Energy Markets:

FERC Chairman Pat Wood lays out broad agenda for FERC's attention this year

The utilities sector has seen plenty of upheaval lately: a major blackout in the Northeast, a power-supply crisis in California, fallout from the Enron scandal, and skyrocketing prices for natural gas. What will 2005 bring? E&E Daily editor Colin Sullivan and senior energy reporter Mary O'Driscoll talk with Pat Wood, chairman of the Federal Energy Regulatory Commission. He cites reliability and security of the grid, improving the Midwest ISO, and more dependable access to affordable natural gas as three priorities for FERC to address early this year.

Transcript

Colin Sullivan: Welcome to OnPoint, I'm Colin Sullivan. Today we're joined by the chairman of the Federal Energy Regulatory Commission, Chairman Pat Wood and the senior energy reporter for E&E Daily and Greenwire, Mary O'Driscoll to discuss the state of the electric power and natural gas markets headed into the new year. Chairman Wood, thanks for joining us.

Pat Wood: Thank you, Colin.

Colin Sullivan: Mr. Chairman, you came to the commission at a time of crisis following the California meltdown and the collapse of Enron. Reliability has been a big issue since you came onboard the commission, can you talk about how you've improved reliability since you've come to Washington?

Pat Wood: I wish I could take the credit for it, but the industry itself is, to their credit, taking a real active role in responding to the blackout of August 2003. We are about, actually we're on the eve of, in about two weeks, the North American Electric Reliability Council, which is still a voluntary organization and I'd like to see that become mandatory, adopting enforceable crisp standards for the first time in its 40-year history. This is what we call affectionately, "Version Zero" because it's taken the practices of reliability that we've used in the U.S. and Canada for 40 years and is actually making them enforceable so that there's a report card that comes out. These are audited and these standards are reported on, just like everything else in our culture it seems. Although there's not a penalty structure in place yet, which a bill from Congress could actually put in and I think should happen, the fact that we've got now standards that say, "This is good practice and this is not and these are the consequences for not." That's a significant step. So we're on the eve of what I would consider probably the biggest single improvement in grid reliability since the blackout. I think there's more to do though.

Colin Sullivan: So you say you'd like to see a bill, what do you think the prospects are this year for seeing that bill out of Congress?

Pat Wood: Oh, I've probably said this so long that nobody believes me anymore, but I'm just one of those glass half-full kind of guys that thinks it's going to be tomorrow, tomorrow, tomorrow. These issues aren't going away. I mean the issues have changed in the six years that we've been talking about energy legislation, but I do think this reliability one has got to be done either stand alone or part of the package. There are other things that need to be, so hopefully, in a package. We just do need it. Odds? I don't know, I'm not good at that game. Mary knows that.

Mary O'Driscoll: Is there any way that you can assure our viewers or just assure people that there won't be a replay of the August 2003 blackout?

Pat Wood: Nothing certain, but I think it's like anything else, risk mitigation. What have we done? The big three problems in the blackout were tools, training and trees. That was really the findings of the binational report from U.S./CAN about what happened in this blackout that started in Ohio and promulgated throughout U.S. and Canada Northeast. On the trees front, clearly vegetation management, that's one of the standards that will actually be worked on at NERC. Not only just next week, but they're actually doing the nationwide standard for that. Just having a basic minimum daily requirement, this is what you should do to run a good utility system. That doesn't exist today, believe it or not, on trees. Trees growing into power lines is about as common as you can imagine. I'm watching it snow and ice here in Washington and thinking, "Okay, how long is this electricity going to last?" One of the big transmission wires, which is what moves the big bulk packages of power around the country, that trees aspect is important. Training, are the people operating the grid sufficiently trained? I mean what they're doing is really the air traffic control system of power and as much as we demand that those men and women in the air towers are qualified and well-trained and efficient at their job, we've got to have that for the grid and we have not had that. So actually our commission and the industry, through NERC, are both doing pretty detailed studies about what should the proper training regime look like? But we don't have that in place yet, so I think there is certainly, in the short-term, attention to that issue but not really a complete fix. And then on the tools issue, do we have the computer systems and the visibility of the grid? I think the most progress in the last year and a half has been made on that front, because the large grid operators in the country as well as all the individual utilities have spent a lot of money and have gotten a lot of what I consider, and I've seen it myself, high quality tools to oversee the grid, so a mixed record, going in the right direction, only not there yet.

