Energy Markets: Additional Actions Would Help Ensure That FERC's Oversight and Enforcement Capability Is Comprehensive and Systematic
Published: 2003-08-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In June 2002, GAO reported that the Federal Energy Regulatory Commission (FERC) had not yet adequately revised its regulatory and oversight approach for the natural gas and electricity industries' transition from regulated monopolies to competitive markets. GAO also concluded that FERC faced significant human capital challenges to transform its workforce to meet such changes. In responding to the report, FERC said that the new Office of Market Oversight and Investigations (OMOI) it was creating and human capital improvements under way would address these concerns. GAO was asked to report on FERC's progress in (1) establishing an oversight and enforcement capability for competitive energy markets and (2) improving agency-wide human capital management.
section_title: What GAO Found
paragraphs: FERC has made strides in putting an energy market oversight and enforcement capability in place, but work remains to ensure that its efforts will be comprehensive and systematic. Since FERC declared OMOI functional in August 2002, the office has focused primarily on outlining its vision, mission, and primary functions; developing basic work processes; integrating its use of an array of tools to oversee the markets; and hiring staff with market experience. OMOI is also assessing its data needs and developing its working relationships with others, such as the industry's market monitoring units. Nonetheless, the office still has work to do in the following two key areas. Clearly defining its role: OMOI has not clearly defined its role and the activities that it will engage in to achieve its mission. For example, the office has not yet decided on the level of detail at which it will review electricity markets. This decision has substantial implications for the office's data, technology, resource, and staff skill mix needs. Developing formal processes and written procedures: OMOI's processes are largely informal and ad hoc, and it has few written procedures to ensure that its efforts are coordinated, systematic, understood by its staff, and transparent to its stakeholders. Although OMOI has had some early accomplishments--such as a $20 million civil penalty against a company for anticompetitive behavior--it is difficult to judge how effective the office will be until its role and major processes are clearly set out. FERC is also making progress toward addressing its considerable human capital management challenges, but additional actions could increase its likelihood of success. FERC's success in these efforts is important because the extent to which it can carry out its mission in a changing environment depends on its ability to adjust its staff skills and abilities in a difficult context. For example, over half of its workforce will be eligible to retire by 2007. In response, FERC has, among other things, expanded its use of certain personnel flexibilities, such as recruiting and retention bonuses, and is considering use of additional flexibilities. More importantly, FERC, in February 2003, developed a human capital plan. However, the plan does not contain some elements key to successful implementation, including (1) details on specific activities and resources needed to implement its human capital initiatives and (2) results-oriented measures that can be used to track the agency's progress in implementing the initiatives and evaluate their effectiveness. FERC also has not established time frames for many of its human capital initiatives.

section_title: Letter
paragraphs: The U.S. electricity and natural gas industries’ transition to competitive  markets has not been smooth. Volatile prices, energy shortages, financial  difficulties such as the bankruptcy of the Enron Corporation (the nation’s  largest energy trading company before its financial problems), and  accusations of price manipulation have raised questions about the  transition to competitive markets and the federal government’s ability to  regulate and oversee these new markets to protect market participants and  consumers. The Federal Energy Regulatory Commission (FERC)—the  federal agency primarily responsible for regulating and overseeing these  industries—will play an important role in developing competitive  wholesale markets and in protecting consumers against market abuses.
In June 2002, we reported that FERC had not yet adequately revised its  regulatory and oversight approach to respond to the transition to  competitive energy markets. We also pointed out that FERC faced  significant human capital and organizational structure challenges as it  transformed its workforce to effectively regulate and oversee these  evolving markets. For example, we noted that the agency did not have  enough staff with knowledge of competitive energy markets, and that its  market oversight function was too dispersed across the agency. In addition,  we noted that FERC was attempting to regulate and oversee the markets  with outdated legal authorities that were mostly derived from laws enacted  when the industries were composed of highly regulated monopolies. We  made a number of recommendations to address these issues and improve  the agency’s capability of overseeing competitive energy markets. FERC  agreed with our conclusions and said that the report’s recommendations  were consistent with the agency’s plans for its new Office of Market  Oversight and Investigations (OMOI) and human capital management  improvements.
In response to concerns about its capability to oversee the evolving energy  markets, FERC announced, in January 2002, that it was creating OMOI. In  making the announcement, FERC stated that the new office would report  directly to the Chairman of FERC, and its functions would include  understanding energy markets and risk management issues, measuring  market performance, investigating compliance violations, and analyzing  market data. In April 2002, FERC hired the office’s director, who began to  plan its operations and hire its staff. In August 2002, the FERC Chairman  declared that OMOI, with about half of its planned personnel in place, was  a formal, functioning office within the agency. This change in FERC’s  approach to monitoring markets—requiring a reassessment and  reprioritizing of how it does business—will not be easy. Experience in  public and private organizations has shown that for an organization to  successfully “transform” itself, it must often change its culture to be more  results oriented, collaborative, and customer focused.
In light of FERC’s stated commitment to and your interest in market  oversight, you asked us to assess FERC’s progress in (1) establishing an  oversight and enforcement capability for competitive energy markets and  (2) improving agencywide human capital management. As agreed with your  office, we focused our review of FERC’s market oversight and enforcement  efforts on OMOI’s formation and operations. To respond to this request, we  reviewed appropriate plans, studies, reports, and other documents, such as  budget justifications, relating to OMOI’s activities and FERC’s human  capital management initiatives. We also interviewed OMOI’s managers and  FERC officials responsible for agencywide human capital management  programs. In addition, we surveyed OMOI’s employees to obtain their views  on the office’s effectiveness, morale, and work environment. About 87  percent of the employees responded to our survey. Furthermore, we  contacted the heads of four units operating at the time of our review with  responsibility for monitoring regional wholesale electricity markets under  FERC’s guidance to obtain their views on OMOI’s progress in establishing  an oversight and enforcement capability for energy markets. We performed  our review from October 2002 through June 2003 in accordance with  generally accepted government auditing standards. (See app. I for a more  detailed discussion of our scope and methodology and app. II for a copy of  the OMOI employee survey with the quantitative results.)
subsections: section_title: Background
paragraphs: The natural gas and electricity industries perform three primary functions  in delivering energy to consumers: (1) producing the basic energy  commodity, (2) transporting the commodity through pipelines or over  power lines, and (3) distributing the commodity to the final consumer. A  range of federal, state, and local entities regulate different aspects of these  functions. While generation siting, intrastate transportation, and retail sales  are generally regulated by state or local entities, wholesale sales and  interstate transportation generally fall under federal regulation, primarily  by FERC. Under federal law, FERC is responsible for ensuring that the  terms, conditions, and rates for the interstate transportation of natural gas  and electricity, certain sales for resale of natural gas, and wholesale sales of  electricity in interstate commerce are “just and reasonable.” Other federal  agencies also play an important role in regulating energy markets. For  example, the Commodity Futures Trading Commission regulates  commodity futures and options markets in the United States and protects  market participants against manipulation, abusive trade practices, and  fraud.
For nearly a century, the natural gas and electricity industries were  regulated as natural monopolies and dominated by a relatively few, large  public utilities that produced, transported, and sold natural gas and  electricity to the ultimate users. This monopoly structure controlled the  entry, prices, and profits of industry participants. Under this regulatory  framework, FERC established individual utilities’ terms, conditions, and  rates for transportation and wholesale sale of natural gas and electricity in  interstate commerce. To ensure that the rates these utilities charged were  just and reasonable, FERC based the rates on the utilities’ cost to provide  the service plus a fair return on investment, which is generally referred to  as cost-of-service regulation.
With technological, economic, and policy developments over the past two- to-three decades, these industries have undergone a transition—commonly  known as “restructuring”—from this highly regulated environment to one  that places greater reliance on competition to determine entry, prices, and  profits. Natural gas was first to make the shift, facilitated by passage of the  Natural Gas Policy Act of 1978 and subsequent FERC orders in 1985 and  1992 that opened pipeline transportation to all on equal terms and required  pipeline companies to completely separate or “unbundle” their  transportation, storage, and sales services. As a result, natural gas became  a commodity bought and sold separately from its transportation.
The electricity industry has experienced similar restructuring, starting  about the same time but evolving more slowly than the natural gas industry.  The Public Utility Regulatory Policies Act in 1978 introduced competition  by requiring electric utilities to buy electricity produced by nonutility,  electric power generators. Then in 1992, the Congress passed the Energy  Policy Act, authorizing FERC to require utilities, on a case-by-case basis, to  allow competitors to use their transmission lines for wholesale sales of  electricity. In 1996, FERC ordered that electric transmission systems be  opened to all qualified wholesale buyers and sellers of electric energy.
