penalties:
Strongly agree: 45%;
Agree: 38%;
Neither agree nor disagree: 6%;
Disagree: 1%;
Strongly disagree: 0%;
No basis to judge: 10%.
When answering the next question, please recall how we defined
division/section earlier in the survey:
Division/Section - Refers to a division within the Office of Markets,
Tariffs, and Rates, such as the Division of Tariffs and Rates, the
Division of Market Information, or the Division of Market Development
or a section within the Office of General Counsel such as Markets,
Tariffs, and Rates or Market Oversight and Enforcement.
10. Thinking about your current division in OMTR or section in OGC,
would you agree or disagree with the following statements? (Check one
box in each row.)
a) My division/section has clearly defined its goals and objectives:
Strongly agree: 17%;
Agree: 38%;
Neither agree nor disagree: 20%;
Disagree: 18%;
Strongly disagree: 8%;
No basis to judge: 0%.
b) My division/section has set clear performance expectations:
Strongly agree: 15%;
Agree: 34%;
Neither agree nor disagree: 19%;
Disagree: 21%;
Strongly disagree: 10%;
No basis to judge: 0%.
c) My division/section can retain quality employees:
Strongly agree: 10%;
Agree: 30%;
Neither agree nor disagree: 24%;
Disagree: 23%;
Strongly disagree: 11%;
No basis to judge: 2%.
d) My division/section currently has adequate staff to do its work:
Strongly agree: 5%;
Agree: 25%;
Neither agree nor disagree: 21%;
Disagree: 29%;
Strongly disagree: 16%;
No basis to judge: 4%.
e) My division/section plans for its future staffing needs:
Strongly agree: 4%;
Agree: 27%;
Neither agree nor disagree: 22%;
Disagree: 11%;
Strongly disagree: 10%;
No basis to judge: 27%.
f) The staff in my division/section have the skills needed to do their
jobs well:
Strongly agree: 12%;
Agree: 42%;
Neither agree nor disagree: 18%;
Disagree: 20%;
Strongly disagree: 6%;
No basis to judge: 3%.
g) Managers in my division/section encourage me to attend training:
Strongly agree: 20%;
Agree: 41%;
Neither agree nor disagree: 20%;
Disagree: 11%;
Strongly disagree: 6%;
No basis to judge: 2%.
h) Managers in my division/section provide time for me to do attend
training:
Strongly agree: 22%;
Agree: 43%;
Neither agree nor disagree: 20%;
Disagree: 8%;
Strongly disagree: 4%;
No basis to judge: 3%.
11. In your opinion, to what extent, if at all, would each of the
following help you perform your job duties better? (Check one box in
each row.)
a) More autonomy in carrying out my job responsibilities:
To a very great extent: 7%;
To a great extent: 17%;
To a moderate extent: 27%;
To some or little extent: 23%;
To no extent: 23%;
No basis to judge: 3%.
b) More direction from management:
To a very great extent: 18%;
To a great extent: 25%;
To a moderate extent: 27%;
To some or little extent: 19%;
To no extent: 10%;
No basis to judge: 2%.
c) More supervision from management:
To a very great extent: 3%;
To a great extent: 8%;
To a moderate extent: 21%;
To some or little extent: 36%;
To no extent: 31%;
No basis to judge: 2%.
d) Improved communication between offices:
To a very great extent: 27%;
To a great extent: 29%;
To a moderate extent: 23%;
To some or little extent: 11%;
To no extent: 5%;
No basis to judge: 5%.
e) Improved communication between divisions in OMTR or sections in OGC:
To a very great extent: 27%;
To a great extent: 26%;
To a moderate extent: 25%;
To some or little extent: 11%;
To no extent: 5%;
No basis to judge: 6%.
f) Additional training opportunities:
To a very great extent: 15%;
To a great extent: 19%;
To a moderate extent: 34%;
To some or little extent: 19%;
To no extent: 11%;
No basis to judge: 3%.
g) More "teaming" with those knowledgeable in other subject areas
(Please list subject areas):
To a very great extent: 20%;
To a great extent: 19%;
To a moderate extent: 24%;
To some or little extent: 20%;
To no extent: 15%;
No basis to judge: 3%.
h) Other - Please specify:
12. In your opinion, would additional training in the following subject
areas assist you in better monitoring or regulating energy markets?
(Check one box in each row.)
a) Basic economic principles/definitions:
Additional training would assist me greatly: 14%;
Additional training would assist me somewhat: 38%;
I feel I'm already proficient in this area: 39%;
Training in this area would not be applicable to the work I do: 6%;
No basis to judge: 3%.
b) Economic theory/models:
Additional training would assist me greatly: 14%;
Additional training would assist me somewhat: 46%;
I feel I'm already proficient in this area: 25%;
Training in this area would not be applicable to the work I do: 12%;
No basis to judge: 4%.
c) Regulatory theory:
Additional training would assist me greatly: 17%;
Additional training would assist me somewhat: 38%;
I feel I'm already proficient in this area: 40%;
Training in this area would not be applicable to the work I do: 3%;
No basis to judge: 3%.
d) Market functions:
Additional training would assist me greatly: 32%;
Additional training would assist me somewhat: 49%;
I feel I'm already proficient in this area: 12%;
Training in this area would not be applicable to the work I do: 4%;
No basis to judge: 3%.
e) Market structures:
Additional training would assist me greatly: 33%;
Additional training would assist me somewhat: 51%;
I feel I'm already proficient in this area: 9%;
Training in this area would not be applicable to the work I do: 4%;
No basis to judge: 3%.
f) Statistical software packages such as SAS or SPSS:
Additional training would assist me greatly: 11%;
Additional training would assist me somewhat: 30%;
I feel I'm already proficient in this area: 7%;
Training in this area would not be applicable to the work I do: 35%;
No basis to judge: 17%.
g) Understanding how financial markets interact with energy markets
(including trading, hedging, derivatives, and financial instruments):
Additional training would assist me greatly: 37%;
Additional training would assist me somewhat: 49%;
I feel I'm already proficient in this area: 3%;
Training in this area would not be applicable to the work I do: 7%;
No basis to judge: 4%.
h) Other - Please specify:
Morale And Work Environment:
The objective of this section is to obtain your views on morale and the
general work environment at FERC.
