A long-awaited General Accounting Office (GAO) report last week concluded that FERC has not effectively policed the energy industry over the past years, but it said the Commission was not totally to blame. The agency needs greater authority to issue civil penalties, more employees who have a working knowledge of how competitive energy markets operate, a bigger budget and a more aggressive monitoring presence in the natural gas and electricity markets, if it is to become effective in the future, according to the GAO.

The report was a “wake-up call” for FERC, said Sen. Joseph Lieberman (D-CT), who along with Sen. Jean Carnahan (D-MO) requested that the GAO, the investigative arm of Congress, review the agency’s oversight performance. The California energy crisis “should have grabbed the Commission by the neck and shook it up,” but instead FERC “hit the snooze button.” As a result, the agency is just now uncovering many of the abusive practices that occurred two years ago in California and other western markets, he noted.

Absent the ability to issue stiff penalties, the Commission “lacks adequate enforcement ‘bite’ to deter anticompetitive behavior or other violations of market rules,” said the nearly 100-page report. It recommended that Congress convene hearings to consider the need to beef up FERC’s oversight authority “in light of the changing energy markets” — particularly the authority to assess civil penalties against companies engaging in anticompetitive behavior and other abuses. This is “important if FERC is to pose a credible threat.” FERC currently can impose civil fines against companies, but it has used this authority only sparingly over the years. And when it does fine companies, the dollar amounts usually are paltry.

The Senate’s omnibus energy bill, which currently is in conference, calls for the expansion of FERC’s civil and criminal enforcement authority under the Federal Power Act, Lieberman noted.

“FERC is not adequately performing the oversight that is needed to ensure that the prices produced by these [energy] markets are just and reasonable and, therefore, it is not fulfilling its regulatory mandate. While FERC has taken some tentative steps in the right direction, more decisive action must be taken to define and implement an effective regulatory and oversight approach,” the report concluded.

FERC’s has been severely hamstrung in its efforts to monitor and oversee energy markets due in part to the fact that it still is “using legal authorities that were enacted when the energy industries were regulated monopolies,” said the GAO in its review of the Commission, which was carried out over a 10-month period.

The Commission “has not yet adequately revised its regulatory and oversight approach to respond to the transition [from monopoly] to competitive markets,” the agency report noted. FERC undertook an “ambitious, two-year reengineering effort” in 1997 to position itself to operate within the new market realities, but it resulted in “little more than superficial changes” to the agency’s organizational structure, the GAO said. About 74% of the FERC employees surveyed by the GAO agreed with this finding.

The agency gave a failing grade to FERC’s monitoring activities. “To date, FERC’s initiatives to monitor competitive markets have served more to help educate FERC’s staff about the new markets than produce effective oversight efforts,” according to the GAO report. For example, it noted the agency’s Market Observation Resource (MOR) room, which was established by former FERC Chairman Curt Hebert Jr. to keep closer tabs on the markets, produces a “substantial amount of market data” for staff, but none of the information has ever been used to “initiate an enforcement action or to confirm or refute a problem identified elsewhere in the agency.”

The GAO urged FERC to examine how the “bulk power studies and the data sources” currently available from the MOR room can be used as effective market monitoring tools in the interim, “until a more comprehensive approach for overseeing energy markets is developed.” The Commission under Chairman Pat Wood has established a new Office of Market Oversight and Investigation to bolster the agency’s monitoring efforts, which the GAO said was a step in the right direction. The office will begin operation in August 2002, the report noted.

The agency’s monitoring activities also have been slowed by the inability of the Commission to attract market-savvy employees, the GAO noted. “FERC needs more staff knowledgeable about competitive energy markets and skilled in regulating and overseeing them,” the agency said, but it noted that the Commission “has [had] trouble competing with private sector salaries.” For example, FERC advertised three times for an “energy industry analyst” at a salary of $120,000, but it has had “little success in finding a qualified candidate.” In addition to luring new workers, FERC faces the impending retirement of a large portion of its staff — more than one-quarter of its employees will be eligible to retire by 2005, according to the report.

FERC “has used recruitment bonuses, retention allowances, tuition reimbursement, and flexible work schedules to attract new staff and to retain current employees, but it has not taken advantage of the full range of personnel flexibilities and tools available to federal agencies, such as special salary rates; and [it] has not developed a strategic human capital management plan to assess its specific workforce needs and to develop strategies to address them.”

The GAO also believes the revolving-door changes of FERC chairmen have posed a problem for the agency. “…[F]requent changes in FERC leadership have been another contributing factor to FERC’s slow progress in developing and implementing a new approach,” the report said, adding that there have been four different chairmen over the past five years. “Making fundamental changes in an agency’s operations, such as implementing a new regulatory and oversight approach, can take a sustained effort over several years. This can be difficult to achieve with significant shifts in an agency’s agenda and priorities caused by continuous change in its top leadership.”

Some senior FERC staff told the GAO that “the seemingly constant transition caused by recent changes in FERC leadership, coupled with the intensive pressure created by the California energy crisis and the bankruptcy of the Enron Corp., has resulted in a lack of consistent management and direction for the agency.”

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