FERC also required utilities to “functionally unbundle” their generation and  transmission businesses to prevent discriminatory practices, such as not  allowing competitors equal access to transmission lines. One option FERC  provided the utilities to help them achieve unbundling was to transfer  management of their transmission lines to an independent system operator  (ISO) that would manage the system without any special interests and for  all users’ benefit. Since 1996, six ISOs have formed and are operating, each  with its own set of operating rules. Of these, four ISOs—California; New  England; New York; Pennsylvania, New Jersey, and Maryland Interconnect  (PJM)—operate interstate wholesale electricity markets in which  electricity suppliers and buyers submit bids to sell and buy power.
In 1999, FERC issued an order encouraging all privately owned electric  utilities to voluntarily place their transmission facilities under the control  of a broader market entity called a regional transmission organization  (RTO). As a result, ISOs created under a previous FERC order would be  supplanted by larger RTOs, which would cover the entire nation. The  rationale behind FERC’s approach to forming RTOs was that the nation’s  transmission systems should be brought under regional control in order to  eliminate the remaining discriminatory practices in use, better meet the  increasing demands placed on the transmission system, improve  management of system congestion and reliability, and achieve fully  competitive wholesale power markets. FERC is in the process of trying to  establish these organizations to cover the continental United States and has  currently approved two RTOs—Midwest ISO and PJM.
In approving the formation and operation of ISOs and RTOs, FERC requires  these organizations to, among other things, establish market monitoring  units. These units are to provide for objective monitoring of the markets  operated by the ISO or RTO to identify market design flaws, market power  abuses, and opportunities for efficiency improvement. The market  monitoring units of four ISOs or RTOs—California, New England, New  York, and PJM—have been operating for several years under FERC’s  approval. FERC has also approved a market monitoring unit for the  Midwest ISO, but Midwest does not currently operate a centralized power  market (it plans to do so by December 2003). FERC approves the units’  market monitoring plans and requires the units to periodically report on  their monitoring activities.
In July 2002, FERC issued a notice of proposed rulemaking to provide a  standard market design for all electric transmission providers. FERC’s  fundamental goal in this initiative is to create “seamless” wholesale  electricity markets, nationwide, that allow sellers to transact easily across  transmission boundaries and allow customers to receive the benefits of a  lower cost and more reliable electricity supply. Accordingly, FERC’s  standard market design proposal contains a wide range of rules to  standardize the structure and operation of wholesale electricity markets  and transmission services. Among other things, it (1) describes the rules for  how a portion of the nation’s electricity will be exchanged in organized  markets, (2) defines a new transmission service, and (3) establishes new  market power mitigation and monitoring requirements. The proposal has  been highly controversial. FERC estimates that the proposed standard  market design rule has generated about 1,000 sets of formal comments  reflecting concerns and reservations about the scope and details of the  proposal. In April 2003, FERC issued a white paper explaining how it  intends to change its proposal in response to the comments and concerns  that had been raised. When the white paper was issued, FERC expected the  final rule to be promulgated later in the year. However, in commenting on  our draft report, FERC said that it is planning to hold technical conferences  in different regions of the country this fall and has postponed the issuance  of any final rule.
With the opening of pipelines and transmission lines, other energy  producers and marketers began to compete with the traditional utilities to  the point that a complex structure of formal and informal primary and  secondary energy markets has evolved. As competition has increased,  FERC has allowed more and more producers and marketers to sell their  energy at prices determined in the marketplace. This evolution to  competitive energy markets is requiring FERC to fundamentally change  how it does business. With the shift to market-based prices for natural gas  and electricity, FERC has concluded that its approach to ensuring just and  reasonable prices has to change: from one of reviewing individual  companies’ rate requests and supporting cost data to one of proactively  monitoring energy markets to ensure that they are working well to produce  competitive prices. FERC established OMOI to coordinate and bring about  this shift in the agency’s energy market oversight efforts. Like the agency’s  other major offices, OMOI reports directly to the Chairman of FERC (see  fig. 1).
OMOI has organized its staff into eight divisions, which are grouped into  three main units: (1) Market Oversight and Assessment, (2) Investigations  and Enforcement, and (3) Management and Communication (see shaded  area of fig. 1). The Market Oversight and Assessment unit performs a  variety of tasks related to monitoring energy markets, monitoring financial  markets, researching new data sources, publishing reports on market  surveillance, and assisting with ongoing investigations. The Investigations  and Enforcement unit performs a variety of tasks related to investigating  market abuse, conducting audits of entities under FERC’s jurisdiction, and  manning the enforcement hotline. Finally, the Division of Management and  Communication and the OMOI director’s office provide administrative and  management support.
OMOI’s budget request for fiscal year 2003 is about $13.5 million and  provides funding for 110 staff years, which includes $500,000 in contracting  services. For fiscal year 2004, FERC has requested a budget for OMOI of  about $14.3 million and 110 staff years, which includes $1 million in  contracting services.
section_title: FERC Has Made Progress, but Work Remains to Ensure That Its Oversight and Enforcement Capability Is Comprehensive and Systematic
paragraphs: With the formation of OMOI, FERC is making headway in establishing an  oversight and enforcement capability for competitive energy markets.  OMOI has taken a significant step forward in setting out its vision, mission,  and primary functions as a framework for comprehensively overseeing the  markets; developing its basic work processes; and beginning to use an  array of tools to oversee the markets. The office also has almost completed  its staffing to authorized levels. Nonetheless, these efforts are largely in  their formative stage and OMOI continues to hire additional staff, improve  its oversight tools, and adjust its processes and procedures. Additional  actions to formalize the office’s work processes and procedures and to  more clearly define its role would help ensure that its efforts to oversee  energy markets are systematic and comprehensive. In addition, OMOI’s  role largely determines its resource, information, technology, and staff skill  mix needs.
subsections: section_title: OMOI Is Planning a Comprehensive Approach to Overseeing Energy Markets, but Important Steps Have Not Been Taken to Clearly Define Its Role
paragraphs: OMOI’s statements of its vision, mission, and functions set out the  framework for a comprehensive market oversight and enforcement  approach. According to the statements, OMOI plans to analyze and assess  both market performance and market rules in the broader context of the  markets’ overall efficiency and effectiveness and market behavior and  compliance with rules at the individual market participant level. (See table  1.)
These statements were a starting point for planning and organizing OMOI’s  activities and serve to provide a concise, if general, outline of the office’s  planned oversight and enforcement approach. OMOI decided to begin  operating under this broad framework and to work out more details as it  became more organized and gained experience with the markets and  available data and oversight tools. At this point, OMOI has not provided  additional details in writing on how it will carry out these functions to  achieve its mission.
However as OMOI moves forward, several issues have not been addressed  that are important to the office’s credibility and to ensuring that it  comprehensively carries out its planned approach. Recognizing that  responsibility for making energy markets work well is shared with the  industries (including the ISOs and RTOs and their market monitoring  units), individual market participants, the states, other FERC offices, and  other federal agencies, it is important that OMOI clearly define its role in  achieving comprehensive oversight of the markets. This role and how  OMOI will carry it out largely determines its resource, information,  technology, and staff skill mix needs.
First, OMOI has not directly and clearly connected its vision, mission, and  functions to FERC’s statutory responsibilities for ensuring that wholesale  natural gas and electricity prices are just and reasonable. Second, OMOI  has not defined undue exercise of market power, although identifying and  addressing the exercise of market power is one of the major aspects of  market oversight, especially when the markets are in transition. Third, the  statements do not explicitly recognize that an important function of the  office will be to integrate its work with that of the industries’ market  monitoring units, other agencies such as the Commodity Futures Trading  Commission, and other parts of FERC, such as the Office of Markets,  Tariffs, and Rates. Fourth, OMOI is still deciding at what level of detail it  will review market transactions as it performs its oversight. Fifth, the office  has not developed outcome or results-oriented performance measures that  express what the office will be working to achieve and that can be used to  assess its progress in carrying out its goals and objectives.
subsections: section_title: FERC Has Not Clearly Defined Just and Reasonable Prices in a Competitive Marketplace
paragraphs: FERC is responsible for ensuring that certain sales for resale of natural gas  and wholesale sales of electricity in interstate commerce are just and  reasonable. With the move to competitive markets, these prices are  generally determined in the marketplace rather than set by FERC. FERC  has recognized that this change means that it needs a new approach to  ensuring that prices are just and reasonable and has begun to provide some  guidance on what just and reasonable means in the context of competitive  markets, most recently in its proposed rule on standardizing electricity  markets. Statements in the proposed rule indicate that just and reasonable  prices are those produced by structurally competitive markets. However,  the statements do not define what a structurally competitive market is. In  addition, these statements concern the operations of market monitoring  units rather than FERC’s own role and responsibilities. Furthermore, the  proposed rule has been highly controversial and may be substantially  delayed and/or modified.
