Energy Markets
Additional Actions Would Help Ensure That FERC's Oversight and Enforcement Capability Is Comprehensive and Systematic Gao ID: GAO-03-845 August 15, 2003In June 2002, GAO reported that the Federal Energy Regulatory Commission (FERC) had not yet adequately revised its regulatory and oversight approach for the natural gas and electricity industries' transition from regulated monopolies to competitive markets. GAO also concluded that FERC faced significant human capital challenges to transform its workforce to meet such changes. In responding to the report, FERC said that the new Office of Market Oversight and Investigations (OMOI) it was creating and human capital improvements under way would address these concerns. GAO was asked to report on FERC's progress in (1) establishing an oversight and enforcement capability for competitive energy markets and (2) improving agency-wide human capital management.
FERC has made strides in putting an energy market oversight and enforcement capability in place, but work remains to ensure that its efforts will be comprehensive and systematic. Since FERC declared OMOI functional in August 2002, the office has focused primarily on outlining its vision, mission, and primary functions; developing basic work processes; integrating its use of an array of tools to oversee the markets; and hiring staff with market experience. OMOI is also assessing its data needs and developing its working relationships with others, such as the industry's market monitoring units. Nonetheless, the office still has work to do in the following two key areas. Clearly defining its role: OMOI has not clearly defined its role and the activities that it will engage in to achieve its mission. For example, the office has not yet decided on the level of detail at which it will review electricity markets. This decision has substantial implications for the office's data, technology, resource, and staff skill mix needs. Developing formal processes and written procedures: OMOI's processes are largely informal and ad hoc, and it has few written procedures to ensure that its efforts are coordinated, systematic, understood by its staff, and transparent to its stakeholders. Although OMOI has had some early accomplishments--such as a $20 million civil penalty against a company for anticompetitive behavior--it is difficult to judge how effective the office will be until its role and major processes are clearly set out. FERC is also making progress toward addressing its considerable human capital management challenges, but additional actions could increase its likelihood of success. FERC's success in these efforts is important because the extent to which it can carry out its mission in a changing environment depends on its ability to adjust its staff skills and abilities in a difficult context. For example, over half of its workforce will be eligible to retire by 2007. In response, FERC has, among other things, expanded its use of certain personnel flexibilities, such as recruiting and retention bonuses, and is considering use of additional flexibilities. More importantly, FERC, in February 2003, developed a human capital plan. However, the plan does not contain some elements key to successful implementation, including (1) details on specific activities and resources needed to implement its human capital initiatives and (2) results-oriented measures that can be used to track the agency's progress in implementing the initiatives and evaluate their effectiveness. FERC also has not established time frames for many of its human capital initiatives.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-845, Energy Markets: Additional Actions Would Help Ensure That FERC's Oversight and Enforcement Capability Is Comprehensive and Systematic
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Report to the Ranking Minority Member, Committee on Governmental
Affairs, U.S. Senate:
August 2003:
Energy Markets:
Additional Actions Would Help Ensure That FERC's Oversight and
Enforcement Capability Is Comprehensive and Systematic:
GAO-03-845:
GAO Highlights:
Highlights of GAO-03-845, a report to the Ranking Minority Member,
Committee on Governmental Affairs, U.S. Senate
Why GAO Did This Study:
In June 2002, GAO reported that the Federal Energy Regulatory
Commission (FERC) had not yet adequately revised its regulatory and
oversight approach for the natural gas and electricity industries‘
transition from regulated monopolies to competitive markets. GAO also
concluded that FERC faced significant human capital challenges to
transform its workforce to meet such changes. In responding to the
report, FERC said that the new Office of Market Oversight and
Investigations (OMOI) it was creating and human capital improvements
under way would address these concerns. GAO was asked to report on
FERC‘s progress in (1) establishing an oversight and enforcement
capability for competitive energy markets and (2) improving agency-
wide human capital management.
What GAO Found:
FERC has made strides in putting an energy market oversight and
enforcement capability in place, but work remains to ensure that its
efforts will be comprehensive and systematic. Since FERC declared OMOI
functional in August 2002, the office has focused primarily on
outlining its vision, mission, and primary functions; developing basic
work processes; integrating its use of an array of tools to oversee
the markets; and hiring staff with market experience. OMOI is also
assessing its data needs and developing its working relationships with
others, such as the industry‘s market monitoring units. Nonetheless,
the office still has work to do in the following two key areas:
* Clearly defining its role. OMOI has not clearly defined its role and
the activities that it will engage in to achieve its mission. For
example, the office has not yet decided on the level of detail at
which it will review electricity markets. This decision has
substantial implications for the office‘s data, technology, resource,
and staff skill mix needs.
* Developing formal processes and written procedures. OMOI‘s processes
are largely informal and ad hoc, and it has few written procedures to
ensure that its efforts are coordinated, systematic, understood by its
staff, and transparent to its stakeholders.
Although OMOI has had some early accomplishments”such as a $20 million
civil penalty against a company for anticompetitive behavior”it is
difficult to judge how effective the office will be until its role and
major processes are clearly set out.
FERC is also making progress toward addressing its considerable human
capital management challenges, but additional actions could increase
its likelihood of success. FERC‘s success in these efforts is
important because the extent to which it can carry out its mission in
a changing environment depends on its ability to adjust its staff
skills and abilities in a difficult context. For example, over half of
its workforce will be eligible to retire by 2007. In response, FERC
has, among other things, expanded its use of certain personnel
flexibilities, such as recruiting and retention bonuses, and is
considering use of additional flexibilities. More importantly, FERC,
in February 2003, developed a human capital plan. However, the plan
does not contain some elements key to successful implementation,
including (1) details on specific activities and resources needed to
implement its human capital initiatives and (2) results-oriented
measures that can be used to track the agency's progress in
implementing the initiatives and evaluate their effectiveness. FERC
also has not established time frames for many of its human capital
initiatives.
What GAO Recommends:
GAO recommends that FERC
* more clearly define OMOI‘s role in overseeing competitive energy
markets and develop formal processes and written procedures for the
office‘s key activities and
* revise the agency‘s human capital plan to (1) identify specific
activities, resources, and time frames and (2) provide results-
oriented measures to track progress in implementing its initiatives
and evaluate their effectiveness.
FERC generally agreed with this report‘s recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-03-845.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Jim Wells at (202)
512-3841 or wellsj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
FERC Has Made Progress, but Work Remains to Ensure That Its Oversight
and Enforcement Capability Is Comprehensive and Systematic:
FERC Is Taking Important Steps to Improve Its Human Capital
Management:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: GAO Survey of Current FERC Employees in the Office of
Market Oversight and Investigations:
Appendix III: FERC's Approach to Addressing Market Manipulation Schemes
and Other Potentially Noncompetitive Actions:
Appendix IV: Comments from the Federal Energy Regulatory Commission:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: OMOI's Statements of Its Vision, Mission, and Functions:
Table 2: OMOI's Principal Oversight Reports or Products:
Table 3: Percentage of OMOI Staff Indicating That Additional Training
Would Help Them Better Oversee Energy Markets and Enforce Market
Rules:
Table 4: FERC's Agencywide Human Resource Goals and Objectives:
Table ; FERC's Approach to Addressing Market Manipulation Schemes and
Other Potentially Noncompetitive Actions:
Figures:
Figure 1: OMOI's Organizational Chart and Position in FERC's
Organizational Structure:
Figure 2: OMOI's Staffing Levels:
Abbreviations:
ERCOT: Electric Reliability Council of Texas:
FERC: Federal Energy Regulatory Commission:
ISO: independent system operator:
OMOI: Office of Market Oversight and Investigations:
PJM: Pennsylvania, New Jersey, Maryland Interconnect:
RTO: regional transmission organization:
Transco: Transcontinental Gas Pipe Line Corporation:
Letter August 15, 2003:
The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Governmental Affairs
United States Senate:
Dear Senator Lieberman:
The U.S. electricity and natural gas industries' transition to
competitive markets has not been smooth. Volatile prices, energy
shortages, financial difficulties such as the bankruptcy of the Enron
Corporation (the nation's largest energy trading company before its
financial problems), and accusations of price manipulation have raised
questions about the transition to competitive markets and the federal
government's ability to regulate and oversee these new markets to
protect market participants and consumers. The Federal Energy
Regulatory Commission (FERC)--the federal agency primarily responsible
for regulating and overseeing these industries--will play an important
role in developing competitive wholesale markets and in protecting
consumers against market abuses.
In June 2002, we reported that FERC had not yet adequately revised its
regulatory and oversight approach to respond to the transition to
competitive energy markets.[Footnote 1] We also pointed out that FERC
faced significant human capital and organizational structure challenges
as it transformed its workforce to effectively regulate and oversee
these evolving markets. For example, we noted that the agency did not
have enough staff with knowledge of competitive energy markets, and
that its market oversight function was too dispersed across the agency.
In addition, we noted that FERC was attempting to regulate and oversee
the markets with outdated legal authorities that were mostly derived
from laws enacted when the industries were composed of highly regulated
monopolies. We made a number of recommendations to address these issues
and improve the agency's capability of overseeing competitive energy
markets. FERC agreed with our conclusions and said that the report's
recommendations were consistent with the agency's plans for its new
Office of Market Oversight and Investigations (OMOI) and human capital
management improvements.
In response to concerns about its capability to oversee the evolving
energy markets, FERC announced, in January 2002, that it was creating
OMOI. In making the announcement, FERC stated that the new office would
report directly to the Chairman of FERC, and its functions would
include understanding energy markets and risk management issues,
measuring market performance, investigating compliance violations, and
analyzing market data. In April 2002, FERC hired the office's director,
who began to plan its operations and hire its staff. In August 2002,
the FERC Chairman declared that OMOI, with about half of its planned
personnel in place, was a formal, functioning office within the agency.
This change in FERC's approach to monitoring markets--requiring a
reassessment and reprioritizing of how it does business--will not be
easy. Experience in public and private organizations has shown that for
an organization to successfully "transform" itself, it must often
change its culture to be more results oriented, collaborative, and
customer focused.[Footnote 2]
In light of FERC's stated commitment to and your interest in market
oversight, you asked us to assess FERC's progress in (1) establishing
an oversight and enforcement capability for competitive energy markets
and (2) improving agencywide human capital management. As agreed with
your office, we focused our review of FERC's market oversight and
enforcement efforts on OMOI's formation and operations. To respond to
this request, we reviewed appropriate plans, studies, reports, and
other documents, such as budget justifications, relating to OMOI's
activities and FERC's human capital management initiatives. We also
interviewed OMOI's managers and FERC officials responsible for
agencywide human capital management programs. In addition, we surveyed
OMOI's employees to obtain their views on the office's effectiveness,
morale, and work environment. About 87 percent of the employees
responded to our survey.[Footnote 3] Furthermore, we contacted the
heads of four units operating at the time of our review with
responsibility for monitoring regional wholesale electricity markets
under FERC's guidance to obtain their views on OMOI's progress in
establishing an oversight and enforcement capability for energy
markets. We performed our review from October 2002 through June 2003 in
accordance with generally accepted government auditing standards. (See
app. I for a more detailed discussion of our scope and methodology and
app. II for a copy of the OMOI employee survey with the quantitative
results.):
Results in Brief:
OMOI has made strides in putting an energy market oversight and
enforcement capability in place, but these efforts are largely in their
formative stage, and work remains to ensure that they will be
comprehensive and systematic. In its first year, OMOI has focused
primarily on outlining its vision, mission, and primary functions;
developing its basic work processes; integrating its use of an array of
tools to oversee the markets; and hiring new staff with market
experience or expertise. OMOI is continuing to hire staff, assess its
information needs, and develop its working relationships with others,
such as the electricity industry's market monitoring units, that have
related or overlapping responsibilities. Still, the office has work to
do to clearly define its role and how it will achieve its mission. For
example, OMOI has not yet decided on the level of detail at which it
will review electricity markets, particularly the extent that it will
rely on the market monitoring units to review daily market transactions
for market manipulation and other anticompetitive behavior. This
decision has substantial implications for the office's data,
technology, resource, and staff skill mix needs. Moreover, OMOI has not
yet formalized its processes and procedures. At this point, its
processes are largely informal and ad hoc, and it has few written
procedures to ensure that its efforts are coordinated, systematic, and
well understood by its staff and stakeholders. OMOI has had some early
accomplishments, for example, a $20 million civil penalty against a
company for anticompetitive behavior. However, it is difficult to judge
how effective the office will be until its role and major processes are
clearly set out. We are making recommendations to FERC aimed at more
clearly defining OMOI's role and instituting formal processes and
written procedures.
FERC is making progress toward addressing its considerable human
capital management challenges. FERC's success in human capital
management is important because the extent to which the agency can
effectively carry out its mission in a changing environment, such as
the move to competitive energy markets, depends on its ability to
adjust its staff skills and abilities in a difficult context. For
example, over half of FERC's workforce will be eligible to retire by
2007, with a loss of considerable institutional knowledge. In response,
FERC is taking steps to help transform its workforce. For example, it
has expanded its use of certain personnel flexibilities, such as a
student loan repayment program and recruiting and retention bonuses,
and is considering additional flexibilities that could improve its
ability to recruit and retain needed expertise. More importantly, since
we issued our June 2002 report, FERC has developed a human capital plan
that is a promising first step toward strategically managing the
agency's workforce. However, the plan does not contain some elements
key to its successful implementation, including (1) details on specific
activities and resources needed to implement the agency's human capital
initiatives[Footnote 4] and (2) results-oriented measures that can be
used to track the agency's progress in implementing its initiatives and
evaluate their effectiveness. The agency also has not established time
frames for many of its initiatives. We are recommending that FERC
revise its plan to include these elements.
We provided FERC with a draft of our report for review and comment. In
its written comments, FERC generally agreed with our conclusions and
recommendations.
Background:
The natural gas and electricity industries perform three primary
functions in delivering energy to consumers: (1) producing the basic
energy commodity, (2) transporting the commodity through pipelines or
over power lines, and (3) distributing the commodity to the final
consumer. A range of federal, state, and local entities regulate
different aspects of these functions. While generation siting,
intrastate transportation, and retail sales are generally regulated by
state or local entities, wholesale sales and interstate transportation
generally fall under federal regulation, primarily by FERC.[Footnote 5]
Under federal law, FERC is responsible for ensuring that the terms,
conditions, and rates for the interstate transportation of natural gas
and electricity, certain sales for resale of natural gas, and wholesale
sales of electricity in interstate commerce are "just and reasonable."
Other federal agencies also play an important role in regulating energy
markets. For example, the Commodity Futures Trading Commission
regulates commodity futures and options markets in the United States
and protects market participants against manipulation, abusive trade
practices, and fraud.
For nearly a century, the natural gas and electricity industries were
regulated as natural monopolies and dominated by a relatively few,
large public utilities that produced, transported, and sold natural gas
and electricity to the ultimate users.[Footnote 6] This monopoly
structure controlled the entry, prices, and profits of industry
participants. Under this regulatory framework, FERC established
individual utilities' terms, conditions, and rates for transportation
and wholesale sale of natural gas and electricity in interstate
commerce. To ensure that the rates these utilities charged were just
and reasonable, FERC based the rates on the utilities' cost to provide
the service plus a fair return on investment, which is generally
referred to as cost-of-service regulation.
With technological, economic, and policy developments over the past
two-to-three decades, these industries have undergone a transition--
commonly known as "restructuring"--from this highly regulated
environment to one that places greater reliance on competition to
determine entry, prices, and profits. Natural gas was first to make the
shift, facilitated by passage of the Natural Gas Policy Act of 1978 and
subsequent FERC orders in 1985 and 1992 that opened pipeline
transportation to all on equal terms and required pipeline companies to
completely separate or "unbundle" their transportation, storage, and
sales services. As a result, natural gas became a commodity bought and
sold separately from its transportation.
