Hebert, a former Mississippi utility regulator who is often regarded as a protégé of Senate Majority Leader Trent Lott (R-Miss.), was named chairman of the Federal Energy Regulatory Commission (FERC) by President George W. Bush in January 2001. A Republican, Hebert was first nominated to FERC in 1997 by former President Bill Clinton. During Hebert's tenure, FERC has been criticized for being too laissez faire, and Hebert's critics accuse him of being a free market ideologue. FRONTLINE interviewed Hebert on April 12, 2001.

I don't know what you're hearing. That's not altogether what I hear. ... While I was in Denver, Steve Larson with the California Energy Commission had a question after my speech. He said, "Look, we just want to know why FERC is not doing enough." ...

I said, "Steve, I want you to share with me what would be enough. ... We've expedited filings, we've removed impediments and obstacles. We issued a pipeline for Kern River in a matter of three weeks, which is unheard of at the federal level. ... The Federal Energy Regulatory Commission has been working awful hard doing everything we can. So tell me what it is that you need, Mr. Larson, that quite frankly I've not been able to give California from the commission?"

He said, "Well, price caps." I said, "Hmm. Is there anything other than price caps that you want?" He said, "No."

You mean a limit on the wholesale price?

On the wholesale market, which would be a way of the commission sitting here in Washington, D.C., telling a group of people in the West, "Quite frankly, we think there is a price at which we're going to make the decision to turn your lights off." ...

There are several problems with that one. One, when I went to Boise, we had 11 states represented there, 11 commissions. And out of those 11 commissions, do you know how many said they wanted hard caps? Three. Certainly not a majority. The other states say quite frankly that they don't want it.

So we have to ask ourselves, in the heartland of America, who makes the decision better to turn their lights on or off, based on cost? People who live in those homes? Or people who live in Washington, D.C.? I'm a firm believer that people in their homes make those decisions better, and I think they should have that opportunity. ...

You've said there may be a lot of pain that people have to go through as we go through the transition period from a regulated environment to a deregulated environment.

I don't think I ever said a lot of pain. I think I said there may be some pain, distinguishing between "a lot" and "some."

And it has been painful in California for consumers, and in other parts of the country. People are complaining about their prices. And the question is, do we have, in a sense, disorganized deregulation going on? Are we playing games or experimenting with what really is the oxygen of our civilization and our society?

I don't know who might be playing games. I will tell you that FERC's job, our job at this commission, is to make certain that there is not market manipulation, that there is not undue influence on the market, illegal conduct. We're continually searching for that. We're continually doing our job. But as we know, energy markets, any volatile markets, experience swings. It's part of the cycle. ...

Based on your access to information and documents, do you believe there has been manipulation in the natural gas market in California, in the delivery of that gas to California?

When the commission believes there is market manipulation, we investigate it. We are certainly in that process in certain realms right now. ... When we can prove out market manipulation, we issue orders.

Well, you issued an order for, I believe, $146 million in refunds that you want generators to give back to the state of California in overcharges. They say that's a drop in the bucket, that there's been $6.2 billion in overcharges. ...

The important thing when we draw conclusions--and I certainly want the American people to draw some conclusions based on this interview--is to understand the realm of what you're talking about. And in fact the number that you're talking about is now ... claimed to be $6.9 billion.

And growing everyday.

Absolutely. But let me tell you what's not been shared with you. Do you realize only $1.3 billion of that is subject to our jurisdiction based on law?

I understand that. ...

Well, then, let's not talk about $6.9 billion. Let's talk about $1.3 billion.

OK, let's talk about a couple of billion dollars, which is still more than chump change.

Well, it's not a couple; it's $1.3 billion.

It's more than chump change.

It's a lot of money.

And it's money that came out of consumers' pockets, or ratepayers' pockets, or taxpayers' pockets in the end. It's money that has created the biggest utility bankruptcy in the United States. ...

Although it may surprise you--and I think it would surprise the American public to find out--this commission acted on December 15. We gave out strict orders as to the direction that California should follow; specifically, the direction that the Power Exchange, where the bids flow through in California. We told them that at the $150 breakpoint, anything in excess of that they would report to us on a weekly basis, which gave us an opportunity to act quickly. That's why we were able to order those refunds for January and the refunds for February, subject to them coming in with cost justification.