13. Overall, how would you characterize the current level of morale in
your division/section? (Check one.)
2%: Very high;
27%: Generally high;
30%: Neither high nor low;
24%: Generally low;
17%: Very low;
1%: No basis to judge.
14. Specifically, how satisfied or dissatisfied are you with each of
the following as they relate to your current work environment? (Check
one box in each row.)
Communication:
a) Communication between the Chairman and my division/section:
Very satisfied: 10%;
Somewhat satisfied: 26%;
Equally Somewhat satisfied as dissatisfied: 20%;
Somewhat dissatisfied: 11%;
Very dissatisfied: 7%;
No basis to judge: 26%.
b) Communication between the Commissioners (not including the Chairman)
and my division in OMTR or section in OGC:
Very satisfied: 6%;
Somewhat satisfied: 22%;
Equally Somewhat satisfied as dissatisfied: 22%;
Somewhat dissatisfied: 14%;
Very dissatisfied: 6%;
No basis to judge: 30%.
c) Communication between my office's top management and my division:
Very satisfied: 12%;
Somewhat satisfied: 24%;
Equally Somewhat satisfied as dissatisfied: 13%;
Somewhat dissatisfied: 15%;
Very dissatisfied: 14%;
No basis to judge: 22%.
d) Communication between different divisions/sections within my office:
Very satisfied: 9%;
Somewhat satisfied: 24%;
Equally Somewhat satisfied as dissatisfied: 20%;
Somewhat dissatisfied: 24%;
Very dissatisfied: 14%;
No basis to judge: 9%.
e) Communication between groups within my division/section:
Very satisfied: 20%;
Somewhat satisfied: 29%;
Equally Somewhat satisfied as dissatisfied: 21%;
Somewhat dissatisfied: 14%;
Very dissatisfied: 10%;
No basis to judge: 7%.
f) Communication with offices other than my own:
Very satisfied: 5%;
Somewhat satisfied: 28%;
Equally Somewhat satisfied as dissatisfied: 24%;
Somewhat dissatisfied: 20%;
Very dissatisfied: 14%;
No basis to judge: 11%.
g) Communication between management of different offices:
Very satisfied: 7%;
Somewhat satisfied: 17%;
Equally Somewhat satisfied as dissatisfied: 19%;
Somewhat dissatisfied: 18%;
Very dissatisfied: 13%;
No basis to judge: 28%.
h) Communication with groups outside FERC:
Very satisfied: 4%;
Somewhat satisfied: 21%;
Equally Somewhat satisfied as dissatisfied: 28%;
Somewhat dissatisfied: 10%;
Very dissatisfied: 10%;
No basis to judge: 28%;.
Cooperation:
a) Cooperation between different divisions in OMTR and sections in OGC:
Very satisfied: 7%;
Somewhat satisfied: 29%;
Equally Somewhat satisfied as dissatisfied: 18%;
Somewhat dissatisfied: 25%;
Very dissatisfied: 11%;
No basis to judge: 10%.
b) Cooperation between groups within my division in OMTR or section in
OGC:
Very satisfied: 18%;
Somewhat satisfied: 34%;
Equally Somewhat satisfied as dissatisfied: 19%;
Somewhat dissatisfied: 16%;
Very dissatisfied: 5%;
No basis to judge: 8%.
c) Cooperation with offices other than my own:
Very satisfied: 7%;
Somewhat satisfied: 29%;
Equally Somewhat satisfied as dissatisfied: 26%;
Somewhat dissatisfied: 20%;
Very dissatisfied: 7%;
No basis to judge: 12%.
d) Cooperation between management of different offices:
Very satisfied: 8%;
Somewhat satisfied: 20%;
Equally Somewhat satisfied as dissatisfied: 23%;
Somewhat dissatisfied: 15%;
Very dissatisfied: 10%;
No basis to judge: 25%.
c) Cooperation with groups outside of FERC:
Very satisfied: 6%;
Somewhat satisfied: 23%;
Equally Somewhat satisfied as dissatisfied: 25%;
Somewhat dissatisfied: 7%;
Very dissatisfied: 7%;
No basis to judge: 31%.
