Director of the University of California Energy Institute and a professor of
business at the Haas School of Business at California-Berkeley
The FERC was supposed to be the referee on prices, right?
The FERC is supposed to make sure that prices are just and reasonable in the
wholesale electricity market. The FERC has not done its job. They, by and
large, were uninterested in reviewing and carefully thinking about whether this
market would work. And then when it became clear that it didn't work, even to
FERC, who in November said the prices were not just and reasonable, their
response was to say, "Yes, but we're not going to do anything about it."
What's that all about?
The [current] chairman of the FERC is a person who believes very deeply in
markets, regardless of the facts.
But the past chairman?
The past chairman was also of that type. He seemed to not believe that the
FERC really needed to worry about prices in these markets.
Democrat or Republican?
I don't think that that philosophy is strictly only associated with one party.
There's no question that the Clinton administration would have liked to see
more intervention and pressured FERC, but FERC is an independent regulatory
agency. There's a limited amount that the president can do to pressure such an
agency into specific actions.
The president of the United States couldn't have influenced FERC by
appointment, or by just in bully pulpit, concerning what was going on?
There was a lot of pressure towards the end of the administration to do exactly
that, and it wasn't very successful.
So FERC took it upon themselves to stay out of the fray?
They went further than staying out of the fray. They stayed out of the fray
and they blocked attempts by the California Independent System
Operator to control prices and to take actions that would have helped.
What's the rationale behind that?
I'm not a political scientist, and I'm not sure why these people act the way
they do. The chairman of the FERC now is somebody who doesn't really
understand economics and doesn't really understand how businesses operate. In
many speeches very recently, he's said, "You have to just let the market work,"
which is of more religion than understanding of economics. In any market in
the United States, we don't just "let the market work." Every market is
regulated to some extent by antitrust laws, by health and safety laws, etc.
The question is, how much intervention should there be? And that, when done
right, is a careful policy question, and not one that can be addressed by
... The FERC has a history of being a legal-oriented regulatory agency, where
the legal process matters much more than good policymaking. They do have some
economists on staff at the FERC, but they actually don't pay any attention to
them. The decisions have been made by the commissioners who, by and large,
have very little training and history in the energy business or in economics,
and by high-ranking lawyers, who also don't seem to understand how markets
work, which isn't very surprising. Up until very recently, most of what they
regulated wasn't very market-oriented, so they didn't really understand markets
and they, for the most part, didn't need to. In the electricity business, that
was particularly true. ...
The problem is we're now moving toward the market-oriented industry, and they
still don't understand how markets work. So they make claims, for instance,
like, "Price caps will discourage investments." Well, that's absolutely right.
If price caps are set too low, they will discourage investments. But as any
economist knows, there's a level at which they would discourage investment and price caps that are higher than that won't discourage investment, and
actually can improve the operation of industry.
So the FERC could have intervened and stopped this crisis from
The FERC could have intervened and certainly lessened the crisis. I think
that, to completely avoid the problems ... we really needed to have a retail
price increase in California as well, and we haven't seen that. And that's not
the first jurisdiction. The first jurisdiction is at the wholesale level.
We needed both of them acting rationally?
That's right. The FERC has dropped the ball on the wholesale market, and the
California Public Utilities Commission has dropped the ball on the
Chairman of the Federal Energy Regulatory Commission (FERC)
... Why don't we start with the common complaint ... that the FERC hasn't
been the cop on the beat, hasn't been investigating, hasn't been intervening,
and hasn't been doing the things that are needed to save California and
possibly the country from disaster?
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
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. ...
Executive director of The Utility Reform Network (TURN)
Wasn't the federal government supposed to be involved in this
deregulation, in making sure [energy companies charge] just and reasonable
rates? What happened here?
