FERC branches out to energy market oversight and investigations

Kathleen Davis, Associate Editor

Earlier this year, the Federal Energy Regulatory Commission (FERC) opened up a new branch labeled the Office of Market Oversight and Investigations (OMOI). OMOI’s function, according to FERC, is to help the commission “improve its understanding of energy market operations and ensure vigilant and fair oversight of those areas under the commission’s jurisdiction.”

William F. Hederman, Jr.
Director, OMOI
Click here to enlarge image

To get a more in-depth introduction to the new office, EL&P spoke with its director, William F. Hederman, Jr., who was appointed to the position in April.

EL&P: Your office is a new one at FERC. What led to the formation of the OMOI–i.e., what needs or problems were not being addressed?

Hederman: Of course that decision was made before I came here, but from what I’ve heard the market problems that arose were ones that the commission did not find it could get a handle on, either analytically or in an enforcement sense. And so, as Pat Wood became chairman and looked at what he aspired to accomplish, he saw a need to have a market oversight capability, which involved a lot of market and financial analytic capability that needed to be hired from the outside. Plus, on the enforcement side, there was a need to integrate the attorneys and the auditors with the analysts, and also to add additional attorney capability in terms of investigative skills. So, he conceived this office, came up with a broad manpower plan–which is that we will have about 120 people when we are fully staffed–put that in place, and started recruiting.

EL&P: Your office oversees gas, oil and electricity markets. Is the area of electricity markets the problem child of the three?

Hederman: No, I wouldn’t say that. Electricity is the primary focus, yes, but natural gas markets are also a very important focus. And, they are so closely linked that I don’t think you can really talk sensibly about looking at one without looking at the other.

EL&P: Do you see the creation of this office giving FERC more “teeth” when it comes to enforcement?

Hederman: Actually, I think the office gives FERC more muscle. What the chairman did was get the OK from Congress for us to make 50 outside hires. So, we’re adding a lot of analytic capability with people who’ve been in the industry and know how power transactions and gas transactions actually work. We’re adding financial analytic capability, and we’re bringing in attorneys with significant investigation experience from both other agencies and private law firms. So, we’re adding muscle in areas where there was more of a bare-bones capability here before.

EL&P: Since diving into this in April, have you encountered any problem areas with electricity markets or natural gas that were unexpected or “out of left field,” so to speak?

Hederman: Well, when I accepted the chairman’s offer I was not expecting a major new piece of bad news or a major new scandal quite every week. So, I guess that was a surprise. I think the primary surprise, though, has been the extent of the financial collapse, and the real crisis of confidence. It’s gotten far graver than I would have expected coming in.

EL&P: The industry has discussed the evolution of energy markets for years, but few predict an end to this growth. Does your office have a timeline for this evolution? Do you have a prediction for when these markets might be fully “evolved”?

Hederman: Well, as far as a timeline, it’s too early for us to have one right now. I would say that, in the specifics in each RTO development, there will be a timeline that will either be in the commission orders establishing it or in something we’ll work out with the market monitor in terms of setting specific milestones that have to be met. And, if they’re not being met, that will be something we will analyze to see if there’s a good reason for it. I can’t say we have those kinds of milestones yet; although, if you go back to the commission hearings on the Midwest ISO and PJM and the evolution and integration of those particular markets, you will see some promises that were made, and we’ll certainly be tracking them for the commission.

As far as when it will be fully evolved, that’s an easy one to answer because I don’t think it will ever be fully evolved. It’s like life in general: If you’re not changing, you’re not alive. So, if the markets are working, they will be constantly changing.

EL&P: Your office has the power to investigate the actions of market participants and enforce governing rules. What does that power entail, exactly? How far can you go, and what are the stiffest penalties you can impose?

Hederman: Well, the commission’s power to require information about electric and gas markets is quite broad. So, information about commercial transactions that the commission can require copies of is almost unlimited. As far as the penalties for failure to comply, that’s an area where the commission has asked for additional authority from Congress because the civil penalty authority is fairly limited, but the commission does have an extremely powerful penalty in that it can remove the ability to have market-based rates in a company. And that is an authority that has been threatened on occasion and has had very serious consequences in the equity markets for those companies.

EL&P: One of the functions of your office’s reports is to provide an early warning of vulnerable market conditions. Are there any red flags in the gas sector or the electricity markets these days? And, how early is “early?”

Hederman: The main way we’ll do this early warning exercise will be through seasonal “look-ahead” reports. We’ll do both a winter and a summer report to give the commission a look at issues which may be arising and what progress has been made. In the winter look-ahead, we’ll look at heat markets and areas related to heating for the most part, which means more around the natural gas-market focus. And, therefore, summer will center around cooling markets, which is, of course, more of an electric market.

In terms of how early is early, it’s probably a month or two. Our goal is to get these out close to the beginning of each season.

Going forward for the cooling look-ahead report, we hope to have that out mid to late spring. It will have two functions. It will give the commission a sense of what we think they should be keeping an eye on, as well as being part of our work plan for OMOI in terms of figuring out both positive and negative trends.

Now, a quick look at potential conditions. In the gas market, if you look at the Northeast, there’s a need to get some additional pipeline capacity in the area. But, overall, we have no major concerns with regards to this winter. The situation seems to be in good shape, and, when you look at supply, there’s a little debate about the long-term supply outlook, but the short-term over the next year looks quite solid. Storage is at near record levels. So, actually, if the weather turned warm, which doesn’t look like an immediate problem, then we would start to watch for the price in a downward direction. We need a gas price strong enough for producers to make the investment to have capacity in place and competitive enough that there’s no market power being exercised.

EL&P: What prompted the establishment of the enforcement hotline, and how have concerned parties used it thus far?

Hederman: Actually, it’s an old device of the commission. It started after the Natural Gas Policy Act of 1978. So, it’s been around, but it’s function has expanded over the years. It started related to wellhead pricing issues. Next, it grew into a device used by landowners with problems, mostly right-of-way owners with concerns about pipelines, transmission lines and maintenance crews. But, we’ve been pushing its use for electricity and gas market matters, and it’s been used by market participants to bring the commission’s attention to matters without having to make the investment in a formal legal case to make a formal complaint.

The hotline allows a quick, informal response and can help us deal with some problems very rapidly. There are about 500 calls a year on the hotline. Lately, about 25 percent of the calls are market related.

Hederman is the first director of FERC’s Office of Market Oversight and Investigations, appointed in April. He has more than 25 years of experience in the energy business, including leading the strategic initiatives and business development processes of the gas pipeline business unit of Columbia Gas Transmission Corp., where he served as vice president from 1998 to 2001.

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