Formerly the chairman of the Texas Public Utility Commission, Wood was nominated to the Federal Energy Regulatory Commission by President George W. Bush in March 2001. It has been widely reported, in fact, that President Bush favors Wood to replace current FERC Chairman Curt Hebert. While Wood supports electricity deregulation, he says that the markets must be regulated to prevent market abuse. FRONTLINE interviewed Wood on March 26, 2001.

Exactly in that order.

Which order?

Competition first. Because on our best day as a regulator, we can't do near the job for the customer that a competitive open market can do. But you've got to have that as the tradeoff. I, and my ilk, have been the substitute for competition for ... 80 years, since 1920 or 1930 or so. ...

But isn't electricity different?

Not much more than natural gas, for example, or gasoline. They're fungible products that move over networks which are privately held, generally, some of which are regulated. Oil pipelines, for example, are regulated. People don't really think a lot about that, but that moves a tremendous amount of product across the nation. Even more than we do on truck, we move oil through pipelines, and refine product through pipelines that are regulated by this quiet agency called FERC [Federal Energy Regulatory Commission] at the federal level. ...

But there's no alternative to oxygen; there's no alternative to water; and there's really no alternative to electricity. You can't even store it.

Correct. Well, it's different in that you can't store it. You hit the nail on the head there. That is the most salient different point between electricity and other commodities-- it's not really storable under any current, feasible economical technology that we have.

But it's also essential, in that I could get along without gasoline for a couple of days, let's say, or I can get along without bananas or oranges. But electricity--no refrigerator. My aunt needs a respirator. So we're talking about something that, if it's scarce, gives a tremendous amount of power to the people who have it.

Absolutely, and that's again part of the market monitoring role. I think those of us who are strong advocates for the free market recognize that "free" is a relative word. "Freer than what it used to be." But there is such a public interest ... over this entire commodity that some public interest governance is still called for. ... There is a very public nature to this good, and if we forget that, or don't provide for that, we've done a disservice to the people.

So you're not a supporter of a totally free unregulated marketplace, sort of Adam Smith with the invisible hand coming in?

No. I think that that ignores the basic realities of this industry. There is a lot that we can do less of on the government side. There are three areas of the electric industry: there's power generation; there's power delivery, which are the poles and wires; there's power sales. Only the middle of those is a natural monopoly. ...

Of your power bill at home, at least mine here in Texas, I'd say probably 25 percent of my $150 bill a month pays for the delivery of power to my house. The other 75 percent of that bill pays for the power plants, the men and women who work there, the fuel that goes into those plants; and then the sale of power to me--the reading of my meter, the rendering of a bill, the collection of my check every month, whatever kind of public service they provide other than that.

So that's where competition works its magic, on that 75 percent of my bill that is power generation and power sales. That's why we across the country have really pushed for a new paradigm here, because regulators don't capture much good savings on those two parts of the equation. The regulation of the grid itself is pretty traditional. We've done it in gas, we've done it in water, we even did in some regard with railways and highways, and other kind of traffic, like oil pipelines. But that's kind of a pretty routine business. We've got to make sure it's safe, and reliable, and upgraded as needed, and replaced as it gets old.

So that's a natural monopoly. The state could own it or run it.

Well, I've seen that debate go on across the country. Yes, anybody could own and operate. You want an efficient operator there, because you don't want that 25 percent to balloon into 30 percent of your bill. ... You want to be sure those companies get sufficient incentive to invest, but keep the price reasonable, so that all the users of power aren't paying more than they really have to pay to have a good product delivered to them, or good delivery of a product. And that's kind of what we did for the whole industry for 80 years. But it's just a smaller role that we now play.

We were interviewing [Loretta] Lynch, the president of the California [Public Utilities Commission], and other people, and the description of the national situation, the federal situation, is that under Clinton, there was no help from the FERC in terms of maintaining a price cap on wholesale electricity prices. Under Bush, there's [Energy Secretary] Spencer Abraham saying, "We're not going to give you any help with maintaining reliability." But you seem to be saying that you want to do that.

Well, I haven't heard, really, the Clinton FERC or Secretary Abraham say it quite so blatantly. I think they acknowledge that there is a shared responsibility between states and feds here. And there are a lot of details here. Say there's no price caps. Well, in effect, they are doing month-by-month review of thousands of invoices to determine if somebody earned too much money. That sounds like of like a price cap to me.

But I'm kind of not into the nomenclature. What's the substance here? And the substance is that you've got a market that is not quite competitive. And so does the FERC and do the states in that region have a role in kind of putting that back together so it can work for the benefit of the people in the future? Of course they do. ...