Leadership/Change:
a) Leadership provided by Commissioners and office directors: at FERC:
Very satisfied: 9%;
Somewhat satisfied: 32%;
Equally Somewhat satisfied as dissatisfied: 20%;
Somewhat dissatisfied: 21%;
Very dissatisfied: 12%;
No basis to judge: 6%.
b) Leadership/supervision that you directly receive:
Very satisfied: 23%;
Somewhat satisfied: 31%;
Equally Somewhat satisfied as dissatisfied: 17%;
Somewhat dissatisfied: 15%;
Very dissatisfied: 12%;
No basis to judge: 2%.
c) Organizational changes within my office:
Very satisfied: 5%;
Somewhat satisfied: 14%;
Equally Somewhat satisfied as dissatisfied: 22%;
Somewhat dissatisfied: 23%;
Very dissatisfied: 30%;
No basis to judge: 6%.
d) Changes in my job duties as a result of recent reorganization:
Very satisfied: 10%;
Somewhat satisfied: 20%;
Equally Somewhat satisfied as dissatisfied: 29%;
Somewhat dissatisfied: 12%;
Very dissatisfied: 17%;
No basis to judge: 12%.
Training/Staffing:
a) Availability of training opportunities at FERC:
Very satisfied: 21%;
Somewhat satisfied: 42%;
Equally Somewhat satisfied as dissatisfied: 22%;
Somewhat dissatisfied: 8%;
Very dissatisfied: 5%;
No basis to judge: 2%.
b) Staffing level in my division of OMTR or section in OGC:
Very satisfied: 6%;
Somewhat satisfied: 28%;
Equally Somewhat satisfied as dissatisfied: 21%;
Somewhat dissatisfied: 23%;
Very dissatisfied: 14%;
No basis to judge: 7%.
c) Staff skills mix:
Very satisfied: 6%;
Somewhat satisfied: 29%;
Equally Somewhat satisfied as dissatisfied: 26%;
Somewhat dissatisfied: 21%;
Very dissatisfied: 13%;
No basis to judge: 5%.
d) Use of teaming within my office:
Very satisfied: 13%;
Somewhat satisfied: 34%;
Equally Somewhat satisfied as dissatisfied: 26%;
Somewhat dissatisfied: 18%;
Very dissatisfied: 8%;
No basis to judge: 2%.
e) Use of teaming between OMTR and OGC:
Very satisfied: 10%;
Somewhat satisfied: 33%;
Equally Somewhat satisfied as dissatisfied: 19%;
Somewhat dissatisfied: 16%;
Very dissatisfied: 13%;
No basis to judge: 10%.
Other:
a) Availability of resources (i.e., budget, technology, staff, etc.)
necessary to do my job at FERC:
Very satisfied: 8%;
Somewhat satisfied: 38%;
Equally Somewhat satisfied as dissatisfied: 22%;
Somewhat dissatisfied: 18%;
Very dissatisfied: 11%;
No basis to judge: 4%.
b) Availability of rewards for job performance in my division of OMTR
or section in OGC:
Very satisfied: 11%;
Somewhat satisfied: 26%;
Equally Somewhat satisfied as dissatisfied: 19%;
Somewhat dissatisfied: 20%;
Very dissatisfied: 19%;
No basis to judge: 5%.
c) Other - Please specify:
15. Thinking about the issues covered in the previous question
concerning your current work environment, overall, how satisfied or
dissatisfied are you with your work environment at FERC? (Check one.)
11%: Very satisfied;
39%: Generally satisfied;
23%: Equally satisfied as dissatisfied;
20%: Generally dissatisfied;
7%: Very dissatisfied.
FERC First:
The objective of this section is to obtain your views on the FERC First
initiative.
16. Were you employed by FERC before the FERC First reorganization,
which occurred in 1998? (Check one.)
87%: Yes; Continue with question 17.
13%: No; Skip to question 22, Comments.
17. To what extent, if at all, do you believe that the efforts to
implement FERC First improved FERC's ability to effectively monitor or
regulate energy markets overall? (Check one.)
0%: To a very great extent;
4%: To a great extent;
17%: To a moderate extent;
25%: To some or little extent;
49%: To no extent.
6%: No basis to judge.
18. To what extent, if at all, do you believe that the efforts to
implement FERC First have improved your ability to perform your job
duties? (Check one.)
2%: To a very great extent;
4%: To a great extent;
12%: To a moderate extent;
17%: To some or little extent;
63%: To no extent;
1%: No basis to judge.
19. Prior to the FERC First reorganization, which of the following was
your area of primary focus? (Check one.)
42%: Gas;
49%: Electricity;
9%: Other - Please specify:
20. After the FERC First reorganization, which of the following is your
area of primary focus? (Check one.)
17%: Gas;
38%: Electricity;
39%: Both gas and electricity;
6%: Other - Please specify:
21. In your opinion, to what extent, if at all, has your work focus
changed as a result of the FERC First reorganization? (Check one.)
15%: Changed to a very great extent;
15%: Changed to a great extent;
24%: Changed to a moderate extent;
24%: Changed to little or some extent;
24%: Has not changed at all.
Please explain your response:
Comments:
22. If you have any additional comments relating to any of the issues
raised in this questionnaire, please enter them in the space provided.
23. If you have any additional suggestions not noted elsewhere on this
questionnaire about how FERC, OMTR or OGC can improve operations,
please enter them in the space provided.
Thank you for your assistance.
[End of section]
Appendix III: Comments from the Federal Energy Regulatory Commission:
Federal Energy Regulatory Commission:
Office Of The Chairman:
Washington, DC 20426:
May 31, 2002:
Mr. Jim Wells:
Director, Natural Resources and Environment:
United States General Accounting Office:
Room 2T23:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Wells:
Thank you for your letter of May 16, 2002, enclosing your draft report
of Energy Markets: Concerted Actions Needed by FERC to Confront
Challenges That Impede Effective Oversight. I appreciate the
opportunity to comment on this report and congratulate you on your
effort.