The electricity industry has experienced similar restructuring,
starting about the same time but evolving more slowly than the natural
gas industry. The Public Utility Regulatory Policies Act in 1978
introduced competition by requiring electric utilities to buy
electricity produced by nonutility, electric power generators. Then in
1992, the Congress passed the Energy Policy Act, authorizing FERC to
require utilities, on a case-by-case basis, to allow competitors to use
their transmission lines for wholesale sales of electricity. In 1996,
FERC ordered that electric transmission systems be opened to all
qualified wholesale buyers and sellers of electric energy. FERC also
required utilities to "functionally unbundle" their generation and
transmission businesses to prevent discriminatory practices, such as
not allowing competitors equal access to transmission lines. One option
FERC provided the utilities to help them achieve unbundling was to
transfer management of their transmission lines to an independent
system operator (ISO) that would manage the system without any special
interests and for all users' benefit. Since 1996, six ISOs have formed
and are operating, each with its own set of operating rules.[Footnote
7] Of these, four ISOs--California; New England; New York;
Pennsylvania, New Jersey, and Maryland Interconnect (PJM)--operate
interstate wholesale electricity markets in which electricity suppliers
and buyers submit bids to sell and buy power.
In 1999, FERC issued an order encouraging all privately owned electric
utilities to voluntarily place their transmission facilities under the
control of a broader market entity called a regional transmission
organization (RTO). As a result, ISOs created under a previous FERC
order would be supplanted by larger RTOs, which would cover the entire
nation. The rationale behind FERC's approach to forming RTOs was that
the nation's transmission systems should be brought under regional
control in order to eliminate the remaining discriminatory practices in
use, better meet the increasing demands placed on the transmission
system, improve management of system congestion and reliability, and
achieve fully competitive wholesale power markets. FERC is in the
process of trying to establish these organizations to cover the
continental United States and has currently approved two RTOs--Midwest
ISO and PJM.[Footnote 8]
In approving the formation and operation of ISOs and RTOs, FERC
requires these organizations to, among other things, establish market
monitoring units. These units are to provide for objective monitoring
of the markets operated by the ISO or RTO to identify market design
flaws, market power abuses, and opportunities for efficiency
improvement. The market monitoring units of four ISOs or RTOs--
California, New England, New York, and PJM--have been operating for
several years under FERC's approval. FERC has also approved a market
monitoring unit for the Midwest ISO, but Midwest does not currently
operate a centralized power market (it plans to do so by December
2003). FERC approves the units' market monitoring plans and requires
the units to periodically report on their monitoring activities.
In July 2002, FERC issued a notice of proposed rulemaking to provide a
standard market design for all electric transmission providers. FERC's
fundamental goal in this initiative is to create "seamless" wholesale
electricity markets, nationwide, that allow sellers to transact easily
across transmission boundaries and allow customers to receive the
benefits of a lower cost and more reliable electricity supply.
Accordingly, FERC's standard market design proposal contains a wide
range of rules to standardize the structure and operation of wholesale
electricity markets and transmission services. Among other things, it
(1) describes the rules for how a portion of the nation's electricity
will be exchanged in organized markets, (2) defines a new transmission
service, and (3) establishes new market power mitigation and monitoring
requirements. The proposal has been highly controversial. FERC
estimates that the proposed standard market design rule has generated
about 1,000 sets of formal comments reflecting concerns and
reservations about the scope and details of the proposal. In April
2003, FERC issued a white paper explaining how it intends to change its
proposal in response to the comments and concerns that had been raised.
When the white paper was issued, FERC expected the final rule to be
promulgated later in the year. However, in commenting on our draft
report, FERC said that it is planning to hold technical conferences in
different regions of the country this fall and has postponed the
issuance of any final rule.
With the opening of pipelines and transmission lines, other energy
producers and marketers began to compete with the traditional utilities
to the point that a complex structure of formal and informal primary
and secondary energy markets has evolved. As competition has increased,
FERC has allowed more and more producers and marketers to sell their
energy at prices determined in the marketplace. This evolution to
competitive energy markets is requiring FERC to fundamentally change
how it does business. With the shift to market-based prices for natural
gas and electricity, FERC has concluded that its approach to ensuring
just and reasonable prices has to change: from one of reviewing
individual companies' rate requests and supporting cost data to one of
proactively monitoring energy markets to ensure that they are working
well to produce competitive prices. FERC established OMOI to coordinate
and bring about this shift in the agency's energy market oversight
efforts. Like the agency's other major offices, OMOI reports directly
to the Chairman of FERC (see fig. 1).
Figure 1: OMOI's Organizational Chart and Position in FERC's
Organizational Structure:
[See PDF for image]
[End of figure]
OMOI has organized its staff into eight divisions, which are grouped
into three main units: (1) Market Oversight and Assessment, (2)
Investigations and Enforcement, and (3) Management and Communication
(see shaded area of fig. 1). The Market Oversight and Assessment unit
performs a variety of tasks related to monitoring energy markets,
monitoring financial markets, researching new data sources, publishing
reports on market surveillance, and assisting with ongoing
investigations. The Investigations and Enforcement unit performs a
variety of tasks related to investigating market abuse, conducting
audits of entities under FERC's jurisdiction, and manning the
enforcement hotline. Finally, the Division of Management and
Communication and the OMOI director's office provide administrative and
management support.
OMOI's budget request for fiscal year 2003 is about $13.5 million and
provides funding for 110 staff years, which includes $500,000 in
contracting services. For fiscal year 2004, FERC has requested a budget
for OMOI of about $14.3 million and 110 staff years, which includes $1
million in contracting services.
FERC Has Made Progress, but Work Remains to Ensure That Its Oversight
and Enforcement Capability Is Comprehensive and Systematic:
With the formation of OMOI, FERC is making headway in establishing an
oversight and enforcement capability for competitive energy markets.
OMOI has taken a significant step forward in setting out its vision,
mission, and primary functions as a framework for comprehensively
overseeing the markets; developing its basic work processes; and
beginning to use an array of tools to oversee the markets. The office
also has almost completed its staffing to authorized levels.
Nonetheless, these efforts are largely in their formative stage and
OMOI continues to hire additional staff, improve its oversight tools,
and adjust its processes and procedures. Additional actions to
formalize the office's work processes and procedures and to more
clearly define its role would help ensure that its efforts to oversee
energy markets are systematic and comprehensive. In addition, OMOI's
role largely determines its resource, information, technology, and
staff skill mix needs.
OMOI Is Planning a Comprehensive Approach to Overseeing Energy Markets,
but Important Steps Have Not Been Taken to Clearly Define Its Role:
OMOI's statements of its vision, mission, and functions set out the
framework for a comprehensive market oversight and enforcement
approach. According to the statements, OMOI plans to analyze and assess
both market performance and market rules in the broader context of the
markets' overall efficiency and effectiveness and market behavior and
compliance with rules at the individual market participant level. (See
table 1.):
Table 1: OMOI's Statements of Its Vision, Mission, and Functions:
Vision; Vigilant oversight and vigorous enforcement of proper market
rules ensure dependable, affordable, competitive energy markets to
benefit end use customers and other participants.
Mission; Guide the evolution and operation of energy markets to ensure
effective regulation and protect customers through understanding
markets and their regulation, timely identification and remediation of
market problems, and assured compliance with Commission rules and
regulations.
Functions; Assess market performance through; * analyzing market
structures and proposing policies for improvement; * acquiring and
analyzing public and proprietary information data bases; * conducting
market research and developing market models and simulation; *
analyzing effects of current and proposed regulations, market rules,
and policy options, and; * advising the Commission on the market
effects of current and proposed policies; Ensure conformance with
Commission rules through; * verifying compliance with Commission rules
and reporting requirements; * investigating actions of market
participants; * facilitating resolution of disputes among market
participants and regulated entities, and; * enforcing Commission rules
that govern the markets; Produce internal and extenal reports; *
describing the state of energy markets; * reviewing and analyzing
market occurrences and trends; * providing early warning of vulnerable
market conditions, and; * making recommendations on the functioning and
governance of energy markets.
Source: FERC.
[End of table]
These statements were a starting point for planning and organizing
OMOI's activities and serve to provide a concise, if general, outline
of the office's planned oversight and enforcement approach. OMOI
decided to begin operating under this broad framework and to work out
more details as it became more organized and gained experience with the
markets and available data and oversight tools. At this point, OMOI has
not provided additional details in writing on how it will carry out
these functions to achieve its mission.
However as OMOI moves forward, several issues have not been addressed
that are important to the office's credibility and to ensuring that it
comprehensively carries out its planned approach. Recognizing that
responsibility for making energy markets work well is shared with the
industries (including the ISOs and RTOs and their market monitoring
units), individual market participants, the states, other FERC offices,
and other federal agencies, it is important that OMOI clearly define
its role in achieving comprehensive oversight of the markets. This role
and how OMOI will carry it out largely determines its resource,
information, technology, and staff skill mix needs.
First, OMOI has not directly and clearly connected its vision, mission,
and functions to FERC's statutory responsibilities for ensuring that
wholesale natural gas and electricity prices are just and reasonable.
Second, OMOI has not defined undue exercise of market power, although
identifying and addressing the exercise of market power is one of the
major aspects of market oversight, especially when the markets are in
transition. Third, the statements do not explicitly recognize that an
important function of the office will be to integrate its work with
that of the industries' market monitoring units, other agencies such as
the Commodity Futures Trading Commission, and other parts of FERC, such
as the Office of Markets, Tariffs, and Rates. Fourth, OMOI is still
deciding at what level of detail it will review market transactions as
it performs its oversight. Fifth, the office has not developed outcome
or results-oriented performance measures that express what the office
will be working to achieve and that can be used to assess its progress
in carrying out its goals and objectives.
FERC Has Not Clearly Defined Just and Reasonable Prices in a
Competitive Marketplace:
FERC is responsible for ensuring that certain sales for resale of
natural gas and wholesale sales of electricity in interstate commerce
are just and reasonable. With the move to competitive markets, these
prices are generally determined in the marketplace rather than set by
FERC. FERC has recognized that this change means that it needs a new
approach to ensuring that prices are just and reasonable and has begun
to provide some guidance on what just and reasonable means in the
context of competitive markets, most recently in its proposed rule on
standardizing electricity markets. Statements in the proposed rule
indicate that just and reasonable prices are those produced by
structurally competitive markets. However, the statements do not define
what a structurally competitive market is. In addition, these
statements concern the operations of market monitoring units rather
than FERC's own role and responsibilities. Furthermore, the proposed
rule has been highly controversial and may be substantially delayed
and/or modified.
The heads of the market monitoring units told us they recognize the
difficulty of defining just and reasonable prices. They also said that
they believe FERC had made progress in doing so. However, they
generally believed that FERC had not yet gone far enough. For example,
the head of the California ISO's monitoring unit told us that for FERC
to define what it will consider just and reasonable prices in a
competitive marketplace is critical to achieving the Federal Power
Act's goal. She stated that a clear standard for just and reasonable is
also critical to performing monitoring and oversight functions, and,
without such a standard, existing ISOs or RTOs cannot move forward and
other geographical areas will have no confidence in ISOs or RTOs and
will not wish to develop them. On the other hand, the heads of the ISO
New England, PJM, and New York ISO monitoring units stated that FERC
should not develop overly detailed or prescriptive definitions that
would reduce needed flexibility. The heads of the PJM and ISO New
England units said that FERC should instead develop a strong policy
statement or paper defining the term at a general or theoretical level
and leave it to the market monitoring units to operationalize or put it
into practice. Similarly, the head of the New York ISO unit cautioned
that, with overly prescriptive criteria, market participants can
structure behavior to avoid specific rules, conditions, or definitions,
while engaging in behavior that would not be deemed acceptable. He
added that, in orders that it has issued in individual cases, FERC has
established precedent that prices can be considered just and reasonable
when they are the product of workably competitive markets, and
determining whether a market is competitive requires some room for
considering individual circumstances.
FERC officials, including OMOI managers, told us that they recognize
the importance of defining just and reasonable prices in a competitive
energy marketplace but are finding it difficult to do. For example, the
Senior Energy Policy Advisor to the Chairman of FERC told us that FERC
has been trying to define the term for several years. The Director of
OMOI said that OMOI has the operational responsibility to give guidance
on just and reasonable rates, but agreed that an important
consideration for the agency is the level of detail at which it needs
to be defined.
FERC Has Not Clearly Defined Market Power:
In its proposed standard market design rulemaking, FERC provides some
details on what it considers market power. In the proposed rule, FERC
states that market power is the ability to raise price above the
competitive level. The agency further states that identifying market
power with precision is difficult, both because it is difficult to
identify the competitive price (which should recover both fixed and
variable costs over the long run) and because it can be difficult to
isolate the impact of one entity on the competitive market. FERC adds
that, in the proposed rule, it is incorporating the concept of when to
intervene in the markets, rather than defining what constitutes market
power. The market monitoring units would review market data, such as
bidding patterns, to identify and intervene in market situations in
which market power could be occurring. In its April 2003 white paper
explaining the changes it planned to make in the final standard market
design rule, FERC said that it would require the ISOs and RTOs to have
clear and enforceable rules to define and police market manipulation
and gaming strategies by market participants trying to unduly exercise
their market power. The white paper also said that the ISOs and RTOs
would be required to have a clear set of rules governing market
participant conduct with the consequences for violations clearly
spelled out. The white paper then provided areas of anticompetitive
behaviors--such as physical and economic withholding of supplies--that,
at a minimum, should be included.
Again, the heads of the market monitoring units did not believe that
FERC had yet gone far enough in defining market power. The head of the
California ISO monitoring unit said that FERC needs to define what it
will consider market power, and that the definition must be agreed on
in order for FERC to perform its market development and oversight
obligations. She added that inappropriate or anticompetitive behavior
need not be defined through an exhaustive list of specific market
behaviors but rather through a general set of characteristics.
According to the heads of the market monitoring units of ISO New
England and PJM RTO, FERC should develop a policy statement or paper on
market power rather than a highly detailed definition. In contrast, the
head of the NY ISO's market monitoring unit stated that FERC needs to
define what it will consider market power only in the context of
specific market monitoring proposals. He told us that his market
monitoring unit has been very successful in preventing market power by
using very specific tests for market power abuse, enabling the unit to
take appropriate action with minimal delay. He added that FERC should
not adopt generic definitions that would restrict the ability of the
New York ISO to implement the tests and market mitigation measures that
have been approved for its use.
The Director of OMOI agreed that a clarifying definition of market
power to communicate the parameters of acceptable market behavior is
needed. He added that developing such a definition is complex, and his
office has to be careful in deciding what constitutes market power
abuse because there is a necessary element of judgment involved in
determining what is and what is not abuse in individual cases that
should not be eliminated with a definition.
OMOI Has Not Explicitly Set Out How It Will Integrate Its Work with
That of Others:
An important OMOI function is to integrate its work with that of others
inside and outside of FERC who also have a role in market oversight or
who carry out related responsibilities. For example, FERC's Office of
Markets, Tariffs, and Rates has major responsibilities relating to
building competitive energy markets and authorizing companies to
participate in those markets. The office is currently leading FERC's
effort to establish a standard market design for wholesale electricity
markets. Thus, it is important for the offices to work together so that
OMOI can (1) better understand the markets that are being created and
that OMOI is to oversee and (2) provide effective input from an
oversight standpoint into structuring the markets. In addition, OMOI
officials told us that they share oversight responsibility with other
federal agencies--particularly the Commodity Futures Trading
Commission--in areas where the financial and futures markets overlap or
affect the physical natural gas and electricity markets. For example,
OMOI officials stated that OMOI, along with the Commodity Futures
Trading Commission and the Department of Justice, would be responsible
for detecting the false reporting of natural gas prices or volumes to
index publishers (see app. III). Moreover, as we discuss later in this
report, OMOI is relying heavily on the market monitoring units to
oversee electricity markets.
