FERC’s 2003 budget, released last week, requests nearly $200 million to operate, but more important, expects to offer a “new way of operating” in the aftermath of the electricity crisis in the Western United States last year. The Commission said that given the California experience, “it is now clear that our primary emphasis must be to facilitate a full transition to competitive wholesale energy markets as soon as possible.”

In its ’03 budget, the Federal Energy Regulatory Commission also addresses “crucial issues” expected to arise as the country moves to competition, including aligning its budget to match its strategic plan. With an “increased emphasis on market oversight and investigation,” FERC’s budget request includes an additional $7 million just to “develop and enhance our market oversight and investigative capabilities.” That money will be used to set up a new Office of Market Oversight and Investigation (OMOI), whose responsibility will be to offer oversight and investigation.

FERC said, “a successful transition to competitive energy markets will require an enhanced effort to prevent severe market malfunctions and the exercise of market power, and to respond quickly to problems that arise.” The Commission said it “is now clear that these efforts are especially important during the transition period when markets are coming into existence.”

FERC noted that “recent experience makes it very clear that good energy markets require good market regulators….The California crisis showed that the need for good oversight and investigation is not only important but also far more urgent than we (or most others) had fully understood.” FERC said it also needed to build a better “understanding of the dynamics among players, market events, prices, and volumes within a market,” and “to identify the data and metrics.”

FERC’s new OMOI would be a high-level organization reporting directly to FERC’s Chairman. “We have little experience in intensive market investigations of the sort that is routine at agencies such as the Commodity and Futures Trading Commission…we need more people who are familiar with the details of how electric and natural gas markets actually work.” FERC said it also needed a better understanding of how financial and physical markets interact, “both in daily trading and in making long-term investment decisions.”

FERC also wants to add “people who can assess how our actions affect those who invest in market-oriented industries, including electric generation,” and “data analysts who can use data management…that go far beyond the capability of spreadsheets.” Finally, FERC said that because electric and natural gas markets differ from most commodity markets, it will add “people who can relate market activities to the underlying physical constraints of the transportation systems.”

FERC, which underwrites its activities completely with its fees for its services, laid out a strategic plan for two years with goals in four areas:

1. Energy infrastructure: FERC plans to promote a secure, high-quality environmentally responsible energy infrastructure through “consistent” goals, which includes investment to remove roadblocks; provide cost recovery clarity; and welcome innovative thinking about rates and new technology. This goal covers traditional responsibilities, including pipeline certificates, hydropower licenses and preliminary permits and most rate determinations.

2. Competitive markets: Here, FERC plans to foster nationwide competitive energy markets as a “substitute for traditional regulation.” The goal focuses on “our need to complete the transition to competitive energy markets as quickly and comprehensively as possible,” …which will “require the growth of many new institutions, particularly clearly defined and independent regional transmission organizations.”

3. Market oversight: FERC wants to protect customers and industry “through vigilant and fair oversight of the transitioning energy markets.” FERC believes this goal will “ensure that competitive energy markets benefit the nation over the long run.” To accomplish the oversight, FERC plans to set up a new office to coordinate all investigative activity. “We need a much stronger ability to recognize and respond to problems in the markets. At the systemic level, we need to recognize problems when — or before — they develop and craft solutions quickly. We must also be able to police individual behavior in markets much more effectively than in the past.”

4. Resource management: The goal is to efficiently administer FERC’s resources, which it noted it would be unable to do “without management support.” This includes enhancing the talents and skills of the staff through recruitment and training, building effective, customer-friendly information technology services, supporting the Commission with logistics and financial services, and strengthening strategic management processes.

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