In general, I agree with the conclusions of your report. The
Commission's internal restructuring to support its new market oversight
role has not kept pace with the speed of energy industry restructuring.
Your recommendations of how to meet the challenges that lay ahead are
consistent with our current direction. Since I became Chairman in
September 2001, the Commission has taken aggressive measures to address
the key challenges we face - ensuring adequate infrastructure for our
Nation's energy industries; fostering nationwide competitive energy
markets with balanced rules; and developing vigilant market oversight
to ensure that energy markets are competitive, efficient, and fair. I
appreciate this opportunity to suggest that our current efforts are
paying off, and we have a plan that is ready to implement the
additional resources and statutory authority that have been identified
in this report.
I agree with your report's conclusion that we have not yet done all we
can to oversee energy markets. Despite a long-standing recognition that
we needed to develop the information, procedures and staffing to
oversee markets, as of the time of your assessment, the Commission had
not previously focused its efforts clearly enough to succeed. That has
now changed. In January 2002 we launched a new Office of Market
Oversight and Investigation (OMOI) to oversee and assess the fair and
efficient operations of electric power and natural gas markets. The new
office, under the leadership of its first director, William Hederman,
will be up and running in August, 2002. Its job will be to understand
energy markets and risk management, measure market performance and
analyze market data with an eye to recommending market improvements,
investigate compliance violations, and, where necessary, pursue
enforcement actions. The office:
* will report directly to me and my fellow commissioners,
* will bring together all of the staff devoted to oversight and
enforcement in one place, and;
* will receive the resources it needs to restore and maintain the
integrity of our nation's energy markets.
Your report accurately addresses the human capital challenges that we
face. Today's staff is better suited to regulate cost-of-service rates
than market-based regulation. By 2005 one quarter of our employees will
be eligible to retire and half will be eligible for early out
retirement. How the Commission replaces these employees will have a
profound effect on the future capabilities of the agency. We have made
significant progress recently in hiring new employees through an
aggressive recruitment program. We are focusing on the skill sets we
need for market oversight and investigation, and we will explore all
the hiring flexibility available to us to build a world-class oversight
staff, drawing ideas from agencies with similar regulatory
responsibilities over complex and rapidly evolving markets. We have
already received Congressional authorization to hire five new senior
positions for market oversight and investigation and I have requested
Congressional authorization for 50 new positions and $5 million in
additional funding. We are presently reviewing existing budget
allocations across the agency for further resources. Finally, we have
implemented training programs for existing staff and are working to
craft more focused training programs to build technical and leadership
capabilities.
I agree with your report's conclusion that the Commission's ability to
develop, regulate and oversee competitive energy markets could be
enhanced with new statutory authority and guidance from Congress on the
agency's appropriate role in these markets. As your report indicates,
the Commission has often struggled to find market solutions while
operating under legislative authority designed for regulated monopolies
with cost-of-service rates. Additional statutory authority is needed,
particularly in providing the Commission with the ability to assess
administrative penalties for violations of the law or Commission rules.
Congress could also strengthen the Commission's ability to create
competitive wholesale markets by clarifying the Commission's authority
to order the formation of RTOs.
I have enclosed a summary of the Commission's current efforts to
address issues of market oversight, human capital and legislative
authority.
Thank you for your insight and recommendations on how we can improve
our efforts to regulate and oversee electricity, natural gas and oil
pipeline markets. I appreciate the hard work your staff put into this
report and hope it will enable us to obtain the resources and authority
needed to face the challenges before us. Thank you again for the
opportunity to comment on your report.
Best regards:
Signed by:
Pat Wood III:
Chairman:
Enclosure:
Attachment: Recent FERC Market Oversight Initiatives:
Our current Strategic Plan, adopted on September 26, 2001, explicitly
recognizes the need to provide vigilant, fair oversight of energy
markets as one of the three major substantive challenges we face in the
next decade. The past two years have made it abundantly clear that
emerging energy markets can be subject to both abusive actions by
individual companies and more general system dysfunctions. The agency
must recognize such problems rapidly and respond to them quickly and
cogently to make wholesale markets work for the Nation's energy
customers.
Following the Strategic Plan, in January 2002 we created a new Office
of Market Oversight and Investigation to meet the challenge. This
Office represents a fundamental break with the past. It will:
* Concentrate all of our oversight and investigation functions in one
place. This will avoid the diffusion of effort that the GAO report
observes as one of the problems of the past.
* Report directly to the Chairman and provide information directly to
all of the Commissioners on a regularly scheduled timetable. This
status provides for executive leadership and regular input into the
thinking of our decision-makers.
* Have the resources it needs to do the job. We have requested $5
million, 50 full-time equivalents, and the authority to hire 5 new
senior (SES or SL) staff for market oversight in our FY 2003 budget. We
have already hired an expert in the energy and financial industries to
set up and run the new office.
The new Office will be operational in August 2002. We have developed
preliminary versions of how it will work: a mission and function
statement, an organizational design and a comprehensive list of the
services and products the Office will produce. These plans are
attached. In light of various findings in the GAO report, three aspects
of the new Office's products deserve highlighting. It explicitly
includes:
* Monitoring of markets in regions where no market monitors are in
place at Regional Transmission Organizations (RTOs) or Independent
System Operators (ISOs), and working closely with market monitors of
RTOs and ISOs where they do exist.
* Providing advance warnings of problems that can be anticipated and
timely responses to those that cannot.