OMOI has various initiatives under way to build its working
relationship with these parties. However, because of the market
monitoring units' substantial role in its market oversight approach,
OMOI has devoted considerable attention to improving its working
relationship with these units, and its efforts with respect to other
FERC offices and other federal agencies are in the early stages. For
example, in responding to our survey, about 50 percent of OMOI managers
and staff expressed dissatisfaction with communication with other FERC
offices. (About 26 percent were satisfied, about 14 percent were as
equally satisfied as dissatisfied, and 10 percent had no basis to
judge.) In providing more detailed responses, several OMOI staff
indicated that they thought communication and cooperation between OMOI
and FERC's Office of Markets, Tariffs, and Rates was a problem. In
addition, the head of a market monitoring unit told us that he has had
to inform OMOI staff about the issuance of orders initiated in other
FERC offices.
The Director of OMOI told us that he understands these concerns about
the office's working relationship with other FERC offices. According to
the Director, OMOI wanted to first get its "act together" before
reaching out to the other offices. He added that OMOI has been working
hard the past couple of months with FERC's Office of Markets, Tariffs,
and Rates and Office of the General Counsel to establish more formal
connections.
OMOI officials told us that they plan to coordinate their work with
other federal agencies to better incorporate their knowledge and views
about related market activities. For example, the Director of OMOI's
Division of Financial Market Assessment told us that he would like to
develop a formal information-sharing arrangement with the Commodity
Futures Trading Commission so that OMOI has better access to financial
information. He said that while FERC has limited jurisdiction over
financial markets, OMOI wants to monitor these markets because the
financial marketplace affects the health of wholesale electricity and
natural gas markets. According to OMOI officials, they have regularly
scheduled meetings with the Federal Trade Commission and the Department
of Justice to discuss overlapping issues, specifically focusing on
antitrust and market manipulation practices.
As we previously reported, events such as the collapse of the Enron
Corporation bring to light the importance of clarifying jurisdiction
across the federal government as restructuring progresses. As we
pointed out, effective coordination between FERC and the Commodity
Futures Trading Commission is particularly important because of
jurisdictional uncertainties regarding the oversight of on-line trading
activities, such as those previously operated by Enron. In the same
way, we also noted that in a Senate Governmental Affairs report and
memorandum,[Footnote 9] and other congressional hearings, both FERC and
the Security and Exchange Commission have been questioned about their
lack of diligence in following through on Enron's activities--even
though they had indications of improper conduct. The report commented
that effective coordination between agencies prevents companies from
exploiting the lack of oversight in areas where neither agency may have
taken full responsibility.
OMOI Has Not Decided on the Level of Detail at Which It Will Review
Market Transactions:
According to OMOI, its primary functions are to assess market
performance, ensure conformance with Commission rules, and produce
internal and external reports on the results. This description of its
functions is general and broad at this point. According to OMOI's
Deputy Director for Market Oversight and Assessment, as the office
builds its capability, it must decide at what level of detail it should
monitor the markets. This issue largely centers around whether OMOI
should operate at a high level--that is, assess the markets' overall
performance and major outcomes, such as competitiveness, supply, and
price, and leave the detailed monitoring to the market monitoring
units--or "get down in the weeds" to review market transactional data
as market monitoring units do for their individual markets. The Deputy
Director anticipates that OMOI will operate somewhere in between these
two levels. The level at which OMOI reviews the markets affects both
the number and skill mix of the staff that OMOI needs. For example, the
head of the New York ISO's market monitoring unit told us that, by the
end of 2003, his unit will have 30 staff, consisting of engineers,
economists, business majors, analysts, and information technologists,
to cover the New York market alone. He indicated that OMOI would need
many more staff than this if it plans to review the markets at the same
level of detail on a national basis.
The responses to our survey and our discussions with OMOI staff
indicate that opinions vary on this issue. In responding to our survey,
57 percent of OMOI's managers and staff said that top management had
clearly defined what role OMOI will play in monitoring markets, while
about 32 percent disagreed. (The remaining 11 percent neither agreed
nor disagreed.) Additional comments provided for our survey indicate
that agreement has not been reached on how OMOI should carry out that
role. Survey respondents expressed concerns that OMOI was not reviewing
and analyzing market data in enough depth. For example, some OMOI staff
said that OMOI should be continuously reviewing market data on a real-
time basis to identify market power abuses. During our interviews, OMOI
managers also expressed different opinions about the issue. For
example, an OMOI division director told us that the office will examine
similar data at a level similar to what the market monitoring units
currently do, and that OMOI has most of the data it needs to do so. On
the other hand, another division director told us said that he was not
certain what the office's vision for overseeing the markets will be,
and that he was not sure if it has the information technology
capability to perform detailed analysis of market transactions like the
market monitoring units do. He also stated that OMOI would need to have
staff who performed this work on a daily basis in order to become
skilled at it, and that they could not gain this expertise on an ad hoc
basis.
OMOI's stakeholders have also expressed varying views. For example, the
heads of the market monitoring units have generally suggested that OMOI
leave the detailed monitoring of market transactions to them and focus
on broader, national issues. On the other hand, others such as consumer
groups have called for FERC to closely monitor the markets to prevent
market abuse or violations by market participants.
OMOI Has Not Yet Developed a Comprehensive Set of Results-Oriented
Performance Measures:
According to FERC's Annual Performance Report for Fiscal Year 2001
(March 2002), the agency recognizes that accountability requires strong
performance measures of the following two types:
* output measures that specify targets for the specific work items that
the agency produces--such as orders, decisions, and environmental
reviews--and for when it produces them, and:
* results-oriented or outcome measures that specify the results that
the agency is working to create in the larger world.
FERC has been developing output measures for many years for its
strategic and annual performance plans but has established few outcome
measures in the energy markets oversight area. The agency has stated
that developing outcome measures is proving to be difficult but
believes that it is possible. In our June 2002 report, we recommended
that FERC develop such measures to assess how well it is doing in
achieving its goals and objectives for overseeing competitive energy
markets.
Although FERC developed new performance measures for its market
oversight goals and objectives for fiscal years 2003 and 2004, the new
measures are generally not outcome-oriented and do not lend themselves
to assessing OMOI's effectiveness. For example, one key performance
measure is to "track performance of natural gas and electric markets,"
while another is to "assess performance of natural gas and electric
markets." The performance targets for these measures are to "issue
market surveillance reports to the Commission twice each month" and
"publish regular summer and winter seasonal market assessments, state
of the market reports, and other reports as conditions warrant,"
respectively. While it can be determined if OMOI issues these products,
the products' mere issuance does not indicate whether OMOI is achieving
its goal of protecting customers and market participants through
vigilant and fair oversight of energy markets. Although outcome
measures most importantly allow the agency, the Congress, and other
stakeholders to assess OMOI's performance in carrying out its mission,
establishing these measures also helps to more clearly communicate what
the office is working to achieve.
OMOI Implemented Informal Processes and Procedures to Begin Its Work:
OMOI does not yet have formal processes and written procedures to
direct its staff in their activities. Instead, it is using a series of
key meetings and internal and external reports. According to OMOI
managers, staff receive direction and guidance as they prepare for and
participate in these meetings and help prepare these reports.
The key meetings are of two types: (1) regularly scheduled meetings of
OMOI managers and staff and (2) OMOI's closed-door meetings with the
FERC commissioners. The key regularly scheduled meetings have been
weekly. However, according to the Director of OMOI, morning meetings to
discuss plans for the day's activities are also becoming important to
the office's operations. The predominant subject of the weekly meetings
alternates from electricity markets one week to natural gas markets the
next. At these meetings, which can last for several hours, OMOI
managers and staff share the results of their market oversight
activities and projects since the last meeting. Staff also use the
weekly meetings to make a variety of decisions, including (1) whether
the oversight staff should follow up on an issue with the appropriate
market monitoring unit and/or begin collecting and analyzing their own
data on the issue or (2) whether the enforcement staff should begin
investigating a situation or should audit market participants'
compliance with certain FERC requirements. They also identify issues to
be discussed in the closed-door meetings. At the closed-door meetings,
OMOI discusses national and regional issues concerning electricity and
natural gas markets--such as changes in prices and the adequacy of
supply and infrastructure--with the commissioners. The commissioners
are also informed of any complaints received, progress on significant
enforcement investigations, and any new investigations.[Footnote 10]
OMOI's also prepares a series of market oversight reports or products
on a daily to annual basis (see table 2). These reports are intended to
(1) help OMOI staff and the FERC commissioners stay abreast of market
developments and activities and (2) inform market participants and
others of market performance issues and OMOI's activities. OMOI
managers also believe that the information needed for these reports
helps inform the office's staff as to the types of analyses that they
need to perform and how their work is linked.
Table 2: OMOI's Principal Oversight Reports or Products:
Type of report: Daily; Timing/purpose/content: Produced daily from news
reports and publicly available energy market data to keep FERC
commissioners and staff aware of current events in the electricity and
natural gas markets. OMOI has been producing these reports almost from
its formation.
Type of report: Biweekly market surveillance; Timing/purpose/content:
Generally produced every 2 to 3 weeks to brief the FERC commissioners
on emerging and ongoing national and regional energy market issues--
such as high prices and energy companies' financial condition. The
reports, which are in the form of briefing charts, also present
information on OMOI's major market monitoring and enforcement
activities, including major cases and overall statistics on the number
of investigations and complaints and inquiries received from market
participants and others. OMOI has been producing these reports since
June 2002.
Type of report: Seasonal assessment; Timing/purpose/content: Produced
as public documents twice a year--once during the summer cooling season
and once during the winter heating season. These reports seek to
identify issues important to electricity/natural gas customers and
market participants and to signal the areas of greatest concern to FERC
at the time. The reports are intended to (1) provide FERC with an early
warning on market issues, (2) guide short-term oversight and
investigation priorities, and (3) communicate priorities to market
participants. The first of these reports by OMOI was issued in late
January 2003 on natural gas markets. OMOI had initially intended to
issue the report in November 2002 at the beginning of the winter
heating season. The report was delayed as the agency deliberated on
what type of information should be in the report and how it should be
presented. On issuance, the energy trade press produced more than a
dozen articles outlining the report's major findings and conclusions as
to the challenges facing the markets. The report also received some
criticism in the press as providing little new information, especially
on market conditions and performance at the end of 2002 and whether
conditions had improved or worsened since 2001.
Type of report: Annual state of the markets; Timing/purpose/content: To
be produced annually and made available to the public. According to the
Director of OMOI, the first such report by OMOI may be issued in
September 2003. (FERC previously issued a state of the markets report
in March 2000.) As currently planned, the reports are to give a
comprehensive review of the year and provide measures for energy market
performance.
Source: GAO analysis of FERC information.
[End of table]
In our survey of OMOI managers and staff, we asked if the office had
established effective processes to oversee natural gas and electricity
markets. Just slightly over half--about 53 percent--said that the
office had established effective processes to oversee the markets.
About 28 percent did not believe that effective processes had been
established for electricity, while 22 percent did not believe they had
been established for natural gas. The remaining respondents said that
they neither agreed nor disagreed that effective processes had been
established or said that they had no basis to judge. In providing more
detailed responses to our survey, several OMOI staff commented on the
office's processes and procedures. For example, one respondent stated
that processes and procedures do not exist, and that most of what is
done is ad hoc. Another said that the office needs adequate planning
tools to be efficient and effective, while another stated that no
operational market monitoring plan has been developed for electricity
or natural gas and to the extent that any plans for the office's
operations have been developed, they are at a high level and not
suitable for monitoring markets. According to OMOI's Deputy Director
for Market Oversight and Assessment, his divisions plan to establish a
consistent process to monitor the electric, natural gas, and related
financial markets, as well as both strong priority setting and
management processes.
FERC officials, including OMOI managers, agreed that OMOI needs to
formalize its processes. However, they said that they did not want to
do so too quickly because OMOI is a new office and constantly learning.
The Senior Energy Policy Advisor to the Chairman of FERC told us that
formalizing OMOI's processes is a matter of timing. She stated that she
would not want the office to "lock down" its processes until it is sure
that they are working well.
OMOI Has a Variety of Oversight Tools and Is Working to Improve Them:
To carry out its oversight activities, OMOI's major tools are its (1)
Market Monitoring Center, (2) enforcement hotline, (3) investigations
and operational audits, and (4) partnership with the market monitoring
units. Although these tools potentially provide OMOI with the means to
oversee the energy markets, they have some significant limitations in
coverage and available data. For example, the Market Monitoring Center
lacks important market information, and market monitoring units do not
operate in most parts of the United States. OMOI is aware of and is
working to address these limitations. Opportunities also exist to use
these tools more systematically to improve their effectiveness.
The Market Monitoring Center Is an Important Research Tool but Lacks
Critical Data to Systematically Monitor the Markets:
Patterned after market operation centers of the ISOs and major energy
trading companies, the center uses computers and various market
reporting services and software packages to make large amounts of data
on natural gas and electricity markets available in a useable format.
For example, electricity market information includes prices on the spot
market and for futures contracts, plant outage information, business
news, and historical data for trend analysis. Natural gas market data
includes spot and futures prices, market commentary, storage levels,
imports and exports, and supply/demand statistics. In addition, several
weather services are available to monitor changing conditions
nationwide, as weather and climate affect energy supply and demand in
both spot and futures markets.
OMOI's staff uses the Market Monitoring Center as a research tool in
carrying out their assigned projects. During these projects, they often
review the center's wholesale price and other market information, such
as the data on power plant outages and transmission constraints, for
anomalies. These anomalies generally include large price increases or
spikes or unexpected constraints in areas of the national grid of
electric transmission lines or the natural gas pipeline network. For
example, OMOI monitored a natural gas price spike in February 2003 and
tracked its effects on the electricity market in the New York area.
When anomalies are identified, OMOI staff investigate to determine the
cause by calling the applicable market monitoring unit or using data in
the center or otherwise available to FERC. Depending on the results of
this examination, the results are presented to the commissioners and
other agency managers as an early warning of market problems or OMOI
initiates a preliminary investigation or operational audit. In some
cases, OMOI staff has worked with ISO or RTO representatives to change
market rules that led to the identified anomaly. OMOI may also become
aware of a market anomaly or potential market problem through another
source, such as a market monitoring unit, and use the center to collect
additional data on it.
OMOI also uses a number of market performance measures or metrics to
graphically capture market trends. OMOI is working to develop
additional metrics and anticipates that, with a more comprehensive set
of these metrics, it will be able to inform the FERC commissioners and
stakeholders such as the Congress, market participants, and the
financial markets as to how well the energy markets are working and
give early warning of problems.
While the center's information is substantial, it is significantly
limited in certain areas. For example, the center has limited up-to-
the-minute information on electricity prices, fuel costs, and spot and
futures contracts prices. It also has limited information on the
operations of the electric system. Operations information, such as data
on power plant outages and the availability of capacity on transmission
lines, is important to detect and analyze changes in the markets and to
identify potential anticompetitive behaviors.
In addition, the center does not have access to nonfederal information
needed to assess reliability of the electric power grid and monitor
overall electricity market performance. This information includes data
system frequency (a measure of how well the system is balancing
electricity demand and supply), power flows on key transmission lines,
and transmission between parties. According to OMOI officials, market
performance and electricity system reliability are mutually dependent,
and such information would help them to determine whether market
participants are behaving anticompetitively. The center also does not
have access to a third party source for price or quantity information
on most bilateral transactions of wholesale electricity, which are the
major portion of market transactions. However, FERC has revised its
filing requirements for utilities to require them to electronically
file quarterly reports on their electric power sales, including
information on prices and quantities.
FERC is continuing to expand the information available in the center.
It has added four information services since our June 2002 report. For
example, Genscape measures power plant operations for selected power
plants. In addition, OMOI is continuing to assess its energy market
information needs. During fiscal year 2002, FERC completed studies to
take stock of the agency's current and future market information needs.
