Grading Pat Wood


Reviewing the FERC chairman's first year, and what he might do next.

Fortnightly Magazine - September 15 2002

This September, Pat Wood III completed his first year as chairman of the Federal Energy Regulatory Commission (FERC). Some long-time FERC watchers gave Fortnightly some insights into how this chairman has performed so far, and what we might expect from him in the future.

For starters, one former FERC commissioner rates Wood's performance so far as "damn good." The former FERC commissioner says, "He did the right things before Congress, which was investigating whether FERC acted properly in addressing the California crisis. Congress could have fried eggs on his forehead. But he had that trusting, happy homeboy Texas look that won them over, and he stuck to his guns."

On a policy front, this former FERC commissioner says, Wood wisely has not let state-level opponents defeat either his standard market design (SMD), or his movement forward from the 1992 Energy Policy Act. Certainly, it is Mr. Wood's activist nature that has won many supporters.

One high-powered attorney admires the chairman's efforts in trying to pull together 10 years of FERC initiatives, and in trying to bring clarity to energy commodity markets by attempting to develop standardization and market monitoring.

"We don't agree with everything," she admits. "But we commend him [for] thinking about extremely complex issues in the most trying of possible times in the energy markets, [with] the fallout from the trading and related disasters from the Enron situation."

In addition, the sheer smorgasbord of responsibilities he manages is also impressive, says this attorney. Wood has had to manage political issues during election time, she notes, with a complicated situation in Congress and a world scene that forces FERC to act on infrastructure security. He has had to do that with a vacant seat on the commission-and the prospect of more retirements soon.

Supporters and critics alike worry that Wood may be trying to take on too much. Certainly, the release of the SMD NOPR, the generation interconnection NOPR, and market monitoring initiatives has made many business executives optimistic that the development of competitive energy markets will continue amid the current turmoil.

But many of these same business types fret that infighting among energy companies, transmission groups, and state groups could bog down Wood's latest initiative, in much the same way that the Order 2000 process was slowed down to a crawl. Furthermore, many executives question whether his initiatives can be implemented on parallel tracks-such as market design developing in parallel with infrastructure security, market monitoring, and Western contract talks. Many of these initiatives will be defined by the other initiatives, executives say.

"Decisions on SMD will inform infrastructure security, as decisions on infrastructure security will define the operation of transmission, markets, and market monitoring. Can you move on all of these simultaneously?" asks one executive.

Of course, Chairman Wood seems all too aware of the pitfalls previous administrations have fallen into. A few months ago, in a conference call hosted by Prudential Securities with institutional investors, he acknowledged some of the problems he saw in the implementation of Order 2000.

"Had I my druthers," said Wood, "it would have been probably easier to lay out the job description first-i.e., the standard market design, standard market rules-and then go out and find the job applicant to achieve the job description.

"But, you know," he added, "that isn't kind of how it works around here. Somebody else was here before I was, and you've got to take what they did. But, we tried to develop with some, I think, difficulty, these regional transmission organizations in a vacuum," Wood said.

Perhaps when FERC passes the order after the comment period, we will have some visibility, says one. Most say they are taking a wait-and-see attitude. Of course, SMD will not come soon enough for many of the merchant energy traders teetering on the edge of bankruptcy. Certainly, SMD could revalidate their business as a necessary part of the functioning of energy markets. But in some cases, the SMD seems too far away on the horizon to shore up confidence by Wall Street, experts say.

In fact, many energy merchants reportedly are selling choice assets at fire-sale prices, and Standard & Poor's recently released a gloomy report on the merchant energy sector.

"The collapse in equity prices and the explosion in credit spreads are testing investors' appetite for the energy merchant sector. These trends, combined with falling credit ratings, depressed power prices, FERC and SEC inquiries, and troubles with creditors, may portend failing business plans, if not bankruptcy. Few doubt that one or more energy merchant companies may soon file for bankruptcy," the S&P report said.

Some critics have said that Pat Wood, like his political ally President Bush, may not be doing enough to sell competitive energy markets, as Bush has been criticized for not doing enough to sell to Wall Street and Main Street the prospects of an economic recovery.

But others believe it would be a tough sell for Wood or anybody in his position, given the current environment of energy company corporate scandals, revelations of Western market price manipulation, and sham trading. The General Accounting Office and others mainly criticize FERC for not being well-equipped to detect market abuse. However, the blame for that might not belong on Wood's shoulder, but on previous FERC chairs.

Meanwhile, Wood defenders say he has done quite a bit under the circumstances. Indeed, some state commission representatives wish he were doing a lot less about competitive energy markets. In his talk with Prudential Securities' institutional investors, Wood outlined the two most important parts of his plans at FERC.

"The first [part of the plan]-is to make sure that we have the high quality, environmentally responsible energy infrastructure in place, which is gas pipelines, power lines and power plants, hydroelectric plants, all of which we have some say over, although power lines and power plants do have a lot of shared responsibility with the state. Such things as standardizing generation interconnection, clarifying rate recovery policies for transmission line investments. And all of you are probably not interested in the things we're doing on the interagency issues, on hydroelectric licensing, [on] gas certificate processing, but those continue apace, as well.

"Our second challenge is to foster a nationwide, competitive energy market, as a substitute for traditional regulation. That builds on FERC's successful experience in the gas industry, doing just the same thing.

"And on electric, the two [prongs] that we're taking to foster the competitive electric industry, are the standardization of market rules and market design, which is something that has not happened yet."

Meanwhile, Wood admits that markets have yet to prove fully competitive. That's a powerful admission-one that continues to give encouragement to his opponents. Certainly, the future success or failure of competitive markets now rest on Wood's shoulders.