* Developing and publishing market performance measures as a key
product in the overall market oversight program. These measures will be
a major part of the Commission's overall performance measures submitted
to Congress every year. Unsatisfactory performance will also be traced
to its root cause, either market design rules, structural features of
supply and/or demand, market participant behavior, to inform corrective
policy action.
OMOI will greatly improve our ability to oversee and investigate
markets. However, we have already made significant progress within our
old structures. Within the past year, our staff:
* Produced and reported studies on infrastructure and transmission
constraints in all regions of the United States,
* Improved its daily and monthly reporting to the Commission,
* Responded to a large array of special needs for market analysis for
various Commission proceedings and investigations,
* Increased its access to needed data from industry organizations,
RTOs, and individual companies, and;
* Hired 7 new staff in the markets program area with 9 additional job
offers or start dates pending,
* Targeted recruitment efforts to needed skill sets, leading to the
posting of 10 vacancy announcements above entry level with 230
applications for these positions including many promising candidates.
A key purpose of market oversight is to identify market problems and
propose remedies. Here, too, we are making progress even before OMOI is
established. We saw that inconsistent electric market designs create
unnecessary transactions costs and market designs that fail to
recognize realities of the electric grid create opportunities for
market manipulation. In response, we will issue a proposed rule this
summer on standard market design (SMD) that will standardize a thorough
set of market rules. We saw that non-discriminatory and rapid generator
interconnection is critical to competition and providing adequate
infrastructure. In response we issued a proposed rule this spring to
standardize interconnection agreements. We saw that poor information on
market conditions leads to illiquid markets and reduced trust in the
integrity of the market. In response we issued Order No. 2001 requiring
the public reporting of pricing and other terms of transactions.
These measures will both greatly reduce the risk of market dysfunction
and make market monitoring a much stronger part of overall market
institutions. Still, the experience of the last two years shows that no
set of initial plans will be perfect. Our aim is to use new rules to
make markets work - and to use market oversight and investigation
to make sure that markets work.
Resources:
As the GAO report finds, past Commissions had limited success hiring
staff at the mid- and upper levels with knowledge of and experience
with competitive energy markets. Our recent targeted recruiting efforts
have generated much greater interest by more promising candidates than
in past efforts, providing reason for optimism. We will continue to be
more creative in our approaches to hiring and retaining needed staff
and offering wages that are competitive with the private sector.
Language in the Commission's current FY 2002 budget appropriation
provides additional resources and SES/SL positions for this purpose.
Since last November, the Commission has been working with the Office of
Personnel Management to gain approval for these positions and will
continue to do so. I also support legislation to provide the Commission
with additional recruitment and pay flexibilities, and with exemptions
from parts of Title 5 or, in the alternative, a demonstration project
through OPM. Given the national importance of making energy markets
work well, OMOI will also appeal directly to the civic-mindedness of
experts in the relevant disciplines who would be willing to make some
financial sacrifice to serve the public interest.
Need for Greater Statutory Authority
As the report notes, the Commission has often struggled to find market
solutions while operating under legislative authority designed for
regulated monopolies with cost of service rates. Additional statutory
authority is needed in the following areas.
Congress can help the Commission protect customers against the exercise
of market power by amending the Federal Power Act to allow the
Commission to establish a refund effective date that is as early as the
date a complaint is filed or initiated by the Commission. The
Commission relies on Section 206(b) of the Federal Power Act for refund
protections if it finds that market-based rates are no longer just and
reasonable. Section 206(b) provides that whenever the Commission
institutes a Section 206 investigation of a rate or charge that may be
unjust or unreasonable, the Commission must establish a refund
effective date. If the investigation is based on a complaint, the
refund effective date must be no earlier than 60 days after the
complaint is filed or initiated by the Commission. Permitting the
Commission to set a refund effective date as of the date a complaint is
filed will increase the deterrent effect of refunds by extending the
time period of possible refunds and give customers a stronger incentive
to notify the Commission immediately when they perceive manipulation of
the electricity markets because customers will have access to greater
refunds.
Congress can also increase civil and criminal penalties under the
Federal Power Act (FPA) and Natural Gas Act (NGA). These changes will
provide stronger deterrents to anticompetitive behavior, market
manipulation, and other violations of the FPA and NGA. Currently, FPA
section 316A provides for a civil penalty authority of up to $10,000
per day for violations of Section 211, 212, 213 or 214. These penalties
could be broadened to all sections of the FPA and increased
significantly. The NGA contains no provision to allow the Commission to
level civil penalties. The Commission supports a recent White House
proposal to increase the penalty for willful and knowing violation of
the FPA from the current $5,000 level to $1 million and that the
potential prison term be increased from two to five years. For a
violation of the Commission's regulations under the FPA, the White
House proposed to increase the penalty from $500 per day to $25,000 per
day. A similar provision could be added to the NGA.
Finally, Congress can help by clarifying the Commission's jurisdiction
with regard to RTOs. Since RTOs help solve many of the problems
observed in recent experience, Congress should clarify the Commission's
authority to require RTO membership.
Office Of Market Oversight And Investigations:
Vision:
Vigilant oversight and vigorous enforcement of proper market rules
ensure dependable, affordable, competitive energy markets to benefit
end use customers and other participants.
Mission:
Guide the evolution and operation of energy markets to ensure effective
regulation and protect customers through understanding markets and
their regulation, timely identification and remediation of market
problems, and assured compliance with Commission rules and regulations.
Functions:
Assess market performance through:
* analyzing market structures and proposing policies for improvement;
* acquiring and analyzing public and proprietary information data
bases;
* conducting market research and developing market models and
simulations;
* analyzing effects of current and proposed regulations, market rules
and policy options; and;
* advising the Commission on the market effects of current and proposed
policies.