As part of that effort, FERC formed teams to identify information that
FERC currently collects and additional information that it might need
to perform its duties related to restructured markets. According to
OMOI officials, the office is using the information from these teams as
a baseline to assess its overall market information needs.[Footnote 11]
Although these data shortcomings significantly limit the Market
Monitoring Center's potential use for comprehensive and real-time
monitoring of the markets, some OMOI staff knowledgeable about the
center's operations and use highlighted the potential to use the center
more systematically. For example, a process is currently not in place
to use the center to continuously monitor the markets, and written
protocols have not been developed for what data are to be reviewed and
what actions OMOI staff should take when certain market situations are
noticed. Currently, OMOI staff use the center intermittently as they do
research for their projects. According to an OMOI staff person, the
center is not in use at times.
OMOI Is Incorporating the Enforcement Hotline into Its Market Oversight
Efforts:
FERC's primary purpose in creating the hotline was to provide a
mechanism to informally receive complaints or inquiries from industry
and the public so that the agency can deal with concerns more quickly
and with fewer resources than would be required under FERC's formal
complaint process. Since the hotline's creation in FERC's Office of
General Counsel in 1987, the number of complaints and inquiries has
increased substantially. For example, the hotline received 145
complaints and inquiries in fiscal year 1996, compared with 584 in
fiscal year 2002. FERC's goal has been to respond to and resolve the
complaints and inquiries very quickly. For example, FERC set a goal in
its fiscal year 2003 performance plan to resolve 80 percent of the
complaints and inquiries within 1 week of the initial contact. When a
complaint or inquiry is received (by telephone, letter, or E-mail), an
attorney is assigned to investigate. The attorney contacts the other
party, usually the same day, and attempts to resolve the issue. If the
issue cannot be resolved through this informal process, the complainant
can file a formal complaint or, if OMOI finds indications of a more
egregious violation of rules or regulations, it can launch an
investigation into the matter.
With the hotline's transfer to OMOI in August 2002, it has become an
important market oversight tool by providing market participants the
opportunity to anonymously and informally make complaints to OMOI about
anticompetitive actions by other parties. According to the Enforcement
Hotline Director, the hotline's underlying philosophy is that of a
neighborhood watch with participants patrolling their own markets. To
this end, OMOI has encouraged market participants and the general
public to call, e-mail, or write the hotline to complain or report
market activities that may be an abuse of market power, an abuse of an
affiliate relationship, a tariff violation, or another type of
violation by an entity regulated by FERC. According to OMOI, hotline
calls have included complaints about bidding anomalies, price spikes,
inappropriate use of certain financial instruments, fluctuations in
available capacity on electric transmission lines and natural gas
pipelines, discrimination in interconnection to the electric grid, and
improper market transactions between a company and an affiliate.
Hotline complaints have led to or contributed to decisions to initiate
several enforcement investigations.
OMOI officials also told us that the hotline staff has been focusing
more attention on tracking market-related calls to look for trends
because OMOI is trying to use the hotline as a tool for identifying
market issues early. For example, the officials said that the hotline
received several calls from energy marketers who said that they could
be driven out of business by stricter standards for creditworthiness.
According to the officials, FERC had been reviewing creditworthiness
issues on a case-by-case basis but, after the calls, decided to convene
a technical conference in February 2003 to begin to address these
issues on a broader basis.
OMOI Has Increased Investigative Activities, but Its Audits Do Not
Systematically Review Compliance with Market Rules:
Led by attorneys in OMOI's Enforcement Division, investigations are
designed to collect and analyze information regarding specific concerns
about whether a party has violated the energy-related laws,
regulations, and/or market rules administered by FERC. OMOI may
initiate an investigation as a result of an action such as a hotline
complaint, a formal complaint, a referral from a market monitoring unit
or another office within FERC, the findings of an audit, or routine
market monitoring. In addition, the enforcement staff may begin an
investigation based on its scanning or tracking of industry or market
events through news or other accounts. OMOI's Division of Operational
Investigations is responsible for conducting audits to review
compliance with FERC's regulations such as those governing companies'
transactions or dealings with their affiliates to prevent
discriminatory practices and reporting of market information. OMOI
initiates operational audits for a variety of reasons, including
providing input to policy deliberations, regulations development, and
enforcement cases.
FERC's investigations and operational audits relating to energy markets
have increased almost steadily each month since this responsibility was
moved to OMOI. For example, on June 1, 2002--about a month before the
enforcement staff was transferred to OMOI from FERC's Office of the
General Counsel--FERC was conducting 37 investigations and operational
audits related to the electricity and natural gas industries and other
areas such as hydroelectric projects. This number was 68 as of May 31,
2003. During this period, OMOI opened a total of 79 investigations and
operational audits and closed 48.
Of the investigations that OMOI closed, several resulted in entities
paying refunds, civil penalties, or the costs of the investigations, as
well as preparing compliance plans and taking other remediation
actions. One highly visible example is the recently settled case
against the Transcontinental Gas Pipe Line Corporation (Transco) for
anticompetitive practices that included a civil penalty of $20 million-
-the largest civil penalty in FERC's history. However, in other cases,
no further action was taken--beyond working with the parties under
investigation to bring them into compliance with the rules and
regulations--because there is no civil penalty authority associated
with the activities. The civil penalty imposed on Transco stemmed from
the company's violation of rules in one of the few areas in which FERC
had the authority to impose such penalties. While FERC can order
refunds of excessive rates, FERC generally lacks authority to impose
appropriate penalties. No section of the Federal Power Act allows FERC
to levy monetary penalties against market participants who charge
unjust or unreasonable rates for electricity. Although the Natural Gas
Policy Act of 1978 gave FERC some authority to levy civil penalties,
this authority applies to a limited number of natural gas transactions
in interstate commerce. Given this situation, legislation was recently
introduced in the Congress that would give FERC additional penalty
authority. On April 11, 2003, the House passed H.R. 6, which would
expand FERC's penalty authority under the Federal Power Act and
increase the maximum civil penalty for certain violations from $10,000
to $1 million per violation per day. The bill is currently awaiting
action by the Senate, which is considering similar legislation.
While investigations are almost always opened in response to specific
complaints or concerns about a potential violation, operational audits
provide the opportunity to review compliance with regulations and
market rules on a broader basis. However, OMOI has limited resources
devoted to these audits. At the end of June 2003, the Division of
Operational Investigations was conducting audits of 16 entities under
FERC's jurisdiction--11 in the Pacific Northwest, 1 in the Midwest, 2
in the mid-Atlantic, and 2 in the Southwest--with respect to certain
aspects of FERC's regulations. According to the Director of the
Division of Operational Investigations, most of the work by the
division's staff is in supporting ongoing enforcement investigations
rather than performing audits. He said that his staff provides
technical support to these investigations by reviewing regulations and
accounting and trading issues. The Director said that he would like to
develop, but has not yet developed, a strategy for systematically
auditing compliance with FERC's regulations and market rules on a
cyclical basis. Absent this type of more comprehensive review, OMOI has
to rely on the limited coverage provided by hotline calls and
enforcement investigations. For example, hotline calls depend on
individuals knowing about violations and being willing to report them
to FERC.
OMOI Is Working to Improve Its Partnership with the Market Monitoring
Units, but the Units Do Not Cover Much of the United States:
Recognizing that market monitoring units play a significant role in
overseeing wholesale electric power markets, OMOI is devoting
considerable attention to improving its working relationship with these
units. However, FERC has not yet put in place a process to periodically
assess the monitoring units' effectiveness so that it will have
assurances that they are effectively carrying out their
responsibilities. Moreover, the partnership's effectiveness in
overseeing the nation's electricity markets is limited because most of
the United States is not covered by these units.
FERC has described the role of the market monitoring units in various
terms, including as the "first line of defense" against market
problems, its "eyes and ears," its "soldiers on the front line," and as
"practically an extension of, or a surrogate for, the Commission's own
market monitoring and investigative staff." The significance of the
monitoring units' role is illustrated by OMOI's response to our request
for information on how the office's market oversight approach will
identify certain trading schemes, such as those used by the Enron
Corporation in the California electricity market and other
manipulations of the energy markets. In their response, OMOI officials
said the monitoring units are responsible for detecting most of the
schemes and manipulations in their respective electricity markets. (See
app. III for OMOI's response.):
OMOI is taking a number of steps to improve communication and to better
ensure that its staff and the market monitoring units work well
together. For example, the office has assigned specific staff members
as contact points for the ISOs/RTOs and their market monitoring units.
Because many of the issues arising and enforcement cases being
initiated concern California, OMOI has located two of its staff with
the California ISO's market monitoring unit. OMOI has also formalized
the frequency and nature of communication between itself and the units,
for example, by establishing a series of routine meetings and drafting
guidelines on how the units will communicate certain market events to
OMOI. Furthermore, OMOI is working with the market monitoring units to
develop a joint OMOI-market monitoring unit mission statement and has
taken steps to standardize the way the market monitoring units will
report on their markets. For example, OMOI is working with the
monitoring units to develop a set of standardized measures or metrics
by January 2004. With standard metrics, FERC can compare and contrast
the individual regional markets and better report on how markets are
performing nationwide.
According to the heads of the four market monitoring units, their
communication with FERC has improved since the creation of OMOI. The
head of one unit told us that the frequency and the detail of their
discussions with OMOI were notable improvements, while another said
that the improvement had been significant. The third market monitor
told us that communication has improved considerably and the more
frequent communication with OMOI has improved OMOI staff's knowledge of
their markets. According to the remaining market monitor, his ability
to communicate with FERC was very poor before OMOI was formed, but
since then the frequency and content of this communication has
improved. He added that he hopes that OMOI's enforcement staff is
letting him know when it is conducting investigations relating to the
markets that he monitors, but he does not know whether or not they are.
In our June 2002 report, we recommended that FERC update its strategic
plan to set out clear expectations for how the ISOs/RTOs will monitor
energy markets and how FERC will evaluate their monitoring units'
effectiveness. While a key strategy in FERC's current strategic plan is
to integrate FERC's market oversight activities with the work of the
monitoring units, the plan does not yet set out clear expectations for
these units or how FERC will ensure that they are effectively carrying
out their market oversight role. OMOI's Director of Management and
Communication told us that performance expectations for the market
monitoring units make sense, and that the office expects to begin the
process to incorporate expectations into FERC's fiscal years 2003-2008
strategic plan that is scheduled to be issued in September 2003.
The heads of the market monitoring units agreed that FERC needs
assurances that their units are carrying out their monitoring functions
effectively and suggested ways that the agency could obtain these
assurances. For example, the head of the New York ISO's market
monitoring unit said that FERC should monitor market outcomes, maintain
close contact with the individual units, and operate a hotline that
market participants can use to register concerns about the units.
Similarly, the head of the New England ISO's monitoring unit said that
OMOI should develop additional expertise for each market and, more
importantly, should synthesize comments from stakeholders in each
market regarding the units' performance.
While the market monitoring units are highly important to OMOI's
efforts to oversee electricity markets, the units' coverage of the
nation's electricity markets is limited. The monitoring units of the
PJM Interconnection RTO, ISO New England, and New York ISO cover the
Northeastern markets, while the California ISO's monitoring unit covers
the markets in that state. The Electric Reliability Council of Texas,
over which FERC has only limited jurisdiction because the market is
essentially intrastate, also has a market monitoring unit that
essentially covers Texas. FERC has also approved a market monitor for
the Midwest ISO, which plans to operate a centralized power market by
December 2003. In addition, FERC has efforts under way to expand the
number and/or the market coverage of RTOs. At present, according to
FERC, five other RTOs have been conditionally approved. However, it
could be several years before these organizations are operating and
have market monitoring units in place.
According to the Director of OMOI, one of the office's major challenges
is how to monitor the markets in places where there is no market
monitoring unit. He added that the office has limited access to market
data without the existence of the formal markets provided by an ISO or
RTO to generate the data and a market monitoring unit to make it
available to them. OMOI officials told us that they are using calls to
the enforcement hotline and audits as a way to provide some oversight
in these areas. These efforts, however, do not replicate the extensive
and detailed monitoring performed by the market monitoring units.
OMOI Faces Challenges as It Completes Its Hiring:
OMOI has almost completed its staffing to authorized levels, including
the hiring of a substantial number of staff from outside FERC with
energy market experience. The office also has trained staff to increase
their knowledge about competitive energy markets, and has contracted to
acquire additional market expertise. However, several key management
positions have not been filled. In addition, OMOI staff raised several
issues, including the adequacy of the office's staffing levels, skills
mix, the need for additional training, and morale.
OMOI Has Almost Completed Its Staffing to Authorized Levels:
As of June 17, 2003, OMOI had a staff of 98 employees--12 less than the
110 positions budgeted for fiscal year 2003. OMOI has staffed the
office with a mix of reassigned FERC employees and outside hires (see
fig. 2). OMOI's director and two of three office directors are outside
hires. During its first 4 months, the office principally consisted of
its top leadership and employees reassigned from other FERC offices,
such as the Office of Markets, Tariffs, and Rates and the Office of
General Counsel's Market Oversight and Enforcement Division, that had
some experience related to energy market oversight and investigation.
These internal transfers continued until they reached a total of 61
employees in September 2002. Senior OMOI officials told us that
transferring to OMOI was voluntary, but not everyone was selected.
According to OMOI officials, approximately 180 FERC employees applied
for OMOI.
Figure 2: OMOI's Staffing Levels:
[See PDF for image]
[End of figure]
As of June 17, 2003, OMOI had hired 45 employees from outside FERC--5
less than the 50 positions budgeted for fiscal year 2003. To recruit
qualified individuals with industry experience, OMOI offered a number
of recruitment bonuses. Because of the specialized skills required to
monitor energy markets, OMOI has generally offered larger recruitment
bonuses than other FERC offices--an average of $12,852 given to 10
individuals. According to OMOI officials, they are still receiving
resumes from interested applicants and plan to continue their
recruiting and hiring efforts over the next few months.
OMOI officials told us that, in hiring potential applicants, they
looked at the applicants' experience in energy markets. In its fiscal
year 2003 budget request, one of FERC's performance targets for OMOI
was the "hiring of staff with market expertise." In the fiscal year
2004 budget request, FERC is revising the performance target to state
that "30 percent of OMOI staff have energy market experience gained
through direct activity in those markets." According to OMOI officials,
29 of the office's current employees (or 29.6 percent) have energy
market experience. More specifically, OMOI officials told us that 19
(or 19.4 percent) of the employees have worked for energy-related
companies and have direct experience with some aspect of energy
markets. An additional 10 employees (or 10.3 percent) have worked as
consultants, legal counsel, or other positions that demonstrated
detailed understanding of market activities without active
participation, according to the officials. OMOI said that they review
the resumes of both internal transfers and outside hires to determine
market experience.
One reason that OMOI has not yet reached its authorized staffing level
is that 13 of its employees have left to go to another FERC office,
another federal agency, or to private industry. The majority of those
leaving--10 of 13--had originally transferred in from other FERC
offices. According to OMOI officials, most of these employees moved to
other FERC offices to take more senior positions. They said that
because OMOI had to bring in a number of outside hires at a high grade
(at the GS-15 level), opportunities for promotion within OMOI are very
limited. Of the three outside hires that have left, two were interns
with limited appointments.
OMOI Is Using Training and Contracting to Increase Its Expertise:
In addition to hiring staff with needed skills, OMOI has offered a
variety of internal and external training programs. For example, OMOI
has:
* instituted technical sessions on a biweekly basis during which OMOI
staff informally share information and expertise with other staff,
* invited industry experts for presentations on market issues,
* invited representatives from market monitoring units to provide the
versions of the training classes they offer their own staffs,
* visited market monitoring units at various RTOs to interact with them
and learn about their markets and functions,
* interacted with vital market participants such as credit rating
agencies and generation and transmission operators to enhance their
overall knowledge of the gas and electricity markets, and:
* identified leadership and managerial training as a critical need and
plans to develop targeted training in these areas.