Then they weren't following the procedures of this commission, consistent with the December 15 order. It would probably surprise you, and I know it would surprise the American public, that one utility was costing the consumers of California up to $20 million a day. So I want you to understand, I think $1 billion is a lot of money. I think $1.3 billion is a lot of money. But I also think $20 million a day is a lot of money, and it would be my hope that California would follow the model that we put forward here at the commission.

Is this a political war? Because ... when we interviewed [California Public Utilities Commission President] Loretta Lynch, she was saying, "We're not going to move ratepayers' rates. The problem is in Washington, because they won't put a cap on wholesale rates." And it's as if the consumer got caught in the middle between the two. There was no conversation. There was no, if you will, decision-making going on that was for the benefit of the people themselves who use electricity, who have to have it to live.

You ask me if I think it's political. It's not political in my sense. I think it's economics. We're following the law. I think it's important that others follow the law as well. ... Let me tell you why it's not [political]. I believe in my heart, and I know in my educated mind that price controls didn't work for President Carter. They didn't work for President Nixon, nor did they work for President Clinton. They won't work today. ...

You sounded pretty adamant out in Idaho and Denver when you were asked about this. You weren't going to issue price caps. You were opposed to it, and there was going to be no relief for California on that level.

... I said that heretofore, price caps have not worked in the sense that, from an economic perspective, we know they do long-term damage. The only reason we ever do price caps--if we do them--is to bring short-term relief.

The commission here, under previous administration--independent of me--gave a report which, in fact, said when the price caps dropped from $750 to $250, the average price went up. I'm concerned with average prices, as I know consumers are. I want to be very careful how we move in that direction.

I think if there's market manipulation, we need to find that market manipulation, and we need to ferret it out, and we need to protect the consumers. And that is what this commission is going to do.

I will also share with you, in fact, that I think I'm fairly intelligent. But I think the good people of America and California are much smarter than anybody in Washington, D.C. ever gives them credit for, and they know when to turn their lights off. They don't need somebody in Washington by some price cap telling them at which point a megawatt will not be delivered and they'll flip the switch off for them on Pennsylvania Avenue.

What do you say to working people whose utility bills are going through the roof and who have to make a choice between buying medicine or buying food and paying their gas bill or their electric bill because we're in this turmoil?

As you know, the Federal Energy Regulatory Commission does not regulate retail rates. ... We regulate wholesale rates. ...

I'll quote you Mr. [Robert] Glynn, the CEO of PG&E, and [FERC Commissioner] Pat Wood, who both say gas prices in Texas have doubled in the last year. They've gone up 20 times by the time they get to the California border. Something is going on there that is not explainable in normal market conditions, or even normal supply and demand conditions. True? Not true? Do you agree with them?

We have a pending matter on that issue right now. I know the American public doesn't understand. It may see this as an opportunity for me to sidestep the issue. I am legally prohibited from discussing a pending matter with you. We will issue that quickly. We're working on it right now. ...

The general public believes there is some kind of conspiracy going on, a cartel that's in control of our electricity rates, of our gas prices, and that's what's going on in the United States right now--that people are being gouged by big business. In Ms. Lynch's case, the federal government is doing nothing to help. She blames the Democratic and the Republican administrations.

Well, I don't think this should be about blame. I think it should be about answering the call, and the call is simple. More supply. More infrastructure to deliver that supply. And let me tell you, as much as people want to talk about cartels, as much as people want to compare this to whatever they want to compare it to, there are only two answers here: add supply; decrease demand. Anything that anyone else is talking about is a waste of time. ...

Should a generator really be kept to--in terms of fair and reasonable prices--$1,000 per megawatt, if it's well above their cost of production? Should they be allowed to bid, let's say, as they have in California, $9,999 and have that bid accepted because the state is desperate for the power? Shouldn't there be a cap? Isn't that profiteering?

Part of what we've seen is that the state would immediately go to the cap or immediately go to the higher price so that they could get the energy, for one thing. Two, don't forget that the ISO requested that the hard cap be removed, OK? The other thing that you must understand is that we were looking at cost-based regulation several years back. We have moved away from cost-based. We're trying to resolve what happened in California.

"Cost-based" means the real cost of production, plus a...

A margin of return.

An agreed-upon margin--12 percent or 15 percent or something you agree upon.

Well, not necessarily agreed upon. It may be ordered. It could be settled, but it certainly could be ordered by a state commission in the retail sense. ...