We hear [Lynch], the head of the Utilities Commission in California, say, "We wanted FERC to come in here before we could deal with retail rates and cap wholesale rates, which were going through the roof." She said they got nothing in return. When they asked them to rule expeditiously on their natural gas complaint: nothing. So there seems to be nationally a conflict, a lack of communication. How would you describe it?

I think those words are pretty accurate. They don't have to be that way.

It can be fixed?

For the summer, I don't know. For the long term, they have to be fixed. ...

If you go back in history [to] the reasons why we have regulation, it doesn't seem like much has changed.

"Just and reasonable rates": That's what every statute says, whether it's telephone, natural gas, or electricity. The customer is entitled to just and reasonable rates. So regulators have done that for 80 years. ...

Markets can deliver that just and reasonable outcome more effectively than regulators can. And I happen to be in agreement that that is the truth, because I am a regulator, and I can tell the dirty truth: We don't do a good job. It's like regulating the flow of Niagara Falls with a bucket. We think we're doing good because we walk out of it wet, but you look in the bucket and you've got half a cubic foot of water, and 50 million times that amount has gone over. So markets tend to be better.

But where markets don't work--that's what regulators are there for. The just and reasonable rate is the goal here. As we move from a system that works on a mediocre level--regulation--we need to make very sure that the system we're moving to is at least an improvement on that. So the market system ought to be better than regulation, and if it's not, then we need to rethink it.

You think we need to rethink it if it doesn't work?

If it doesn't work, right. But let's work to make it work. And that's why I think the efforts so far--certainly on electricity, nationally--are just in their infancy. Quite honestly, when I look at what we've been able to accomplish here in Texas ...

Well, you're the czar of your own universe here. You have the wholesale rates, the retail rates, the suppliers. You don't have to worry like California or anybody else in the country about somebody in some other state who is beyond their authority.

Right. So get it under whoever the relative authority, in this cause, the multi-state authority in interstate commerce is the federal government. That's in the U.S. Constitution. ...

But you and I both know that the agency responsible for doing that on an interstate basis, whether it was under Democratic authority or under Republican authority today, hasn't been doing that.

Well, Republican authority today is not in place yet. ... This work of setting up the electric market is still in its infancy. And there is a lot of work left to do.

It sort of reminds me of the dissolution of the Soviet Union--the privatization of basic industries, electricity included, and the chaos that ensued. Is that what we're seeing here?

I don't think you're seeing it anywhere else but the West Coast. I think the concern is that there was a plan that was set up for California only by that legislature that was intended to apply to California. What was missing there--and it's the same frustration that we have in Texas with other parts of Texas--is that there are a lot of other people that need to play on that football team other than that quarterback, and they're all out there in the West. That grid does not know the difference between the California side and the Nevada side. Those electrons flow where the laws of physics send it, not the laws of the U.S. Congress or of the state of California. So that's a regional issue, and I think that's the next step there is to look at a regional solution.

I think the FERC has pushed very strongly for regional electricity organizations, much like we have within this region of Texas to really set up workable, fluid wholesale electricity markets. That has not happened yet. So I would definitely say that the solution hasn't even been put out there, much less tried, that would work to set up markets, not only in the West, but elsewhere in the country. This is something they're grappling with. ...

But I've noticed that there is a political problem here, because you have organizations, let's say, like the Southern Company with its transmission lines. Then you have people here in Texas who say they want to use those transmission lines and can't get access to it. There is a real political and economic struggle between different entities, and with different political powers...

That struggle was resolved by law in 1992, and I think we're off and running to get that law implemented. ... The Federal Energy Policy Act of 1992 made clear that transmission lines are open for everybody's commerce on comparable and fair terms. That's a decided issue, and I think it's just the resolve of the state and federal regulators...

Not if you talk to your friends at Enron, it isn't.

Well, they think it has not been implemented correctly. I don't think they think there needs to be a change in the law. ...

If Pat Wood is head of the FERC, does he impose just and reasonable rates?

No tool is off the table, even if it's a bad tool, because a lot of moving parts need to be put together before there is a just and reasonable rate solution.

A lot of people, rate payers, consumers, and some of the people we've talked to in California say basically what has happened out in California is a conspiracy. The people who control generation, the people who control natural gas, figured out how to game the system and make as much money as the market would bear. Is that a fair system?

Well, only if a conspirator can prevent it from raining over a third of the continent does the conspiracy theory carry truck in my house. These are 30-year-old power plants that people probably ought to probably get blue ribbons for keeping on. We've got some here in Texas, and if you can run them 10 days a year, you get a bonus. These are things that have been running 10 months in California because it didn't rain up there.