The heads of the market monitoring units told us they recognize the  difficulty of defining just and reasonable prices. They also said that they  believe FERC had made progress in doing so. However, they generally  believed that FERC had not yet gone far enough. For example, the head of  the California ISO’s monitoring unit told us that for FERC to define what it  will consider just and reasonable prices in a competitive marketplace is  critical to achieving the Federal Power Act’s goal. She stated that a clear  standard for just and reasonable is also critical to performing monitoring  and oversight functions, and, without such a standard, existing ISOs or  RTOs cannot move forward and other geographical areas will have no  confidence in ISOs or RTOs and will not wish to develop them. On the  other hand, the heads of the ISO New England, PJM, and New York ISO  monitoring units stated that FERC should not develop overly detailed or  prescriptive definitions that would reduce needed flexibility. The heads of  the PJM and ISO New England units said that FERC should instead develop  a strong policy statement or paper defining the term at a general or  theoretical level and leave it to the market monitoring units to  operationalize or put it into practice. Similarly, the head of the New York  ISO unit cautioned that, with overly prescriptive criteria, market  participants can structure behavior to avoid specific rules, conditions, or  definitions, while engaging in behavior that would not be deemed  acceptable. He added that, in orders that it has issued in individual cases,  FERC has established precedent that prices can be considered just and  reasonable when they are the product of workably competitive markets,  and determining whether a market is competitive requires some room for  considering individual circumstances.
FERC officials, including OMOI managers, told us that they recognize the  importance of defining just and reasonable prices in a competitive energy  marketplace but are finding it difficult to do. For example, the Senior  Energy Policy Advisor to the Chairman of FERC told us that FERC has  been trying to define the term for several years. The Director of OMOI said  that OMOI has the operational responsibility to give guidance on just and  reasonable rates, but agreed that an important consideration for the agency  is the level of detail at which it needs to be defined.
section_title: FERC Has Not Clearly Defined Market Power
paragraphs: In its proposed standard market design rulemaking, FERC provides some  details on what it considers market power. In the proposed rule, FERC  states that market power is the ability to raise price above the competitive  level. The agency further states that identifying market power with  precision is difficult, both because it is difficult to identify the competitive  price (which should recover both fixed and variable costs over the long  run) and because it can be difficult to isolate the impact of one entity on  the competitive market. FERC adds that, in the proposed rule, it is  incorporating the concept of when to intervene in the markets, rather than  defining what constitutes market power. The market monitoring units  would review market data, such as bidding patterns, to identify and  intervene in market situations in which market power could be occurring.  In its April 2003 white paper explaining the changes it planned to make in  the final standard market design rule, FERC said that it would require the  ISOs and RTOs to have clear and enforceable rules to define and police  market manipulation and gaming strategies by market participants trying to  unduly exercise their market power. The white paper also said that the  ISOs and RTOs would be required to have a clear set of rules governing  market participant conduct with the consequences for violations clearly  spelled out. The white paper then provided areas of anticompetitive  behaviors—such as physical and economic withholding of supplies—that,  at a minimum, should be included.
Again, the heads of the market monitoring units did not believe that FERC  had yet gone far enough in defining market power. The head of the  California ISO monitoring unit said that FERC needs to define what it will  consider market power, and that the definition must be agreed on in order  for FERC to perform its market development and oversight obligations.  She added that inappropriate or anticompetitive behavior need not be  defined through an exhaustive list of specific market behaviors but rather  through a general set of characteristics. According to the heads of the  market monitoring units of ISO New England and PJM RTO, FERC should  develop a policy statement or paper on market power rather than a highly  detailed definition. In contrast, the head of the NY ISO’s market monitoring  unit stated that FERC needs to define what it will consider market power  only in the context of specific market monitoring proposals. He told us that  his market monitoring unit has been very successful in preventing market  power by using very specific tests for market power abuse, enabling the  unit to take appropriate action with minimal delay. He added that FERC  should not adopt generic definitions that would restrict the ability of the  New York ISO to implement the tests and market mitigation measures that  have been approved for its use.
The Director of OMOI agreed that a clarifying definition of market power to  communicate the parameters of acceptable market behavior is needed. He  added that developing such a definition is complex, and his office has to be  careful in deciding what constitutes market power abuse because there is a  necessary element of judgment involved in determining what is and what is  not abuse in individual cases that should not be eliminated with a  definition.
section_title: OMOI Has Not Explicitly Set Out How It Will Integrate Its Work with That of Others
paragraphs: An important OMOI function is to integrate its work with that of others  inside and outside of FERC who also have a role in market oversight or  who carry out related responsibilities. For example, FERC’s Office of  Markets, Tariffs, and Rates has major responsibilities relating to building  competitive energy markets and authorizing companies to participate in  those markets. The office is currently leading FERC’s effort to establish a  standard market design for wholesale electricity markets. Thus, it is  important for the offices to work together so that OMOI can (1) better  understand the markets that are being created and that OMOI is to oversee  and (2) provide effective input from an oversight standpoint into  structuring the markets. In addition, OMOI officials told us that they share  oversight responsibility with other federal agencies—particularly the  Commodity Futures Trading Commission—in areas where the financial and  futures markets overlap or affect the physical natural gas and electricity  markets. For example, OMOI officials stated that OMOI, along with the  Commodity Futures Trading Commission and the Department of Justice,  would be responsible for detecting the false reporting of natural gas prices  or volumes to index publishers (see app. III). Moreover, as we discuss later  in this report, OMOI is relying heavily on the market monitoring units to  oversee electricity markets.
OMOI has various initiatives under way to build its working relationship  with these parties. However, because of the market monitoring units’  substantial role in its market oversight approach, OMOI has devoted  considerable attention to improving its working relationship with these  units, and its efforts with respect to other FERC offices and other federal  agencies are in the early stages. For example, in responding to our survey,  about 50 percent of OMOI managers and staff expressed dissatisfaction  with communication with other FERC offices. (About 26 percent were  satisfied, about 14 percent were as equally satisfied as dissatisfied, and 10  percent had no basis to judge.) In providing more detailed responses,  several OMOI staff indicated that they thought communication and  cooperation between OMOI and FERC’s Office of Markets, Tariffs, and  Rates was a problem. In addition, the head of a market monitoring unit told  us that he has had to inform OMOI staff about the issuance of orders  initiated in other FERC offices.
The Director of OMOI told us that he understands these concerns about the  office’s working relationship with other FERC offices. According to the  Director, OMOI wanted to first get its “act together” before reaching out to  the other offices. He added that OMOI has been working hard the past  couple of months with FERC’s Office of Markets, Tariffs, and Rates and  Office of the General Counsel to establish more formal connections.
OMOI officials told us that they plan to coordinate their work with other  federal agencies to better incorporate their knowledge and views about  related market activities. For example, the Director of OMOI’s Division of  Financial Market Assessment told us that he would like to develop a formal  information-sharing arrangement with the Commodity Futures Trading  Commission so that OMOI has better access to financial information. He  said that while FERC has limited jurisdiction over financial markets, OMOI  wants to monitor these markets because the financial marketplace affects  the health of wholesale electricity and natural gas markets. According to  OMOI officials, they have regularly scheduled meetings with the Federal  Trade Commission and the Department of Justice to discuss overlapping  issues, specifically focusing on antitrust and market manipulation  practices.
