By Kathleen Davis, Associate Editor
Kathleen Davis, EL&P associate editor, and James Hoecker, former FERC chairman, met at the University of Tulsa, Tulsa, Okla.
I spoke with James J. Hoecker, former chairman of FERC from June 1997 to January 2001, in a small conference room belonging to the National Energy-Environment Law & Policy Institute on the campus of the University of Tulsa, Tulsa, Okla, in late November. In town as the law school’s distinguished practitioner-in-residence, Hoecker looked at ease in the book-lined room, adjacent to a framed map of the world redundantly titled in German “Die ERDE.”
EL&P: If given the opportunity, would you choose to be FERC chairman today?
Hoecker: Certainly. It’s not that different, really, from when I was chairman. I think that the issues that FERC addresses are profoundly important to the American economy. This is a time of great transition in the electric industry-both at the wholesale and at the retail levels. If you like the challenges of public policy making, there really couldn’t be a better time to be involved in an agency like FERC.
So, I would gladly do it-all things being equal-but, you do make some sacrifices to be in public service. I did that for many years. That part of it I don’t miss.
EL&P: What do you feel was your greatest accomplishment in the electricity arena as chairman?
Hoecker: The greatest accomplishment was Order 2000. We did many, many good things on the electric side, and the challenges were tremendous. FERC used to be known as a natural gas regulator, primarily, and electricity was an afterthought. Of course, our jurisdiction on the electric side is nowhere near as extensive as it is on the natural gas side, but the electric power industry is the last major monopoly in the country to be exposed to the winds of competition. We have worked very hard throughout the 1990s to contribute to that evolution and to make that evolution smooth. Our proposal for regional transmission organizations [RTOs] provides not only essential ingredients, but also the necessary institutional backdrop for wholesale competition.
I think that agenda continues to march ahead at the commission today. There are a lot of people committed to it, including the new commissioner, and I am hoping that this will be as short of transition as possible.
EL&P: Any particular tidbits of advice that you wish you could whisper into the ear of current chairman Pat Wood?
Hoecker: Be patient. Try to focus on a few critical projects. FERC-historically and temperamentally-is not equipped to drive these developments by itself. A lot of work needs to be done with the commission’s constituents, with the Congress, with the industry. That is just as important as taking dramatic regulatory steps.
I think it’s important to maintain a focus on what you want as an end result, and to move deliberately toward that-in this case, an efficient bulk power system. I have every confidence that Chairman Wood understands that.
EL&P: Is there anything you would have changed in hindsight-a particular issuance, order or policy?
Hoecker: Well, I wish we had been more critical of California’s proposed restructuring plan earlier on. I think people need to understand that what the commission did in the mid-90s in helping California institute AB 1890-its restructuring legislation-was guided by a strong commitment to state-federal cooperation in deference to the desires of state policymakers. Unfortunately, in this instance, California devised a widely imperfect bulk power market and then resisted changing it until it was too late and caused ratepayers in California enormous sums of money.
It was a learning process for the commission, and, hopefully, a learning process for the state. Whether the commission could have avoided it single-handedly is something we may never know. I reiterate to people how little experience FERC had in the structuring and operation of bulk power markets in a competitive environment before 1996 when we issued Order 888, our open access rule. If I would do anything over, it would be to work to give the commission a different perspective and a different skill set so that it could have anticipated the problems in California. As it was, during my chairmanship, we did a tremendous amount to change the way FERC operates and to improve its capacity to monitor competitive markets.
EL&P: Why is FERC a necessary entity?
Hoecker: I think the commission-even in an era of deregulation or heightened competition-has a important responsibility and a key role in insuring that markets, which are allowed to set prices outside the restraints of cost-of-service regulation, act responsibly both for shareholders and for consumers. Markets can be imperfect; they can be volatile. Markets can pose significant risk. In an industry that is so essential to human welfare and the economy, that volatility and that risk needs to be minimal. That is the commission’s new role. It worked hard to create competitive markets. Now it has to work hard to make sure those markets are competitive and function appropriately.
EL&P: Given President Bush’s ties to the energy industry, do you believe that utilities and power marketers will have more say in today’s energy policy than they had during the Clinton administration?
Hoecker: Well, there’s a widespread debate about what level of input particular companies of particular industries had into the present energy policy that was developed by Vice President Cheney. The Vice President has resisted giving information about who he talked to, and the events of September 11 have put that whole debate at the bottom of the vice president’s inbox, I’m sure.