OMOI has also used contractors to obtain skills not available
internally. For example, OMOI has hired, on a consulting basis, an
energy trader formerly with the Enron Corporation. OMOI also has used
contractors to assist them in a variety of other ways, including
developing measurement metrics for the market monitoring units and
studying power plant outages. In addition, OMOI used contractors to
help develop its first seasonal market report. Furthermore, the office
has contracted with knowledgeable vendors to provide employees with
information on key aspects of energy markets. Since its inception in
fiscal year 2002, OMOI has spent a total of about $501,000 on contract
services. The office is requesting an increase in funding for these
services from $500,000 for fiscal year 2003 to $1 million for fiscal
year 2004.
OMOI Faces Several Additional Staffing Challenges:
Although OMOI has made progress in hiring staff, OMOI continues to face
challenges in filling some of its leadership and technical positions.
As of June 17, 2003, OMOI had not permanently staffed three of OMOI's
seven division director positions. According to a senior OMOI official,
finding qualified applicants for the division director positions has
been particularly difficult because not many applicants have both
technical skills and leadership experience coupled with a public-
service mentality. For example, OMOI has advertised a "Division
Director" position at the senior executive service level for the
Division of Energy Market Oversight on several occasions, but FERC
hiring officials did not find any applicants suitable to meet OMOI's
needs. The position has been relisted. OMOI's difficulty in filling its
leadership positions is particularly important because sustained,
committed leadership is indispensable to successful organizational
transformations. By its very nature, the transformation process entails
fundamental change. Consistent leadership helps the process stay the
course and helps ensure changes are thoroughly implemented and
sustained over time. Senior OMOI officials also told us that OMOI
continues to face challenges hiring people with certain skills such as
engineers with market experience, people with technical skills for
performing sophisticated analysis, and people with forensic auditing
experience.
In addition, in responding to our survey, OMOI employees indicated a
relatively high level of concern about the office's staffing levels and
skill mix. About 49 percent of OMOI employees did not believe that the
office's staffing levels were satisfactory. In comparison, 22 percent
thought that the levels were satisfactory. The remaining 30 percent
neither agreed nor disagreed that the staffing levels were satisfactory
or stated that they had no basis to judge. In addition, while about 45
percent of the employees believed that the office's skill mix was
adequate, 35 percent did not. The remaining 21 percent neither agreed
nor disagreed or had no basis to judge. In providing written comments
for our survey, the employees often commented on staffing levels and
skill mix. For example, one respondent wrote "the resources in the
office are clearly inadequate to perform comprehensive oversight of
industries as large as wholesale electricity and natural gas." Another
wrote "staffing levels are not sufficient to regularly, systematically
evaluate all energy markets in the United States to look for aberrant
behavior." The written comments on skill mix varied. For example, some
staff wrote that OMOI had too many employees with natural gas
experience and too few with electricity experience. Others commented
that the office had too few engineers, especially electrical engineers,
or needed more investigations staff, economists, attorneys, or
technical staff.
To some extent, these concerns about staffing levels and skill mix
likely reflect the staff's individual views about what this new office
should do to oversee the markets, particularly the level of detail at
which it should review market transactions. It is difficult to judge
the validity of the staff's concerns until OMOI has clearly defined its
role. Of course, the FERC commissioners and the Congress would be
involved in defining the role and committing the resources to carry it
out.
Many of OMOI's employees also indicated that they would benefit from
additional training. For example, in responding to our survey, over 70
percent of OMOI employees expressed a need for more training in areas
such as market functions, market structures, and the interaction of
financial markets and energy markets. In addition, more than half of
the staff indicated that additional training in economic theory and
models would be useful. (See table 3.):
Table 3: Percentage of OMOI Staff Indicating That Additional Training
Would Help Them Better Oversee Energy Markets and Enforce Market Rules:
(Percentage).
How financial markets interact with energy markets (including trading,
hedging, derivatives, and financial instruments); Additional training
would assist me: 76; Already proficient in this area: 15; Does not
apply or no basis to judge: 9.
Market structures; Additional training would assist me: 71; Already
proficient in this area: 23; Does not apply or no basis to judge: 7.
Market functions; Additional training would assist me: 70; Already
proficient in this area: 24; Does not apply or no basis to judge: 7.
Economic theory/models; Additional training would assist me: 52;
Already proficient in this area: 34; Does not apply or no basis to
judge: 14.
Statistical software packages; Additional training would assist me: 48;
Already proficient in this area: 15; Does not apply or no basis to
judge: 37.
Regulatory theory/process; Additional training would assist me: 44;
Already proficient in this area: 43; Does not apply or no basis to
judge: 13.
Basic economic principles/definitions; Additional training would
assist me: 35; Already proficient in this area: 53; Does not apply or
no basis to judge: 12.
Source: GAO survey of OMOI employees.
[End of table]
Furthermore, our survey of OMOI staff uncovered a potential issue
regarding the office's morale. In responding to the survey, about 49
percent of OMOI managers and staff characterized the office's morale as
generally high or very high, compared to about 31 percent that said
morale was generally low or very low. (The remaining 20 percent
characterized morale as neither high nor low or said they had no basis
to judge.) However, there was a disparity of opinion between new hires
and internal transfers. Among staff that had been with FERC for more
than a year or before OMOI was established (internal transfers), about
40 percent said the office's morale was low, slightly higher than the
38 percent that said it was high. In comparison, 14 percent of staff
that had been with FERC for less than 1 year (new hires) said the
office's morale was low, while 68 percent said it was high.
Additionally, several internal transfers expressed concern that OMOI's
top managers do not value them as highly as those hired from outside
FERC. In their written comments to our survey, several staff expressed
their sense that a "double standard" exists in that (1) the work of the
"new FERC" employees (outside hires) is valued by top managers more
than that of the "old FERC" employees (transfers) and (2) the new FERC
employees receive higher pay and more than their share of the bonuses
and other rewards. Several employees also commented that there is not
much promotion potential for internal transfers. Furthermore, several
employees that left OMOI to go to other parts of FERC told us that they
had left for a promotion, but the sense that they were not valued was
also a factor in leaving.
FERC Is Taking Important Steps to Improve Its Human Capital Management:
Since we issued our June 2002 report, FERC has developed a human
capital plan that lays the foundation for the agency to strategically
manage its workforce. As our previous work has found, strategic human
capital planning must be the centerpiece of any serious change
management initiative, yet a key challenge for many federal agencies is
to strategically manage their human capital.[Footnote 12] Given that
many federal agencies have not yet begun any comprehensive human
capital planning, FERC's human capital plan is commendable and a
promising first step. Nonetheless, the plan is in the formative stages
and lacks key elements. The plan does not yet fully (1) identify
specific activities, resources, and time frames needed to implement the
agency's human capital initiatives and (2) provide results oriented or
outcome measures to track the agency's progress in implementing the
plan's initiatives and evaluate their effectiveness. By including these
key elements in its human capital plan, FERC could better ensure that
its workforce is able to effectively oversee and monitor energy
markets. In addition to human capital planning, the agency is taking
other steps to help transform its workforce, including assessing
additional human capital flexibilities that could improve recruitment
and retention efforts.
FERC's Human Capital Management Plan Is an Important First Step but
Lacks Key Elements:
In February 2003, the Chairman of FERC approved the agency's first
human capital management plan, a step forward in fostering a more
strategic approach to human capital management. In our June 2002
report, we pointed out that FERC was one of many federal agencies that
had not given adequate attention to human capital management.
Specifically, we found that FERC had not conducted systematic strategic
human capital planning to guide its efforts to recruit, develop, train,
and retain the type of workforce that can effectively oversee
competitive energy markets. Properly done, human capital planning
provides managers with a strategic basis for making human resources
decisions and allows agencies to systematically address issues driving
workforce change, such as those affecting OMOI. One tool that agencies
can use to improve their human capital management is a human capital
plan that systematically identifies the workforce needed for the future
and identifies strategies for shaping this workforce. Accordingly, we
recommended that FERC develop a comprehensive strategic human capital
management plan to include the following:
* a skills assessment program that would identify gaps in skills
currently held by the workforce that are necessary to carry out the
agency's evolving regulatory and oversight responsibilities;
* a recruitment and retention initiative, based on priorities for
meeting future regulatory and oversight staffing needs, which addresses
filling skill gaps in the current workforce;
* a training effort targeted at increasing staff knowledge in the areas
of market functions and market structures so that FERC staff will be
better prepared to regulate and oversee competitive energy markets;
and:
* a comprehensive succession plan for solving challenges posed by the
large number of impending retirements within the agency, including
reliable projections of the number of eligible staff who may actually
retire.
The plan, which covers a period of from 2 to 5 years, is essentially
broken up into two major sections. The first section addresses issues
facing the agency as a whole. For example, the plan's first section
describes FERC's current human capital situation, including data on
overall workforce demographics such as size and composition of the
workforce, employee pay grade distribution, attrition rates, projected
retirement eligibility, and retirement rates. The plan then uses these
data to frame five broad workforce challenges and identifies five human
resource goals and 19 objectives to achieve these goals. (See table 4.)
The plan's second section provides information specific to each major
FERC office. This section identifies each office's specific human
capital challenges based on their particular workforce demographics and
current and future work requirements and includes a short-term hiring
plan and longer-term human capital initiatives.
Table 4: FERC's Agencywide Human Resource Goals and Objectives:
Human resource goal: Goal 1: Attract and retain talented, diverse
employees capable of maintaining excellence; Objectives: *
Institutionalize an agencywide workforce planning process; * Implement
recruiting and retention strategies based on workforce planning results
and office hiring plans; * Use the full range of hiring flexibilities
to increase hiring speed and success; * Develop a demonstration project
to increase hiring and retention success and improve accountability.
Human resource goal: Goal 2: Provide development opportunities to
expand individual and organizational capabilities; Objectives: * Link
employee development activities to strategic goals and plans; * Upgrade
the effectiveness of office and central training programs; * Increase
the capabilities of underperforming employees; * Institute rotational
assignments to build skills and learn new business practices.
Human resource goal: Goal 3: Build leadership to inspire and draw the
best from all employees; Objectives: * Establish a leadership
succession planning program; * Deliver a comprehensive training program
for new and experienced managers; * Create feedback mechanisms and
development plans to foster leadership development; * Increase support
for managers handling human resources and employee development
responsibilities.
Human resource goal: Goal 4: Foster a performance culture that rewards
achievement; Objectives: * Ensure employees understand agency
priorities and how to contribute; * Strengthen the connections among
accomplishments, awards and performance feedback; * Develop options for
addressing shortfalls in accountability and non-performance; * Measure
results and use the data to keep improving.
Human resource goal: Goal ; Create organizations with the ability to
meet rapidly changing conditions; Objectives: * Use flexible processes
for acquiring specialized, limited-duration expertise; * Strengthen the
role of subject matter experts in helping managers handle new program
challenges; * Compile best practices and apply them to help
organizations and teams at FERC successfully meet difficult workload
challenges; * Share innovations and creative approaches across
organizational lines.
Source: FERC.
[End of table]
The plan, to varying degrees, discusses the four major components that
we previously recommended be included--skills assessment, recruitment
and retention, training, and succession planning. Regarding skills
assessment, the second section of the plan identifies for each office
the current and future skills they need to achieve FERC's strategic
goals. Where gaps existed between current and future skill needs, the
offices have developed human capital initiatives to close the gaps.
According to a senior FERC human resource official, the plan will
improve as this skills assessment process improves. The official said
that the FERC offices are still learning how to determine their skill
needs and, as a result, when someone retires or otherwise leaves, FERC
managers tend to seek a replacement with the same skills, rather than
thinking about future skill needs.
Concerning recruitment and retention, the plan establishes attracting
and retaining talented, diverse employees capable of maintaining
excellence as a human resource goal. To accomplish this goal, FERC
identifies various objectives, including institutionalizing an
agencywide workforce planning process and implementing recruiting and
retention strategies based on the results of this workforce planning
process and the offices' hiring plans. Another of the objectives is to
develop a demonstration project to increase hiring and retention
success and improve accountability for hiring and retention decisions.
FERC's plan also identifies a number of initiatives to improve
recruitment and retention. For example, FERC plans to implement an exit
interview process to track and document why employees leave. According
to the plan, the information gained from exit interviews will be used
to support or modify agency personnel practices in order to improve
employee retention.
With respect to training, the plan establishes development
opportunities to expand individual and organizational capabilities as a
goal. An objective under this goal is to upgrade the effectiveness of
the central and individual office training programs. The plan
recognizes that FERC needs to implement a revamped energy markets
curriculum to ensure that staff, such as those in OMOI, have current
market-oriented skills and expertise. One of the next steps in the plan
is that the human resources staff will coordinate the offices' efforts
to design and offer training for managers and to develop a markets-
oriented curriculum to build organizational and staff capabilities.
Human resources officials told us that FERC is already using an
agencywide team to develop such a curriculum. According to senior human
resources officials, the curriculum will likely be offered to all FERC
offices to develop a common foundation across the agency. Although OMOI
is the FERC office primarily responsible for monitoring competitive
energy markets, FERC officials indicated that a number of offices in
addition to OMOI are seeking markets training to do their jobs better.
As FERC develops this new curriculum, the current central program has
been temporarily suspended, and each office is responsible for
providing informal training to its own staff. For example, OMOI has
offered a variety of training to increase staff knowledge on
competitive energy markets. According to a senior FERC official, the
new agencywide training program should be implemented by the beginning
of fiscal year 2004.
FERC's plan identifies succession planning as a challenge and points
out that over half of FERC's workforce will be eligible to retire by
2007. It also sets out the establishment of a leadership succession
planning program as an objective under its building leadership goal. To
address this challenge, many of FERC's offices intend to develop their
own succession planning strategies. For example, the section of the
plan for the Office of Markets, Tariffs, and Rates states that because
of its "graying" leadership ranks, the office must develop a succession
plan for its key leadership positions. The section also states that
because of its overall graying workforce, the office must develop a
larger entry-level/career ladder pipeline to maintain adequate numbers
of employees, both in total numbers and at the top level of career-
ladder positions. The section of the plan for OMOI also addresses
succession planning. In the plan, OMOI states that it will develop a
succession plan to address the loss of leadership and skills due to
retirements and the return of employees to the private sector. However,
the human capital plan does not provide any additional information on
how these succession plans will be developed, what resources are
needed, how they will be implemented, and when they will be completed.
Leading organizations use their succession planning initiatives not
only to identify individual replacements for current leaders but also
as a strategic tool to build current and future organizational capacity
by identifying and developing the right people, with the right skills,
at the right time for leadership, managerial, and other critical
positions.[Footnote 13]
FERC's plan also addresses other related human capital issues. For
example, it notes that the current performance management system may
not be adequate to sustain and build the workforce needed for the
future. As FERC takes steps to transform its workforce, performance
management will be a critical element. Our previous work has found that
instituting a results-oriented culture and creating a modern, credible,
and effective performance management system can be strategic tools to
drive change and achieve desired organizational results.[Footnote 14]
Under the plan's goal of fostering a performance culture that rewards
achievement are four broad performance management objectives. For
example, the plan indicates that the agency will strengthen connections
among accomplishments, awards, and performance feedback but does not
yet provide details on how this will be done, what resources are
needed, and when it will be completed. According to senior FERC
officials, the agency's current performance system does not
meaningfully differentiate between high and low performers, and
performance is not directly linked with annual pay increases. Instead
of awarding pay increases based on annual performance appraisals,
performance is rewarded through the use of bonuses throughout the year.
As a result, employees are rewarded for specific events rather than
their overall contribution to agency results. According to FERC
officials, this system was put in place to avoid the problem of too
many outstanding ratings.
