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Interview: richard rattey

Rattey, a senior staff economist at the Federal Energy Regulatory Commission (FERC), wrote a memorandum in June 2000 that he distributed by email to his colleagues at FERC. In it, he describes FERC staff as "impotent in our ability to monitor, foster, and ensure competitive electric power markets." Here, he talks about why he decided to come forward with his criticisms of FERC. FRONTLINE interviewed Rattey on April 10, 2001.
... The organization you joined 25 years ago ... was designed to protect ratepayers?

It was designed to protect ratepayers and utilities as well. The objective was to work in the public interest, which I've always interpreted [as] a balancing of both ensuring companies' viability and financial health ... and consequently that meant that rates to utility consumers should be as low as possible. ...

This is the era of regulation, when the idea of just and reasonable [prices originated]...?

Yes, which is still in the statutes that FERC is mandated to ensure that the rates that it allows utilities and power marketers to charge are just and reasonable. ...

In your experience, the commission normally would intervene when they would determine that rates were not just and reasonable?

In the past, under regulation, ... the commission always could go back to looking at the cost and determining what the rates would be just and reasonable, based on booked costs of the utilities. ...

But that's not happening anymore?

No, in the era of deregulation, the theory is that if you have competitive markets, then the competition between the utilities and power marketers will ensure that the rates are at the level of cost. That is not happening in the West. The rates are, as best I can tell, averaging 10 times what they were a couple of years ago and costs have not increased 10 times over the last couple of years, so...

Maybe you're looking at different numbers. But Jeff Skilling, the CEO of Enron, says that wherever deregulation has come in, prices have gone down.

It hasn't been the case so far, not in the U.S. Generally, prices have been higher in most of the regions where we have these independent systems operating ... and where the price of electricity generally within those regions is being set by auctions. Probably, during parts of the year, those prices are lower now than they were in the past. But during peak seasons, in the summertime, those prices have skyrocketed in just about all the [independent system operators]. ...

Has FERC defined what "market power" is? ...

The commission's approach to deregulation has been haphazard, and designed to create a rocky road to deregulation, to competitive markets. It's got definitions of market power in different places, but in terms of a definition that can be used in the case of California right now, the commission hasn't defined it.

So, somebody like yourself or your colleagues, if you were trying to investigate this--it sounds like you don't have a standard to base it on?

Yes. ... The vagueness of that standard was made clear in then-Chairman [Jim] Hoecker's January 4 concurrence to that order, where he said that the commission has not specified a workable standard for evaluating when rates are not just and reasonable, and the future commission is going to have to do something about that. He conceded, essentially, that the commission was operating without a clear standard for market power. ...

How can you police something when you don't know what the rules are?

I believe we're letting the market police itself. We are not policing. We haven't historically been a policeman. In fact, I believe if you go back to the commission's order in instituting its investigation of California and markets around the country last July, it made clear that it wasn't going out there looking for bad guys and trying to police the situation. They wanted to understand what was happening in the markets, and then to make some judgments about it. The commission did not--could not--see that prices being so much higher than they were the previous summer was a problem that should be remedied at that point. They were not willing to do anything to limit the liability of the utilities or consumers in California. ...

Just about everybody we've interviewed, from Enron to the California Public Utilities Commission, says we need a cop on the beat.

Yes. And the commission has not been there. The commission [has] not set itself up to be a cop looking for rule infractions and market power abuse. The commission has deregulated in a way that it expects the marketplace will work itself out; or it wants the marketplace to work itself out, and thinks it's going to do a better job than if it lets its staff go out and try to enforce rules and regulations.

And the staff--you being one of the staff--feels frustrated by this? ... What is the reaction of the staff?

... My sense is that quite a few of the staff agree with me that the commission does not have a clear interest in enforcing any of its rules and regulations in the sense that it relies on the marketplace to bring it filings and to complain. When the complaints do come in, the commission will look at something.

But generally, if you're going [to] file a complaint with the commission saying that somebody's exercising market power over you in an area, you have to pretty much have all of the information together and present it as a full case to the commission. ... The commission has some good staff who actually go out and have done some good investigations. But generally, the commission does not have the staff capability, does not have the resources, to go out and investigate every instance. ...

A year ago, you wrote this--I wonder if you could read it?

"Once again, it seems that FERC has caved in to the utility industry or some segment, with the effect of making us, FERC staff, impotent in our ability to lodge or foster and ensure competitive electric power markets."

You wrote that after your experiences in 1998 and 1999?

Yes. ... Coincidentally, because I didn't have a clear picture of was going to happen in California throughout last summer, but it was just right after the May price spikes in California ...

What happened as a result of your memo?

Very little. What I did with my memo was, I attached it to an email to all commission staff, an open memo. ... I emailed that around to people around 8:30. A little after 9:00, my supervisor came in. He discovered it, he'd heard about it, and he asked me to retract it. I held off retracting it until I felt at least 50 percent of the staff had opened it, and I retracted it from the rest of the people who hadn't opened it.

