**[Energy Investment:]{.underline}**

**[Advice for New Opportunities and Challenges]{.underline}**

remarks by

**William F. Hederman**

to the

**Energy Bar Association**

**New York, N.Y.**

**June 9, 2005**

Thank you for the opportunity to join your discussion today. I was
delighted to see a conference regarding "the Street" and energy business
that has a positive tone.

Before I address the substance of my remarks, let me remind you that the
observations and opinions I share with you today are my personal
opinions. They do not represent official Commission opinions or policy.

Let me start by explaining my organization, FERC's Office of Market
Oversight and Investigations (OMOI). OMOI seeks to help restore
integrity to energy markets subject to Commission jurisdiction through
enforcement of the Commission's rules. We also attribute equal
importance to restoring the public's confidence in the integrity of
energy markets. OMOI's strategy for this restoration combines vigilant
oversight by our analysts and auditors with enforcement actions. I
believe that industry and we have largely succeeded in restoring
integrity. We have also made substantial progress in convincing the
public and their elected representatives that integrity has improved.
Nevertheless, there remains room for improvement.

Our staff of 130 attorneys, auditors and analysts is constantly
examining the markets. If you want to understand our short term
priorities, review the latest Seasonal Assessment. We have designed
Summer and Winter Assessments to identify the concerns that will get our
oversight priority during the upcoming peak season. We also pursue more
strategic priorities, such as the Standards of Conduct and Market
Behavior Rules, that the Commission's strategic plan specify.

For Summer 2005, OMOI has identified five areas of concern:

1.  Western markets,

2.  New England load pockets,

3.  MISO implementation,

4.  New York City/Long Island load pockets, and

5.  Natural gas storage fill.

Let me address our first priority, Western markets. Since the latter
part of 2004, in response to information brought to the FERC's attention
by CAISO staff, the Commission has encouraged California market
participants to prepare for a potentially difficult summer. The
governor's office has exercised strong leadership in pursuing this same
objective. Unfortunately, weather conditions have left the hydro-power
situation weak. At this time, the late summer hydro outlook is
particularly threatening because of poor snow pack conditions in the
Pacific Northwest. Making matters worse, the California attorney general
has sued an important supplier of hydro-power from Canada. California
should be able to deal with normal weather conditions. NERC projects a
28% reserve margin for the West as a whole. Looking in more detail,
southern California's margins appear inadequate for extreme heat.

NOAA anticipates above-average temperatures for much of the U.S. West,
and this could increase western market prices because of costly
gas-fired power on the margin. System failures could, of course, also
cause market problems. Nevertheless, the combination of forward
contracting, improved Commission and CAISO rules, and intense oversight,
we believe, make spot market manipulation far less likely than in
2000-2001.

Back here in the East, OMOI is on the alert for brief price spikes,
primarily for Southwest Connecticut and also for New York City and Long
Island. Such spikes could be market-driven by scarcity or---what we and
the NYISO and ISONE market monitors work hard to
prevent---manipulation-driven. I can discuss these issues in greater
detail during questions.

[OPPORTUNITIES/CHALLENGES]{.underline}

Let me turn to the many opportunities returning or emerging for energy
investors, in both the power and natural gas market space. In both
markets, the greatest opportunities appear likely to involve asset
transfers, either through M&A or facility sales.

For power markets, transmission opportunities appear to be improving,
yet remaining less than what the nation appears to need. I anticipate
serious capital requirements for enhancing transmission security and
reliability. With respect to generation, nationally not much is
happening. Nevertheless, the lead time for coal-fired power is long
enough that planning there should be underway, and load pockets such as
New York City need generation and "the numbers" look interesting.

For natural gas, LNG investments are the strongest segment for
investment. Of course, given the number of proposals and consultants
hovering around projects, this appears to have achieved the excessive
exuberance stage in record time. There are still opportunities in
storage but the opportunities are limited by technology and geology.

Pipeline investment opportunities continue. I find pipelines to be the
star performer of the Nation's energy regulatory reform efforts. These
firms have consistently managed to reconfigure and grow their systems by
anticipating market needs and working with communities to enhance the
North American gas pipeline system to serve both new suppliers and
evolving loads.

The challenges to these investment opportunities include the usual:
jurisdictional uncertainty, NIMBY opposition, and alleged, regulatory
uncertainty.

[REGULATORY UNCERTAINTY]{.underline}

Curiously for me, OMOI has recently been included in the regulatory
uncertainty. This is an interesting development for me. When I took the
job---3 years ago---many asked me why an energy company would pay
attention to any FERC enforcement initiative, especially given the
constraints on enforcement authority. If market participants are now
overly concerned about enforcement, that is a constructive improvement
for both energy markets and customers.

Nevertheless, I do not want OMOI to be part of the problem. We have all
worked very hard to be part of the solution. Let me assure you, our
focus is ---and has been---COMPLIANCE. We are not looking for "gotchas."
From the very beginning, I have urged companies to perform internal
audits. There is of course, a transition from FERC as a regulator
through rates to FERC as a regulator through oversight. Like any major
change, there is often more pain and friction during the transition than
there will be after the transition. OMOI is keeping its eye on the
future. We think the worst is over.

Let me make this clear. My firm intention is to encourage self reporting
and honor the integrity it embodies. When OMOI addresses a case based on
self-reporting, we are quite lenient relative to other circumstances,
especially on penalties. We must insist on the disgorgement of excess
profits, but we have been quite forgiving on penalties. Even on
disgorgement, OMOI is inclined to give a self-reporting company the
benefit of the doubt on disputed figures. I cannot prove these factors
to you without revealing confidential settlement information.

[A STRATEGIC OPPORTUNITY]{.underline}

There is a business opportunity in the current situation. As my auditors
report to us on Standards of Compliance audits, they have found genuine
cultures of compliance at companies. This is great news!

The opportunity arises if the speakers at our May compliance officers
conference in Chicago represent the position of many companies. Some
speakers indicated that they have adopted conservative strategies that
hinder market innovation. There is no need to do this. Many of my staff
come from industry, as do I. We understand business. Don't be afraid of
the phrase "legitimate business purpose." This is not meant as a "trick
question." The concept is borrowed from the CFTC, where we understand it
has worked quite well. Document why you are adopting a strategy or
tactic. You should be on solid ground with OMOI if you make an
investment of capital or talent, incur business risk, and make a profit.
The notion that we frown on "businesses making money" is more than
absurd. It is irresponsible for business managers to be so timid that
they recommend avoiding legitimate business opportunities because of
remedies for infractions that occurred in a prior time.

So, keep up the good work! Listen to this recent article's title (from
[Pipeline and Gas Journal]{.underline}, May 2005) reporting on the
results of a recent Mastio Customer Satisfaction survey:

"Integrity, Reputation Key for Natural Gas Buyers"

That delights us at OMOI. I know how the Mastio surveys work and this is
as legitimate a confirmation as I could hope for that integrity has
returned to the energy marketplace.

Thank you for your attention. I look forward to your questions.