Given that FERC is one of only a small number of agencies that have
begun efforts to address their human capital challenges by developing
human capital plans, FERC's efforts are commendable. However, work
remains to be done to ensure FERC's plan is successful. Varying senior
FERC human resources officials described the plan as having a "ways to
go" or as a "baby step." As we previously discussed, the plan, at this
point, provides limited information how the agency's goals and
objectives will be achieved. While the plan includes strategies, it
generally does not yet identify specific activities, resources, and
time frames. This type of information helps provide more clarity of
direction and organizational commitment as the plan is being
implemented. The plan also does not provide results-oriented
performance measures to help FERC gauge its progress in achieving the
plan's goals and objectives. Our previous work has shown that high-
performing organizations recognize the fundamental importance of
developing and using indicators to measure both the outcomes of human
capital strategies and how these outcomes have helped the organizations
accomplish their missions and programmatic goals. For example, a human
capital plan can include measures that indicate whether the agency
executed its human capital initiatives--such as hiring, retention,
training, or performance management strategies--as intended, whether it
achieved the goals for these strategies, and how these initiatives
helped improve programmatic results. Although FERC intends to review
and update the plan on a quarterly basis and revise it annually, it may
be difficult to review the plan's progress in a meaningful way without
this type of specificity.
FERC Continues to Use a Wide Range of Human Capital Flexibilities, and
Is Exploring Opportunities for Additional Flexibilities:
In our June 2002 report, we noted that although FERC had taken steps to
acquire and develop the staff knowledge and skills it needed to
effectively regulate and oversee energy markets, it had not fully
explored all the human capital flexibilities that are available to
federal agencies for responding to workforce challenges. All federal
agencies, including FERC, have personnel flexibilities and tools
available to them to help overcome workforce recruitment and retention
issues. Many of these flexibilities and tools can be initiated by
federal agencies on their own, while others require approval from the
Office of Personnel Management, the Office of Management and Budget, or
the Congress. In our prior report, we found that FERC was using a
number of available flexibilities such as recruitment bonuses,
retention allowances, tuition reimbursement, and alternative work
schedules but had not requested other flexibilities that could help
improve recruitment and retention. Accordingly, we recommended that
FERC (1) identify the personnel tools, flexibilities, and strategies,
other than those already in use by FERC, available to federal agencies
to recruit and retain employees; (2) conduct an internal assessment of
the effectiveness and applicability of these to FERC; and (3) develop
an action plan to use the appropriate tools, flexibilities, and
strategies to recruit and hire needed expertise.
Since our prior report, FERC has expanded its use of some existing
human capital flexibilities to improve its ability to recruit and
retain employees. One example is FERC's student loan repayment program.
As one of the first federal agencies to employ this flexibility, FERC
has used a total of $331,499 to help 41 employees repay their student
loans. Participants in the program commit to staying at FERC for a
minimum of 3 years. According to FERC officials, this program has been
particularly successful in retaining attorneys, who often have high
student loan debt. In addition, FERC has expanded its use of
recruitment and retention bonuses. For example, FERC offered 10
retention bonuses in 2002 compared with 2 in 2001. FERC has also given
75 recruitment bonuses of around $3,000 to $4,000 each to attract
qualified employees. As noted earlier, OMOI has typically offered
larger recruitment bonuses than other FERC offices because of the
specialized skills required to effectively monitor competitive energy
markets.
In addition, according to FERC's human resources manager, the agency's
senior human resources officials have identified additional human
capital flexibilities that could prove useful in attracting and
retaining quality employees and have assessed their applicability to
FERC. However, the Chairman of FERC has not yet decided which, if any,
of these additional flexibilities FERC will seek approval for from the
Office of Personnel Management, the Office of Management and Budget, or
the Congress. As part of their assessment, FERC officials examined the
flexibilities in use at agencies including the Internal Revenue
Service, the Federal Aviation Administration, the Securities and
Exchange Commission, and the Transportation Security Agency to identify
lessons learned and strategies for acquiring additional flexibilities.
Senior FERC human resources officials said that they may look to
acquire many of the same flexibilities currently available to the
Securities and Exchange Commission, a similar regulatory agency.
However, these officials also noted that FERC may have more difficulty
obtaining approval for the additional flexibilities because of its
relatively low attrition rate, an average of 7 percent since 1995. In
contrast, the Security and Exchange Commission, which has a turnover
rate of around 30 percent, uses compensation-based programs, such as
special pay rates, more actively than other government agencies.
Conclusions:
OMOI has made a credible start toward establishing an oversight and
enforcement capability for competitive energy markets. Significantly,
the office recognizes that additional efforts are needed and has under
way or is planning a number of initiatives, including expanding its
activities, further identifying its information needs, and improving
its working relationships with the market monitoring units. While these
initiatives are important to OMOI's success, the activities that the
office needs to engage in, the information and other resources it needs
to carry out these activities, and the working relationships it needs
to establish with others depend on the role that it has defined for
itself to achieve its mission. At this point, OMOI's role lacks clarity
in several respects. For example, OMOI has not explicitly and directly
related its role and activities to the agency's responsibility for
ensuring just and reasonable prices nor decided at what level of detail
it will review the markets. In addition, OMOI has not clearly defined
market power, although market power is a major oversight concern and an
issue that OMOI has to make sure is adequately addressed. Moreover,
OMOI has not explicitly defined how it will work with others inside and
outside of FERC that either share energy market oversight
responsibilities or have related responsibilities.
OMOI is a new office with unique and broad responsibilities for
overseeing the nation's energy markets. As such, its first months have
been a learning experience as it hired its staff and began to carry out
its activities. Thus, we do not disagree with the office's decision to
begin its work with few formal processes and written procedures as it,
in effect, was developing and testing them. However, after almost a
year, OMOI has added more staff, and its oversight activities are
becoming more complex. Establishing formal processes and developing
written procedures are important to help ensure that they are
systematic, understood, and implemented effectively. Formal processes
and written procedures also help provide assurances to OMOI's
stakeholders that the office has fully thought through and is
systematically monitoring today's energy markets.
Although FERC's recently completed human capital plan begins to lay the
foundation for the agency to strategically manage its human capital, it
does not yet contain key elements that could increase the likelihood
that the plan will be effective. It generally does not identify
specific activities, resources, and milestones to implement the human
capital objectives. It also does not contain results oriented
performance measures that can help FERC measure progress toward
achieving these objectives. Setting out specific activities, resources,
and milestones provide a clearer road map for achieving the plan's
objectives and more clearly defines the organizational commitment
needed for the plan's implementation. Moreover, without results
oriented measures, FERC will be unable to determine whether its
initiatives are leading to better outcomes and achieving the desired
effects, such as whether its workforce is better able to meet the
challenges posed by competitive energy markets.
Recommendations for Executive Action:
To help ensure that FERC's oversight of competitive energy markets is
comprehensive and resources are effectively directed, we recommend that
the Chairman of FERC more clearly define OMOI's role in overseeing the
nation's energy markets by taking the following actions:
* Explicitly describe OMOI's activities relative to carrying out the
agency's statutory requirements to ensure just and reasonable prices
and to preventing market manipulation.
* Explicitly establish the level of detail at which OMOI will routinely
review market transactions to carry out its oversight activities.
* Delineate how other FERC offices and other organizations, including
the market monitoring units and other federal agencies, share in and
contribute to OMOI's mission and establish expectations for how they
will work together.
To help ensure that OMOI carries out its role systematically and
effectively, we recommend that the Chairman of FERC direct OMOI to
establish formal processes and written procedures for its key
activities.
To strengthen FERC's human capital plan, we recommend that the Chairman
of FERC revise the agency's plan to (1) identify specific activities,
resources, and time frames to implement the human capital initiatives
and (2) provide results-oriented measures to track the agency's
progress in implementing the initiatives and evaluate their
effectiveness.
Agency Comments:
We provided FERC with a draft of this report for review and comment. In
his written comments, the Chairman of FERC generally agreed with the
report's conclusions and recommendations. Specifically, the Chairman
stated that the report offers valuable advice for additional
improvement and accomplishment and that, in general, he agrees with the
report on the steps that are needed next to more clearly define the
role of market monitoring and expand the agency's human capital
initiative. The Chairman further stated that he agrees that it is now
time to formalize and document many of OMOI's processes. The complete
text of FERC's comments on our draft report is presented in appendix
IV.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to other
appropriate congressional committees; the Chairman, FERC; the Director,
Office of Management and Budget; and other interested parties. We also
will make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at
[Hyperlink, http://www.gao.gov] http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3841. Key contributors to this report are
listed in appendix V.
Sincerely yours,
Jim Wells:
Director, Natural Resources and Environment:
Signed by Jim Wells:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine FERC's progress in establishing an oversight and
enforcement capability for competitive energy markets, we focused our
review on the formation and operation of OMOI. We reviewed pertinent
FERC documents, including annual reports, budget requests, strategic
and annual performance plans, reports, speeches, and congressional
testimony by the FERC Chairman, commissioners, and other officials
relating to energy market oversight. We also reviewed OMOI documents,
including OMOI divisions' strategic plans, market oversight reports,
enforcement reports, and information related to OMOI's staffing levels
and budget. In addition, we interviewed OMOI managers at the division
head level and above, including the director and deputy directors of
the office. We also obtained the views of the heads of the four market
monitoring units that were operating at the time of our review on
OMOI's progress in establishing a market oversight and enforcement
capability at the national level. Furthermore, we drew on our prior
work in the areas of electricity and natural gas markets.
In addition to our document review and interviews, we conducted a
survey of OMOI staff, up to and including those at the director and
deputy director level. The survey was conducted using a self-
administered electronic questionnaire posted on the World Wide Web. We
sent E-mail notifications to 92 OMOI staff beginning on March 24, 2003.
We then sent each employee who was surveyed a unique password by e-mail
to ensure that only members of the target population could participate
in our survey. We closed the survey on April 11, 2003, having received
a total of 80 responses, for an overall response rate of 87 percent. A
copy of this survey with the quantitative results can be found in
appendix II.
While our survey results are generalizable to the current OMOI
population as described above, the practical difficulties of conducting
surveys may introduce errors into the results. Although we administered
our survey to all known members of the population of OMOI employees,
and thus our results are not subject to sampling error, nonresponse to
the entire survey or individual questions can introduce a similar type
of variability or bias into our results--to the extent that those not
responding differ from those who do respond in how they would have
answered our survey questions. We took steps in the design, data
collection, and analysis phases of our survey to minimize population
coverage, measurement, and data-processing errors, such as checking our
population list against known totals of employees, pretesting and
expert review of questionnaire questions, and follow-up with those not
immediately responding.
To determine FERC's progress in improving agencywide human capital
management, we reviewed pertinent FERC documents, including the
agency's human capital plan and information related to the agency's
training, human capital flexibilities, and performance management
programs. In addition, we interviewed senior human resources officials
at FERC, including FERC's Executive Director. We conducted our work
between October 2002 and June 2003 in accordance with generally
accepted government auditing standards.
[End of section]
Appendix II: GAO Survey of Current FERC Employees in the Office of
Market Oversight and Investigations:
This appendix contains the questions and responses from our survey of
Federal Energy Regulatory Commission (FERC) employees in the Office of
Market Oversight and Investigations. Responses are expressed as a
percentage of those responding to the survey.
[See PDF for image]
[End of figure]
[End of section]
Appendix III: FERC's Approach to Addressing Market Manipulation Schemes
and Other Potentially Noncompetitive Actions:
This appendix contains the Federal Energy Regulatory Commission's
(FERC) response to our questions concerning how the agency's new market
oversight approach will detect certain market manipulation schemes,
such as the ones used by the Enron Corporation, and other potentially
noncompetitive actions. (See table 5.) For each of these schemes or
types of actions, Office of Market Oversight and Investigations (OMOI)
officials provided the (1) FERC office or other organization
responsible for detecting it, (2) type of oversight used, and (3) type/
source of data used. We received this information from OMOI officials
in April 2003.
Table 5: FERC's Approach to Addressing Market Manipulation Schemes and
Other Potentially Noncompetitive Actions:
Type of action: Electricity markets.
Type of action: Enron schemes.
Type of action: Scheduling fictitious load to receive congestion
payments; (Enron's "load shift" scheme); Description of action:
Electricity markets: Enron schemes: A company owns transmission rights
on a transmission path connecting two separate areas or "zones." In a
schedule that it submits to the transmission provider, the company
artificially overschedules load in one zone and underschedules load in
the other zone. This fictitious schedule creates the appearance of
congestion on the transmission path. The company then reschedules its
load by "shifting" the overscheduled load to the other zone, which
appears to relieve the congestion, and is paid by the transmission
provider for doing so; Organization/office responsible for detecting
action: Electricity markets: Enron schemes: Not applicable for all
markets except the California ISO,[A] the CAISO market monitor is
responsible for detecting; Type of oversight used to detect action:
Electricity markets: Enron schemes: Review of detailed market data;
Type/source of data used to detect action: Electricity markets: Enron
schemes: Schedule and bid data.
Type of action: Scheduling fictitious load to manipulate electricity
prices; (Enron's "fat boy" scheme); Description of action:
Electricity markets: Enron schemes: A company artificially increases
load on a schedule it submits to the transmission provider to
correspond with the amount of generation in its schedule. The company
then generates electricity in real time that is in excess of its actual
load. As a result, the transmission provider pays the company for
excess generation at the market clearing price established in the real-
time electricity market; Organization/office responsible for
detecting action: Electricity markets: Enron schemes: Not applicable
for all markets except the California ISO,[B] the CAISO market monitor
is responsible for detecting; Type of oversight used to detect action:
Electricity markets: Enron schemes: Review of detailed market data;
Type/source of data used to detect action: Electricity markets: Enron
schemes: Schedule and bid data.
Type of action: Scheduling fictitious generation to receive congestion
payments; (Enron's "death star" scheme); Description of action:
Electricity markets: Enron schemes: In a schedule that it submits to
the transmission provider, a company schedules the transmission of
electricity in the opposite direction of congestion on a transmission
path. The company then collects payments from the transmission provider
for appearing to relieve congestion. However, the company does not
actually put electricity on the grid or take it off; Organization/
office responsible for detecting action: Electricity markets: Enron
schemes: Not applicable for all markets except the California ISO,[C]
the CAISO market monitor is responsible for detecting; Type of
oversight used to detect action: Electricity markets: Enron schemes:
Review of detailed market data; Type/source of data used to detect
action: Electricity markets: Enron schemes: Schedule and bid data.
Type of action: Ancillary services sellback; (Enron's "get shorty"
scheme); Description of action: Electricity markets: Enron schemes: A
company commits to provide ancillary services that it does not have
(i.e., selling "short") to the day-ahead market, with the intention of
buying back this capacity in the hour-ahead market at a lower price.
This scheme is also known as "paper trading," in the sense that the
trader does not have physical resources to back up the trade;
Organization/office responsible for detecting action: Electricity
markets: Enron schemes: ISO/RTO market monitoring units; Type of
oversight used to detect action: Electricity markets: Enron schemes:
Not applicable for all markets except the California ISO,[A] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[B] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[C] the CAISO market monitor is responsible for
detecting. Verification of physical ability to supply reserves.[D];
Type/source of data used to detect action: Electricity markets: Enron
schemes: Supplier bidding and unit operational performance data.
Type of action: Megawatt laundering; (Enron's "ricochet" scheme);
Description of action: Electricity markets: Enron schemes: A company
buys electricity from the day-ahead market and exports it to a second
company, which receives a fee from the first company. The electricity
is later resold back to the transmission provider in the real-time
market at a higher price; Organization/office responsible for
detecting action: Electricity markets: Enron schemes: NA (This scheme
exploited features of the California Market rules before 6/20/2001, but
most of those features have been eliminated in recent market
rules.)[E].
Type of action: Withholding.
Type of action: Withholding capacity (physical withholding);
Description of action: Electricity markets: Enron schemes: A company
withholds electricity from the market to create an artificial shortage
of electricity, which increases real-time prices; Organization/office
responsible for detecting action: Electricity markets: Enron schemes:
ISO/RTO market monitoring units, OMOI (Withholding is much more
difficult to detect for non-ISO markets.); Type of oversight used to
detect action: Electricity markets: Enron schemes: 1. Reduce potential
with good market rules; 2. General monitoring of the health of
electric markets; 3. Specific investigations: review of historical
outage data, on site audits, complaint and hotline calls.[F]; Type/
source of data used to detect action: Electricity markets: Enron
schemes: General monitoring:; electric market price and supply data;
Specific investigations:; plant specific and industrywide outage data.
