At the end of its first year of operation, a federal watchdog agency last week concluded that FERC’s Office of Market Oversight and Investigations (OMOI) is severely hamstrung in its ability to effectively monitor the wholesale natural gas and electricity markets.

Although the OMOI has made a “credible start” in establishing tougher market oversight and enforcement at the agency, its role at the Federal Energy Regulatory Commission and in the energy markets still “lacks clarity in several respects,” the General Accounting Office (GAO) said in a follow-up report on the progress — or the lack of progress — the agency has made in this area.

Notably, the OMOI “has not directly and clearly connected its vision, mission and functions” with the Commission’s responsibility to ensure that wholesale gas and power prices are “just and reasonable,” noted the GAO, the investigative arm of Congress. Nor has the OMOI “clearly defined” what market power is, “although market power is a major oversight concern and an issue that OMOI has to make sure is adequately addressed.” Lastly, it has not “explicitly defined” how it will share market oversight responsibilities with other offices inside FERC, industry market monitoring units and with other federal agencies, such as the Commodity Futures Trading Commission and Department of Justice, said the report, which was issued last Wednesday.

Granted, the OMOI “is a new office with unique and broad responsibility for overseeing the nation’s energy markets. [And] its first months have been a learning experience,” the GAO report said. But it is time for the OMOI to establish formal processes and develop written procedures to assure energy consumers and others that it “has fully thought through and is systematically monitoring today’s energy markets.”

The OMOI’s biggest accomplishment during its first year was a multi-million penalty against Transcontinental Gas Pipe Line Corp., the GAO believes. In March, Transco entered into a settlement at FERC to pay a civil penalty of $20 million — the largest in the agency’s history — for violating laws and agency regulations that prohibit interstate gas pipelines from showing preferential treatment to marketing affiliates and other sister companies.

But the OMOI’s successes were few, the GAO report said, adding that “it is difficult to judge how effective the office will be until its role and major processes are clearly set out.”

The office has been hampered by the failure of FERC to “clearly” define just what are “just and reasonable” prices in a competitive marketplace. In its proposed standard market design (SMD) rule, the agency indicated that “just and reasonable prices are those produced by structurally competitive markets,” but it “[did] not define what a structurally competitive market is,” the GAO said.

FERC market monitors are split on how detailed the Commission should be in defining “just and reasonable.” The head of the California Independent System Operator (CAISO) believes there needs to be a “clear standard,” while officials with the New England, New York and PJM ISOs said they were opposed to an “overly detailed or prescriptive” definition.

“FERC officials, including OMOI managers, told us that they recognize the importance of defining just and reasonable prices in a competitive energy marketplace, but are finding it difficult to do…FERC has been trying to define the term for several years,” the report noted.

OMOI Director William Hederman told GAO that he believes “a clarifying definition of market power to communicate the parameters of acceptable market behavior [was] needed” as well. “He added that developing such a definition is complex, and his office has to be careful in deciding what constitutes market power abuse because there is a necessary element of judgement involved in determining what is and what is not abuse in individual cases that should not be eliminated with a definition.”

The OMOI has devoted “considerable attention” this past year to developing a working relationship with its market monitoring units, often at the expense of coordinating ties with other FERC offices and federal agencies, according to the GAO. “For example, in responding to our survey, about 50% of OMOI managers and staff expressed dissatisfaction with communication with other FERC offices,” particularly the Office of Markets, Tariffs and Rates.

While the OMOI has focused on the monitoring units in its first year, the GAO report said the Commission “has not yet put in place a process to periodically assess the monitoring units’ effectiveness.”

The OMOI has a number of “major tools” to help it keep tabs on energy markets — FERC’s Market Monitoring Center, enforcement hotline, investigations and operational audits, and its partnerships with market monitoring units — but the GAO said these have “some significant limitations in coverage and available data.” For example, the Market Monitoring Center “lacks important market information, and market monitoring units do not operate in most part of the United States.” The OMOI apparently is aware of the shortfalls and is working to address them, the report noted.

The ability of OMOI to be tough on violators has been hobbled by the Commission’s limited penalty authority, the GAO noted. “While FERC can order refunds of excessive rates, FERC generally lacks authority to impose appropriate penalties. No section of the Federal Power Act allows FERC to levy monetary penalties against market participants who charge unjust and unreasonable rates for electricity.” The House energy bill would increase the agency’s maximum penalty authority under the Federal Power Act to $1 million per violation per day from the current $10,000.

Operational audits offer the best opportunity for FERC to determine whether companies are complying with its regulations and market rules, but “OMOI has limited resources devoted to these audits,” the GAO report noted. “According to [FERC’s] Director of the Division of Operational Investigations, most of the work by the division’s staff is in supporting ongoing enforcement investigations rather than performing audits…The director said that he would like to develop, but has not yet developed, a strategy for systematically auditing compliance with FERC’s regulations and market rules on a cyclical basis.”

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