As we previously reported, events such as the collapse of the Enron  Corporation bring to light the importance of clarifying jurisdiction across  the federal government as restructuring progresses. As we pointed out,  effective coordination between FERC and the Commodity Futures Trading  Commission is particularly important because of jurisdictional  uncertainties regarding the oversight of on-line trading activities, such as  those previously operated by Enron. In the same way, we also noted that in  a Senate Governmental Affairs report and memorandum, and other  congressional hearings, both FERC and the Security and Exchange  Commission have been questioned about their lack of diligence in  following through on Enron’s activities—even though they had indications  of improper conduct. The report commented that effective coordination  between agencies prevents companies from exploiting the lack of oversight  in areas where neither agency may have taken full responsibility.
section_title: OMOI Has Not Decided on the Level of Detail at Which It Will Review Market Transactions
paragraphs: According to OMOI, its primary functions are to assess market  performance, ensure conformance with Commission rules, and produce  internal and external reports on the results. This description of its  functions is general and broad at this point. According to OMOI’s Deputy  Director for Market Oversight and Assessment, as the office builds its  capability, it must decide at what level of detail it should monitor the  markets. This issue largely centers around whether OMOI should operate  at a high level—that is, assess the markets’ overall performance and major  outcomes, such as competitiveness, supply, and price, and leave the  detailed monitoring to the market monitoring units—or “get down in the  weeds” to review market transactional data as market monitoring units do  for their individual markets. The Deputy Director anticipates that OMOI  will operate somewhere in between these two levels. The level at which  OMOI reviews the markets affects both the number and skill mix of the  staff that OMOI needs. For example, the head of the New York ISO’s market  monitoring unit told us that, by the end of 2003, his unit will have 30 staff,  consisting of engineers, economists, business majors, analysts, and  information technologists, to cover the New York market alone. He  indicated that OMOI would need many more staff than this if it plans to  review the markets at the same level of detail on a national basis.
The responses to our survey and our discussions with OMOI staff indicate  that opinions vary on this issue. In responding to our survey, 57 percent of  OMOI’s managers and staff said that top management had clearly defined  what role OMOI will play in monitoring markets, while about 32 percent  disagreed. (The remaining 11 percent neither agreed nor disagreed.)  Additional comments provided for our survey indicate that agreement has  not been reached on how OMOI should carry out that role. Survey  respondents expressed concerns that OMOI was not reviewing and  analyzing market data in enough depth. For example, some OMOI staff said  that OMOI should be continuously reviewing market data on a real-time  basis to identify market power abuses. During our interviews, OMOI  managers also expressed different opinions about the issue. For example,  an OMOI division director told us that the office will examine similar data  at a level similar to what the market monitoring units currently do, and that  OMOI has most of the data it needs to do so. On the other hand, another  division director told us said that he was not certain what the office’s vision  for overseeing the markets will be, and that he was not sure if it has the  information technology capability to perform detailed analysis of market  transactions like the market monitoring units do. He also stated that OMOI  would need to have staff who performed this work on a daily basis in order  to become skilled at it, and that they could not gain this expertise on an ad  hoc basis.
OMOI’s stakeholders have also expressed varying views. For example, the  heads of the market monitoring units have generally suggested that OMOI  leave the detailed monitoring of market transactions to them and focus on  broader, national issues. On the other hand, others such as consumer  groups have called for FERC to closely monitor the markets to prevent  market abuse or violations by market participants.
section_title: OMOI Has Not Yet Developed a Comprehensive Set of Results- Oriented Performance Measures
paragraphs: According to FERC’s Annual Performance Report for Fiscal Year 2001  (March 2002), the agency recognizes that accountability requires strong  performance measures of the following two types:  output measures that specify targets for the specific work items that the  agency produces—such as orders, decisions, and environmental  reviews—and for when it produces them, and  results-oriented or outcome measures that specify the results that the  agency is working to create in the larger world.
FERC has been developing output measures for many years for its strategic  and annual performance plans but has established few outcome measures  in the energy markets oversight area. The agency has stated that  developing outcome measures is proving to be difficult but believes that it  is possible. In our June 2002 report, we recommended that FERC develop  such measures to assess how well it is doing in achieving its goals and  objectives for overseeing competitive energy markets.
Although FERC developed new performance measures for its market  oversight goals and objectives for fiscal years 2003 and 2004, the new  measures are generally not outcome-oriented and do not lend themselves  to assessing OMOI’s effectiveness. For example, one key performance  measure is to “track performance of natural gas and electric markets,”  while another is to “assess performance of natural gas and electric  markets.” The performance targets for these measures are to “issue market  surveillance reports to the Commission twice each month” and “publish  regular summer and winter seasonal market assessments, state of the  market reports, and other reports as conditions warrant,” respectively.  While it can be determined if OMOI issues these products, the products’  mere issuance does not indicate whether OMOI is achieving its goal of  protecting customers and market participants through vigilant and fair  oversight of energy markets. Although outcome measures most  importantly allow the agency, the Congress, and other stakeholders to  assess OMOI’s performance in carrying out its mission, establishing these  measures also helps to more clearly communicate what the office is  working to achieve.
section_title: OMOI Implemented Informal Processes and Procedures to Begin Its Work
paragraphs: OMOI does not yet have formal processes and written procedures to direct  its staff in their activities. Instead, it is using a series of key meetings and  internal and external reports. According to OMOI managers, staff receive  direction and guidance as they prepare for and participate in these  meetings and help prepare these reports.
The key meetings are of two types: (1) regularly scheduled meetings of  OMOI managers and staff and (2) OMOI’s closed-door meetings with the  FERC commissioners. The key regularly scheduled meetings have been  weekly. However, according to the Director of OMOI, morning meetings to  discuss plans for the day’s activities are also becoming important to the  office’s operations. The predominant subject of the weekly meetings  alternates from electricity markets one week to natural gas markets the  next. At these meetings, which can last for several hours, OMOI managers  and staff share the results of their market oversight activities and projects  since the last meeting. Staff also use the weekly meetings to make a variety  of decisions, including (1) whether the oversight staff should follow up on  an issue with the appropriate market monitoring unit and/or begin  collecting and analyzing their own data on the issue or (2) whether the  enforcement staff should begin investigating a situation or should audit  market participants’ compliance with certain FERC requirements. They  also identify issues to be discussed in the closed-door meetings. At the  closed-door meetings, OMOI discusses national and regional issues  concerning electricity and natural gas markets—such as changes in prices  and the adequacy of supply and infrastructure—with the commissioners.  The commissioners are also informed of any complaints received, progress  on significant enforcement investigations, and any new investigations.
OMOI’s also prepares a series of market oversight reports or products on a  daily to annual basis (see table 2). These reports are intended to (1) help  OMOI staff and the FERC commissioners stay abreast of market  developments and activities and (2) inform market participants and others  of market performance issues and OMOI’s activities. OMOI managers also  believe that the information needed for these reports helps inform the  office’s staff as to the types of analyses that they need to perform and how  their work is linked.
In our survey of OMOI managers and staff, we asked if the office had  established effective processes to oversee natural gas and electricity  markets. Just slightly over half—about 53 percent—said that the office had  established effective processes to oversee the markets. About 28 percent  did not believe that effective processes had been established for electricity,  while 22 percent did not believe they had been established for natural gas.  The remaining respondents said that they neither agreed nor disagreed that  effective processes had been established or said that they had no basis to  judge. In providing more detailed responses to our survey, several OMOI  staff commented on the office’s processes and procedures. For example,  one respondent stated that processes and procedures do not exist, and that  most of what is done is ad hoc. Another said that the office needs adequate  planning tools to be efficient and effective, while another stated that no  operational market monitoring plan has been developed for electricity or  natural gas and to the extent that any plans for the office’s operations have  been developed, they are at a high level and not suitable for monitoring  markets. According to OMOI’s Deputy Director for Market Oversight and  Assessment, his divisions plan to establish a consistent process to monitor  the electric, natural gas, and related financial markets, as well as both  strong priority setting and management processes.
FERC officials, including OMOI managers, agreed that OMOI needs to  formalize its processes. However, they said that they did not want to do so  too quickly because OMOI is a new office and constantly learning. The  Senior Energy Policy Advisor to the Chairman of FERC told us that  formalizing OMOI’s processes is a matter of timing. She stated that she  would not want the office to “lock down” its processes until it is sure that  they are working well.
section_title: OMOI Has a Variety of Oversight Tools and Is Working to Improve Them
paragraphs: To carry out its oversight activities, OMOI’s major tools are its (1) Market  Monitoring Center, (2) enforcement hotline, (3) investigations and  operational audits, and (4) partnership with the market monitoring units.  Although these tools potentially provide OMOI with the means to oversee  the energy markets, they have some significant limitations in coverage and  available data. For example, the Market Monitoring Center lacks important  market information, and market monitoring units do not operate in most  parts of the United States. OMOI is aware of and is working to address  these limitations. Opportunities also exist to use these tools more  systematically to improve their effectiveness.
subsections: section_title: The Market Monitoring Center Is an Important Research Tool but Lacks Critical Data to Systematically Monitor the Markets
paragraphs: Patterned after market operation centers of the ISOs and major energy  trading companies, the center uses computers and various market  reporting services and software packages to make large amounts of data on  natural gas and electricity markets available in a useable format. For  example, electricity market information includes prices on the spot market  and for futures contracts, plant outage information, business news, and  historical data for trend analysis. Natural gas market data includes spot and  futures prices, market commentary, storage levels, imports and exports,  and supply/demand statistics. In addition, several weather services are  available to monitor changing conditions nationwide, as weather and  climate affect energy supply and demand in both spot and futures markets.