Type of action: Withholding capacity (economic withholding);
Description of action: Electricity markets: Enron schemes: A company
submits an inflated bid for providing electricity to the day-ahead
market. The inflated bid creates the perception of a shortage of
electricity, which increases real time prices; Organization/office
responsible for detecting action: Electricity markets: Enron schemes:
ISO/RTO market monitoring units, OMOI (Withholding is much more
difficult to detect for non-ISO markets.); Type of oversight used to
detect action: Electricity markets: Enron schemes: 1. Reduce potential
with good market rules; 2. General monitoring of the health of
electric markets; 3. Specific investigations: review of bids compared
expected bid thresholds, complaints and hotline calls.[ G]; Type/source
of data used to detect action: Electricity markets: Enron schemes:
General monitoring:; electric market price and supply data; Specific
investigations:; bid data, generator production cost data (unit heat
rate, fuel costs, start-up costs, O&M).
Type of action: Discrimination.
Type of action: Discriminatory pricing practices; Description of
action: Electricity markets: Enron schemes: A privately owned utility
sells power to an affiliated power marketer at prices lower than it
sells to nonaffiliated buyers; Organization/office responsible for
detecting action: Electricity markets: Enron schemes: OMOI
(Discrimination is much more of a problem and more difficult to detect
for non-ISO markets.); Type of oversight used to detect action:
Electricity markets: Enron schemes: Complaints, hotline calls, analysis
of Electronic Quarterly Reports(EQR) data, audits.h[H]; Type/source of
data used to detect action: Electricity markets: Enron schemes: EQR
data, company records.
Type of action: Discriminatory access practices; Description of action:
Electricity markets: Enron schemes: A transmitting utility uses its
control of transmission facilities and system operations to limit
market access of competitors in capacity and energy markets;
Organization/office responsible for detecting action: Electricity
markets: Enron schemes: OMOI, OMTR (Discrimination is much more of a
problem and more difficult to detect for non-ISO markets.); Type of
oversight used to detect action: Electricity markets: Enron schemes:
Complaints, hotline calls, audits; Type/source of data used to detect
action: Electricity markets: Enron schemes: OASIS data, company
records.
Type of action: Other noncompetitive actions.
Type of action: Control of assets; Description of action: Electricity
markets: Enron schemes: A company assigns control of jurisdictional
assets (e.g., a trading platform) to another company without receiving
prior FERC approval; Organization/office responsible for detecting
action: Electricity markets: Enron schemes: OMOI, OMTR; Type of
oversight used to detect action: Electricity markets: Enron schemes:
Complaints, hotline calls, audits; Type/source of data used to detect
action: Electricity markets: Enron schemes: Company records.
Type of action: Sleeve trading; Description of action: Electricity
markets: Enron schemes: A company acts as a middleman (or "sleeve")
between two affiliates of a parent company in order to allow
transactions to proceed that affiliates would be forbidden to undertake
directly; Organization/office responsible for detecting action:
Electricity markets: Enron schemes: OMOI, OMTR, market monitoring
units; Type of oversight used to detect action: Electricity markets:
Enron schemes: Complaints, hotline calls, audits, analysis of EQR data;
Type/source of data used to detect action: Electricity markets: Enron
schemes: Company records, EQR data.
Type of action: Fraudulent ownership of a qualifying facility;
Description of action: Electricity markets: Enron schemes: An electric
utility holding company uses fraudulent financial arrangements to own a
qualifying facility, which is exempt from certain state and federal
regulations. The qualifying facility then applies for recertification
with FERC as a qualifying facility; Organization/office responsible
for detecting action: Electricity markets: Enron schemes: OMTR,[I]
OMOI; Type of oversight used to detect action: Electricity markets:
Enron schemes: Complaints, hotline calls, audits; Type/source of data
used to detect action: Electricity markets: Enron schemes: Company
records.
Type of action: Gas markets.
Type of action: Withholding.
Type of action: Withholding capacity (physical withholding of pipeline
capacity); Description of action: Electricity markets: Enron schemes: A
pipeline company withholds operationally available capacity from the
market. This withholding of capacity creates an artificial shortage of
capacity, which increases basis differential. This could lead to higher
downstream prices or to reduced upstream prices; Organization/office
responsible for detecting action: Electricity markets: Enron schemes:
OMOI; Pipeline customers; Type of oversight used to detect action:
Electricity markets: Enron schemes: Not applicable for all markets
except the California ISO,[A] the CAISO market monitor is responsible
for detecting. Not applicable for all markets except the California
ISO,[B] the CAISO market monitor is responsible for detecting. Not
applicable for all markets except the California ISO,[C] the CAISO
market monitor is responsible for detecting. When OMOI observes
unusual basis differentials, pipelines are contacted to ascertain flow
levels vs. capacity and get an explanation for why capacity not
offered; Type/source of data used to detect action: Electricity
markets: Enron schemes: Basis differential observed from daily reported
prices published in the trade press.
Type of action: Withholding capacity (physical withholding of storage
withdrawals); Description of action: Electricity markets: Enron
schemes: A company owning natural gas in storage elects to keep the gas
in storage rather than withdraw it for sale. This withholding of
capacity creates an artificial shortage of gas, which increases overall
gas prices in the marketplace; Organization/office responsible for
detecting action: Electricity markets: Enron schemes: OMOI; Type of
oversight used to detect action: Electricity markets: Enron schemes:
Not applicable for all markets except the California ISO,[A] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[B] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[C] the CAISO market monitor is responsible for
detecting. General monitoring of the health of gas markets; Type/
source of data used to detect action: Electricity markets: Enron
schemes: General gas storage, gas market price and supply data.
Type of action: Withholding capacity (physical withholding of gas
production); Description of action: Electricity markets: Enron schemes:
A producer elects to keep its gas in the ground rather than offering it
for sale. This withholding of capacity creates an artificial shortage
of gas, which increases overall gas prices in the marketplace;
Organization/office responsible for detecting action: Electricity
markets: Enron schemes: OMOI; (FERC has no jurisdiction over gas
production.); Type of oversight used to detect action: Electricity
markets: Enron schemes: Not applicable for all markets except the
California ISO,[A] the CAISO market monitor is responsible for
detecting. Not applicable for all markets except the California
ISO,[B] the CAISO market monitor is responsible for detecting. Not
applicable for all markets except the California ISO,[C] the CAISO
market monitor is responsible for detecting. General monitoring of the
health of gas markets (If OMOI determines that withholding by producers
is raising prices or threatening deliverability, we would alert the FTC
and DOJ.); Type/source of data used to detect action: Electricity
markets: Enron schemes: General gas market price and supply data.
Type of action: Other noncompetitive actions.
Type of action: Communicating market information from pipelines to
marketing affiliates; Description of action: Electricity markets:
Enron schemes: A pipeline shares information about its capacity with an
affiliated marketer, which is able to use the information to gain more
advantageous positions in a marketplace than its competitors;
Organization/office responsible for detecting action: Electricity
markets: Enron schemes: OMOI; Pipeline customers; Type of oversight
used to detect action: Electricity markets: Enron schemes: Not
applicable for all markets except the California ISO,[A] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[B] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[C] the CAISO market monitor is responsible for
detecting. Monitor and audit pipeline internal information controls.
Maintain contacts with market participants who may notice
abnormalities; Type/source of data used to detect action: Electricity
markets: Enron schemes: Data requests and interviews with company
personnel.
Type of action: Financial markets.
Type of action: Manipulating physical marketplaces to affect prices in
financial marketplaces; Description of action: Electricity markets:
Enron schemes: A company uses its dominant position within a market to
manipulate prices in physical markets in order to affect associated
financial markets; Organization/office responsible for detecting
action: Electricity markets: Enron schemes: CFTC, OMOI; Type of
oversight used to detect action: Electricity markets: Enron schemes:
Not applicable for all markets except the California ISO,[A] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[B] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[C] the CAISO market monitor is responsible for
detecting. Compare trading positions of players to assess whether a
trader attempted to corner the market, or took unusual physical or
financial positions; Type/source of data used to detect action:
Electricity markets: Enron schemes: CFTC receives trading position data
from NYMEX. FERC can subpoena information.
Type of action: Providing false data about prices or volumes to index
publishers; Description of action: Electricity markets: Enron schemes:
A company deliberately reports inaccurate natural gas prices to the
reporting firms (i.e., private, commercial companies such as Platts and
Bloomberg that report electricity and natural gas prices) in order to
manipulate the reported prices data; Organization/office responsible
for detecting action: Electricity markets: Enron schemes: CFTC, DOJ,
OMOI; Type of oversight used to detect action: Electricity markets:
Enron schemes: Not applicable for all markets except the California
ISO,[A] the CAISO market monitor is responsible for detecting. Not
applicable for all markets except the California ISO,[B] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[C] the CAISO market monitor is
responsible for detecting. Observe daily prices for unusual patterns,
request trading transaction data to compare to reports made to
reporting firms. Audits, analysis of EQR data; Type/source of data used
to detect action: Electricity markets: Enron schemes: Published daily
prices and filed reports. Company records and EQR data.
Type of action: Wash trading; Description of action: Electricity
markets: Enron schemes: Wash trades are transactions that give the
appearance of sales and purchases, but which are initiated without the
intent to make a bona fide transaction and which generally do not
result in any actual change in ownership or the trader's market
position; Organization/office responsible for detecting action:
Electricity markets: Enron schemes: CFTC, DOJ, OMOI; (Wash trading of
physical gas may be wrong, but it is not illegal.); Type of oversight
used to detect action: Electricity markets: Enron schemes: Not
applicable for all markets except the California ISO,[A] the CAISO
market monitor is responsible for detecting. Not applicable for all
markets except the California ISO,[B] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[C] the CAISO market monitor is responsible for
detecting. Observe daily prices for unusual patterns, request trading
transaction data to compare to reports made to reporting firms. Audits,
analysis of EQR data; Type/source of data used to detect action:
Electricity markets: Enron schemes: Published daily prices and filed
reports. Company records and EQR data.
Type of action: Manipulating trading platforms; Description of action:
Electricity markets: Enron schemes: A company uses its electronic
trading platform to obtain a competitive advantage and to distort
published market price indices for natural gas and electricity;
Organization/office responsible for detecting action: Electricity
markets: Enron schemes: CFTC, DOJ, OMOI; Type of oversight used to
detect action: Electricity markets: Enron schemes: Not applicable for
all markets except the California ISO,[A] the CAISO market monitor is
responsible for detecting. Not applicable for all markets except the
California ISO,[B] the CAISO market monitor is responsible for
detecting. Not applicable for all markets except the California
ISO,[C] the CAISO market monitor is responsible for detecting. Monitor
trading platform structure and controls. Audits; Type/source of data
used to detect action: Electricity markets: Enron schemes: Interview
trading company employees, market participants. Company records.
Source: FERC.
Note: We prefer to prevent or minimize the potential for noncompetitive
actions with good market structure, design, and rules.
[A] The "Load Shift" scheme was tailored to take advantage of flaws in
the California market design, particularly its congestion management
system. That is, the scheme depended on the development of a day-ahead
schedule for power purchases without determining whether that day-ahead
schedule was physically feasible. In real time, the California ISO made
payments to entities to relieve "virtual" congestion. This created an
incentive for a market participant to create congestion in the day-
ahead schedule so that the same entity would be paid to relieve that
congestion in real time.
Currently, however, PJM Interconnection, New York ISO, ISO-New England,
and ERCOT use a different congestion management system (i.e.,
locational marginal pricing), together with a physically feasible and
financially binding day-ahead schedule that make the schemes
infeasible. The use of a locational congestion management system
ensures that all transmission constraints are considered in developing
day-ahead schedules, and any congestion is reflected in the prices for
energy and transmission services. Thus, there is no need for
transmission providers (e.g., ISOs) to make separate payments in real
time to relieve congestion in the day-ahead schedule, as there was in
California.
Moreover, the day-ahead schedules under current ISO markets, except the
CAISO, are financially binding so that a marketer that changed its
schedule in real time would still be financially liable for its day-
ahead schedule. This eliminates opportunities and incentives for the
"load shift" scheme that relies on differences between day-ahead and
real-time prices.
Although the load shift scheme may not be directly applicable to the
current ISO markets, it has been recognized in certain ISO markets
(e.g., PJM) that market participants might try to take advantage of
virtual bidding, which is allowed in some ISO markets, to create
fictitious congestion to collect Financial Transmission Right (FTR)
revenue in a day-ahead market. PJM currently has market rules and
screening mechanisms in place to deal with this type of manipulation.
To the extent that remedying this type of trading scheme in the current
ISO markets involves detecting the manipulative behavior and changing
of market rules, collaborative work among OMOI, OMTR, and regional MMUs
may be required.
[B] The Enron-type "fat boy" trading scheme was premised on submitting
false scheduling information, artificially increasing load on a
schedule it submited to the Cal ISO in an attempt to take advantage of
the fact that the three California public utilities, especially PG&E,
habitually under-scheduled their load in the day-ahead market (Cal PX)
in an effort to minimize their procurements costs. Currently, however,
the other ISO markets (New York ISO, PJM, and ISO New England,) do not
require load or generation to submit balanced day-ahead schedules.
Therefore, such a scheme is not viable in these markets. ISOs have
scheduling requirements and entities that do not follow them are
subject to penalties under ISO tariffs.
[C] The "Death Star" scheme was tailored to take advantage of flaws in
the California market design, particularly its congestion management
system. That is, the scheme depended on the development of a day-ahead
schedule for power sales without determining whether that day-ahead
schedule was physically feasible. In real time, the California ISO made
payments to entities to relieve "virtual" congestion. This created an
incentive for a market participant to create congestion in the day-
ahead schedule so that the same entity would be paid to relieve that
congestion in real time. This is not a viable scheme under current
rules of operating markets.
Currently, however, PJM Interconnection, New York ISO, ISO-New England,
and ERCOT use a different congestion management system (i.e.,
locational marginal pricing), together with a physically feasible and
financially binding day-ahead schedule that make the schemes
infeasible. The use of a locational congestion management system
ensures that all transmission constraints are considered in developing
day-ahead schedules, and any congestion is reflected in the prices for
energy and transmission services. Thus, there is no need to for
transmission providers (e.g., ISOs) to make separate payments in real
time to relieve congestion in the day-ahead schedule, as there was in
California.
Moreover, the day-ahead schedules under current ISO markets are
financially binding so that a marketer that changed its schedule in
real time would still be financially liable for its day-ahead schedule.
This eliminates opportunities and incentives for the "death star"
scheme that relies on differences between day-ahead and real-time
prices.
Although the death star scheme may not be directly applicable to the
current ISO markets, however, it has been recognized in certain ISO
markets (e.g., PJM) that market participants might try to take
advantage of virtual bidding, which is allowed in current ISO markets,
to create fictitious congestion to collect Financial Transmission Right
(FTR) revenue in a day-ahead market. PJM currently has market rules and
screening mechanisms in place to deal with this type of manipulation.
To the extent that remedying this type of trading scheme in the current
ISO markets involves detecting the manipulative behavior and changing
of market rules, collaborative work among OMOI, OMTR, and regional MMUs
may be required.
[D] This scheme depended on Enron committing fraud by claiming to have
capacity resources when they did not. This may only be used in markets
where participants may financially trade ancillary services (reserves)
in both the day-ahead and real-time markets. In current ISO markets,
financial offers of ancillary service are not permitted. Only physical
providers of services may bid, and their performance is subject to ISO/
RTO verification and oversight by the market monitoring unit.
[E] Prior to 6/20/2001, a generator in California could produce energy
or a marketer could buy energy, ship it out of state, and cause it to
be shipped back in-state in the real-time market, in order to avoid a
price cap on in-state electricity. This situation is no longer relevant
in California, due to the imposition of a west-wide mitigation plan.