This is going on all around the country, and people don't know where the end is. That's where the anxiety is coming. ...

Rules of competition govern that economies work, that choice works. It's why we're American. We inherently like choice. It's why we left the mother country. We didn't like the rules they were setting. We want to make our own rules. We want our own choices, and we believe that works. But when you set up artificial markets, it doesn't work. ... We've got to get market certainty. We've got to give some insulation to the American public. And that's what we're doing. ...

Has your personal utility bill in this district come down where you live in the last two or three years?

No, but my use has. You could call my house right now; you could get my wife on the phone, and you could ask her where the thermostat is. And I would be willing to bet you she has got it five or six degrees below where you have yours. ...

Is there a time that you could envisage where we might decide [deregulation] is not working and it's better to go back to what we were doing in the past?

I think competition works. I think it will work. I think there have been some real bad decisions made in places which have run up costs. You're going to continue to see some bad decisions made. It's the American process. ...

Do I think we're ever going to get all 50 states in the United States of America to always make decisions which are in the best interests of consumers? No, I don't think that. But I do think we've got a system that will work. I do think we will move forward with competition. And it's my hope that, by the time you air this, that in fact you're going to see some successes. You're going to see some positive things. ...

Most people have never heard of the FERC. It appears like it's one of the most powerful regulatory agencies in the United States in terms of the size of the economy you can influence. Could you explain how important it is to people, what it does and the reaches of your power?

Well, most estimate that we regulate between 4-6 percent of the GDP.

That's 4-6 percent of the whole economy?

And that's a lot of money. That's why things that happen here are serious, and need to be treated that way. ...

Do you have a gut instinct in this process of transition--I know you can't talk about a specific case--that, in fact, there may be some egregious market manipulation, either in gas or in electricity that would explain these high prices?

I don't think there's any question that in the future you're going to continue to have some market manipulation that is unduly discriminatory that we're going to look at.

It could be legal, but they're taking advantage of the rules that are in place.

It also could be illegal, and we're going to continue to look for those. ...

Is California justified in feeling that they've been abandoned by the FERC with the summer coming?

Not at all. Especially when we've acted on everything they've asked us to do. ... The other day, Steve Larson [of the California Energy Commission], in fact, admitted the only thing we haven't done is give them a price cap which, one, their ISO asked to be removed, and two, they've just done away with retail price caps themselves. ...

		Editor's Note: FRONTLINE conducted a second interview with Hebert on May 17, 2001.

We've been looking at some of the issues that have been raised in terms of the announcement of new energy strategy. What we've found is that there has been some intensive lobbying going on both here in Washington and around the country on the issue of open access. What is open access?

When people are talking about open access, what they are really talking about is the opportunity to have open and free trading within the United States, specifically with the states, giving them retail access. There are some that, quite frankly, would like for the federal government to force the hand of states and for them to open up and have retail competition. ...

It's our understanding that open access ... is a major issue being pushed by Enron Corporation. Is that correct?

Absolutely. There's no question about that. ...

[We] actually talked to some people who had been interviewed as potential nominees for the FERC. Enron apparently went to them and asked them, "What's your position on open access?" And what we were told is that they made that sort of a litmus test for their support. Are you familiar at all with their activities around this?

I have heard those rumors. ...

When we spoke with [former Energy] Secretary Richardson, for instance, he said Enron came to him and wanted him to institute open access by some executive order, and he had to tell them no. And Enron told us that they have contacted you and the FERC on this directly. Have you spoken with them about this issue?

I have spoken with people who work for and leaders of Enron, yes.

Has [Enron Chairman] Ken Lay called you?

I have talked with Ken Lay on the phone and in private.

(Editor's note: For Mr. Lay's version of these conversations, see his interview.)

And what did he ask you to do?

Obviously, those communications are confidential. I'd rather not get into the nature of them. Certainly it is clear that he would like retail access and he would like retail competition forced upon the states. Clearly my position has been that I think there's a real question as to whether or not we have the legal authority to do that. Therefore I'm not comfortable doing it.

You know when you're talking to Ken Lay, you're talking to somebody who's the main campaign contributor to the president of the United States. You're aware of that.

Well, I'm not into the campaign finance side of the president, what he does. Certainly the president is a friend of mine.