Ensure conformance with Commission rules through:
* auditing compliance with Commission rules and reporting requirements;
* investigating actions of market participants;
* facilitating resolution of disputes among market participants and
regulated entities; and;
* enforcing Commission rules that govern the markets.
Produce internal and external reports:
* describing the state of energy markets;
* reviewing and analyzing market occurrences and trends;
* providing early warning of vulnerable market conditions; and;
* making recommendations on the functioning and governance of energy
markets.
Office of Market Oversight and Investigations (OMOI):
Skillsets:
Director:
* Division of Management & Communication:
- Planning;
- Career Development;
- Performance Management;
- HR;
- Budgeting;
- Recruiting;
- Facilitation;
- Contracting;
- Speaking;
- Writing/Editing;
- Knowledge of Industry;
- Web design;
- Graphics;
- Partnering;
- Presentation development.
Deputy Director, Market Oversight & Assessment:
* Market Scanning;
* Division of Energy Market Oversight;
- Electrical Engineers;
- Pipeline Engineers;
- Economists;
- Deep Industry Expertise;
- Information Analysis;
- Modeling;
- Operations Research;
- Market Design & Operation;
* Division of Financial & Integrated Market Assessment:
- Engineers;
- Economists;
- Broad Industry Experience (Cross-Industry, Scenario, Regulatory
Analysis; Market Microstructure Issues);
- Understanding of Investment;
- Operations Research;
- Writing/Presentation Skills;
* Division of Information Development:
- Information Analysis;
- Energy Industry Expertise;
- Software Applications (Large databases, Date Analysis, Statistical,
Presentations (including Mapping);
- Web Experience;
- Questionnaire & Survey Design;
- Statistical Analysis.
Deputy Director Investigations & Enforcement:
* Hotline;
- Public Speaking;
- ADR;
- Phone answering;
* Division of Enforcement:
- Attorneys
- Litigation;
- Investigation;
- Knowledge of financial markets;
- Enforcement;
- ADR Training;
- Paralegal;
* Division of Operational Investigation:
- Forensic Auditors;
- Analytic ability;
- Statistical sampling;
- Documentation;
- Industry experience;
* Division of Technical Investigations:
- Gas Engineer;
- Electric Engineer;
- Mechanical Engineer;
- Quantitative Economist.
Oversight And Assessment:
Activities And Products Overview:
Markets:
Commodity Prices;
Basis Differentials;
Market Power;
Market Performance.
Major Products:
Analysis and recommendations regarding anomalous prices or other
problematic market behavior;
Biweekly Surveillance Report and Early Warnings;
Annual "State of the Markets" (SOM) Report on Structure, Conduct, and
Performance; and Quarterly updates ("Report Cards").
Related Activities:
Real time monitoring;
Daily tracking reporting;
Economic, financial, and policy analysis;
Support investigations and enforcement initiatives;
Performance metric development and evaluation.
Infrastructure:
Transmission;
Generation;
Gas Storage;
New Projects.
Major Products:
Annual assessment of adequacy and needs (in SOM);
RTO Performance Report Cards;
Annual assessment of progress in accelerating approvals and
completions.
Related Activities:
Real time monitoring;
Tracking, reporting, and analysis of outages;
Assessments of price effects as function of generation, transmission,
and storage status/trends;
Performance metric development and evaluation;
Background:
Weather;
Economic Activity;
Corporate Behavior;
Other Regulatory Developments;
Other.
Major Products:
Look-ahead scenario development to assess range of important
"uncontrollable" factors for quarterly reports;
Reports on actual versus expected patterns and price behavior;
Reports on major changes and market implications (M&A, credit watches,
regional economic surprises, major policy changes from outside FERC).
Related Activities:
Daily monitoring;
Strategic scanning;
Analysis of effects on prices and access.
Investigations And Enforcement:
Activities And Products, By Type Of Effort:
Markets:
Hotline:
* Market power abuse;
* Affiliate abuse;
* Other, including tariffs and rates;
* Transmission issues (Gas, Electric, or Oil);
* Service changes;
* Coordination with OMTR.
Audit:
* Market trading practices;
* Market-related transactions;
* ISO/RTO operations;
* RTO Board/MMU Independence;
* Affiliate abuse;
* Conformity of RIO rules with tariff and actual operation.
Investigations: Informal; Formal/enforcement; With Other Agencies:
* Market power abuse:
- Withholding, physical and economic;
- Market rule violation;
- Other;
* Affiliate abuse, for example:
- Between transmission companies and affiliates;
- Among marketing and supply affiliates;
- Between gas and electric affiliates;
* Market evaluation:
- Commission-sponsored rules;
- Effectiveness of tariffs;
- RTO/ISO tariffs and operations;
* Other (e.g., degradation of service).
Infrastructure:
Hotline:
* Landowners;
* Interconnections;
* Environmental issues.
Audit:
* OASIS, Internet postings;
* Transmission or Plant outages;
* NERC/WECC activity;
* Transparency of RTO grid operations;
* Constraints, TLRS and OFOs.
Investigations: Informal; Formal/enforcement; With Other Agencies:
* Market-related infrastructure issues:
- Outages;
- TLRS, OFOs;
- OASIS, Internet postings;
* Gas Construction, Uncertificated construction:
- Certificate violations: Construction; Environmental; Landowner;
- Hydro license issues;
- Unlicensed operation or construction;
- License violations: Landowner; Environmental; Construction; Other.
