Calif. Energy Crisis Tests a Free-Market Regulator
Some families squabble over politics. Some talk sports. In the Southeast Texas home where Pat Wood grew up, the favored topic at dinner was how to keep the family drugstore business competitive.
“It’s what we talked about at the table,” recalled Wood, chairman of the Federal Energy Regulatory Commission. “Daddy, what are you going to do to keep the customers from going to Walgreens?”
Wood says his youthful experience with the family business proved to him that competition is a good thing -- as long as there is a level playing field. That philosophy may be reflected in FERC’s stance against companies accused of creating shortages during the California energy crisis.
On March 26, FERC moved to strip Reliant Resources Inc., Enron Corp. and BP Energy Co. of their right to trade energy for alleged market manipulation, which the companies deny. The commission also took steps to increase refunds to California by $1.5 billion, for a total of $3.3 billion, to compensate the state for artificially inflated power costs during the 2000-01 energy crisis. A FERC administrative judge had ruled that refunds should be $1.8 billion.
Wood says the accumulation of evidence gathered over a 13-month probe suggests there was more misbehavior than regulators initially suspected.
“You just assume that people have a certain sense of right and wrong,” Wood, 40, said in an interview. “But it’s not always so. That’s why you have a policeman around.”
Critics say the cop isn’t tough enough. At an appearance before the House energy policy subcommittee today, Wood is expected to be grilled on the amount of the refunds and on his reluctance to order the renegotiation of long-term power contracts that California providers signed in 2001.
A coalition of state government agencies and utilities claims the state is owed $8.9 billion in refunds, not the $3.3 billion contemplated by FERC.
“We have proof of manipulation and we can’t even get justice,” said Sen. Barbara Boxer (D-Calif.), who vows to bottle up the nomination of the next FERC commissioner until the agency satisfies California’s demands. Asked how she thought Wood was doing, she responded with a single word: “Terrible.”
The issue is far from resolved, as Wood and his fellow commissioners work in coming weeks to finalize the amount of refunds for California and the penalties for companies found to have violated federal rules. FERC also must respond to California’s demand to renegotiate long-term power contracts signed in 2001.
How Wood deals with those issues will affect his larger goal of extending deregulation, observers say.
“The California crisis is a major stumbling block that Pat Wood must overcome if he is to achieve his broader ambitions,” said Roger Berliner, an attorney with Manatt, Phelps & Phillips in Washington. “Many people believe Pat Wood has the requisite skills and commitment to bring to that task. He has many fans.... But to repair a broken system, and fairly compensate those harmed by it, that’s the challenge.”
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Patrick Henry Wood III is a believer in markets and a believer in regulation, viewed by some as capable of surprising pragmatism, viewed by others as an ideologue.
He also is an engineer, an attorney, a two-time George W. Bush appointee and a man so religious that on his first date with the woman who became his wife, he asked her to Mass. His office displays a framed photograph of the pope, whom they met at the Vatican on their honeymoon.
In an interview last week, Wood recalled the talks around the family dinner table as a lesson in the benefits of competition, a value he would like to spread with a new design for the nation’s electricity market.
“I saw how good it worked,” Wood said of his father’s efforts to counter the threat from big chain stores with personal service and quality wares. “Not only for the customer in my hometown, but how good it made my dad” by sharpening his business skills.
Still, Wood says, he does not place complete faith in private enterprise to do the right thing. He is quick to pull out a worn, handwritten poster that lays out the elements of his vision. An eyeball is prominently featured.
“This eyeball here is the market-oversight eyeball,” Wood explains, noting that “balanced market rules” and sufficient infrastructure are crucial to establishing a competitive marketplace. “It’s only when you have true competition that you can go to deregulation,” he said.
After graduating from high school, where he was valedictorian and class president, Wood earned degrees in engineering from Texas A&M; University and a law degree from Harvard. He worked as an engineer with Arco in Indonesia, an energy lawyer in Washington and an attorney for FERC.
One admirer said that Wood can have a maddening dedication to laying out the evidence. Such an incident occurred more than 10 years ago, when FERC was considering something called modified fixed variable ratemaking, said Jerry Langdon, a former FERC commissioner.
Wood, he said, laid out the technical facts in excruciating, time-consuming detail: “It was irritating to me because I didn’t have that time to spend,” Langdon remembered. “But he wanted me to know I could argue my position persuasively the next morning.” When then-Texas Gov. Bush asked his friend Langdon to recommend a candidate for the state’s Public Utility Commission, Langdon steered the governor to Wood, who took the job in 1995.
Entrenched interests jeered Wood’s early efforts to champion electricity deregulation. But ultimately, Wood helped craft an unusual alliance of utilities, environmentalists and large industrial concerns to win passage.
Four years later, the Texas approach has won cheers from business. It has sparked some criticism, but nothing like the troubles prompted by the California plan, which had features -- such as a reliance on short-term spot markets -- that Texas purposely avoided.
“Pat Wood is a true believer in markets, but he is a pragmatic true believer,” said Janee Briesemeister, senior policy analyst at Consumers Union Southwest in Austin, Texas.
She pointed to provisions in the Texas plan that were meant to ease the bills of the poor. “He understood that the market doesn’t take care of low-income consumers as well as it should, and we have to help them,” she said.
By May 2001, Wood’s former boss was sitting in the Oval Office, and California’s energy deregulation plan was being blamed for the blackouts. Bush once again tapped Wood, this time at the national level.
Wood’s successful push for price caps comforted those who believed the problems dictated a firmer regulatory hand.
A year later, Wood posted the now-infamous Enron memos on the FERC Web site -- documents that outlined schemes to manipulate the energy market and introduced such gaming terms as “Fat Boy” and “Get Shorty” into the lexicon of energy policy.
Asked why he publicized the memos, Wood said simply: “We knew this was not market behavior that we wanted to have happen.”
But Loretta M. Lynch, a member of the California Public Utilities Commission, said she does not believe Wood’s actions live up to his rhetoric.
“He’s a smart guy, and he’s a talented guy,” she said. “But I think he’s become captive to his own ideology.... I’m deeply disappointed.”
It is not a universally shared perspective. Companies continue to protest that they were operating within allowable rules and should not be made scapegoats for flaws in California’s deregulated marketplace. Conservative lawmakers are wary about FERC action that might undermine the sanctity of contracts. Further litigation -- and controversy -- is likely.
All of which puts Pat Wood in the cross-fire as he wrestles with the actions to come.
“I would say that he’s a populist, that he’s trying earnestly to do what’s best for the people,” said Clark Evans Downs, an energy lawyer in Washington. “Mr. Wood is not one to turn his eye. He’s stepped into the breach. But it’s still not clear what he’s going to do.”