I think it’s very good that we have an administration with hands-on experience in the oil and gas business, but the administration needs to recognize that the oil and gas business is just one piece of a much larger, more integrated marketplace where a network of economic and social and environmental impacts need to be taken into account.
EL&P: What-or who-were your greatest hindrances during your tenure as FERC chairman?
Hoecker: I don’t know if I want to comment on that.
I think that the FERC staff and my colleges on the commission are all spirited public servants and provided their best advice to me and their best council to the country on energy policy. But, people will disagree. That level of disagreement is part of the decision-making process at an agency like FERC. Some disagreements are a little closer to the bone than others, but I would say that-to the extent I was able to formulate a constructive agenda for the commission-we were able, as a group, to carry out objectives.
EL&P: Has California killed deregulation?
Hoecker: Not by a long shot. California’s problems were unique in many respects. They resulted from the way the legislature and the state regulatory commission designed the market, a breakdown in communications between state and federal authorities, and conditions that are unique to California-including an incredible surge in demand growth in the 1990s. I think there are many good lessons to learn from California, and I think that other states need to take that experience-good and bad-seriously. But, if you look at the map, there are plenty of states who are marching ahead with retail access, and FERC is continuing to promote competition at the wholesale level.
This industry is going to change profoundly, notwithstanding California. I’m persuaded that-even if it takes a little longer because of what happened there-we are going to see a fundamentally different utility business at the end of this decade. It will be more dynamic. It will be better at managing risk. It will provide a range of services on a competitive basis. Consumers will have choice, and we will see new technologies that will help make this a more efficient industry-a much more efficient industry than we would have if the state were to intrude as profoundly as it has over the last 60 years.
EL&P: FERC has bumped back the Dec. 15 RTO deadline. Your thoughts on that.
Hoecker: I think there’s less there than meets the eye. December 15 was established as the operational date in Order 2000 for RTOs across the country, but remember that Order 2000 was a voluntary program. However, I don’t think anyone should be concerned that the commission isn’t serious about Order 2000 just because it was voluntary. It wants all transmission systems to be part of an RTO, and I think you will see in 2002, that it will begin to happen.
Pushing back the date is simply a recognition of the facts on the ground. We won’t have sufficiently well-developed tariffs, sufficiently well-developed organizational structures, enough RTO managers to be able to operate anytime near December 15 of this year. But, in those instances where RTOs have been in process for a while, the commission has said it will move ahead-perhaps this year. I don’t think this is a setback in any way.
EL&P: Continuing with your thoughts on RTOs. Profit vs. non-profit, which is the better system?
Hoecker: Well, I’ve always told people that I’m an agnostic about the form that RTOs take. We were very, very positive about ISOs [independent system operators] in Order 888, as the ISOs formed up in the Northeast, simply because you didn’t have to worry about divestiture and the whole process could happen more quickly.
I think there are pros and cons for each. A for-profit, since it unites ownership and operation, may be more creative and more aggressive about expanding the transmission systems. An ISO’s focus will almost always be improving reliability.
There is no end to this debate, but I think the possibility is significantly less than a few years ago that we will have more ISOs. On the other hand, the state of Florida-just last week-told their utilities to abandon their transco formula and to form an ISO.
EL&P: In a speech given a year ago in San Diego, you stated that “we cannot re-regulate, we cannot return to the old days of regulation that strangled investment and innovationellipse We must move forward.” Do you still feel that strongly?
Hoecker: Yes. The conditions are so much different than they were in 1980 or 1990. Technology is different; the level and kinds of participation in the market by non-utility entities is different. E-commerce makes it different; the gas turbine makes it different. Public policy makes it different.
We haven’t, as a nation, quite figured out where we want to end up, but, after two or three decades of cost overruns at nuclear plants, increasing electric rates, a lot of volatility, a lot of rate disparity, and tremendous amounts of inefficiency, I think we’ve decided we want to be someplace else. Where that “someplace else” ultimately is remains open to debate, but it definitely isn’t within our heavy-handed, cost-of-service history. I continue to be persuaded of that.
James J. Hoecker is currently a partner in the law office of Swidler Berlin Shereff Friedman LLP in Washington, D.C. Besides his three-and-a-half years as FERC chairman, he served as a member of the commission beginning in May 1993.
EL&P would like to thank R. Dobie Langenkamp, acting director of the National Energy-Environment Law & Policy Institute, and Sue Lorenz, assistant to the director, for arranging the personal interview with Hoecker. More information on the organization can be found at www.nelpi.org.