-Caveat Lector- http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2002/06/18/MNFERC.TMP&nl=top
Washington -- An independent government auditor has found that the nation's top energy regulator lacked the expertise and authority to oversee electricity markets during the height of California's power crisis, according to a study to be released today. The report by the General Accounting Office, the investigative arm of Congress, faults the Federal Energy Regulatory Commission for being woefully behind the industry it is suppose to regulate and incapable of ensuring that electricity rates are "just and reasonable," as required by law. The GAO report, obtained by The Chronicle, is the first time an independent agency has concluded that FERC may have played a major role in allowing California's power crisis to spiral out of control. The report strongly reinforces charges that California Democrats have made in Washington for months as they seek to wrest about $9 billion in refunds from energy generators and to renegotiate more than $40 billion in long-term contracts Gov. Gray Davis signed at the height of the crisis. Those contracts, signed in the spring of 2001 after California consumers suffered blackouts, repeated warnings about energy shortages and a spike in electricity rates, saddled the state's ratepayers with exorbitant costs. "We have known for a long time that FERC failed to protect California consumers by ensuring just and reasonable electricity rates," said Sen. Barbara Boxer, D-Calif. "It has appeared that FERC was not willing to do this job, but now the GAO report seems to indicate that it was not able to do its job either." California Democratic Sen. Dianne Feinstein charged that the report proves it was FERC's "inability and unwillingness to regulate the California energy market in the first place that led to the severe energy crisis that lasted from May 2000 to June 2001." Boxer and Feinstein are insisting that FERC maintain the price caps it imposed last June -- which are set to expire Sept. 30 -- saying the GAO report shows that it would be dangerous to lift the caps given the agency's inability to monitor power markets. FERC CHIEF AGREES FERC Chairman Patrick Wood, President Bush's appointee who took office a year ago and immediately moved to cap skyrocketing Western electricity prices, said in a letter included in the report that he largely agrees with its findings. "The Commission's internal restructuring to support its new market oversight role has not kept pace with the speed of energy industry restructuring," Wood conceded. Wood said he is moving aggressively to overhaul the agency and improve its capacity to monitor power markets. Wood has also ordered the agency to investigate evidence of market manipulation by energy traders during California's crisis. The GAO report describes FERC, the 1977 successor to the New Deal-era Federal Power Commission, as a backward agency beset by frequent changes in leadership whose employees are still mired in an old regulatory framework that has not kept pace with rapidly evolving electricity markets. "To date, FERC's initiatives to monitor competitive markets have served more to help educate FERC's staff about the new markets than produce effective oversight efforts," the report said. For example, the report found that while FERC has plenty of market data, the information has yet to be "used to initiate an enforcement action." The agency is caught, the report said, between an old "cost of service" regulatory regime that set electricity rates for monopoly utilities such as Pacific Gas and Electric Co. and the new wholesale power markets where electricity is freely bought and sold at market prices. CONGRESS PARTLY TO BLAME Congress shares some of the blame, the report said, for failing to update laws giving FERC the authority it needs to carry out its new duties. FERC is not even allowed, under current law, to levy meaningful civil penalties against power generators, the report found. Economists who studied California's power crisis have long suspected that generators were able to wield market power, withholding supplies to drive up prices. No one has yet been able to prove the charge, and the GAO report does not attempt to do so. FERC released internal Enron Corp. documents last month that detailed schemes the now-bankrupt energy giant used to manipulate the market and yield greater profits. The GAO report found that FERC's legal tools to monitor the rapidly evolving power markets were and remain woefully inadequate. Being able to punish market players, it said, "is important if FERC is to pose a credible threat and deter anticompetitive behavior or violations of market rules by market participants." Without effective oversight, federal regulators cannot ensure that markets are producing "just and reasonable rates" for electricity or natural gas, the report found. A LONG WAY TO GO Moreover, FERC's remedy, which is to create regional transmission organizations that can monitor power trading, is still several years away from being functional. FERC's problems are compounded by its inability to recruit staff knowledgeable about markets, because it has trouble competing with private sector salaries. In addition, the report spotted flaws in the agency's organizational structure, calling it too diffuse to adequately monitor private markets. Wood, the agency's chairman and a former Texas state energy regulator, responded that he is moving aggressively to improve the agency's market-monitoring capability, including a new Office of Market Oversight and Investigation that will be running in August. Wood insisted he is building a "world-class oversight staff, drawing ideas from agencies with similar regulatory responsibilities" such as the Securities and Exchange Commission, which regulates financial markets. Wood has indicated in recent congressional testimony that he is open to extending the price caps, but also said the agency might rely on other tools to restrain prices. Boxer insisted, however, that "until FERC is both willing and able to protect our consumers, it must extend the June 19, 2001, order requiring the Western regional rate cap." E-mail Carolyn Lochhead at [EMAIL PROTECTED] <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. 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