OMOI’s staff uses the Market Monitoring Center as a research tool in  carrying out their assigned projects. During these projects, they often  review the center’s wholesale price and other market information, such as  the data on power plant outages and transmission constraints, for  anomalies. These anomalies generally include large price increases or  spikes or unexpected constraints in areas of the national grid of electric  transmission lines or the natural gas pipeline network. For example, OMOI  monitored a natural gas price spike in February 2003 and tracked its effects  on the electricity market in the New York area. When anomalies are  identified, OMOI staff investigate to determine the cause by calling the  applicable market monitoring unit or using data in the center or otherwise  available to FERC. Depending on the results of this examination, the  results are presented to the commissioners and other agency managers as  an early warning of market problems or OMOI initiates a preliminary  investigation or operational audit. In some cases, OMOI staff has worked  with ISO or RTO representatives to change market rules that led to the  identified anomaly. OMOI may also become aware of a market anomaly or  potential market problem through another source, such as a market  monitoring unit, and use the center to collect additional data on it.
OMOI also uses a number of market performance measures or metrics to  graphically capture market trends. OMOI is working to develop additional  metrics and anticipates that, with a more comprehensive set of these  metrics, it will be able to inform the FERC commissioners and  stakeholders such as the Congress, market participants, and the financial  markets as to how well the energy markets are working and give early  warning of problems.
While the center’s information is substantial, it is significantly limited in  certain areas. For example, the center has limited up-to-the-minute  information on electricity prices, fuel costs, and spot and futures contracts  prices. It also has limited information on the operations of the electric  system. Operations information, such as data on power plant outages and  the availability of capacity on transmission lines, is important to detect and  analyze changes in the markets and to identify potential anticompetitive  behaviors.
In addition, the center does not have access to nonfederal information  needed to assess reliability of the electric power grid and monitor overall  electricity market performance. This information includes data system  frequency (a measure of how well the system is balancing electricity  demand and supply), power flows on key transmission lines, and  transmission between parties. According to OMOI officials, market  performance and electricity system reliability are mutually dependent, and  such information would help them to determine whether market  participants are behaving anticompetitively. The center also does not have  access to a third party source for price or quantity information on most  bilateral transactions of wholesale electricity, which are the major portion  of market transactions. However, FERC has revised its filing requirements  for utilities to require them to electronically file quarterly reports on their  electric power sales, including information on prices and quantities.
FERC is continuing to expand the information available in the center. It has  added four information services since our June 2002 report. For example,  Genscape measures power plant operations for selected power plants. In  addition, OMOI is continuing to assess its energy market information  needs. During fiscal year 2002, FERC completed studies to take stock of the  agency’s current and future market information needs. As part of that  effort, FERC formed teams to identify information that FERC currently  collects and additional information that it might need to perform its duties  related to restructured markets. According to OMOI officials, the office is  using the information from these teams as a baseline to assess its overall  market information needs.
Although these data shortcomings significantly limit the Market Monitoring  Center’s potential use for comprehensive and real-time monitoring of the  markets, some OMOI staff knowledgeable about the center’s operations  and use highlighted the potential to use the center more systematically. For  example, a process is currently not in place to use the center to  continuously monitor the markets, and written protocols have not been  developed for what data are to be reviewed and what actions OMOI staff  should take when certain market situations are noticed. Currently, OMOI  staff use the center intermittently as they do research for their projects.  According to an OMOI staff person, the center is not in use at times.
section_title: OMOI Is Incorporating the Enforcement Hotline into Its Market Oversight Efforts
paragraphs: FERC’s primary purpose in creating the hotline was to provide a  mechanism to informally receive complaints or inquiries from industry and  the public so that the agency can deal with concerns more quickly and with  fewer resources than would be required under FERC’s formal complaint  process. Since the hotline’s creation in FERC’s Office of General Counsel in  1987, the number of complaints and inquiries has increased substantially.  For example, the hotline received 145 complaints and inquiries in fiscal  year 1996, compared with 584 in fiscal year 2002. FERC’s goal has been to  respond to and resolve the complaints and inquiries very quickly. For  example, FERC set a goal in its fiscal year 2003 performance plan to  resolve 80 percent of the complaints and inquiries within 1 week of the  initial contact. When a complaint or inquiry is received (by telephone,  letter, or E-mail), an attorney is assigned to investigate. The attorney  contacts the other party, usually the same day, and attempts to resolve the  issue. If the issue cannot be resolved through this informal process, the  complainant can file a formal complaint or, if OMOI finds indications of a  more egregious violation of rules or regulations, it can launch an  investigation into the matter.
With the hotline’s transfer to OMOI in August 2002, it has become an  important market oversight tool by providing market participants the  opportunity to anonymously and informally make complaints to OMOI  about anticompetitive actions by other parties. According to the  Enforcement Hotline Director, the hotline’s underlying philosophy is that of  a neighborhood watch with participants patrolling their own markets. To  this end, OMOI has encouraged market participants and the general public  to call, e-mail, or write the hotline to complain or report market activities  that may be an abuse of market power, an abuse of an affiliate relationship,  a tariff violation, or another type of violation by an entity regulated by  FERC. According to OMOI, hotline calls have included complaints about  bidding anomalies, price spikes, inappropriate use of certain financial  instruments, fluctuations in available capacity on electric transmission  lines and natural gas pipelines, discrimination in interconnection to the  electric grid, and improper market transactions between a company and an  affiliate. Hotline complaints have led to or contributed to decisions to  initiate several enforcement investigations.
OMOI officials also told us that the hotline staff has been focusing more  attention on tracking market-related calls to look for trends because OMOI  is trying to use the hotline as a tool for identifying market issues early. For  example, the officials said that the hotline received several calls from  energy marketers who said that they could be driven out of business by  stricter standards for creditworthiness. According to the officials, FERC  had been reviewing creditworthiness issues on a case-by-case basis but,  after the calls, decided to convene a technical conference in February 2003  to begin to address these issues on a broader basis.
section_title: OMOI Has Increased Investigative Activities, but Its Audits Do Not Systematically Review Compliance with Market Rules
paragraphs: Led by attorneys in OMOI’s Enforcement Division, investigations are  designed to collect and analyze information regarding specific concerns  about whether a party has violated the energy-related laws, regulations,  and/or market rules administered by FERC. OMOI may initiate an  investigation as a result of an action such as a hotline complaint, a formal  complaint, a referral from a market monitoring unit or another office  within FERC, the findings of an audit, or routine market monitoring. In  addition, the enforcement staff may begin an investigation based on its  scanning or tracking of industry or market events through news or other  accounts. OMOI’s Division of Operational Investigations is responsible for  conducting audits to review compliance with FERC’s regulations such as  those governing companies’ transactions or dealings with their affiliates to  prevent discriminatory practices and reporting of market information.  OMOI initiates operational audits for a variety of reasons, including  providing input to policy deliberations, regulations development, and  enforcement cases.
FERC’s investigations and operational audits relating to energy markets  have increased almost steadily each month since this responsibility was  moved to OMOI. For example, on June 1, 2002—about a month before the  enforcement staff was transferred to OMOI from FERC’s Office of the  General Counsel—FERC was conducting 37 investigations and operational  audits related to the electricity and natural gas industries and other areas  such as hydroelectric projects. This number was 68 as of May 31, 2003.  During this period, OMOI opened a total of 79 investigations and  operational audits and closed 48.
Of the investigations that OMOI closed, several resulted in entities paying  refunds, civil penalties, or the costs of the investigations, as well as  preparing compliance plans and taking other remediation actions. One  highly visible example is the recently settled case against the  Transcontinental Gas Pipe Line Corporation (Transco) for anticompetitive  practices that included a civil penalty of $20 million—the largest civil  penalty in FERC’s history. However, in other cases, no further action was  taken—beyond working with the parties under investigation to bring them  into compliance with the rules and regulations—because there is no civil  penalty authority associated with the activities. The civil penalty imposed  on Transco stemmed from the company’s violation of rules in one of the  few areas in which FERC had the authority to impose such penalties. While  FERC can order refunds of excessive rates, FERC generally lacks authority  to impose appropriate penalties. No section of the Federal Power Act  allows FERC to levy monetary penalties against market participants who  charge unjust or unreasonable rates for electricity. Although the Natural  Gas Policy Act of 1978 gave FERC some authority to levy civil penalties,  this authority applies to a limited number of natural gas transactions in  interstate commerce. Given this situation, legislation was recently  introduced in the Congress that would give FERC additional penalty  authority. On April 11, 2003, the House passed H.R. 6, which would expand  FERC’s penalty authority under the Federal Power Act and increase the  maximum civil penalty for certain violations from $10,000 to $1 million per  violation per day. The bill is currently awaiting action by the Senate, which  is considering similar legislation.