Imposition of a bid cap eliminates the difference in treatment of
electricity supplies, depending on their source and thus the profit-
making opportunity associated with this scheme.
Megawatt laundering is not relevant within or between Northeastern ISO
or RTO markets, as supplies are not subject to different price caps in
these locations. This problem can be avoided in the future through
greater consistency of market power mitigation rules across regions.
The movement of energy to market locations is a good thing in
functional markets as such market arbitrage can enhance market
efficiency.
[F] We have a three-part strategy for addressing physical withholding.
First, good market rules can help reduce the potential for physical
withholding, as long as the rules do not undermine competition. In
establishing rules, it is important to provide clear guidance on what
constitutes physical withholding. Examples of rules in place in some
ISO markets include: resource adequacy, special contracts for
generators in load pockets, market mitigation procedures, and "must
offer" provisions.
Second, outside load pockets, physical withholding is a concern only
when supply is tight. By monitoring supply and demand conditions in
electricity markets, OMOI can watch for conditions where physical
withholding is most likely to occur.
Third, when these "tight" market conditions occur, market monitoring
units and OMOI can review outage data. The market monitoring units are
responsible for monitoring for physical withholding in the organized
markets. The comparison of quantities bid to historical offer
thresholds is a first step in order to help determine if withholding
conduct is occurring. Actual output may be compared to thresholds for
output and for deratings. The thresholds are generally based upon
"normal" levels of output for individual units. When a unit is derated
or has an unscheduled outage, physical inspections or audits may be
used to ensure that the outage is legitimate.
Outside the organized markets, OMOI is the entity responsible for
monitoring for physical withholding of electric supply. Given the
number of potential market players, detecting this type of physical
withholding depends on complaints and hotline calls.
[G] We have a three-part strategy for addressing economic withholding.
First, good market rules can help reduce the potential for economic
withholding, as long as the rules do not undermine competition. In
establishing rules, it is important to provide clear guidance on what
constitutes economic withholding. Examples of rules in place in some
ISO markets include: resource adequacy, special contracts for
generators in load pockets, and market mitigation.
Second, outside load pockets, economic withholding is a concern only
when supply is tight. By monitoring supply and demand conditions in
electricity markets, OMOI can watch for conditions where economic
withholding is most likely to occur.
Third, when these market conditions occur, market monitoring units and
OMOI can review bid and generator production cost data. The market
monitoring units are the entities responsible for monitoring for
economic withholding within the ISOs and RTOs. They do so by comparing
the offer information to thresholds for anticipated offer behavior
(expected bids given historical norms, often adjusted for fuel prices).
If the entities exceed the thresholds for offers, the ISO or RTO may
then see if the withholding has affected the market prices.
Outside the RTOs and ISOs, it would be very difficult to determine when
economic withholding occurred, rather than simply scarcity pricing for
a scarce resource. Economic withholding may be associated with
withholding of transmission capacity to keep the buyer from reaching
other market alternatives. OMOI is responsible for monitoring for such
withholding, and uses the complaint and hotline processes to determine
when it is occurring.
[H] This is defined to be a situation in which a privately owned
utility sells power to an affiliated power marketer at lower prices
than it sells to other nonaffiliated buyers. This situation pertains to
bilateral markets, because in organized RTO and ISO markets, the seller
does not choose either the party to which it sells, nor can it
differentiate across buyers. In the bilateral markets, the seller has
an incentive to provide power at a discount to an affiliate when the
seller can charge other sellers more through regulated rates.
OMOI is the organization responsible for monitoring for discriminatory
pricing. Until now, we have been monitoring primarily by reviewing
complaints which have been filed with the Commission and responding to
hotline calls. With the Electric Quarterly Report data now organized in
a data base, OMOI staff can analyze the information to check for
differences between affiliated and non-affiliated transactions.
Additionally, OMOI will be auditing transactions to check for evidence
of affiliate abuse.
[I] The Office of Markets, Tariffs, and Rates (OMTR) reviews notices of
self-certification of qualifying status or applications for Commission
certification of qualifying facility status, which are subject to the
ownership criteria of 18 C.F.R. 292.206 among other requirements.
[End of table]
[End of section]
Appendix IV: Comments from the Federal Energy Regulatory Commission:
FEDERAL ENERGY REGULATORY COMMISSION WASHINGTON, DC 20426:
OFFICE OF THE CHAIRMAN:
July 25, 2003:
Mr. Jim Wells:
Director, Natural Resources and Environment United States General
Accounting Office 441 G Street, N.W.
Washington, D.C. 20548:
Re: GAO Report Entitled Additional Actions Would Help Ensure FERC's
Oversight and Enforcement Capability is Comprehensive and Systematic:
Dear Mr. Wells,
Thank you very much for your thoughtful report Additional Actions Would
Help Ensure FERC's Oversight and Enforcement Capability is
Comprehensive and Systematic. As you note, electric and natural gas
markets are very dynamic, and policing them effectively presents
challenges that are novel to any government agency.
I am proud of the considerable progress FERC as a whole, and OMOI have
made over the past year in addressing the market challenge. Beyond
OMOI's efforts, numerous Commission offices - OMTR, OGC, OAL, and OEP -
play important roles in creating rules and market designs that
encourage appropriate, effective behavior; litigate specific issues and
infractions, and help get more infrastructure built, which affects
market effectiveness and competitiveness. And like other agencies, we
face a significant human capital challenge, and here too we have made
some satisfying progress. Your report offers valuable advice for
additional improvement and accomplishment.
Successes So Far. It is gratifying that you noted so many of our
successes over the past year. These include the following.
The Office of Market Oversight and Investigations has implemented
informal processes to begin its work (page 20). While we will need to
document and elaborate on these processes, they have served us well
over the past year.
The value of even informal processes is clear from the fact that OMOI
is now producing a steady flow of regularly scheduled reports to the
Commission ant' the public on market developments in both the short and
long term (pp. 21-
22). These reports cover energy markets more systematically than the
Commission has ever been able to do before. In addition, these reports
reflect a growing level of sophistication and insight about physical
and financial gas and electric markets and the interaction between
them.
OMOI staff is gaining confidence in its ability to oversee markets. You
note that 53 percent of the staff believes that processes are now in
place to oversee gas and electric markets effectively (p. 22). That is
a significant improvement
over your findings in your June 2002 report Energy Markets: Concerted
Actions Needed by FERC to Confront Challenges That Impede Effective
Oversight, where you found that before we established OMOI only 32
percent of the staff believed the Commission could effectively monitor
electric and gas markets.
OMOI has a variety of oversight tools and is constantly working to
improve them (p. 23-25). One crucial improvement that you note is the
Electric Quarterly Report (p. 25). This filing will show all
jurisdictional power sales for companies that have authority to sell at
market and cost-based rates. The information includes data on every
transaction, including reports of price, quantity and counter-parties.
While these data are delayed (filing occurs one month after the end of
a quarter), they will let us examine market behavior at useful levels
of aggregation.
OMOI is incorporating new sources of information into its market
monitoring, including especially the use of the Enforcement Hotline not
only to help solve disputes but also to serve as an early warning
system for emerging market problems (p. 26-27).
OMOI has increased its investigative activities (p. 28). We have opened
more investigations and audits than before. And we have had a number of
important successes. You note the Transcontinental case (p. 28). We
would also bring to your attention a series of other important cases:
* A Nicor Gas case that found violations of the Commission's reporting
requirements and regulations where Nicor settled these violations with
a compliance plan and refunds and credits to its customers at a value
of just under $1.8 million.
* An Idaho Power Company case where Idaho Power admitted to having
violated its Standards of Conduct and its Code of Conduct and agreed to
a compliance plan and $6.1 million in various refunds.
* A Cleco case where for various violations of the Federal Power Act,
Commission regulations and tariff provisions, and the standards of
conduct, Cleco's market-based rate authority was revoked and Cleco
agreed to pay civil penalties and refunds totaling $2.85 million.
OMOI is improving its partnership with Market Monitoring Units (MMUs)
around the country (pp. 30-31). We find our growing relationship with
the MMUs valuable and highly informative and appreciate that all
functioning MMUs
testified to the improvement. This continues to be a high priority.
OMOI has addressed some key staffing needs (pp. 33-35). In particular,
OMOI has almost completed its staffing to authorized start-up levels
(p. 33) and is using training and contracting to increase its expertise
(p. 35).
Across the agency, we have developed office-specific and agency-wide
Human Capital Plans (p. 39). The plan-which you characterize as
commendable and a promising first step--will help us recruit, retain
and develop the skilled staff needed to accomplish our mission. We
appreciate your statement that FERC is one of only a small number of
agencies to have begun addressing human capital challenges by
developing such a plan.
Finally, I would like to mention one other crucial success that you did
not highlight in your report. The Commission now has the ability to see
critical market issues and to respond appropriately sooner than ever
before. During the past year, for example, we have identified two major
problems in market operation - the validity of published price indices
and the expense of current credit clearing systems. In both cases, we
have held technical conferences to elucidate the problems and lay the
groundwork for solutions. I am confident that solutions will be in
place much sooner than they otherwise would have been because of our
timely intervention and facilitation of an industry-accepted solution
rather than through regulatory mandate. This self-correction mechanism
lies at the heart of the market oversight function. I am very proud of
the results achieved so far, especially since they occurred during the
first year of OMOI's existence.
Next Steps. In general, I agree with your report on the steps that are
needed next. You raise several points in noting that we need to define
the role of market monitoring more clearly and expand upon our human
capital initiative:
The Commission needs to define just and reasonable rates and market
power more clearly (p.13, 14). The issue is inherently very difficult.
The disagreements you note among the various MMUs testify to the wide
variations in possible approaches and also to the sheer conceptual
difficulty
of finding a good overall approach. Addressing the need to define just
and reasonable rates and market power will be centered in OMTR.
* OMOI needs to integrate its work with that of other offices in the
Commission and with other organizations (p. 15). I agree, this has been
an ongoing focus of mine.
OMOI needs to define the level at which it will review market
transactions (p. 18). As a general matter, I agree. I would note three
points. First, budget constraints will limit what we can do. Second, a
key part of making our effort work will involve making best use of
synergies with others, such as MMUs and states. Third, the answer here
will almost certainly vary according to circumstance. During
problematic periods, I would expect to see analyses at much finer level
of detail than at other times.
OMOI needs to develop a comprehensive set of results-oriented
performance measures (p. 19). This point applies to the whole
Commission and I agree with it. Our work to develop market metrics
illustrates such an attempt.
The Commission needs to expand its Human Capital Plan to identify
specific activities, resources and time frames needed to implement its
initiatives (p. 39). We will continue to implement the actions
contained in the Human Capital Plan. As one example of how we intend to
undertake more specific activities to implement the plan, the
Commission recently requested buyout and early out authorities. The
requests target specific positions--in both program and support
offices--over a multi-year period, to assist with succession planning.
This initiative, developed as a coordinated effort among the office
representatives who developed and are implementing the Human Capital
Plan, addresses aspects of the challenges posed by potential
retirements and existing skills mix problems (p. 43), as identified in
the plan. If the Commission can successfully take advantage of the
opportunity retirements provide to open new positions with the new
skills needed to oversee markets, we can turn these challenges in our
favor.
The Commission needs to provide results-oriented measures to track its
progress in implementing its Human Capital Plan initiatives and
evaluating their effectiveness (p. 39). As mentioned in relation to
OMOI, I agree that results-oriented performance measures are desirable
for this and other Commission activities.
You also say that OMOI needs to develop formal processes and written
procedures to replace the largely "informal and ad hoc" processes in
place today.
I agree that the current processes are informal, though I would not
call them ad hoc. During this first phase of development, the informal
procedures have served both the Office and Commission well by letting
us experiment with varied approaches and build on what works. Overall,
the processes have been remarkably coherent, in that they have all
pointed toward better ways of understanding market behavior and better
ways of communicating that understanding. I agree that it is now time
to formalize and document many of the processes, but not at the cost of
stifling creativity and experimentation so important for a new
organizational unit.
One Final Point: In the background of the report (p. 9), you state that
FERC hopes to issue a final rule on its initiative to create "seamless"
wholesale electricity markets. At this time, FERC is planning on
holding technical conferences in different regions of the country this
fall and has postponed the issuance of any final rule.
Thank you again for the valuable insights in your report.
Best regards,
Pat Wood, III
Chairman:
Signed by Pat Wood, III:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jim Wells (202) 512-3841 Dan Haas (202) 512-9828:
Staff Acknowledgments:
In addition to the individuals named above, Adam Hoffman, Jason
Holliday, and Raymond Smith made key contributions to this report.
Important contributions were also made by Stuart Kaufman, Ellen Rubin,
and Barbara Timmerman.
(360280):
FOOTNOTES
[1] U.S. General Accounting Office, Energy Markets: Concerted Actions
Needed by FERC to Confront Challenges That Impede Effective Oversight,
GAO-02-656 (Washington, D.C. June 14, 2002).
[2] See U.S. General Accounting Office, Highlights of a GAO Forum:
Mergers and Transformation: Lessons Learned for a Department of
Homeland Security and Other Federal Agencies, GAO-03-293SP (Washington,
D.C. November 2002).
[3] OMOI had 92 employees on March 28, 2003, when we made our survey
available. Eighty of these employees responded to the survey.
[4] Human capital initiatives are the programs, policies, and processes
that agencies use to build and manage their workforces.
[5] FERC was established in 1977 as a successor to the Federal Power
Commission and is an independent regulatory agency. It also regulates
the interstate transmission of oil by pipeline; licenses and inspects
private, municipal, and state hydroelectric projects; and approves site
choices as well as decisions to abandon interstate pipelines and
related facilities no longer in use.
[6] A natural monopoly is a company that becomes the only supplier of a
product or service because the nature of that product or service makes
a single supplier more efficient than competing ones.
[7] These ISOs are the California ISO, ISO New England, Midwest ISO,
PJM, New York ISO, and the Electricity Reliability Council of Texas
(ERCOT) ISO. ERCOT established an ISO in 1996 to satisfy the
requirements of the Public Utility Commission of Texas for deregulating
the wholesale electricity market in that state. FERC has limited
jurisdiction over the ERCOT region because its market is essentially
intrastate. FERC initially approved the Midwest ISO and PJM as ISOs and
has since approved them to operate as regional transmission
organizations.
[8] As of December 2002, the Midwest ISO operated in all or parts of
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri,
Montana, North Dakota, Ohio, South Dakota, Virginia, Wisconsin, and
Manitoba (Canada). PJM operates in Delaware, District of Columbia, New
Jersey, Maryland, Ohio, Pennsylvania, Virginia, and West Virginia.
[9] Report of the Staff to the Senate Committee on Governmental
Affairs, Financial Oversight of Enron: The SEC and Private-Sector
Watchdogs, Oct. 8, 2002, and Majority Staff Memorandum to the Committee
on Governmental Affairs, Subject: Committee Staff Investigation of the
Federal Regulatory Commission's Oversight of Enron Corp., Nov. 12,
2002.
[10] According to OMOI staff, FERC patterned its closed-door meetings
after similar meetings held at the Commodity Futures Trading
Commission.
[11] See our June 2003 report, Electricity Restructuring: Action Needed
to Address Emerging Gaps in Federal Information Collection, GAO-03-586,
for a more detailed discussion of the limitations in FERC's electricity
information and its authority to collect it.
[12] U.S. General Accounting Office, High-Risk Series: Strategic Human
Capital Management, GAO-03-120 (Washington, D.C. January 2003).
[13] U.S. General Accounting Office, Human Capital: A Self-Assessment
Checklist for Agency Leaders, GAO/OCG-00-14G (Washington, D.C.
September 2000).
[14] U.S. General Accounting Office, Results-Oriented Cultures:
Creating a Clear Linkage Between Individual Performance and
Organizational Success, GAO-03-488 (Washington, D.C. March 2003).
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