Presented to:Euro Gas/IEA Conference

Paris, France13 June 2005

The Role of Regulators in Liberalized Energy Markets

William F. Hederman, DirectorOffice of Market Oversight and Investigations

Federal Energy Regulatory Commission

WH-5-3-05

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Outline

• Commission Strategy

• OMOI Processes

• Case Studies

• Conclusion

(Opinions expressed are Hederman’s, not those of the Federal Energy Regulatory Commission.)

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FERC has a 3-prong strategy.

Effective Rules

Infrastructure

Rules

Enforcement/Oversight

CompetitiveMarkets

Just & ReasonableOutcomes

StrategicApproach

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OMOI has 3 essential processes to “Trust and Verify”.

• Professionally skeptical

• Diverse (private/public sectors, disciplines)• Highly skilled• Team-oriented

C

O

I

OutsIde

FERC

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We are working to empower responsible participants.

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Monitors have addressed several important natural gas anomalies

• Weekend “price blip” (NY)

• Cold snap (New England)

• EIA storage reporting error

• North Atlantic LNG diversion

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OMOI’s enforcement arm has pursued several natural gas matters.

• Inter-company storage data sharing

• Affiliate abuse

• Standards of Conduct compliance

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OMOI’s helped re-establish natural gas price integrity.

• Wash trading• False reporting cases• Withdrawal from voluntary reporting• FERC technical conference• Industry coalition formation• Reformed practices

– At price publishes– At reporting companies/“Safe Harbor” signals

• Recovery

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FERC has learned several lessons through OMOI.

• Knowledge is critical.

-- Regulators: market/business/regulation

-- Participants: price indices/storage data/"the Rules"

• Cooperation is helpful.

-- Companies with FERC

-- FERC with

-- other feds

-- states

-- MMUs and other regional players

• Change is difficult.

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Lessons (continued)

• Market monitoring is far more challenging than traditional utility regulation.

• Natural Gas market restructuring provided massive benefits to U.S. gas customers.

• The excess natural gas production capacity from the difficult restructuring transition has only recently disappeared.

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Market Integrity is Everyone’s Business

FERC Hotline:

1-888-889-8030

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Attachments

• Enron values statement

• Market complexity

It’s easy to talk the talk.

Our Values

RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here.

INTEGRITY: We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.

COMMUNICATION:We have an obligation to communicate. Here, we take the time to talk with one another … and to listen. We believe that information is meant to move and that information moves people.

EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.

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The relevant markets and jurisdictions are complex. Natural Gas & Electric Market Space

Gas Supply

Trading Venues

Futures (NYMEX)

Electronic Platforms

Bilateral Trading

Voice Brokers

Pipelines&

Storage

Players

Delivered Market

Physical Nat Gas

Generation

Transmission&

Pumped Storage

Delivered Market

Phys Electric Power

Gas to fuel power generation

RTO’s & ISO’s

Price Contributors-Fixed price buyers & sellers-Speculators

Price Takers-Indexed price buyers & sellers

Source: FERC-OMTR&OMOI

Nat Gas & Electric Derivatives

Nat Gas & Electric Clearing