Twenty-eight percent of the power supply for the hottest day this summer is supposed to come from hydroelectricity. It didn't rain; it didn't snow. Now if a conspirator can stop that from happening, that's the only way that these--we call them "old dogs" down here--that's only why those old dogs had any room to hunt, because the hydro never showed up at the party.

Did they take advantage of rules that were on the books? You know, is that illegal? No. But maybe those rules shouldn't have been on the books. To me, that's the rulemaker's issue, which is either FERC or the state or both. ... Rules, if followed, should suffer no consequence. If rules are not followed, or if they're bypassed, that suffers a consequence. But if rules followed have a bad consequence, then rewrite the rule. It's like law. If the law isn't right, then go change the law. Don't go breaking it.

It all sounds real nice down here in Texas, where you've got a surplus of power, where you're the czar over wholesale rates and retail rates, and where your local generators and suppliers are just reaping in billions of dollars, people in California and other parts of the country would say, from windfall profits.

Gaming in Texas?

Well, you've got Enron here, Reliant here, Dynegy here. ... I looked at the Houston skyline. It isn't getting smaller.

... We're not allergic to profit here. That's what drives the investment in the new industry. There is a line, I think, between profits and profiteering, and I think that's where your question is trying to go. ... Is there profiteering going on here, which is a bad thing for your listener? Or is it just profit-making going on here, which is not a bad thing?

Well, various economists in California have done studies saying that the prices in California do not reflect supply and demand problems.

Then they reflect market power problems, and that's a problem.

What is market power?

... If I have only two suppliers in the neighborhood ... that are able to operate and generate more power on the grid ... we call that a duopoly. It's only one thing better than a monopoly, and that's the duopoly. It's only got one notch up. That's what goes on--that's market power--when you got two guys who basically looked at each other's price and kind of let the other one lead or we lead. ...

[Do] you think the mid-Atlantic market, Pennsylvania, for example, is a successful example of deregulation?

... Yes, I think on the wholesale and on the retail, Pennsylvania is probably the best in class here in the country.

But isn't that all dependent on there being a surplus of power?

Absolutely. Look at gasoline last summer. There was a temporary dislocation in gasoline supplies being allocated, because a few refineries were out. This new mandate came in for some additive that was targeted toward the Chicago market, or Wisconsin, or one of those markets in the North or Midwest, and that dislocation of supply ran up the price 50 percent--just like that. There were a lot of calls and cries and hollers, but it settled back down as the market responded back to it.

The market got disciplined as they say, right? People got used to paying the higher prices.

And then fortunately, they did come back down.

Not all the way down.

Not all the way down. Because you did have OPEC at the same time kind of ratcheting its rates up, too. ... You also at the same time had some refining problems and some delivery problems. That would [be] equivalent to the California's north-south path on their transmission grid being fully open to allow these commodities to be rationalized across a broader area. The result is retail dislocation. ... The transmission grid gets congested. The cars don't get through, i.e., the electrons don't get from L.A. to San Francisco.

Well, what do you do? If it's gasoline, you don't fill up your tank. If it's electricity, you have blackouts. They're just more pronounced. The problem is more immediate, and you can't focus it on individuals, either. ...

You had a situation in California up to 1996 where there was regulation.

And there was lots of power.

Correct. And they would build new plants whenever they wanted. There was a surplus. ...

That's not how it worked in the old system. That's how a hypothetical old system would have worked--correct. ...

They had the surplus in 1996?

Some. ... But they were doing nothing to kind of plan ahead. Everybody... quit building. They didn't worry about that it would be my obligation to build a power plant, which is what happened here in Texas. ...

If you're going to trust the market to do the planning, then you need to send the market some signals. And if you're not going to trust the market to do the planning--and that's fine--then have a state agency whose job is to direct that new generation be built or transmission be built or energy conservation maintained. None of those three equations were followed at all. ...

Hypothetically, you as energy czar of America--what do you tell the people in California who have been paying these natural gas prices over the last six months?

We're paying natural gas prices, too. What interests me is why their price is $19 and ours is $6, when I know that the commodity price of gas, which has been deregulated for 10 or 15 years, went from about $2.50 up to about $5 or $6. OK, that's a big stout increase, but it's not eightfold. It's onefold. Onefold is bad enough; don't get me wrong. But again, I don't understand why $5 gas plus $1 transportation equals a $19 product. ...