Mr. Lay made no secret with us about his close relationship with the president and the White House and so on. We've been told that he in fact says things like, "I'll help you with what you need politically, let's say, staying on as chairman of the FERC, if you'll go along with me on this policy issue." Did that ever happen?

I would never make that trade.

Did he ever propose such a trade?

I would just say that I would never make such a trade.

I'm not trying to be cute.

I understand.

Another individual we spoke with--who was a potential nominee for the FERC--told us that this was a litmus test. Mr. Lay said something like, "If you endorse this policy, I'll talk to my friends in the White House and we'll see about your nomination." A quid pro quo. Has anything like that ever been offered to you?

Ken Lay and I have certainly had discussions as to what should be done with retail competition. He has his position and I have mine. He represents Enron and their shareholders and I represent the American people. Therefore, I have taken my position and I am going to stick with it. As to any quid pro quo that he might offer or might have offered, I would tell you that I would not go forward with anything like that and I would maintain my position. Me being chair or remaining chair is not worth me doubting the integrity of myself or this agency.

Our sources tell us that in fact he offered to talk to the president on your behalf if you would go along with what he wanted.

I don't think there's any doubt he would be a much stronger supporter of mine if I ... were willing to do what he would want me to do.

If I were to tell you that he has told the governor of California, for instance, in a private meeting which the governor then reported, that you're history, you're going to be replaced. Does that surprise you?

Nothing that comes out of California at this point would surprise me. It's not secret that Governor Gray Davis asked for the previous chairman under President Clinton of this agency to be fired. I know for a fact that he has asked for me to be fired as well. I'm not sure what the litmus test is for Gray Davis. And if there is some relationship between Gray Davis and Ken Lay, I find that very curious.

Our information is that Ken Lay told the governor, "Keep your powder dry. Hebert is going to be out of there soon. Pat Wood will be in his place." It sounds like he's confident that you're history.

Well, I think the president will make that call, and not Ken Lay.

I called the vice president. I've talked to the vice president. He says Pat Wood will be the new chairman. It sounds like Ken Lay is getting his way.

He might. This will be the first knowledge I've had if Pat Wood is in fact to be chairman.

You see where I'm coming from?

No, I understand. ...

Has any other CEO of any company ever called you privately to lobby their position?

No.

Other than Ken Lay?

No.

It's unusual?

I would say it's unusual. Ken Lay is very active in this industry. [He] has a lot of respect from a lot of people in this industry, and he's a very powerful man. But to me, he's just a man, period.

Enron has matters before the commission?

Right.

Is it illegal or improper in some way for an official of one of those companies, particularly a chairman of the board and a man like Ken Lay, to call you when you have matters before the commission and to try to discuss them?

... If he is to discuss issues with me as to that pending matter, yes.

Was there a pending matter when he called you?

No. If the discussion had gone to a pending matter, I would have informed him at that time it was a pending matter. I would have to make a letter for the record and put it in the file, and would do so.

Did you do so in this case?

No, because retail access was not something that was before the commission at that time.

Did you tell him or warn him that this was really not a good thing to do, to be talking to you directly?

Obviously in conversations I've had with him, I have let Ken know my position, and that my position is quite frankly that we have questionable authority here. ...

No one else has called you directly, as I understand it?

No, I communicate with CEOs and CFOs and COOs all the time, but generally they're just social, if we talk courtesy visits around here. They're letting us know what's happening with their company, what direction they're moving in--just informative sessions, not lobbying sessions.

So it's unusual for the head of a company--one of the president's best friends, one of his major backers, a man who is known for his political clout around town--to call you directly?

I would say it's unusual for regulators to be lobbied, period. But I will tell you in my conversations with Ken Lay, I specifically never felt lobbied, because I was never going to move.

You may not have felt that way, but did you feel pressured?

I've been doing this a long time for a young man, so I guess I don't feel the pressure as much anymore. I just I make the decisions as I see them fit based on the facts, and based on the merits and based on the law. ...

Did he call you up and talk about open access and his ability to help you politically in some fashion with the White House in the same conversation?

Have we had conversations about my chairmanship and me being chair and things that this commission should be doing? Yes. ...

He reflects a certain attitude because he is, in a sense, the only CEO or the only head of a major, major company with matters before you to have done this. Is that correct?

It's correct that he is the only CEO, I guess, that has asked me to take certain positions. But I've had those conversations with Ken Lay for a long time, and have disagreed with him for a long time. ...

