Presented to:Goldman School of Public PolicyUniversity of California, Berkeley

October 22 , 2004

High Power Analysis: Building a New TeamIn An Established Federal Agency

William F. Hederman, DirectorOffice of Market Oversight and Investigations

Federal Energy Regulatory Commission

WH-10/22/04

2

To recover from the aftermath of California and Enron, energy markets in the U.S. require:

• Integrity

• Confidence

3

The relevant energy markets are complex.

Natural Gas & Electric Market Space

Gas Supply

Trading Venues

Futures (NYMEX)

Electronic Platforms

Bilateral Trading

Voice Brokers

Pipelines&

Storage

Players

Delivered Market

Physical Nat Gas

Generation

Transmission&

Pumped Storage

Delivered Market

Phys Electric Power

Gas to fuel power generation

RTO’s & ISO’s

Price Contributors-Fixed price buyers & sellers-Speculators

Price Takers-Indexed price buyers & sellers

Source: FERC-OMTR&OMOI

Nat Gas & Electric Derivatives

Nat Gas & Electric Clearing

4

The FERC strategy to provide dependable, affordable energy through sustained competitive markets has 3 elements.

Effective Rules

Infrastructure

Rules

Enforcement

CompetitiveMarkets

Just & ReasonableOutcomes

StrategicApproach

5

Director

Office of Market Oversight and Investigations Organization Chart

Division of Management & Communication

Division of Management & Communication

Deputy Director Market

Oversight & Assessment

Deputy Director Market

Oversight & Assessment

Deputy Director Investigations & Enforcement

Deputy Director Investigations & Enforcement

Division of Energy Market

Oversight

Division of Energy Market

Oversight

Division of Financial

Market Assessment

Division of Financial

Market Assessment

Division of Integrated

Market Assessment

Division of Integrated

Market Assessment

Division of EnforcementDivision of

Enforcement

Division of Operational

Audits

Division of Operational

Audits

Division of Financial

Audits

Division of Financial

Audits

•

Division of Information Development

Division of Information Development

6

Monitor staff characteristics for success.

• Diverse (econ, finance, law, engineering, accounting, public policy)

• Highly skilled (79 advanced degrees)

• Public-spirited

• Team-oriented

• Self-motivated

• Motivated by challenges

• Sense of humor

Much has been accomplished.

2002 2003 2004

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Director Hired

Observed CFTCMarket Surveillance

1st Market Surveillance Report

1st Seasonal Assessment report

FERC Re-organization:OMOI Official

FERC CaliforniaOffice Opens

1st Winter Assessment Report

Hotline Promotion Launched

Critique of CPUC Report IssuedTransco and Nicor Settlements

Calif Anomalous Bidding/Physical Witholding Handoff to OMOIPrice Reporting Policy StatementCleco Settlement

BLACKOUT*

Reliant Settlement

Standards of Conduct OrderBehavior Rules OrderWinter Assessment

Duke Settlement

1st State of the Markets Report

ISO/RTO Monitors Present 1st Common Metrics

Price Index Survey Report

Summer Seasonal Assessment

Williams Settlement

Storage Data Settlements

Storage Data Technical Conference

New Auditors Join OMOI

Energy Ethics Conference(http://energyethics2004.nd.edu)

Jan

Feb

Mar

OMOI e-library

Summer Assessment

1st Price Index Technical Conference

OMOI Fellows Lectures Begin

* OMOI does not claim the blackout as an accomplishment.

7

8

OMOI has become pro-active.

• Audits

-- targeted

-- random

• Educating regulators about

markets

-- OMOI own staff

-- Other FERC

-- State regulators

-- International

• Market intelligence gathering

-- ‘signals’ (data/alarms)

-- ‘human’

• Empowering key players

-- compliance and risk officers

-- engineers

-- board members

9

OMOI Next Steps

• Integrating into FERC processes• Continuous improvement

-- market surveillance reports

-- oversight meetings

-- seasonal look-aheads

-- definitions of market power, abuse, etc.• Enhanced auditing and other intelligence gathering• Empowering key market participants• Rapid response to observed anomalies• More intense scrutiny of less transparent markets• Expanded teaming

-- MMUs

-- states

-- other federal agencies

-- North American colleagues

10

The market has recognized FERC’s progress.

1. The Desk: “OMOI hit the ground running on this one – that the size, speed and depth of the investigation would have made an SEC ‘tiger team’ proud.” (July 25, 2003)

2. Edison Electric Institute: “They’re clearly developing a good analytical model to monitor gas and electricity markets, and we commend them for that and encourage it.” (in Dow Jones, January 22, 2004)

3. Restructuring Today: OMOI “has a significant team and yesterday…they showed off what they can do and how well they are plugged in.” (January 23, 2004)

4. Restructuring Today: “How different the world is today from the early days of the California meltdown when OMOI didn’t exist and FERC had little idea of what was going on.” (January 27, 2004)

5. The Desk: “…a colossal effort…the sort of report your office of strategy or market analysis would typically pay tens of thousands of dollars....It is by far the most in-depth document to come out of FERC in a very long time.” (March 19, 2004)

6. American Public Gas Association: “The Commission took important and forceful steps this week to improve the fairness and effectiveness of the competitive natural gas market…the abuses uncovered by OMOI and acted upon by the commission reinforce the need for effective market rules…” (in Platts Inside FERC, August 9, 2004)

7. FERC Chairman Pat Wood III: The State of the Markets report is “everything I dreamed of” in setting up OMOI. (January 22, 2004)

11

Market Integrity is Everyone’s Business

FERC Hotline:

1-888-889-8030