When we sold our power producing plants to generators who had corporate
headquarters in Texas or the South--out-of-state corporate headquarters--we
lost control over them. In other words, the state could no longer tell them
what to do. The state regulation was gone. At that point, the only oversight
in regulation was at the federal level, and it was housed in the Federal Energy
Regulatory Commission, [which] has a statutory mandate to assure that the rates
charged customers are just and reasonable.
What the FERC did is they said, "We're not going to look at the rates; we're
going to assume that because the market is wonderful, magic, and efficient,
that any rate produced by the market mechanism is per se just and reasonable."
Soon after that, they issued their own decision, which said, "Whoa! Prices are
out of control. They're not just and reasonable."
But in the face of their own decision that prices were not just and reasonable,
they stood back and refused to intervene. They could have fixed the California
problem in a nanosecond. What they would have done would be to impose
cost-based caps on a region-wide basis and they stepped back and said, "No."
They left California twisting in the wind. ...
So I understand that you're saying that the FERC--the Federal Energy
Regulatory Commission--has the power already, under the law, to bring this
whole situation under control.
The Federal Energy Regulatory Commission--the FERC--has not only the power to
bring this system under control, it has the mandate in law to assure that the
rates we pay are just and reasonable. And it has failed utterly in its
Why aren't they doing it?
There's a number of explanations for why the Federal Energy Regulatory
Commission is failing to step up to the plate. The first one is that they're
apologists for a market mechanism that they set into play in 1988, and ever
since that time, they've been going down the stairway of the market. Their
mantra is, "The market will save us; all we have to do is suffer through the
current environment." In reality, that's not their job. They're not to make
distinctions between the benefits of market versus regulated enterprises.
They're supposed to use the tools they have to assure rates are just and
You said the feds aren't acting; they are acting. They just passed
$69 million in refunds. ...
The federal government has really, really late in the game woken up and decided
they'd better do something. What they've done is symbolic. Sixty-nine million
dollars is chump change in terms of the $13 billion that was vacuumed out of
this economy. ... The feds are asleep at the switch. They are looking the
other way because they're apologists for some kind of market rhetoric and
ideology that they committed themselves to and will follow blindly, regardless
of the consequences to the California economy....
Chairman of Enron Corporation
In California, they say we can't deal with this problem because the real
market cop is in Washington--the FERC, the Federal Energy Regulatory
Commission--and they're not helping us.
Basically, what they're saying in California is, "We want the FERC to put price
caps on wholesale electricity prices." That just camouflages the problem. It
doesn't solve the problem. We have a supply/demand imbalance in
California--too much demand, too little supply ... I prefer to let the market
sift that out. When the governor put on price caps back in October, we, along
with another company, cancelled the construction of a couple of big power plant
peaking plants, which would have been available for this summer, because we
couldn't justify making those big investments in peaking plants, which will
just run a few days during the year. Price caps do not solve the problem, but
price caps just require the politicians to decide who's going to be
President of the California Public Utilities Commission (CPUC)
[CPUC attorney] Harvey [Morris] wanted to file a case on
behalf of the citizens of California at the FERC, charging that El Paso
[Corporation] was manipulating the price, and manipulating behavior on the main
pipeline into California. He showed me his evidence. I thought it was a
dead-bang, absolute case of price manipulation. So the commission, in late
March--right after I had become president--voted to take that case to FERC. ...
Which has, so far...
... Done absolutely nothing. In fact, more than that, they've sat on the
complaint. It's now a full year since the state of California brought this
clear evidence to the federal government, and they have done absolutely nothing
with the complaint--while all of California has suffered from higher natural
gas prices. ...
You say the feds haven't been acting, but it looks like [in the] last month
or so, they've been asking for refunds. They seem to be on the ball.
California and all of its various agencies--as well as the California
utilities--are now starting to go to the federal government with just absolute
evidence of price gouging.
The $6.5 billion, for instance?