I got a few emails from other staff, most of them praising me for talking the risk. One senior staff emailed me, very angry that I would complain about something--that this is the first time he had ever heard about any of these issues. I thought that was crazy.

You must have been pretty angry?

Oh, yes, I was pretty angry. ... And I have to tell you, California was not on my mind when I was writing my memo.

It was the rest of the country?

It was the rest of the country. It was a presentation by a consultant a couple of weeks earlier where he documented--after painstaking efforts, pulling together data that we've allowed to be made almost impenetrable by market players--that he made a good presentation showing market power abuses around the country using control of transmission lines.

A consultant who was paid by FERC?

No. ... Actually, he was brought in by Enron. Enron was paying him, Enron and it was a group of power marketers. They were raising issues about market power abuses in areas outside of the ISOs, where transmission was the motive. ...

The [FERC] staff hadn't done any of that kind of work. We knew that it would take a humongous effort to be able to pull together the data that this consultant had pulled together, follow through it and identify market power abuses specific that we could take...

Did that make you angry? Why?

That was exposing in that area that we were impotent in our ability to monitor and police the industry and that rampant abuses were taking place.

The second thing was that a group of senior staff, the week before I wrote my memo, went to the North American Electric Power Reliability Council to talk ... to them about getting access to data on supply and demand for electric power in the industry, which they were the primary holders of.

This is a council for all the electrical generators in the country?

Yes.

And they have all the numbers--they would have the secret basically to what's going on?

Yes. They would have a lot of the physical information about what was happening around the country. Without that data, [it] was virtually impossible to understand how power was flowing around the country, and where market power abuses might be taking place. ... I was upset because I wasn't even asked to attend, and I probably was the one staff person who had been complaining about this data for two years. ...

You were willing to put your job on the line?

I didn't think my job was going to be on the line. I feel like--I've been there 25 years. I've essentially got tenure. They can't fire me unless they've got cause, and as far as I know, writing a memo like that is not just cause for firing somebody.

It made you into a whistleblower.

No, what made me into a whistleblower was when it was leaked to the press. ... Within a few days, the office director for my office wrote a short memo that he sent to all staff referring to my issues as legitimate, but difficult issues, saying that the process that I used was inappropriate--that I was essentially trying to do an end run around ...

Around the bureaucracy?

Yes, because nobody was listening to me. ...

Tell me the difference between the marketplace in California and New York, how you noticed the difference, and what that made you conclude.

Early on in the California market, when it was first deregulated, prices went up as high as $1,000. ... In the same kind of markets in New York, shortly after they opened up, prices went up to like $6,000 or $10,000 a year, I'm not sure. ...

And you've been able to learn this almost because you made an individual effort to find out? The commission wasn't telling you, "Go find this"?

Yes, I get very little direction from anybody above me to go and do anything specific. Essentially, during the summer of 1999, all of my analysis and everything, I was just told to be on this team, to look at and monitor markets. So I spent most of that time pulling data and analyzing the data, and looking at it more closely than we normally would.

Because you were suspicious?

Yes, I was suspicious. I did not see that normal supply and demand conditions were explaining everything that was going on. I wanted to learn about how the markets were working. ... In the past, under regulation, we didn't have to know how trading was taking place between people, because it was all cost-based. ...

You know, Mr. Rattey, it sounds to me like, sitting here in Washington, what many people think was a California problem, precipitated by California's dumb deregulation ... In a way, you said that's already been coming, and these problems are endemic around the country. ...

There just no clear signals from the commissioners or the majority of the commissioners or from senior staff that anybody wants commission staff to look for problems in the industry. If the commission finds problems out there, it means that its policies are not working. So it's kind of an incentive to not find the problems. It only goes out and looks for problems when it wants to set a new policy. ...

And the idea of setting up a competitive market--it's sort of like, open the marketplace and they will come?

I call it the "Field of Dreams" approach to deregulation of electric utilities. We've deregulated utility by utility, power market by power market and things. If we deregulate everybody's rates, the more people that we'll let charge whatever they want, then competition will come. Well, I don't think we've seen competition come anywhere in the country yet. And whether or not it's going to come is hard to imagine. ...

There's been some prediction that only a few, less than 10 companies, are going to own 80 percent of the generation capacity in the country. ...

So it seems like from the beginning, the lay of the land for deregulation, if you will, and competitive markets wasn't there, and based on your observations, it still isn't there.

The commission's approach to deregulation has been haphazard, and designed to create a rocky road to deregulation, to competitive markets. I have not come to any firm conclusions about whether or not deregulation can work for electric utilities. ... But I do believe that if it's going to come, it's got to be managed a lot better than it is. ...

Do you see more problems this summer?

Yes. I, along with everyone else, believe that California is going to have horrendous prices, and I don't see any end to it unless the commission makes some changes. ... FERC has primary responsibility for the California problem because FERC controls the wholesale electricity markets. California cannot do anything about what generators want to charge for their generation. If FERC lets them charge 10 times what their costs are, California can't do anything except eat the cost. ...

And that would mean putting in a price cap?

