GAO REPORT ON FERC
Regulatory Agency Has Failed to Keep up with Changing Markets

June 18, 2002

As Prepared for Delivery

Good morning. I’m glad to be here today with Senator Carnahan. Ever since last year’s energy crisis in California and other Western states, the Governmental Affairs Committee has been keeping close watch over the Federal Energy Regulatory Commission, the agency responsible for oversight of America’s energy markets.

Part of FERC’s core responsibility is to ensure that wholesale electricity and natural gas prices, in the words of its statute, are "just and reasonable." In the past, FERC did this by setting the rates electric and pipeline companies could charge. Now, in deregulated markets, FERC generally allows the energy companies to charge whatever the market will bear, based on the premise that fair, competitive markets will deliver fair, "just and reasonable" prices.

But FERC still retains the statutory obligation to oversee these new markets to make sure that they are, in fact, just and reasonable and that market participants are not manipulating or abusing them. While FERC has been very aggressive in transforming America’s energy markets from ones based on FERC-determined rates to ones based on competitive markets, the agency has failed to fulfill its obligation to police the markets its created to make sure the participants are acting fairly.

Today, Senator Carnahan and I are releasing a General Accounting Office report which documents FERC’s irresponsibility. In April 2001, Senator Carnahan and I asked the GAO to investigate whether FERC was carrying out its obligations to ensure that prices in wholesale electric and natural gas markets were "just and reasonable." The report concludes, as we suspected, that FERC is not adequately upholding its responsibility to protect electricity consumers from unjust and unreasonable rates.

For nearly a decade, FERC has recognized that it needed to do a better job overseeing the deregulated markets it was creating. Yet, despite multiple attempts and the expenditure of millions and millions of dollars, FERC still lacks that basic capability which means that our electricity and natural gas markets are not only deregulated, they may also be uncompetitive.

There is no more egregious example of what happens when FERC doesn’t do its job than the energy crisis that struck California and the Western United States in 2000 and 2001. We now know that Enron and other energy companies took advantage of both an energy shortage and the absence of a FERC cop on the beat, to force electricity consumers out West to pay billions of dollars more than they should have paid. It is unconscionable that – two years after the Western electricity markets began to melt down and over seven months after Enron’s collapse – FERC is just now uncovering these abuses such as exporting power from California and then reselling that same power back to the state at higher prices.

GAO calls the California energy crisis FERC’s wake up call. I’d say the California energy crisis should not only have woke FERC up - it should have grabbed the Commission by the neck and shook it up. But, how many times did FERC hit the snooze button before opening its eyes? It shouldn’t have taken the nightmare of sky-high rates and rolling blackouts to shake FERC out of its slumber. Aggressive oversight of emerging energy markets should have gone hand-in-hand with the changes that created the new deregulated markets - instead of being an afterthought. And even if FERC is now awake, the GAO tells us that the agency simply doesn’t have the capability to oversee our energy markets properly.

The GAO reports that FERC lacks the skilled personnel, the computer and software capability, the organizational structure, and even the plans needed to monitor energy trading and transmission activities to determine if abuses are occurring. Attracting and keeping skilled employees is a significant challenge throughout the Federal Government; in this case that means individuals with detailed knowledge and experience in how energy commodity markets operate. But the GAO found that FERC never even requested some of the hiring and retention authorities available to it to solve these problems - authorities such as seeking approval from the Office of Personnel Management to offer higher salaries to workers with critical skills.

Furthermore, the GAO’s report recommends that Congress take another look at FERC’s statutory authority to oversee energy markets. The Senate version of the energy bill, which is now in conference, would expand both civil and criminal enforcement authority under the Federal Power Act. So the Congress is already working to address this issue. Maybe more needs to be done to strengthen FERC’s authority. We will be providing a copy of this report to Senator Bingaman and to Senator Murkowski – the Chairman and Ranking Member on the Energy Committee, and consulting with the Committee about possible changes.

To his credit, FERC Chairman Pat Wood agrees with GAO that FERC’s past efforts have failed and that it needs to try again, and try harder. In January, Wood announced that FERC was initiating yet another reorganization of the agency and the creation of yet another new market oversight office – the Office of Market Oversight and Investigations. This one must work. American consumers cannot afford another FERC failure. Senator Carnahan and I will ask the GAO to monitor FERC’s efforts to set up this new office and report back to us within a year.

We are hopeful, but given the record of the Commission, it’s hard to be optimistic. An affordable, reliable supply of electricity and natural gas is too important to the quality of life of the American people and to the quality of health of our economy for us accept anything less than bold reform. To restore consumers’ and investors’ badly-shaken confidence in our energy markets, FERC must first restore their confidence that our regulatory system is still out there protecting them.

Thank you. Senator Carnahan?