The $6.5 billion. Or the over-$500 million that the Independent System
Operator brought to their attention for January power purchases. And when
faced with overwhelming, incontrovertible evidence of gouging, the federal
government said, "Oh. We're not going to look at this system as a whole and say
that something's wrong with this system. We're going to pick the worst actor
and say to the worst actor, not 'You're wrong,' but 'Something appears to be
wrong here. Would you please give us more documentation about why we should
let you charge those outrageous prices?'"
But in doing so, in picking the worst actor on an individual basis, they have
let all the other market participants--all the other sellers of power at too
high a price--run free. They got home free with the feds picking on only one
player, or two, or three. It's just a small number of the most egregious
players they are asking for more documentation on. But in doing so, they have
approved the outrageous prices of most of the marketeers.
So it's both a fig leaf and a slick maneuver?
It's certainly a fig leaf, and it certainly leaves California customers holding
the bag. And we just want the feds to come to conclusion in that process so we
can take that evidence to court. The problem is, the federal regulators stand
between the state of California and a justice system. We can't go to court
first. We have to ... exhaust our administrative remedies through the federal
administrative process. So as long as they sit on our evidence and sit on our
complaint and let 90 percent of the folks off scot-free, while they only pick
on a couple individual players, we are precluded from getting real justice in
the federal court.
Senior staff economist at the Federal Energy Regulatory Commission (FERC)
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
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.
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.
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. ...
Chief executive officer of Enron Corporation
Isn't there a federal responsibility to enforce just and reasonable
No. I think if you believe that the market model is deregulation, which is the
model that we would have proposed, the role of the regulator is to ensure fair
practice in the market. ... It's a different form of regulation. They don't
influence the price; they don't do cost-plus pricing. They just make sure the
markets are functioning effectively. That's what the FTC does. ...
Is the FERC an effective cop on the beat in Washington to maintain
I think if you compare or contrast gas deregulation to electricity deregulation
... the FERC, in those days [for the natural gas pipeline industry] exerted
very strong jurisdiction over the transmission grid. They basically said, "You
guys are going to open up to competition. Anybody that wants to use your pipes
uses them on an equivalent basis. You can't bias the use of the pipes to
In electricity, FERC has not pushed as hard. It's more complicated because
there are more jurisdictional issues and all the rest of this. But for
example, regional transmission organizations--RTOs, they're called--everybody
agrees they make sense. And FERC comes out with an order that says it's
voluntary. ... If you're the cop on the beat and somebody's stealing apples,
you tell them to stop it. You don't say, "I would like you voluntarily to stop
stealing apples from the shopkeeper." So, yes, I think FERC has to exert more
forceful jurisdiction on the system to guarantee that people open up these
systems to competition. ...
Professor of economics at Stanford University, and chairman of the Market
Surveillance Committee of the California Independent System Operator
FERC, which is supposed to police the wholesale market, has apparently taken
the position of Adam Smith?
I would say worse than that--the ostrich. ... If you read the Federal Power
Act, it states very, very clearly what their charge is: to make sure wholesale
rates are just and reasonable; to take actions to order refunds to any payments
in excess of just and reasonable rates; and to immediately, as quickly as
possible, set just and reasonable rates. ...
It's an understatement that the FERC is not doing a good job?
What do you mean?
They're doing horrible. They basically fail to enforce the law. How can you
do anything worse than that? ...
Federal law says rates have to be "just and reasonable." ...
And what "just and reasonable" historically has meant is, as we said, recover
costs plus the return to capital. Every one of these market participants in
California--Duke, Dynegy, Reliant ... would file with FERC to say, "We have no
ability to exercise market power. We have no ability, through our own
unilateral actions, to raise market prices." ...
FERC then goes through and ... then blesses it and says, "Yes, you have no
ability to exercise market power." The methods that they used [to assess
whether those power companies had market power] were probably things that in
the economics profession we would have said were antique 20 years ago. ... I
think the events of the last six months in California have demonstrated that
the basic premise of granting these firms market-based rates is false. ...
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