Presented to: Euro Gas/IEA Conference Paris, France 13 June 2005 The Role of Regulators in Liberalized Energy Markets William F. Hederman, Director Office of Market Oversight and Investigations Federal Energy Regulatory Commission WH

2 Outline Commission Strategy OMOI Processes Case Studies Conclusion (Opinions expressed are Hederman’s, not those of the Federal Energy Regulatory Commission.)

3 FERC has a 3-prong strategy. Effective Rules Infrastructure Rules Enforcement/Oversight Competitive Markets Just & Reasonable Outcomes Strategic Approach

4 OMOI has 3 essential processes to “Trust and Verify”. Professionally skeptical Diverse (private/public sectors, disciplines) Highly skilled Team-oriented C O I OutsIdeOutsIde FERCFERC

5 We are working to empower responsible participants.

6 Monitors have addressed several important natural gas anomalies Weekend “price blip” (NY) Cold snap (New England) EIA storage reporting error North Atlantic LNG diversion

7 OMOI’s enforcement arm has pursued several natural gas matters. Inter-company storage data sharing Affiliate abuse Standards of Conduct compliance

8 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

9 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.

10 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.

11 Market Integrity is Everyone’s Business FERC Hotline:

12 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.

14 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