A price cap, or Commissioner [William] Massey has a proposal that makes a lot of sense. I think it's been proposed by academics in California, too-- where you just require the generators to recover their costs, the variable operating costs. It's not a return to cost-based regulation. It's just knowing what their fuel costs are and allowing them to get those costs. ...

But recently--yesterday--the chairman of the commission, Mr. Hebert, said, "No price caps in California, temporary or otherwise."

To me that has to reflect a purely ideological focus. ...

This is Chairman Hebert, who has been running the commission since President Bush came in.

Yes. But he has fought price caps ever since he's been a commissioner on the commission. He does not believe in price caps. He thinks that any attempt to restrain prices is going to backfire in giving the wrong signals to companies in building new generation. ... To me, that's wrong. ...

If you were me and were to talk to Commissioner Hebert, or if you had a chance to ask him a question, what would it be?

What's wrong with a price cap that is above the costs needed to build a new plant? ... That should be adequate to incent people to build new plants, especially if that's a definite price. ... Essentially, what I'm saying is that price caps should not be a problem to generators and new construction as long as the cap is set at a level that is above costs. ...

You wanted to clarify something about why you are speaking to us?

Yes. A big part of why I'm speaking now is because I'm seeing the beginnings of some projects that involve getting additional data, getting more capability to do the things that I've thought the commission should be doing for years. And if I back off now and stop pushing, then those might get stopped when they get finalized by the commission or the chairman, who I don't believe would, on his own, have an inclination to do the investigation.

You're talking about Chairman Hebert.

Yes.

What's his motive for not wanting to look?

I think he's a laissez-faire believer. And he probably epitomizes my perception of the commission over the last 10 years, in the sense of thinking that the less role the commission has out in the marketplace, the better the markets are going to work. Enforcing, going out and searching for problems, trying to enforce our regulations, would hamper competitive behavior. ...

I have no reason to believe that he's anything other than an honorable man and following his beliefs. But his beliefs are different than mine in terms of how you get competition working in the industry. You can't let the marketplace enforce itself, at least not in this transition stage. We don't have competition anywhere, and we won't get competition as long as there is no incentive for people to have a level playing field set up for them. ...

And then the president of the [California Public Utilities Commission] says to us that she can't do anything with her situation unless FERC does something about wholesale prices, and they won't do it.

FERC is the only one who can do anything about the wholesale prices. FERC has full authority.

And the consumers are caught in the middle?

Yes. ... If the traders see an advantage that they can take advantage of a situation, and they don't know whether that's going to be available the next day, they'll take advantage as soon as they can. That's their job. There's nothing malicious about it. It's just what they do, and it's how they make their money. ...

You say that FERC is basically asleep at the switch, not looking for problems, not an effective cop on the beat, and issued an inane order. Not a pretty picture?

I haven't been especially proud of FERC in the last few years. And I've probably said things that might be hyperbole a little, but to make a point. I think that FERC needs to acknowledge that it does not have the staff, the resources, to do an adequate job of policing the industry, and it should not tell the public that it is policing when, in fact, it is not. ...

Was deregulation just a bad idea?

... FERC has permitted everybody to do whatever they want to do, and we'll tinker on the edges. Many FERC staff believe that California brought their problems on themselves, because they bulldozed their deregulation plan through the FERC. They probably did do a lot of bulldozing, and FERC acquiesced on a lot of stuff. But FERC had the ultimate responsibility of regulating the wholesale market in California. And if FERC thought that there were problems in that market, they should have fixed them or told California to fix them--and I know they did in some situations. But FERC needs to take responsibility. ...

Is it possible that the energy companies, companies like Enron, didn't know that it was going to happen [in California]?

I find it hard to believe ... I suspect that companies like Enron and probably Dynegy--some of the big companies--they probably have sophisticated staff. ... That's what they want to find. They want to find pockets of where shortages are going to be, and that's where they're going to go out and buy power.

I would find it hard to believe that Enron didn't have a better viewpoint of what was going to happen in 2000 in California than FERC did. Because FERC, you know, wasn't...

FERC didn't have a clue.

... didn't have a clue. Didn't, and wasn't doing anything that would have allowed it to have a clue on that. ...

Is that why you got so angry? You joined this organization 25 years ago, thought you'd make a difference, thought it was protecting ratepayers and business--and these people have gutted the place?

Yes. It's so different now at FERC than it used to be when I first started. There was open debate by staff and the commissioners there. Now it's a few people up at top who make all the policy calls and decisions. And in recent years, I have to believe that ideology has taken hold and led policy. ... Economists, who at least supposedly are charged with understanding marketplaces, have been delegated to the bottom rungs of the decision-making at FERC right in the last few years.

It's become political?

Yes. Politics. The people who have the most say are the politicians ... and the senior staff, who are primarily lawyers and engineers.

It doesn't sound like the consumers are part of this political power structure at FERC.

Yes. ...

So what do you do in the interim?

I think there's a lot of people at FERC, a lot of staff, who really would like to make a difference and work hard in what they do. But there are a lot of them that don't have the right training. And the agency is currently being run by people who have a certain belief system that doesn't permit the finding of problems that might be out there in the industry. ...

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