Mary O'Driscoll: Okay. I wanted to ask you, you mentioned that you'd like to see congressional action on this and comprehensive legislation that addresses other electricity and FERC-related issues. Yet FERC really came under pretty substantial fire from members of Congress for your policies regarding the regional market formation on the RTO process and I wanted to know, they put language in there prohibiting your doing any RTO activities until 2007, do you anticipate that you're going to run into that kind of attitude again this year when they debate it?

Pat Wood: I think, I want to be clear, what they prohibited was our action on a specific docket called the standard market design, which would have required everybody to be into RTOs of a certain definition by October of last year. In fact, in that same bill, there's a sense of the Congress provision that I thought was very positive and was very helpful that said the Congress supports RTOs for all the reasons that we've long endorsed them ourselves at the commission and thinks that everybody should join the RTOs across the country.

Mary O'Driscoll: Um-hmm.

Pat Wood: We want to see that. I mean we want to see that type of provision there. I know there were some members that were concerned about the mandatory nature of joining RTOs. I think we've responded to that since then.

Colin Sullivan: Do you think this is an intractable political fight? I mean there's people in different regions of the country that have different theories about what should happen going forward, the South, the Pacific Northwest, they just can't seem to get on the same page. How do you solve that problem when you're trying to get everyone into the same RTO?

Pat Wood: Well it's certainly been the biggest challenge on the wholesale market front for us and for the industry. Two-thirds of the country is there, I mean I think people kind of tend to forget that. Two-thirds of the country's economy is in markets that are served by the organized regional grids, including Texas, California, Southwest Power Pool, Midwest ISO, PJM, New England, New York. So if the proof of concept has got to continue in those areas, so does our focus in the two-thirds, we call it the 'two-thirds/one-third agenda.' The two-third area is where you're really honing the tools of market transparency, efficiency, so that you continue to have downward pressure on prices, even in a time of rising fuel costs, and responsiveness to customers. So there's issues that come up everyday that are meant to be worked on there, but they're kinda philosophically there, that understanding that the grids are integrated, they have to be operated that way. In the parts of the country where we're not there yet, the commission still has a statutory responsibility that wholesale customers get dependable and affordable supplies of power at just and reasonable rates. So we will continue to pursue that mandate, which I think the commission honestly has not been as aggressive on in the '90s and I think we'll need to get back to doing our jobs.

Colin Sullivan: So there needs to be, I mean FERC needs to be more aggressive with Southern Co. and Entergy and Duke Power, is that what you're saying?

Pat Wood: Well I think we are moving forward now as we should. I don't know if that's more or less aggressive, but I think we've got to take those areas that are basically the unincorporated territory and be fair to their customers too. There are a lot of customers throughout that area, municipal utilities, cooperative utilities, small other utilities that want to buy and sell power using the transmission grid in that region of the country.

Mary O'Driscoll: But how do you do that when some of the state regulators down there don't really support that kind of a policy as well and they are resistant to this, this idea?

Pat Wood: Well it's our job to do wholesale and transmission, so I mean that's our job. I think most of the regulators who, once you talk to them for awhile understand that. They recognize that we've got to do our job, but they need to do theirs as well, which is the retail regulation. There's some conflict there, but I think when you pierce to the core there is, I think as there is in gas, an understanding that we both need to do our jobs well to make it work good for the end user.

Mary O'Driscoll: Well, now you're also seeing some rumblings of discontent on Capitol Hill regarding the market power screens, which has caught several of the large utilities, in fact, the same ones who oppose the RTO proposals, they're starting to make some noises that they're not pleased with the direction that FERC is going on that. Do you anticipate that there's going to be some move on Capitol Hill to restrict your activities in that area as well?

