Q&A: The Energy at the Energy Commission

FERC's Pat Wood on Enron's aftermath--and preventing rolling blackouts

Since Patrick H. Wood III arrived at the Federal Energy Regulatory Commission last June, he has had to face one tempest after another. The California power crisis. The ousting of FERC's chairman. The catastrophic failure of energy giant Enron Corp. And most recently, news stories suggesting that former Enron CEO Kenneth Lay pulled strings to oust Wood's predecessor, Curtis Hebert, and install Wood as chairman. Still, nothing seems to shake the easygoing Wood.

The 39-year-old Harvard-educated lawyer has good reason to be confident. In his last job as head of the Texas Public Utility Commission, Wood won praise from virtually every stakeholder in the push to deregulate the state's power system. A Republican, Wood impressed his boss, then-Governor George W. Bush, with his ability to reach across party lines. Wood's attention to detail in crafting complex regulations won over industry players.

Even consumers took to the native Texan, thanks to his willingness to challenge Big Business. After learning that customers were willing to pay up to $10 more a month for enviro-friendly wind power, Wood not only decided to include wind in the state's deregulation plan but also started buying the green power for his own home. Even today, he keeps a 9-inch-high model of a wind turbine on his desk.

All in all, Wood oversaw more changes in Texas' electricity markets than any other regulator in recent history. Now at the federal level, he faces a bigger challenge. He has to update the nation's energy infrastructure to prevent another California-style electricity crisis. And he has to track the energy markets in case of any more Enrons. Wood recently spoke with BusinessWeek correspondent Laura Cohn about his free-market agenda.

Q: Will the Enron debacle slow electricity deregulation among the states?

A: I view Enron's collapse as an affirmation of the efficiency of energy markets. Here was a player that, because of bad investments in noncore businesses, managerial shortcomings and--to be charitable--accounting obfuscation, became tainted and lost creditworthiness. Yet, with few exceptions, energy customers have been able to work through those problems without any real significant impact.

Simply put, there are a lot of efficiencies still to be unlocked. In opening up the gas markets to competition between 1985 and 1992, FERC set forth a process that resulted in tens of billions of dollars in consumers' pockets.

Q: Didn't Enron's trading partners get hurt?

A: There were some counterparties that took hits. But the market's efficiency in dealing with a tainted player was actually kind of reaffirming. These energy markets are deep. In a broader, philosophical sense, it does force people to get smarter. I remember going through energy deregulation in Texas. For years, people were like, "What's that? Does that mean my bill is lower? O.K., great." It was superficial. Now, there's a deeper understanding and a more thoughtful process about what energy markets ought to be--and how the balance between business interests and customer interests ought to be accommodated.

Q: Before Enron collapsed, you had to deal with power shortages out West. Are we through with California-style blackouts?

A: I don't know that we are through it. We were fortunate that California had very mild weather last year. And conservation efforts there and in New York were excellent, as were the rushed additions to power plants. These [power plant additions] weren't necessarily the most cost-effective or efficient way to meet customers' needs because the planning aspect disappeared.

I watch the Weather Channel every night--not to see what the forecast is for Virginia, but to see if it's snowing out in the Mountain West. Fortunately, it is. The dams are recharging, so the hydropower picture looks better. California depends on hydro for 30% of its power supply. For Oregon and Washington, it's probably 60% to 70%. With a few dry years, that resource pretty much goes away.

Q: What can FERC do to prevent blackouts elsewhere?

A: One of the things we've done is start a regional road show on infrastructure. It's an effort to get all the relevant people together--from the public side and the private side. That's where the capital comes from to upgrade the grid, the pipeline network, build power plants, and add new technology to make it all more efficient. We say, "O.K., this is what the next 10 years looks like--population growth, economic growth, demands for power and gas, and so on. Here are the tools we've got. Let's do something about it."

Q: And the reaction?

A: Positive. I found in Texas the government doesn't need to do much if you can simply act as a catalyst. We were facing a tight crunch in 1998. But as a result of the steps we took, investment came to the state. For the coming summer, it looks like Texas will have a 30% excess supply cushion over the hottest day's needs. I'm willing to bet that nationally, the market will react with good solutions in a timely manner.

Q: Yet just because private investors are enthusiastic, that doesn't mean power plants will be built. Are enough being built even now?

A: California needs to move at a pretty hectic pace. Otherwise, they're going to be importing power from outside the state, which they don't want to do. It's going to require some more investment in new power plants. The plants that are there now are getting older and older. Replacing them with new efficient plants is good for the environment, too.

Q: Generating capacity is just one problem. What is FERC doing to fix the nation's transmission system?

A: We have a role to play, but ultimately, transmission [construction is regulated] by the states. So our role in these infrastructure road shows is to talk a lot about what can we do together. In Texas, we standardized how a generator could interconnect to the Texas grid. Transmission investment projects under way since 1998 exceed $1 billion. We want to have that same thing across the country. On a national scale, transmission has not been invested in for a decade. We're paying the price for that. We've got a lot of little two-lane dirt roads moving electric power in the Information Age. That isn't the recipe for long-term success.

Q: Another of your top priorities is to set up a national office to oversee and investigate power markets. What's behind this?

A: I set up an office like this in Texas, so I just brought the playbook here. This agency needs to be equipped to move into the role of market referee. There are reams of data that come in on trades, on reliability issues. This office should help prevent some of the concerns over unfair pricing that came from the California crisis.

Q: Part of your agenda is getting states to join up and form regional transmission organizations. What are the advantages of these?

A: RTOs are a good vehicle that the prior commission set up. The RTO is a recognition that the power business must be planned and operated regionally. We've got to connect Washington to Richmond to Roanoke. The RTO ought to be the respected body that initiates regional planning by saying, "In this large area we need these four projects to be built." Then it becomes the states' responsibility.

Q: Do the states need incentives?

A: I don't know. All the regulators meet together about three times a year and check each other out. There's a little bit of competitiveness there and a lot of regionalism. That's where the RTOs fit in. They're more objective. They base their analysis not on politics, but on facts: where the power system is weak and where the system should be buttressed.

Q: Do you say that as a former state regulator?

A: As a conservative, I'm a big believer in why there are 50 states, 50 little boxes. But electric power markets don't recognize those boundaries. Do you mandate one-size-fits-all for retail competition by some date? No. Each state has to do its own bill. It's a little messy, but who promised this stuff would be neat?

Q: But must deregulation take a long time, too?

A: Wholesale deregulation can happen in the short term--over the next couple of years. It's been going on for seven years already, so it's not like it's a new deal that we just dreamed up. To further open up retail competition is up to the states.

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