Financial:
Audit:
* Track SEC reports;
* Credit ratings;
* AICPA pronouncements;
* Corporate accounting policy.
Products:
Hotline:
* Informal dispute resolution;
* Referrals;
* Reports:
- Hotline Overview;
- Hotline Detail;
- Hotline Annual;
* Outreach and marketing.
Audit:
* Audit reports;
* Survey reports;
* Fact-finding reports;
* Recommendations.
Investigations: Informal; Formal/enforcement; With Other Agencies:
* Enforcement Recommendations to Commission:
- Report of investigation;
- Request to initiate formal investigation;
- Consent agreement;
- Show cause order;
- Recommendation for rule or policy change;
- Briefs, motions and other pleadings;
* Quarterly Report of Cases;
* Annual Enforcement Report;
* Sharing Information with Other Agencies.
Management And Communication:
Activities And Products:
Strategy & Planning:
* Strategy:
- Message;
- Long-term Strategy;
- Performance Measures (Commission Markets Program);
* Planning:
- Business Planning;
- Office Budget;
- Resource Coordination;
- Office Operation & Program Assessment;
* Commission Coordination:
- Agenda Tie-in;
- Inter-office coordination;
- Surveillance reporting process.
Outreach:
* Facilitate;
* Partnership's with:
- MMU/RTO;
- Industry;
- States;
- Academics;
- Think tanks;
- SEC, CFTC, FTC, DOJ;
- Consumer Groups;
- Environmental Entities;
- NAESB;
- Financial Institutions;
* Awards:
- Individual and/or to organizations for innovation.
Administrative:
* People:
- Recruitment;
- Career Development;
- Performance Evaluations;
- Fellows Programs and Internships;
- Mentoring;
- Orientation;
- Union;
- Ministerial HR: travel; training; awards; other;
* Support:
- Contracts;
- Procurement;
- CIO;
- Logistics;
- Property;
- Internal Controls.
Publication:
* Services;
* Document repository;
* Powerpoint;
* Education;
* MORe;
* Editing;
* Formatting;
* Standards;
* Internet Expertise.
Products:
Strategy & Planning:
* GPRA Documents;
* Commission Budget;
* Business Plan;
* Workload Tracking System;
* Agenda Report Coordination.
Outreach:
* Communication Plan;
* Conferences;
* Speeches;
* Workshops;
* Interviews;
Administrative:
* New Employees;
* IDP Program;
* Training Sessions;
* Work Environment;
* Resource Acquisition;
Publication:
* Reports;
* Articles;
* Glossary;
* Web Page;
* Videos;
* Presentations.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Jim Wells (202) 512-3841:
Anu Mittal (202) 512-9846:
Acknowledgments:
In addition to the individuals named above, R. Stockton Butler,
Elizabeth Erdmann, William Lanouette, and Raymond Smith made key
contributions to this report. Important contributions were also made by
Stuart Kaufman and Barbara Timmerman.
[End of section]
Footnotes:
[1] A natural monopoly is a company that becomes the only supplier of a
product or service because the nature of that product or service makes
a single supplier more efficient than competing ones.
[2] Staff resources are measured in this report in terms of full-time-
equivalent staff years.
[3] A natural monopoly is a company that becomes the only supplier of a
product or service because the nature of that product or service makes
a single supplier more efficient than competing ones.
[4] Phillips Petroleum v. Wisconsin, 347 U.S. 672 (1954).
[5] PUHCA and the Federal Power Act were enacted as part of the Public
Utility Act of 1935.
[6] Qualifying facilities fit into one of two categories: (1)
cogenerator qualifying facilities, in which electric energy and another
form of energy, such as heat or steam, are produced sequentially using
the same fuel source and (2) small power producer qualifying facilities,
in which at least 75 percent of energy source inputs are from renewable
resources. Both cogenerating and small power producing qualifying
facilities cannot have more than 50 percent of their equity interest
held by an electric utility.
[7] Avoided costs are the energy and facilities costs that would have
been incurred by the purchasing utility if that utility had to provide
its own generating capacity. According to FERC, while it certifies and
provides general avoided cost QF regulations, states set the QF rates
that are often above market rates.
[8] Although the commission has jurisdiction under sections 211 and 212
of the Federal Power Act to order federally owned utilities to provide
transmission in certain circumstances, this jurisdiction is limited.
The commission also has limited authority to approve the Bonneville
Power Administration’s power and transmission rates and, by delegation
from the Secretary of Energy, to review the rates charged by other power
marketing administrations.
[9] There are nine federal electric utilities: Tennessee Valley
Authority, Bonneville Power Administration, Western Area Power
Administration, Southwestern Power Administration, Southeastern Power
Administration, U.S. Army Corps of Engineers, U.S. Bureau of
Reclamation, U.S. Bureau of Indian Affairs, and the International Water
and Boundary Commission. Publicly owned utilities include municipal
authorities, state authorities, public power districts, and irrigation
districts. Cooperatively owned utilities are formed and owned by groups
of residents, often in rural areas, and provide service mostly to
members.
[10] A futures contract is a risk management tool used in agricultural,
metal, and energy commodities markets designed to manage the risk of
price changes.