While investigations are almost always opened in response to specific  complaints or concerns about a potential violation, operational audits  provide the opportunity to review compliance with regulations and market  rules on a broader basis. However, OMOI has limited resources devoted to  these audits. At the end of June 2003, the Division of Operational  Investigations was conducting audits of 16 entities under FERC’s  jurisdiction—11 in the Pacific Northwest, 1 in the Midwest, 2 in the mid- Atlantic, and 2 in the Southwest—with respect to certain aspects of FERC’s  regulations. According to the Director of the Division of Operational  Investigations, most of the work by the division’s staff is in supporting  ongoing enforcement investigations rather than performing audits. He said  that his staff provides technical support to these investigations by  reviewing regulations and accounting and trading issues. The Director said  that he would like to develop, but has not yet developed, a strategy for  systematically auditing compliance with FERC’s regulations and market  rules on a cyclical basis. Absent this type of more comprehensive review,  OMOI has to rely on the limited coverage provided by hotline calls and  enforcement investigations. For example, hotline calls depend on  individuals knowing about violations and being willing to report them to  FERC.
section_title: OMOI Is Working to Improve Its Partnership with the Market Monitoring Units, but the Units Do Not Cover Much of the United States
paragraphs: Recognizing that market monitoring units play a significant role in  overseeing wholesale electric power markets, OMOI is devoting  considerable attention to improving its working relationship with these  units. However, FERC has not yet put in place a process to periodically  assess the monitoring units’ effectiveness so that it will have assurances  that they are effectively carrying out their responsibilities. Moreover, the  partnership’s effectiveness in overseeing the nation’s electricity markets is  limited because most of the United States is not covered by these units.
FERC has described the role of the market monitoring units in various  terms, including as the “first line of defense” against market problems, its  “eyes and ears,” its “soldiers on the front line,” and as “practically an  extension of, or a surrogate for, the Commission’s own market monitoring  and investigative staff.” The significance of the monitoring units’ role is  illustrated by OMOI’s response to our request for information on how the  office’s market oversight approach will identify certain trading schemes,  such as those used by the Enron Corporation in the California electricity  market and other manipulations of the energy markets. In their response,  OMOI officials said the monitoring units are responsible for detecting most  of the schemes and manipulations in their respective electricity markets.  (See app. III for OMOI’s response.)
OMOI is taking a number of steps to improve communication and to better  ensure that its staff and the market monitoring units work well together.  For example, the office has assigned specific staff members as contact  points for the ISOs/RTOs and their market monitoring units. Because many  of the issues arising and enforcement cases being initiated concern  California, OMOI has located two of its staff with the California ISO’s  market monitoring unit. OMOI has also formalized the frequency and  nature of communication between itself and the units, for example, by  establishing a series of routine meetings and drafting guidelines on how the  units will communicate certain market events to OMOI. Furthermore,  OMOI is working with the market monitoring units to develop a joint  OMOI-market monitoring unit mission statement and has taken steps to  standardize the way the market monitoring units will report on their  markets. For example, OMOI is working with the monitoring units to  develop a set of standardized measures or metrics by January 2004. With  standard metrics, FERC can compare and contrast the individual regional  markets and better report on how markets are performing nationwide.
According to the heads of the four market monitoring units, their  communication with FERC has improved since the creation of OMOI. The  head of one unit told us that the frequency and the detail of their  discussions with OMOI were notable improvements, while another said  that the improvement had been significant. The third market monitor told  us that communication has improved considerably and the more frequent  communication with OMOI has improved OMOI staff’s knowledge of their  markets. According to the remaining market monitor, his ability to  communicate with FERC was very poor before OMOI was formed, but  since then the frequency and content of this communication has improved.  He added that he hopes that OMOI’s enforcement staff is letting him know  when it is conducting investigations relating to the markets that he  monitors, but he does not know whether or not they are.
In our June 2002 report, we recommended that FERC update its strategic  plan to set out clear expectations for how the ISOs/RTOs will monitor  energy markets and how FERC will evaluate their monitoring units’  effectiveness. While a key strategy in FERC’s current strategic plan is to  integrate FERC’s market oversight activities with the work of the  monitoring units, the plan does not yet set out clear expectations for these  units or how FERC will ensure that they are effectively carrying out their  market oversight role. OMOI’s Director of Management and  Communication told us that performance expectations for the market  monitoring units make sense, and that the office expects to begin the  process to incorporate expectations into FERC’s fiscal years 2003-2008  strategic plan that is scheduled to be issued in September 2003.
The heads of the market monitoring units agreed that FERC needs  assurances that their units are carrying out their monitoring functions  effectively and suggested ways that the agency could obtain these  assurances. For example, the head of the New York ISO’s market  monitoring unit said that FERC should monitor market outcomes, maintain  close contact with the individual units, and operate a hotline that market  participants can use to register concerns about the units. Similarly, the  head of the New England ISO’s monitoring unit said that OMOI should  develop additional expertise for each market and, more importantly, should  synthesize comments from stakeholders in each market regarding the  units’ performance.
While the market monitoring units are highly important to OMOI’s efforts to  oversee electricity markets, the units’ coverage of the nation’s electricity  markets is limited. The monitoring units of the PJM Interconnection RTO,  ISO New England, and New York ISO cover the Northeastern markets,  while the California ISO’s monitoring unit covers the markets in that state.  The Electric Reliability Council of Texas, over which FERC has only  limited jurisdiction because the market is essentially intrastate, also has a  market monitoring unit that essentially covers Texas. FERC has also  approved a market monitor for the Midwest ISO, which plans to operate a  centralized power market by December 2003. In addition, FERC has efforts  under way to expand the number and/or the market coverage of RTOs. At  present, according to FERC, five other RTOs have been conditionally  approved. However, it could be several years before these organizations are  operating and have market monitoring units in place.
According to the Director of OMOI, one of the office’s major challenges is  how to monitor the markets in places where there is no market monitoring  unit. He added that the office has limited access to market data without the  existence of the formal markets provided by an ISO or RTO to generate the  data and a market monitoring unit to make it available to them. OMOI  officials told us that they are using calls to the enforcement hotline and  audits as a way to provide some oversight in these areas. These efforts,  however, do not replicate the extensive and detailed monitoring performed  by the market monitoring units.
section_title: OMOI Faces Challenges as It Completes Its Hiring
paragraphs: OMOI has almost completed its staffing to authorized levels, including the  hiring of a substantial number of staff from outside FERC with energy  market experience. The office also has trained staff to increase their  knowledge about competitive energy markets, and has contracted to  acquire additional market expertise. However, several key management  positions have not been filled. In addition, OMOI staff raised several issues,  including the adequacy of the office’s staffing levels, skills mix, the need for  additional training, and morale.
subsections: section_title: OMOI Has Almost Completed Its Staffing to Authorized Levels
paragraphs: As of June 17, 2003, OMOI had a staff of 98 employees—12 less than the 110  positions budgeted for fiscal year 2003. OMOI has staffed the office with a  mix of reassigned FERC employees and outside hires (see fig. 2). OMOI’s  director and two of three office directors are outside hires. During its first 4  months, the office principally consisted of its top leadership and employees  reassigned from other FERC offices, such as the Office of Markets, Tariffs,  and Rates and the Office of General Counsel’s Market Oversight and  Enforcement Division, that had some experience related to energy market  oversight and investigation. These internal transfers continued until they  reached a total of 61 employees in September 2002. Senior OMOI officials  told us that transferring to OMOI was voluntary, but not everyone was  selected. According to OMOI officials, approximately 180 FERC employees  applied for OMOI.
As of June 17, 2003, OMOI had hired 45 employees from outside FERC—5  less than the 50 positions budgeted for fiscal year 2003. To recruit qualified  individuals with industry experience, OMOI offered a number of  recruitment bonuses. Because of the specialized skills required to monitor  energy markets, OMOI has generally offered larger recruitment bonuses  than other FERC offices—an average of $12,852 given to 10 individuals.  According to OMOI officials, they are still receiving resumes from  interested applicants and plan to continue their recruiting and hiring efforts  over the next few months.
