Energy Monitor Failed to Do Job
WASHINGTON -- Federal energy regulators failed to set up measures to protect consumers when they approved California’s deregulation scheme and are still outgunned by energy traders a year after the energy crisis that hobbled the state, according to the findings of a congressional investigation to be released today.
The report by the nonpartisan General Accounting Office said the Federal Energy Regulatory Commission still lacks the expertise and clout to protect consumers from price gouging and other maneuvers, despite “hopeful” changes under its new chairman.
“FERC is not adequately performing the oversight that is needed to ensure that the prices produced by these markets are just and reasonable, and therefore, it is not fulfilling its regulatory mandate,” said the GAO report, a copy of which was obtained by The Times.
The report, the strongest and most detailed criticism of federal energy regulators to date by the GAO, prompted a concession by FERC Chairman Patrick H. Wood III that the agency had fallen down on the job during the energy crisis.
“The commission had not previously focused its efforts clearly enough to succeed,” Wood wrote the GAO in response. “That has now changed.”
Wood is setting up a new oversight and investigations office while aggressively pursuing a probe of alleged market manipulation in California and the West. The investigation was given new momentum by the disclosure last month of internal Enron Corp. memos indicating that its traders used various ploys to manipulate the California energy market.
Sen. Joseph I. Lieberman (D-Conn.), chairman of the Governmental Affairs Committee, said he would ask the GAO to monitor the new energy investigations office to ensure that Wood lives up to his promise.
“If we are to restore consumers’ and investors’ badly shaken confidence in our energy markets ... we will first have to restore confidence in the regulatory system,” Lieberman said in a statement.
FERC’s fitful regulatory efforts have been undermined by insufficient expertise with competitive electricity markets, a continually changing agency leadership and the lack of legal authority to impose penalties that “bite” companies that engage in market manipulation, the GAO report found.
FERC, which functions like a national utilities commission, is charged with ensuring “just and reasonable” rates in wholesale electricity markets. It was heavily criticized by public officials as remaining aloof while California’s energy crisis escalated during late 2000 and early 2001.
Under pressure, the agency imposed price limits throughout the West last summer, an act credited with belatedly calming the markets. FERC is considering California’s petition for $9 billion in refunds for alleged overcharges and for revising long-term power contracts negotiated during the crisis.
The investigators found that FERC was adept at monitoring electric utilities in the previous era of government-regulated prices but that it never made the transition to being a watchdog in the freewheeling world of unregulated markets. Nonetheless, FERC gave its approval to the deregulation plans of California and other states. The agency’s regulatory weaknesses meant that the states would be on their own if they got into trouble, as California soon found out.
In a revealing survey, 37% of FERC enforcement staffers told GAO investigators that their agency was ineffective in detecting monopolistic abuses in wholesale electricity markets.
Among enforcement staffers, 33% said the agency did a poor job of analyzing market data to determine if prices are inflated, compared with 28% who said FERC performed adequately. Thirty-nine percent said the agency’s top management had failed to give clear and concise directions. The agency has had four chairmen in the last five years.
Nearly three-fourths of the staff told the GAO that FERC’s previous major effort to reinvent itself--a 1997 reorganization called “FERC First”--had been of little or no help in making it a better watchdog. “While many employees told us that overall, FERC First was a failure, several stated that it was a disaster,” the report said.
The GAO investigation, requested by Sen. Jean Carnahan (D-Mo.), found that previous efforts by the agency to improve as a watchdog had failed to produce results. “Most of these actions have been incomplete or limited in their effectiveness,” the report said.
Last summer, for example, then-FERC Chairman Curtis L. Hebert Jr. announced the opening of a high-tech “market observation resource room.” Staffers equipped with speedy computers and sophisticated hardware would track energy markets around the country, ready to react to the first sign of an unexplained price spike.
But FERC has never subscribed to information services that would allow it to obtain the names and other details about parties trading in a large slice of the markets, the GAO found. The result is like a window on the markets with the blinds half-lowered. Its main use is not as an enforcement tool but to educate staffers about how energy trading works, the report said.
“FERC has not yet been able to use the [market observation] room to its full regulatory and oversight potential,” the report said.
Although FERC is the principal federal agency overseeing electricity and natural gas markets, the GAO found that 75-year-old federal laws give the agency insufficient penalties to pose a credible deterrent against market abuses.
“No section of [federal law] allows FERC to levy monetary penalties against market participants who charge unjust or unreasonable rates for electricity,” the report said. “Without a meaningful range of penalties, FERC lacks adequate enforcement ‘bite’ to deter anticompetitive behavior or other violations.”
The agency has authority to order limited refunds and to revoke a company’s trading rights.
It may take several years for FERC to become a better watchdog, investigators cautioned. In the meantime, state and regional regulators will be the main line of defense protecting consumers.
“Absent an effective regulatory and oversight approach,” the report concluded, “FERC lacks assurance that today’s energy markets are producing interstate wholesale natural gas and electricity prices that are just and reasonable.”