But if a document from inside the company that is in charge of the transmission and part of the capacity says that their intent is to widen the physical spread...

... Inside the regulated company?

Inside the unregulated marketing arm of the company that controls a critical part of the capacity. What does it say to you?

That says there's probably something else going on there that ain't what's supposed to be going on there.

And inside the industry, everyone we talk to said, "The only reason that this company would be doing that in this case is that they didn't expect there'd be a cop on the beat to do anything about it, based on the history of what had happened up until then."

The U.S. is not a Third World country. There are cops on the beat, and if you don't expect them to be there, watch out. ...

So you are saying that we may need something that existed before?

One of the things that the old world did reasonably well was encourage utilities to overbuild. ... But by and large, the utility had a profit incentive, that if it built more and bigger and better, it got more cash flow, because we gave them 12 percent or 15 percent return on that investment. ...

In a competitive environment, where you don't have anybody with a regulated requirement to serve, to build power plants, the people who do build power plants may not have as strong an incentive to overbuild. ...

Does that authority now exist with the FERC to enable people to overbuild?

Yes, and in fact, they made a controversial decision a few months ago that said, in fact, I believe somewhere in the Northeast, that they should charge more for the overbuilding insurance. So, yes, it exists. But I think that's a very important part of the equation, and I'm not sure why there was none of that going on in California. ...

But regional planning of generation adequacy is really the silver bullet here. Had there been sufficient generation, new or old--hydro, coal, gas, nuclear, whatever, it doesn't matter--in the West, we wouldn't be pointing fingers about just and reasonable and the screwed-up gamed rules, and this person making money off their fees. Those things would have all been totally disciplined by the fact that a wholesale market had multiple choices. But when a wholesale market has one choice, or maybe at best two, that ain't a market.

And so that's really what happened here is that you don't have the fundamentals of supply and demand in check. ...

So then how then does this relate to Spencer Abraham proposing that we have to open up the energy markets in America, drill in the Arctic Circle? How does that relate to this? One doesn't seem to equal the other.

They do relate. Because the long-term solution to all of these things is that we get back to the business of planning. I think that my experience, at least here in Texas, has shown me that the market can actually respond pretty well if the infrastructure, i.e. the rules, the regulatory climate, are set up, then they can respond. If that doesn't work, then you go to plan B pretty fast.

... The administration has proposed (a) Hands off. California, we're not going to help you. Then (b) the solution here is drilling in the Alaska Wildlife Refuge. It sounds like they're apples and oranges.

Well, the Alaska thing is one small piece of a broad array of supply alternatives. We need to have more domestically produced fuel, unless we care to import a lot of fuel from overseas, which isn't in our best interest. ... [But it is in our best interest to have] sufficient supplies of basic fuel, which in this case would be gas and oil, perhaps coal, exporting the wind as much as possible for renewable power, and solar, perhaps. ...

If you have enough natural gas--whether that be from Texas or the Gulf or Alberta or offshore California, wherever it's coming from--that disciplines the price of that commodity, too. So it is all linked. When they talk about the need for a national energy plan, it includes all this array of supply alternatives, and then that feeds into having a healthier long-term supply of electricity.

Can't you see how people are suspicious when all of a sudden the federal government starts saying in the middle of this crisis in California, "Oh, it's time to lift environmental restrictions on drilling?"

No. This Alaska thing... There are certain things you've got to provide for, like clean drilling. But I live where oil was discovered here 100 years ago. I still live there. My parents still live there. I had grandparents that all lived to their late 80s. It's not some cultural or physical wasteland.

But this is an overreaction on both sides. I think everybody is thinking, "Well, we have to go everywhere for supply options." And I think it's practical to look in the United States, as opposed to looking in Saudi Arabia or Kuwait or other places for our supply options. ...

This treading water period around the country is getting a little too long everywhere. People are starting to sink.

Yes. They're sick of treading. They need some certainty about, "OK, if the old rules are gone, what are the new rules supposed to be?" So that's where I think we've got a lot to add to the national debate from down here in Texas. ... As the old rules were phasing out, we had new rules to kick on the wholesale market.

That's because you're the FERC in Texas. You're basically the one-man FERC in Texas. You can regulate wholesale prices.

But this has worked okay in PJM, because the states up there work together. ...

You're talking about Pennsylvania...

Pennsylvania, New Jersey, Maryland. That power pool has historically been very strong, very interconnected.

Because they have a surplus.