OMOI officials told us that, in hiring potential applicants, they looked at the  applicants’ experience in energy markets. In its fiscal year 2003 budget  request, one of FERC’s performance targets for OMOI was the “hiring of  staff with market expertise.” In the fiscal year 2004 budget request, FERC is  revising the performance target to state that “30 percent of OMOI staff have  energy market experience gained through direct activity in those markets.”  According to OMOI officials, 29 of the office’s current employees (or 29.6  percent) have energy market experience. More specifically, OMOI officials  told us that 19 (or 19.4 percent) of the employees have worked for energy- related companies and have direct experience with some aspect of energy  markets. An additional 10 employees (or 10.3 percent) have worked as  consultants, legal counsel, or other positions that demonstrated detailed  understanding of market activities without active participation, according  to the officials. OMOI said that they review the resumes of both internal  transfers and outside hires to determine market experience.
One reason that OMOI has not yet reached its authorized staffing level is  that 13 of its employees have left to go to another FERC office, another  federal agency, or to private industry. The majority of those leaving—10 of  13—had originally transferred in from other FERC offices. According to  OMOI officials, most of these employees moved to other FERC offices to  take more senior positions. They said that because OMOI had to bring in a  number of outside hires at a high grade (at the GS-15 level), opportunities  for promotion within OMOI are very limited. Of the three outside hires that  have left, two were interns with limited appointments.
section_title: OMOI Is Using Training and Contracting to Increase Its Expertise
paragraphs: In addition to hiring staff with needed skills, OMOI has offered a variety of  internal and external training programs. For example, OMOI has   instituted technical sessions on a biweekly basis during which OMOI  staff informally share information and expertise with other staff,   invited industry experts for presentations on market issues,   invited representatives from market monitoring units to provide the  versions of the training classes they offer their own staffs,  visited market monitoring units at various RTOs to interact with them  and learn about their markets and functions,   interacted with vital market participants such as credit rating agencies  and generation and transmission operators to enhance their overall  knowledge of the gas and electricity markets, and   identified leadership and managerial training as a critical need and plans  to develop targeted training in these areas.
OMOI has also used contractors to obtain skills not available internally. For  example, OMOI has hired, on a consulting basis, an energy trader formerly  with the Enron Corporation. OMOI also has used contractors to assist them  in a variety of other ways, including developing measurement metrics for  the market monitoring units and studying power plant outages. In addition,  OMOI used contractors to help develop its first seasonal market report.  Furthermore, the office has contracted with knowledgeable vendors to  provide employees with information on key aspects of energy markets.  Since its inception in fiscal year 2002, OMOI has spent a total of about  $501,000 on contract services. The office is requesting an increase in  funding for these services from $500,000 for fiscal year 2003 to $1 million  for fiscal year 2004.
section_title: OMOI Faces Several Additional Staffing Challenges
paragraphs: Although OMOI has made progress in hiring staff, OMOI continues to face  challenges in filling some of its leadership and technical positions. As of  June 17, 2003, OMOI had not permanently staffed three of OMOI’s seven  division director positions. According to a senior OMOI official, finding  qualified applicants for the division director positions has been particularly  difficult because not many applicants have both technical skills and  leadership experience coupled with a public-service mentality. For  example, OMOI has advertised a “Division Director” position at the senior  executive service level for the Division of Energy Market Oversight on  several occasions, but FERC hiring officials did not find any applicants  suitable to meet OMOI’s needs. The position has been relisted. OMOI’s  difficulty in filling its leadership positions is particularly important because  sustained, committed leadership is indispensable to successful  organizational transformations. By its very nature, the transformation  process entails fundamental change. Consistent leadership helps the  process stay the course and helps ensure changes are thoroughly  implemented and sustained over time. Senior OMOI officials also told us  that OMOI continues to face challenges hiring people with certain skills  such as engineers with market experience, people with technical skills for  performing sophisticated analysis, and people with forensic auditing  experience.
In addition, in responding to our survey, OMOI employees indicated a  relatively high level of concern about the office’s staffing levels and skill  mix. About 49 percent of OMOI employees did not believe that the office’s  staffing levels were satisfactory. In comparison, 22 percent thought that the  levels were satisfactory. The remaining 30 percent neither agreed nor  disagreed that the staffing levels were satisfactory or stated that they had  no basis to judge. In addition, while about 45 percent of the employees  believed that the office’s skill mix was adequate, 35 percent did not. The  remaining 21 percent neither agreed nor disagreed or had no basis to judge.
In providing written comments for our survey, the employees often  commented on staffing levels and skill mix. For example, one respondent  wrote “the resources in the office are clearly inadequate to perform  comprehensive oversight of industries as large as wholesale electricity and  natural gas.” Another wrote “staffing levels are not sufficient to regularly,  systematically evaluate all energy markets in the United States to look for  aberrant behavior.” The written comments on skill mix varied. For  example, some staff wrote that OMOI had too many employees with  natural gas experience and too few with electricity experience. Others  commented that the office had too few engineers, especially electrical  engineers, or needed more investigations staff, economists, attorneys, or  technical staff.
To some extent, these concerns about staffing levels and skill mix likely  reflect the staff’s individual views about what this new office should do to  oversee the markets, particularly the level of detail at which it should  review market transactions. It is difficult to judge the validity of the staff’s  concerns until OMOI has clearly defined its role. Of course, the FERC  commissioners and the Congress would be involved in defining the role and  committing the resources to carry it out.
Many of OMOI’s employees also indicated that they would benefit from  additional training. For example, in responding to our survey, over 70  percent of OMOI employees expressed a need for more training in areas  such as market functions, market structures, and the interaction of  financial markets and energy markets. In addition, more than half of the  staff indicated that additional training in economic theory and models  would be useful. (See table 3.)
Furthermore, our survey of OMOI staff uncovered a potential issue  regarding the office’s morale. In responding to the survey, about 49 percent  of OMOI managers and staff characterized the office’s morale as generally  high or very high, compared to about 31 percent that said morale was  generally low or very low. (The remaining 20 percent characterized morale  as neither high nor low or said they had no basis to judge.) However, there  was a disparity of opinion between new hires and internal transfers. Among  staff that had been with FERC for more than a year or before OMOI was  established (internal transfers), about 40 percent said the office’s morale  was low, slightly higher than the 38 percent that said it was high. In  comparison, 14 percent of staff that had been with FERC for less than 1  year (new hires) said the office’s morale was low, while 68 percent said it  was high. Additionally, several internal transfers expressed concern that  OMOI’s top managers do not value them as highly as those hired from  outside FERC. In their written comments to our survey, several staff  expressed their sense that a “double standard” exists in that (1) the work of  the “new FERC” employees (outside hires) is valued by top managers more  than that of the “old FERC” employees (transfers) and (2) the new FERC  employees receive higher pay and more than their share of the bonuses and  other rewards. Several employees also commented that there is not much  promotion potential for internal transfers. Furthermore, several employees  that left OMOI to go to other parts of FERC told us that they had left for a  promotion, but the sense that they were not valued was also a factor in  leaving.
section_title: FERC Is Taking Important Steps to Improve Its Human Capital Management
paragraphs: Since we issued our June 2002 report, FERC has developed a human capital  plan that lays the foundation for the agency to strategically manage its  workforce. As our previous work has found, strategic human capital  planning must be the centerpiece of any serious change management  initiative, yet a key challenge for many federal agencies is to strategically  manage their human capital. Given that many federal agencies have not  yet begun any comprehensive human capital planning, FERC’s human  capital plan is commendable and a promising first step. Nonetheless, the  plan is in the formative stages and lacks key elements. The plan does not  yet fully (1) identify specific activities, resources, and time frames needed  to implement the agency’s human capital initiatives and (2) provide results  oriented or outcome measures to track the agency’s progress in  implementing the plan’s initiatives and evaluate their effectiveness. By  including these key elements in its human capital plan, FERC could better  ensure that its workforce is able to effectively oversee and monitor energy  markets. In addition to human capital planning, the agency is taking other  steps to help transform its workforce, including assessing additional  human capital flexibilities that could improve recruitment and retention  efforts.
subsections: section_title: FERC’s Human Capital Management Plan Is an Important First Step but Lacks Key Elements
paragraphs: In February 2003, the Chairman of FERC approved the agency’s first human  capital management plan, a step forward in fostering a more strategic  approach to human capital management. In our June 2002 report, we  pointed out that FERC was one of many federal agencies that had not given  adequate attention to human capital management. Specifically, we found  that FERC had not conducted systematic strategic human capital planning  to guide its efforts to recruit, develop, train, and retain the type of  workforce that can effectively oversee competitive energy markets.  Properly done, human capital planning provides managers with a strategic  basis for making human resources decisions and allows agencies to  systematically address issues driving workforce change, such as those  affecting OMOI. One tool that agencies can use to improve their human  capital management is a human capital plan that systematically identifies  the workforce needed for the future and identifies strategies for shaping  this workforce. Accordingly, we recommended that FERC develop a  comprehensive strategic human capital management plan to include the  following:  a skills assessment program that would identify gaps in skills currently  held by the workforce that are necessary to carry out the agency’s  evolving regulatory and oversight responsibilities;  a recruitment and retention initiative, based on priorities for meeting  future regulatory and oversight staffing needs, which addresses filling  skill gaps in the current workforce;  a training effort targeted at increasing staff knowledge in the areas of  market functions and market structures so that FERC staff will be better  prepared to regulate and oversee competitive energy markets; and  a comprehensive succession plan for solving challenges posed by the  large number of impending retirements within the agency, including  reliable projections of the number of eligible staff who may actually  retire.
