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is it ferc's fault?
Severin Borenstein

Director of the University of California Energy Institute and a professor of business at the Haas School of Business at California-Berkeley

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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 campaign slogans.

... 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 happening?

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 retail market.

Curt Hebert

Chairman of the Federal Energy Regulatory Commission (FERC)

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... 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 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. ...

Nettie Hoge

Executive director of The Utility Reform Network (TURN)

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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 obligation.

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 reasonable. ...

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....

Ken Lay

Chairman of Enron Corporation

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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 curtailed.

Loretta Lynch

President of the California Public Utilities Commission (CPUC)

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[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.

Ron Rattey

Senior staff economist at the Federal Energy Regulatory Commission (FERC)

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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.

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. ...

Jeff Skilling

Chief executive officer of Enron Corporation

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Isn't there a federal responsibility to enforce just and reasonable rates?

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 competition?

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 yourself."

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. ...

Frank Wolak

Professor of economics at Stanford University, and chairman of the Market Surveillance Committee of the California Independent System Operator (ISO)

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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?

Yes.

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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