[11] Options contracts are unilateral contracts that give buyers and
sellers the right to buy or sell a specified quantity of a commodity at
a specific price within a specified period of time, regardless of the
market price of that commodity. On publicly regulated exchanges such as
NYMEX, buyers and sellers are revealed once the transaction is
complete. This is different from sales made in nonregulated forums,
such as “over-the-counter” or in Internet markets, where the parties
are known only to one another or to Internet-service subscribers and the
market’s operators. These over-the-counter prices (but not the buyers
and sellers) are aggregated and reported the next day in the energy
trade press.
[12] An ISO is an entity encouraged by FERC to manage the transmission
system as the electric industry in the United States is restructured.
An ISO is to control the power system or grid without special interest,
and is to own no generation, transmission or load. Therefore, the ISO
is intended to run the system fairly, for the benefit of all market
participants.
[13] These ISOs are California ISO; ISO New England; Midwest ISO; New
York ISO; Pennsylvania, New Jersey, Maryland (PJM) ISO; and Electric
Reliability Council of Texas (ERCOT) ISO. FERC approved the Midwest ISO
as the first regional transmission organization in December 2001. ERCOT
established an ISO in 1996 to satisfy the requirements of the Public
Utility Commission of Texas for deregulating the wholesale electricity
market in the state. The wholesale market in the ERCOT region is
basically isolated from other U.S. markets because its power grid or
transmission system has only minor connections to other U.S.
transmission systems. FERC has limited jurisdiction over the region
because the ERCOT market is essentially intrastate.
[14] Derivatives are financial instruments based on the value of one or
more underlying stocks, bonds, commodities, or other items, such as
contracts for future natural gas sale or distribution. Derivatives
involve the trading of rights or obligations based on the underlying
product but do not directly transfer property.
[15] We did not survey Hawaii, where FERC does not have regulatory
jurisdiction, nor did we survey Nebraska, where no state regulatory
body exists.
[16] The Government Performance and Results Act of 1993 required almost
all federal agencies to, among other things, develop strategic plans
covering a period of at least 5 years. These strategic plans were to
include the agency’s mission statement, long-term general goals, and
the strategies that the agencies will use to achieve these goals.
Agencies were to submit their first strategic plans to the Office of
Management and Budget and the Congress by September 30, 1997.
[17] Federal Energy Regulatory Commission, First Annual State of the
Agency Report, Fiscal Year 2000 (Washington, D.C.: October 2000). FERC
has not issued similar reports for subsequent fiscal years.
[18] FERC’s 2001 revision was not a complete update of the strategic
plan document. Instead, new strategic goals and objectives were
developed and made available on FERC’s Internet Web site, and the
agency’s fiscal year 2003 budget request provides information on the new
strategic goals and objectives and the strategies to achieve them.
[19] UBS Warburg and Dynegydirect are “bilateral” electronic traders
that, like the once dominant market-maker Enron, always take one side
of a buy or sell transaction. ICE is a “multilateral” electronic
trader, which invites and matches buy and sell orders for other
customers.
[20] In 2000, FERC set a goal to reduce paper filings by 90 percent
within 2 years, although currently only four of its forms must be filed
electronically and another four may be at the filer’s discretion.
[21] ERCOT established an independent system operator in 1996 to
satisfy the requirements of the Public Utility Commission of Texas for
deregulating the wholesale electricity market in the state. The
wholesale market in the ERCOT region is basically isolated from other
U.S. markets because its power grid or transmission system has only
minor connections to other U.S. transmission systems. FERC has limited
jurisdiction over the region because the ERCOT market is essentially
intrastate.
[22] On February 1, 2001, FERC staff issued a report on the bulk power
markets in the Northwest during November and December 2000. This
report, which was an extension of the November 1, 2000, report on the
west region, focused on the rapid increase in electric power prices
during these 2 months.
[23] The PJM ISO uses the presence of congestion on the transmission
lines to determine that, during the period of congestion, competition
is reduced and market-based bids or offerings of electricity for sale
should be replaced by cost-based bids. In contrast, the New York ISO
looks directly at bidding behavior and resulting price effects to
determine if market power exists that warrants mitigation.
[24] TAPS v. FERC, 225 F.3d 667 (D.C. Cir. 2000).
[25] New York v. FERC, 535 U.S. 1 (2002).
[26] 16 U.S.C. 824j, 16 U.S.C. 824k, 16 U.S.C. 824l, 16 U.S.C. 824m.
[27] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Health and Human Services, [hyperlink,
http://www.gao.gov/products/GAO-01-247] (Washington, D.C.: January 1,
2001).
[28] A handbook entitled Human Resource Flexibilities and Authorities
in the Federal Government is available from OPM and provides
information on the various human resource flexibilities and authorities
available to federal agencies.
[29] This is subject to the limit on aggregate compensation established
by 5 U.S.C. 5307 and 5 CFR part 530, subpart B.
[30] The Congress, in the Internal Revenue Service (IRS) Restructuring
and Reform Act, authorized IRS to establish up to 40 critical pay
positions to attract senior managers with special knowledge and skill
that IRS would otherwise have been unable to attract. IRS also created
a broadbanded personnel classification and pay system to increase its
flexibility in rewarding and utilizing managers.
[31] U.S. General Accounting Office, Performance and Accountability
Series: Major Management Challenges and Program Risks: A Governmentwide
Perspective, [hyperlink, http://www.gao.gov/products/GAO-01-241]
(Washington, D.C.: January 2001).
[32] U.S. General Accounting Office, Managing For Results: Building on
the Momentum for Strategic Human Capital Reform, [hyperlink,
http://www.gao.gov/products/GAO-02-528T] (Washington, D.C: March 2002).
[End of section]
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