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After less than a year in his post, Pat Wood III has turned the Federal Energy Regulatory Commission into a Washington contradiction: A government agency that plans to deregulate the electricity market by regulating it even more. Wood is the second chairman appointed by President George W. Bush to lead FERC. A Texan half a year shy of his 40th birthday, Wood is a lawyer, an Aggie fan, and one of the most activist and galvanizing chairmen the traditionally stolid agency has had in years. “He’s really dumped the old laissez-faire attitude in the trash can,” says John Hughes, director of technical affairs for the Electricity Consumers Resource Council, an association of large industrial users. “The old commission under [James] Hoecker or [Curt] Hebert never had the votes for something that was remotely active. Now it’s a solid three-to-one vote on activism. “They are now being accused of doing too much,” Hughes adds. On the commission for seven months, and chairman for just over four, Wood has already fashioned one of the most intriguing voting blocs to force the issue of electricity deregulation. Wood and his fellow commissioners are arguing for a free market for electricity. But it will be a market that is carefully and precisely constructed by FERC. After years of inching toward an unfettered electricity market, the commission, under Wood’s leadership, is saying it will do it. In the process, the commission is proving remarkably friendly toward regulation, government rules, and federal oversight. “There has been a dramatic change,” says Steven Kramer, an energy lawyer at Milbank, Tweed, Hadley & McCloy who previously worked at FERC. “[Wood] seems to be more of a hands-on regulator.” IN WITH THE NEW It would have been hard to predict an energy commission like this one at the beginning of Bush’s term. James Hoecker, the pro-deregulation Democratic FERC chairman under President Bill Clinton, resigned, and Bush appointed Curt Hebert Jr. to the chairmanship. Hebert was a committed free-marketeer. He not only believed markets work, but that they work better the less government shapes them. Hebert took over during the California energy crisis. Hoecker had steadfastly avoided calls for price caps and significant federal intervention in California during his chairmanship. Hebert dug in even harder. But Bush soon showed he wanted to change the approach. In late March, Bush announced his intention to nominate Wood and another Republican, Nora Mead Brownell, to the commission. While Wood was announced as a nominee for the commission, it was well-known that the president wanted him as chair. The two had worked together in Texas, when Wood ran the Public Utility Commission and helped fashion the state’s deregulation plan. Hebert was still chair when Wood and Brownell joined the commission. But it became clear almost immediately that it was no longer Hebert’s commission. In the first meeting Wood and Brownell attended together, the commission voted to rein in prices for California and the Western region. Hebert announced in August that he was leaving, and Wood was appointed to his spot. Wood has set an ambitious agenda for how a wholesale electricity market will be created and implemented. And although, as chairman, Wood is the driving force, his success is dependent on a solid commission voting bloc. So far he has had that with the help of Brownell and the man known as FERC’s populist, William Massey. ODD ALLIANCE “It’s a whole new world,” says Craig Goodman, president of the National Energy Marketers Association, a group that supports deregulation. “In the past FERC has had a reputation for half-measures and going a bit forward, and coming a bit back. Wood and Brownell and Massey have taken a very bold new step toward a whole new approach to energy restructuring.” Both Wood and Brownell are Republicans with significant experience as state regulators. And while both are driving hard to set up a free market for wholesale electricity, it’s also clear that the two are less ideological, more pragmatic. “I will take the heat and I will get the job done,” says Brownell. “I think Pat is the same kind of person. We are going to do the right thing. I am not going to oversee the development of a market where the rules aren’t fair and the incumbents are bound to win.” And in that area, Wood, whose office did not respond to interview requests, and Brownell find themselves agreeing most frequently with Commissioner Massey. A Clinton-era appointee, Massey had until recently found himself often the lone vote for regulation. Now, with the two new GOP additions, Massey is finally agreeing with the actions the commission is taking. “In a lighthearted way, I could say what has changed is that there is now majority support for the positions I have been championing for four years,” says Massey. “I am an old yellow dog Democrat, and now there are two Republican commissioners who happen to agree with me. It’s exhilarating.” CHARGING AHEAD What FERC is ultimately doing is deregulating wholesale electricity. There is little disagreement among the commissioners or even between the Democrats and the Republicans over the concept of moving electricity from the old heavily regulated public utility structure to a market-style one in which companies will compete to generate, transmit, and sell electricity. It’s the goal FERC has been moving toward for years, since it deregulated natural gas, the other industry it oversees. While Wood’s FERC has been aggressive, it has also compromised. The issue of RTOs is the perfect example. The Wood commission has fashioned its deregulation strategy on one cornerstone — the regional transmission organization. RTOs, as they are known, are independent organizations that would control the power lines in geographic regions, allowing all generators access to the lines. Wood and his allies argue that RTOs will control transmission costs, encourage more wholesale competition, and end up lowering consumer prices. New energy companies that buy, sell, and trade electricity have been pushing for RTOs, while the utilities that have traditionally owned the lines have been less than enthusiastic. For several years, FERC, the states, and power companies have been involved in an intricate dance around how and when to develop RTOs. But Wood has demanded that it get done now. He is also determined that FERC will be the one to decide what the RTOs should look like and how they will work, rather than letting a slew of radically different RTOs pop up all over the country. The commission just approved the first RTO in December, which will cover the Midwest. It rejected a proposal by 11 other Midwestern companies to create their own transmission group. When Wood first joined the commission, he backed the concept of four RTOs for the country. A number of companies and state regulators balked, complaining to FERC and members of Congress. Now Wood and the commission say that more RTOs may be a better solution. POWER STRUGGLE In November, Wood, Brownell and Massey backed changing the guidelines for determining if a company has market power. FERC requires companies that are deemed market powers to charge cost-based rates; those that are not may charge market rates. FERC singled out three major power companies — American Electric Power Co., Southern Co. and the Entergy Corp. — and announced that they would no longer be allowed to charge market rates because they had market power under the new definitions. Several others faced similar fates. The new rules would not apply if a company was in an RTO. It was a clear move to push companies into a regional grid structure. “The impression now is that they are on a mission and they are going to use every lever they can, and if fairness gets run over in the process, so be it,” says an energy lawyer who represents a range of clients, including large utilities. “If they are not careful, the industry is going to say, ‘If that is going to be the way you are going to play, then I am going to litigate against you.’ If they keep going like this, there is a real risk of losing the good will of the industry.” But as with the decision over the number of RTOs, the commission proved willing to compromise. Last month, FERC announced that it may have acted hastily. After companies complained, and their legal counsel filed critical comments about the new market power test, the commission decided to hold a conference on the issue at the end of January before moving forward. “If you are making dramatic change and you receive enough input that says you need to take another look, you should — I am open to that,” says Commissioner Brownell. But at the same time, the commissioner says, FERC will continue to take steps that won’t always be received with rounds of applause. “We probably wouldn’t be doing a good job,” she says, “if we weren’t causing some people to stand up and pay attention.”

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