Successful energy market development means understanding new subtleties and nuances.
A recent McKinsey article proclaimed, "More progress has been made improving the governance of U.S. corporations during the past couple of years than in the several decades preceding them" (). Yet, revelations from the disgraceful behavior associated with Enron and related events continue to surface and confuse the issue of what is needed today to move energy markets forward.
Ethics will play an essential role in any energy market in which restructuring succeeds. Federal Energy Regulatory Commission Chairman Pat Wood created our Office of Market Oversight and Investigations in response to the California market chaos he encountered when he became FERC chairman. Our assignments include cleaning up some of the remnants of the California mess and serving as the commission's "cop on the beat" to ensure market participants behave according to commission rules ("macro-level" ethical considerations). I am happy to report that the broad chaotic disorderliness that accompanied the California meltdown from 2000 to 2001 has ended.
Our investigatory team of more than 70 auditors, engineers, analysts, and attorneys continue to find problems in the marketplace, but most of these matters require fine-tuning of corporate compliance ("micro-level" ethics) rather than fundamental changes. Our analytic team (another 50 staffers) is probing market developments to find indications of anomalous and/or suspicious bidding, other attempts at market manipulation, or inappropriate communications or cooperation. The commission has a solid grasp of what the markets are doing, and that ethical responsibility is part of the commission's regulatory role. We have tried to encourage improvements in energy ethics because, as the cops on the beat, an ethical neighborhood is easier to police. Moreover, an ethical market environment is more likely to provide a "level playing field" for fair competition.
The Office of Market Oversight and Investigations (OMOI) has focused on education and empowerment to enhance energy ethics. We believe energy marketplaces have moved beyond black-and-white legal issues (i.e., violating the law) and that participants in those markets now face difficult decisions that must be seen in various shades of gray. For instance;
When does a generating plant need another maintenance check before returning to service, and when does delay boost prices inappropriately? When might a cut in O&M expenditures cause a danger to public safety? When do you need to report a co-worker or a supervisor for something you heard or saw, and how do you do this? When is another rewrite of a system impact study justified, and when is it simply a tactic to harm a competitor through delay?
The recent "Ethics and Changing Energy Markets" conference () included several forums focused on best practices. For instance, the conference explored how organizations can stand up for what is right even when they are under fire and how peer pressure among executives, engineers, and even corporations can help promote better behavior. The discussions also considered how to encourage persons to raise issues without endangering their jobs and careers. Participants identified practices that can help empower individuals to take responsibility and be pro-active about raising ethical concerns. For instance, creating self-directed project teams shows interesting potential for building responsibility. Furthermore, ombudsmen and hotlines provide opportunities to raise issues in non-threatening processes.
OMOI also expects risk officers, compliance officers, and board members to improve their effectiveness by learning more about current compliance issues. In addition, regulators can improve effectiveness by learning more about actual markets and real-world business practices.
Several important, practical points emerged from the conference discussions. Nobel Laureate and George Mason University Professor Vernon Smith highlighted a point echoed in many discussions and presentations: It makes no sense to exhort participants to behave ethically and then penalize those who do so. Thus, one challenge is to remove real or perceived threats that individuals encounter when concerned about an ethics matter.
Empowering technical staff to advocate doing the right thing is preferable to having them become whistleblowers. Also, the identification and communication of best practices appear to help encourage positive peer pressure (and, sometimes, rating agency pressure) that leads to improved practices.
Several points relate to corporate leadership. Effective ethics/corporate-compliance programs require leadership, support "at the top," and effective follow-up. A responsible board member, for example, needs to know the right questions to ask management and the compliance team. A conscientious director should seek information about emerging issues in the energy marketplace regarding compliance and should insist on direct communications with internal auditors and the chief compliance officer. Management needs to "walk the walk;" simply "talking the talk" is not taken seriously. A corporate ombudsman helps when the ombudsman is a respected leader with independent power within a firm or organization. Similarly, a hotline (now essentially mandatory under Sarbanes Oxley) requires competent staffing to make a positive difference.
The conference illustrated a point often made regarding ethics: Much of the value in ethics training comes from the discussions rather than the proposed answers. Two gas industry leaders told me that listening to the power discussions led them to want similar discussions on some emerging gas topics.
Last, why is energy different? I think this can be answered with one word: Enron. By demonstrating a commitment to ethics and to continuous improvement in this area, energy companies can improve their business prospects and energy regulators can improve the prospects for the customers whose interests we protect.
Corporate ethics is not a competitive disadvantage. I hope this conference marks the end of the backward looking, second-guessing about ethical matters and the beginning of a focus on practical ethics problem-solving.
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