Pat Wood: I don't. I think in light of what has happened in the last four years that would be a surprising turn. After California, when it was clear that market power issues mattered a lot there, and this is just generation market power that we're talking about, not transmission market power which is then really the thrust of the commission's RTO and open access agenda. But generation market power, we just got a pretty stinging opinion from the 9th Circuit saying that FERC's administration of the market power program, at least prior to when I got here which is when it was effecting the case at the court bar, was not handled well at all, in fact, but a lot of the power sales that were made in that period are in a lot of peril and we've got to deal with that whenever we can get the case ultimately back before the commission. You know the courts have been pretty clear going back the other way that the commission needs to do its job, the job it's been told to do since 1935. It would surprise me if there were substantial interest in Congress to do that. You know, it's just so blatant I think on the customer behalf to do something against customer welfare that it would be surprising.

Colin Sullivan: Do you think the tension you've had with some of the lawmakers on Capitol Hill with implementing standard market design will put your future at FERC in jeopardy? Your term expires June 30. Do you expect to be back? Do you want to be back?

Pat Wood: My future at FERC runs through June 30, I'll keep you posted after then. You know, we are an independent regulatory agency and you need and you should have, as I think I've been, regulators who are independent. Who do what the law says and do what is good policy for customers. I've been lucky to be with four, three other commissioners, different ones over the years that think the same way. That's kind of not a big deal honestly, I mean, I'm doing my job and that's what the president wants me to do.

Colin Sullivan: Would you like to be back?

Pat Wood: I'll leave that between me and him.

Mary O'Driscoll: I wanted to ask you, Excelon and PSE&G recently announced a merger. This is the biggest merger you've had in, what about four or five years? Now you're starting to dust off the old FERC merger policy, do you have any indication, are you convinced that the FERC merger policy is up to the task of doing this merger in kind of a post-RTO world? You know you're looking at several kinds of market structure issues that have changed over the past four or five years.

Pat Wood: Yeah, I do. That's a great question because it's one that I had occasion to ask myself 10 days ago and I do think it's written that way. It's more of a procedural document that was adopted in, I guess the mid-90s by the commission when it was looking at a big wave of mergers that I think they had a few, but they really never came. Maybe they're about to come. I do think that our concerns about combinations of large wires owning companies, which this is one, look a lot different when they're inside an RTO, which is where the wires are operated if not owned, but operated by an independent entity on behalf of the broader public interests. Our concerns about transmission market power are substantially reduced when there are RTOs and I think that's the main difference. It's actually one that makes it easier for us to approve an application as opposed to the other way. I think the review of generation market power, generation concentration, is very much the same as it was and I don't know that that will change inside or outside RTOs.

Mary O'Driscoll: Um-hmm.

Pat Wood: I think we've got to look at that the same way.

Colin Sullivan: Sorry to interrupt, can we shift the conversation to natural gas really quick, natural gas supply in crisis, price crisis. Chairman Greenspan a few years ago on Capitol Hill sort of went before the Hill and said, "Liquefied natural gas is the future." Sort of said that it's kind of a panacea for economic problems in natural gas markets. How do you see the LNG market developing, the siting process, some of the applications there at FERC and what's the future of LNG?

Pat Wood: Well we need, and this is a National Petroleum Council study, but it's one we verified and most people agree with that, we need in North America, in the near future, eight to nine new LNG facilities. Now that was a little vague, because it didn't count the fact that we've got some existing facilities here that are undergoing, some of them are undergoing substantial expansions. But there's a number that we need and we've certainly got more interest than that number. The eight to nine I've got, we've got 36 announced. Now 'announced' is sometimes just a press release, but it could also include that they filed something at FERC and are spending hundreds of thousands and millions of dollars on environmental reviews. So the ones that are pending at FERC right now are about 10, about 10 that are in either the pre-filing process or the formal filing process, both of which we take very seriously. And they're all around the country, a lot in the Gulf of Mexico, but also on either coast and Canada, Maritimes Canada, Nova Scotia, Quebec, maybe New Brunswick, the Bahamas. There were three applicants, they've now kinda joined efforts on one application which I think is a pretty good sign that that one's gonna happen. The Bahamas is where the vaporization facilities are, underground to Florida, Baja California, as well as some in California. I read a press release last night about a state official in Oregon saying one's likely to be up there, that's good. There'll be places were they're not that welcome, but there'll be plenty of other places where they are.

