Regulators need to weed out the “bad guys” who flouted the laws and rules of the energy markets, but the Federal Energy Regulatory Commission and its sister agencies must resist the urge to overreact by increasing their control of the industry, FERC Commissioner Nora M. Brownell told industry analysts and energy executives last Thursday.

There is a “kind of overreaction and penalizing everyone…for the failures of a few” that is taking place in the industry. “I…hope we can begin to contain that because I think we’re [paying] a price that I don’t think should be paid,” Brownell said during a UBS Warburg “Natural Gas and Electric Utilities” conference in New York City.

“We need to penalize the people who broke the rules” and/or “behaved in a way that was unconscionable,” but it has to be based on a record of fact, not simply allegations, she noted.

Brownell disputed a suggestion that FERC might “exonerate [the] big guys” because they’re more likely to build much-needed energy infrastructure. “No way. I don’t want to exonerate anybody who’s guilty, but I also don’t want to condemn anyone who is innocent.”

Federal regulators hands have been tied to some extent “by the fact [that] there were not rules” in place at the time barring certain actions. For example, “there was not a rule that said ‘Thou shalt not withhold,” said Brownell, who added she expects such a rule to take shape in the “not-to-distant future.”

On the industry’s financial front, she noted the “picture is pretty bleak today,” the credit situation is the “worst in several decades, and I fear it’s getting worse.” But she expects the industry to recover. “We are going to work our way through this crisis,” she noted, adding “we want the energy sector to come back.”

She said most of the California proceedings at FERC — power refunds, contract renegotiations and El Paso market manipulation — are on schedule to be completed within the next two months, which she believes will help to restore certainty to the power and natural gas markets.

Assuming they aren’t settled, a FERC decision on California refunds and contract renegotiations is on track for either late March or early April, Brownell noted. She said the Commission wants the California decisions to come together at once. “I don’t want any Monday morning quarterbacking. When it’s over, it’s over,” and then it’s the Supreme Court’s problem, she noted.

Responding to questions, Brownell said she expected the dates for California refunds, which would limit refunds to Oct. 2, 2000 onward, to “hold up” to any legal challenge. If they don’t, “I suspect we would have to look at the legitimacy and appropriateness of the formulas that we’ve created” to determine the refund amounts, she noted. But she doesn’t believe that will happen — it wouldn’t be good for California or the energy sector.

A ruling on the El Paso complaint proceeding is scheduled for the same March-April time period. “It’s gone on too long. I look at the downgrades [to El Paso] everyday,” referring to the major slash in the company’s debt rating last week that put El Paso further into junk status. The company’s stock hit new lows late in the week, trading at below $3.50 a share.

In addition, Brownell said an affiliate standard rule limiting the contacts between parent corporations and their affiliates is likely to be issued in either April or May. Calling it a “very controversial” issue, she said she wants a “series of very simple rules that people can monitor themselves, and I can monitor them quickly.”

As for standard market design (SMD) of electricity markets, Brownell said a white paper to be issued in April will be the “next step [in] our thinking before we issue a final rule,” which could happen in July or maybe the fall. The rule may be more than 600 pages.

Once SMD is “fully fleshed out…[it] may make people more comfortable with moving forward more quickly,” she said. FERC could face some roadblocks along the way, however. If Congress tells the agency to slow down, “we’re going to slow down,” Brownell noted, adding that the Commission currently was having a “good, strong, healthy” discussion with lawmakers over SMD. Also, litigation could hold up SMD.

FERC faces a “huge tension” in getting the details of SMD “sufficiently worked through so people understand how the pieces work together.” Clear rules for the industry to follow is important to Brownell. “We’re [now] paying the price of greed, we’re paying the price of stupidity, but we’re also paying a price for not having rules that were clear.”

Asked when she believes regional transmission organizations (RTOs) will become fully functional, she noted they have different timetables — 2004, 2005, 2008 and 2009. “Large parts of the country are well underway” with respect to forming RTOs, which would follow the principles of SMD. “I’d like to live long enough…to see them.”

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