Other people we've spoken to say that if you don't please Ken Lay and Enron, you don't wind up on the FERC as a nominee.

Obviously, I'm here until 2004 regardless of what happens now. If at some point the president decides he would like to have someone else as chair, that is certainly his opportunity and ability to do so as president of the United States, and I would honor that.

... If there's one reason why this issue has become so important, it's [that the people at home watching this are] all paying utility bills. And they know there are huge corporations involved with tens of billions and hundreds of billions at stake. This is a big money thing.

This agency touches somewhere between 4 percent and 6 percent of the GDP. It's a lot of money.

Which is hundreds of billions of dollars.

Absolutely.

So it may not surprise them that there's direct lobbying of the chairman of the commission but, theoretically at least, that shouldn't happen, right?

In a perfect world, it wouldn't happen.

The Consumer Federation of America doesn't call you up and say, "You'd better take this position, otherwise..."

I get letters from the Consumer Federation of America, Concerned Citizens for Whatever, and yes, I do get phone calls and communications from people like that.

But they're not going to call and say, "We have a friend in the White House and he could help you stay where you are."

I'm not going to say what they will or won't do. I'll say what they haven't done, and they have not done that.

Because of the sensitivity of this, it is not incorrect to characterize these communications as ones that involve one, policy, and two, his political ability to help you in some fashion?

There's no doubt Ken Lay and I have had communications as to policy, and the direction he would like to see this commission move in. There is also no doubt that he and I have had conversations as to whether or not he was supporting me for the chairmanship.

It doesn't sound like he is.

I don't know. ...

The economic health of the state, from everyone we talked to, is in the balance. The gross national product of the United States has already been affected, and apparently will be affected negatively by this in ripple effects. The question to people sitting at home is, how can this be happening? It seems like a war between you guys here in Washington and the regulators of government in California. But the people are in the middle.

No, the people aren't in the middle. The people, I believe, are right beside me, and believe what I believe. They believe it's enough of this political shell game. It's enough of the moving transmission companies and generating companies around and moving assets. Get me more power, get me cheaper power, get me reliable power. ... I'm not stupid. I'm an American citizen and I know what's going on here. It's absolutely ludicrous that people are doing it. It's even more ludicrous that some people in the media are promoting this. ...

It all sounds great, Chairman Hebert. But you yourself have said that you have been called on the phone by the head of a major corporation with matters of concern in general to this subject area where they have lots of money. And this person has made it clear to you ... that he has a public relationship with the president of the United States. That's the kind of leverage, if you will, that the consumers don't feel they have. Now, he may not have been able to move you. But it implies a certain level of power that is not accountable.

If your fear is that there are some powerful people out there that have the ability to move some politicians, that's always been there. That's nothing new. I certainly hope that's not happening. I certainly hope it doesn't happen. But I will tell you the people of America have much better leverage with me than Ken Lay does. And I believe they have much better leverage with this entire agency and my colleagues presently here. ...

Do you know approximately when you had this conversation with [Ken Lay]?

I don't know. I had conversations with Ken Lay so many times. Sometime in late January, early February.

Right after you got named.

Appointed.

And so the conversation really was about your tenure. You had been appointed already.

I understand. ... Well I don't, OK, I mean it was a private conversation. I don't want to--

Chairman Hebert, it's a private conversation. But it's a private conversation with public implications.

I understand.

I'm not trying to argue with you that your understanding of it may limit what you are willing to say about it. ... I'm not misunderstanding that it was a mixture of policy and politics basically in the conversation?

Right. And that was some time late January or early February. ...

You were chairman by that time.

Correct. ...

You understand why I'm interested in it, from a public point of view. There's a potential conflict here, in the sense that, while Mr. Lay is not a public official, he has the ear of the president of the United States. He makes no bones about that.

OK.

He claims to us that, while he agrees that he gets to talk to the president, he says he doesn't always get his way with the president. But he's a formidable character in this game.

OK. I don't disagree with that.

So I could see why people at home might be concerned about activity like that. ...

No, I do see the importance. I understand the importance of it, and I don't disagree with the importance of it.

You felt uncomfortable?

I did feel a little uncomfortable, yes.

No one else had called you and talked like that.

No, absolutely not.

Not the head of one of the major companies that's involved?

No.

This was pretty unique?

It was unique. ...