No, but how did they get to the surplus? They got to the surplus because they set up infrastructure and rules, just like we did down here, that provided certainty for someone who wanted to build a power plant up in that part of the country. That's really the key here. Does a power plant investor, whether it's a regulated company or an unregulated company, have an incentive to come in and sink half a billion dollars in a new power plant, in my state or their state or some other state?

There's a difference in the structure that's set up there for people to recover their investments over the next 15-20 years. And so if you had done that in California, if you had done that in the upper Midwest, we wouldn't be talking about this stuff today.

It's a fundamental question--do you want to welcome investment in this technology, which is in this state much cleaner than what we've got in utilities? These guys aren't coming in and building coal plants that are belching a lot of stuff in the air.

Texas is not known for its environmental regulation.

Well, you just watch. Because what has happened is that these power plants that are coming on are all natural gas. They are all very lower emissions, much lower than the existing fleet of anything, almost anywhere in the country, except for wind, power and solar, and those have downsides of their own. What's coming on here will shut down the old stuff because it's more efficient, and that's a market working.

A market regulator will never be able to say, "We're going to shut that plant down." Because no regulator is going to look the men and women in the eye and say, "We're going to kick you out of a job."

We just don't do that well; it doesn't work. But a market does that relentlessly well, saying that this power plant is more efficient that that one. And "efficient," during today's time and age, means clean. It's clean and efficient running together. Because quite frankly, if you're not clean, you've got to spend a lot of money to clean it up, and that just makes it less efficient. ...

But in the deregulation that's taken place so far, isn't it the big dogs that get to eat first? Consumers haven't seen prices go down because of deregulation.

I think the big dogs are eating beautifully under regulation. Quite honestly, that's my secondary motivator in pushing for this thing. I think the current regulated environment reacts very well to political pressure placed by large industrial customers, who put the pressure on the utility and the regulator under the regulated environment to get sweetheart deals, such as low rates and subsidized rates and interruptibility rates that really are low rates in disguise.

So my general response has been that the big guy is at the trough. Let us little pigs there to get it, too. That's why I've been a strong advocate for letting me out of the regulated environment--so I can go out and get a taste of some of this low-cost power just like the big guys do.

But that hasn't happened.

Well, it's going to happen here. It's happening in Pennsylvania-- probably the only place where it's happening on any substantial scale. I think Texas is going to be the showcase for that.

"Going to be"?

Yes, in 2002. But again, this is this myth that the current environment is fair and equitable. It's not. In every state in the union, the larger customers are doing quite well under regulation. I think they have been advocates--and I agree that they should be--for further deregulation, so that they can get all the way out of the gate and do their own deal.

In California, it was the big customers who pushed for deregulation.

As here, as well. So that's why I think the balance here is very difficult on the public policy side--most people perceive that they were better off under regulation. We have to at least acknowledge that in the structure of our transitions from the old world to the new, such as here in Texas, our deregulation plan spans 12 years. Our transition to competition plan spans 12 years, from 1995 to 2007.

In 2007, all regulation will be removed. But for the first five years of competition here in Texas, we will have a safe harbor for the small commercial and small residential customer to basically emulate the same price that they would pay under regulation.

So when Loretta Lynch says, "Show me where deregulation works today," your answer is, "Wait?"

No, my answer is, "Look at Pennsylvania. Look at the United Kingdom. They've opened up."

But their rates went through the ceiling. ...

Their rates today are quite a bit lower than they were in the early Thatcher years, when they started talking about all this. So they did have some issues about run-up in the beginning. ...

[Looking at the campaign donations made by energy companies to the Bush campaign, there is a perception out there that there seems to be a connection between the companies and the politicians that pits deregulation against the consumer.]

I would say, to anybody worried about President Bush on that account, "Look at his record on regulation here in Texas." I've been one of his three people in charge of that deal. ... I would venture to say that no consumer group in Texas would truthfully say that there was any better treatment that they received under a Democrat or Republican-appointed commission in recent history in Texas than they've gotten here from Governor Bush's appointees.

It has been our charge from day one to call it straight like we see it, to work for the public interest, and to look at energy companies. Well, every one of these is pitted at each other's throat. And you've got traditional regulated utilities in there against competitors on the marketing side, in there also contributing against people who are building new power plants.

To the average reader, those are all energy companies. But to the regulator, those are three people at hateful war against each other on a daily basis. So the fact that they are all contributing to various campaigns of candidates--you begin to wonder if those cancel each other out. ...

Should competition determine a just and reasonable rate? And what if it doesn't?

Competition is set up so that just and reasonable rates will result, absolutely. And if it doesn't, then keep writing the rules until it does. Then if that doesn't work, then I guess you go back to plan A, which is regulation. ...