Presented to: 19 th World Energy Congress Sydney, Australia September 8, 2004 National Energy Market Monitoring in the United States Surveillance Nationale Des Marches D’Energie Aux Etats-Unis William F. Hederman, Director Office of Market Oversight and Investigations Federal Energy Regulatory Commission WH

2 To recover from the aftermath of California and Enron, energy markets in the U.S. require: Integrity Confidence

3 The relevant energy markets 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

4 The FERC strategy to provide dependable, affordable energy through sustained competitive markets has 3 elements. Effective Rules Infrastructure Rules Enforcement Competitive Markets Just & Reasonable Outcomes Strategic Approach

OMOI has already accomplished much Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Apr May June July Aug Sept Oct Nov Dec Director Hired Observed CFTC Market Surveillance 1 st Market Surveillance Report 1 st Seasonal Assessment report FERC Re-organization: OMOI Official FERC California Office Opens 1 st Winter Assessment Report Hotline Promotion Launched Critique of CPUC Report Issued Transco and Nicor Settlements Calif Anomalous Bidding/Physical Witholding Handoff to OMOI Price Reporting Policy Statement Cleco Settlement BLACKOUT* Reliant Settlement Standards of Conduct Order Behavior Rules Order Winter Assessment Duke Settlement 1 st State of the Markets Report ISO/RTO Monitors Present 1 st Common Metrics Price Index Survey Report Summer Seasonal Assessment Williams Settlement Storage Data Settlements Storage Data Technical Conference New Auditors Join OMOI Energy Engineering Ethics Conference ( Jan Feb Mar OMOI e-library Summer Assessment 1 st Price Index Technical Conference OMOI Fellows Lectures Begin * OMOI does not claim the blackout as an accomplishment. 5

6 The market has recognized FERC’s progress. 1.The Desk : “OMOI hit the ground running on this one – that the size, speed and depth of the investigation would have made an SEC ‘tiger team’ proud.” (July 25, 2003) 2.Edison Electric Institute: “They’re clearly developing a good analytical model to monitor gas and electricity markets, and we commend them for that and encourage it.” (in Dow Jones, January 22, 2004) 3.Restructuring Today: OMOI “has a significant team and yesterday…they showed off what they can do and how well they are plugged in.” (January 23, 2004) 4.Restructuring Today: “How different the world is today from the early days of the California meltdown when OMOI didn’t exist and FERC had little idea of what was going on.” (January 27, 2004) 5.The Desk : “…a colossal effort…the sort of report your office of strategy or market analysis would typically pay tens of thousands of dollars....It is by far the most in-depth document to come out of FERC in a very long time.” (March 19, 2004) 6.American Public Gas Association: “The Commission took important and forceful steps this week to improve the fairness and effectiveness of the competitive natural gas market…the abuses uncovered by OMOI and acted upon by the commission reinforce the need for effective market rules…” (in Platts Inside FERC, August 9, 2004) 7.FERC Chairman Pat Wood III: The State of the Markets report is “everything I dreamed of” in setting up OMOI. (January 22, 2004)

7 Director Office of Market Oversight and Investigations Organization Chart Division of Management & Communication Division of Management & Communication Deputy Director Market Oversight & Assessment Deputy Director Market Oversight & Assessment Deputy Director Investigations & Enforcement Deputy Director Investigations & Enforcement Division of Energy Market Oversight Division of Energy Market Oversight Division of Financial Market Assessment Division of Financial Market Assessment Division of Integrated Market Assessment Division of Integrated Market Assessment Division of Enforcement Division of Enforcement Division of Operational Audits Division of Operational Audits Division of Financial Audits Division of Financial Audits Division of Information Development Division of Information Development

8 OMOI has become pro-active. Audits --targeted --random Educating regulators about markets --OMOI own staff --Other FERC --State regulators --International Market intelligence gathering --‘signals’ (data/alarms) --‘human’ Empowering key players --compliance and risk officers --engineers --board members

9 Monitor staff characteristics for success. Diverse (econ, finance, law, engineering, accounting, public policy) Highly skilled (79 advanced degrees) Public-spirited Team-oriented Self-motivated Motivated by challenges Sense of humor

10 OMOI Next Steps Integrating into FERC processes Continuous improvement --market surveillance reports --oversight meetings --seasonal look-aheads --definitions of market power, abuse, etc. Enhanced auditing and other intelligence gathering Empowering key market participants Rapid response to observed anomalies More intense scrutiny of less transparent markets Expanded teaming --MMUs --states --other federal agencies --North American colleagues