Mary O'Driscoll: Well, one place where it's not exactly welcome, where you got a lawsuit going on with the state of California, you got this kind of problem where they seem to be concentrated in the gulf area, the Gulf of Mexico, but there's a need for them on both coasts. How do you overcome some of that opposition to the power plants? The FERC authority is being challenged. People are saying that FERC doesn't care about what happens to the local people, they only care about LNG and the natural gas markets and that kind of thing. So how do you get over that hurdle?

Pat Wood: I mean we've had these concerns about our federal siting authority since the '30s when we were given it by Congress on gas pipelines; this is a really similar concern. It's been harder to site gas pipelines, you know Iroquois, Independence, --

Mary O'Driscoll: Millennium.

Pat Wood: Millennium, you name 'em. But our job is to look after the broader good. I mean we've got to balance in local needs, I just voted to put one in my hometown last week so I mean I have to kind of live with these consequences too. So it is personal, but we've got a very thorough professional review. It involves a very large number of agencies, state and local and other federal agencies that look at, on a fair objective basis, not only the safety issues but all the environmental issues. We even look in some cases, at rate issues, although that's one of the changes that we've made in LNG policy, that this really looks like an offshore gathering system from a rate perspective. So we haven't focused on that as much, because it's a very competitive marketplace out there. But those things are all important. I do think there may be some permits that don't get issued by FERC or some that do and I think the public wants it that way, that we do a thorough probing review even though we know we need gas. It's not an ordained given that every single one that comes into the commission will be approved, because some of them are not as well thought through as others. The applicants tend to pull those down early, they know either due to local issues or due to the fact that they've got some unique environmental attributes that they're not, that that's not an easy one to sell. It's going to be too expensive to build.

Colin Sullivan: What do you think Congress can do this year on natural gas? Specifically, I mean I know that they'll ask natural gas pipelines going forward now -

Pat Wood: Thank the Lord! That was the best piece of legislation Bush signed last year.

Colin Sullivan: Right.

Pat Wood: It was the Alaskan Natural Gas Act in October, which really got the ball moving on that critical project. We talk about LNG, but its LNG plus Alaska that we need to have affordable supplies in say 2008 and beyond. The earliest the pipeline will come will probably be 2012. Votes on those two are important, but there's a lot in the Rockies, you know, and I say this as a Gulf Coaster and it's a little hard to say but, the Rockies, I think in the next few years will supplant the Gulf Coast region as the major production region in North America. But it's still difficult to get the permitting, all that land is federal land under, it's not just national park I think, but everybody recognizes that we're not doing it in the parks, but there's a lot of federal land under BLM and other agencies that, you know we need to be more thoughtful about how that gets permitted and allow people to explore and produce. Build the pipeline so that, that's where FERC takes over, we get the pipelines from the Rockies to both the West Coast and to the central part of the country. We've had a very good record there, dealing with the environmental issues in a timely manner and the permitting issues. But that's a big region and we tend to wanna talk about the LNG in Alaska because they're fun and new, but the old tried and true coming out of the Rocky Mountain region there's a lot of gas there. It has a lot of potential to really, I think, address customer needs over the next 20 or so years and we need to keep that development chain going forward. So Congress did put some actions in the last energy bill that would allow more open use of those land resources out in the Western states. I think those were largely very broadly supported. I don't think they're controversial at all, but they do require some changes to the law.

Colin Sullivan: Okay Chairman Wood, we'll leave it at that. Thank you for joining us today. Mary O'Driscoll, thanks for being here. Join us tomorrow for another edition of OnPoint. Until then, this has been Colin Sullivan.

[End of Audio]

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