The plan, which covers a period of from 2 to 5 years, is essentially broken  up into two major sections. The first section addresses issues facing the  agency as a whole. For example, the plan’s first section describes FERC’s  current human capital situation, including data on overall workforce  demographics such as size and composition of the workforce, employee  pay grade distribution, attrition rates, projected retirement eligibility, and  retirement rates. The plan then uses these data to frame five broad  workforce challenges and identifies five human resource goals and 19  objectives to achieve these goals. (See table 4.) The plan’s second section  provides information specific to each major FERC office. This section  identifies each office’s specific human capital challenges based on their  particular workforce demographics and current and future work  requirements and includes a short-term hiring plan and longer-term human  capital initiatives.
The plan, to varying degrees, discusses the four major components that we  previously recommended be included—skills assessment, recruitment and  retention, training, and succession planning. Regarding skills assessment,  the second section of the plan identifies for each office the current and  future skills they need to achieve FERC’s strategic goals. Where gaps  existed between current and future skill needs, the offices have developed  human capital initiatives to close the gaps. According to a senior FERC  human resource official, the plan will improve as this skills assessment  process improves. The official said that the FERC offices are still learning  how to determine their skill needs and, as a result, when someone retires or  otherwise leaves, FERC managers tend to seek a replacement with the  same skills, rather than thinking about future skill needs.
Concerning recruitment and retention, the plan establishes attracting and  retaining talented, diverse employees capable of maintaining excellence as  a human resource goal. To accomplish this goal, FERC identifies various  objectives, including institutionalizing an agencywide workforce planning  process and implementing recruiting and retention strategies based on the  results of this workforce planning process and the offices’ hiring plans.  Another of the objectives is to develop a demonstration project to increase  hiring and retention success and improve accountability for hiring and  retention decisions. FERC’s plan also identifies a number of initiatives to  improve recruitment and retention. For example, FERC plans to implement  an exit interview process to track and document why employees leave.  According to the plan, the information gained from exit interviews will be  used to support or modify agency personnel practices in order to improve  employee retention.
With respect to training, the plan establishes development opportunities to  expand individual and organizational capabilities as a goal. An objective  under this goal is to upgrade the effectiveness of the central and individual  office training programs. The plan recognizes that FERC needs to  implement a revamped energy markets curriculum to ensure that staff,  such as those in OMOI, have current market-oriented skills and expertise.  One of the next steps in the plan is that the human resources staff will  coordinate the offices’ efforts to design and offer training for managers and  to develop a markets-oriented curriculum to build organizational and staff  capabilities. Human resources officials told us that FERC is already using  an agencywide team to develop such a curriculum. According to senior  human resources officials, the curriculum will likely be offered to all FERC  offices to develop a common foundation across the agency. Although OMOI  is the FERC office primarily responsible for monitoring competitive energy  markets, FERC officials indicated that a number of offices in addition to  OMOI are seeking markets training to do their jobs better. As FERC  develops this new curriculum, the current central program has been  temporarily suspended, and each office is responsible for providing  informal training to its own staff. For example, OMOI has offered a variety  of training to increase staff knowledge on competitive energy markets.  According to a senior FERC official, the new agencywide training program  should be implemented by the beginning of fiscal year 2004.
FERC’s plan identifies succession planning as a challenge and points out  that over half of FERC’s workforce will be eligible to retire by 2007. It also  sets out the establishment of a leadership succession planning program as  an objective under its building leadership goal. To address this challenge,  many of FERC’s offices intend to develop their own succession planning  strategies. For example, the section of the plan for the Office of Markets,  Tariffs, and Rates states that because of its “graying” leadership ranks, the  office must develop a succession plan for its key leadership positions. The  section also states that because of its overall graying workforce, the office  must develop a larger entry-level/career ladder pipeline to maintain  adequate numbers of employees, both in total numbers and at the top level  of career-ladder positions. The section of the plan for OMOI also addresses  succession planning. In the plan, OMOI states that it will develop a  succession plan to address the loss of leadership and skills due to  retirements and the return of employees to the private sector. However, the  human capital plan does not provide any additional information on how  these succession plans will be developed, what resources are needed, how  they will be implemented, and when they will be completed. Leading  organizations use their succession planning initiatives not only to identify  individual replacements for current leaders but also as a strategic tool to  build current and future organizational capacity by identifying and  developing the right people, with the right skills, at the right time for  leadership, managerial, and other critical positions.
FERC’s plan also addresses other related human capital issues. For  example, it notes that the current performance management system may  not be adequate to sustain and build the workforce needed for the future.  As FERC takes steps to transform its workforce, performance management  will be a critical element. Our previous work has found that instituting a  results-oriented culture and creating a modern, credible, and effective  performance management system can be strategic tools to drive change  and achieve desired organizational results. Under the plan’s goal of  fostering a performance culture that rewards achievement are four broad  performance management objectives. For example, the plan indicates that  the agency will strengthen connections among accomplishments, awards,  and performance feedback but does not yet provide details on how this will  be done, what resources are needed, and when it will be completed.  According to senior FERC officials, the agency’s current performance  system does not meaningfully differentiate between high and low  performers, and performance is not directly linked with annual pay  increases. Instead of awarding pay increases based on annual performance  appraisals, performance is rewarded through the use of bonuses  throughout the year. As a result, employees are rewarded for specific  events rather than their overall contribution to agency results. According to  FERC officials, this system was put in place to avoid the problem of too  many outstanding ratings.
Given that FERC is one of only a small number of agencies that have begun  efforts to address their human capital challenges by developing human  capital plans, FERC’s efforts are commendable. However, work remains to  be done to ensure FERC’s plan is successful. Varying senior FERC human  resources officials described the plan as having a “ways to go” or as a “baby  step.” As we previously discussed, the plan, at this point, provides limited  information how the agency’s goals and objectives will be achieved. While  the plan includes strategies, it generally does not yet identify specific  activities, resources, and time frames. This type of information helps  provide more clarity of direction and organizational commitment as the  plan is being implemented. The plan also does not provide results-oriented  performance measures to help FERC gauge its progress in achieving the  plan’s goals and objectives. Our previous work has shown that high- performing organizations recognize the fundamental importance of  developing and using indicators to measure both the outcomes of human  capital strategies and how these outcomes have helped the organizations  accomplish their missions and programmatic goals. For example, a human  capital plan can include measures that indicate whether the agency  executed its human capital initiatives—such as hiring, retention, training,  or performance management strategies—as intended, whether it achieved  the goals for these strategies, and how these initiatives helped improve  programmatic results. Although FERC intends to review and update the  plan on a quarterly basis and revise it annually, it may be difficult to review  the plan’s progress in a meaningful way without this type of specificity.
section_title: FERC Continues to Use a Wide Range of Human Capital Flexibilities, and Is Exploring Opportunities for Additional Flexibilities
paragraphs: In our June 2002 report, we noted that although FERC had taken steps to  acquire and develop the staff knowledge and skills it needed to effectively  regulate and oversee energy markets, it had not fully explored all the  human capital flexibilities that are available to federal agencies for  responding to workforce challenges. All federal agencies, including FERC,  have personnel flexibilities and tools available to them to help overcome  workforce recruitment and retention issues. Many of these flexibilities and  tools can be initiated by federal agencies on their own, while others require  approval from the Office of Personnel Management, the Office of  Management and Budget, or the Congress. In our prior report, we found  that FERC was using a number of available flexibilities such as recruitment  bonuses, retention allowances, tuition reimbursement, and alternative  work schedules but had not requested other flexibilities that could help  improve recruitment and retention. Accordingly, we recommended that  FERC (1) identify the personnel tools, flexibilities, and strategies, other  than those already in use by FERC, available to federal agencies to recruit  and retain employees; (2) conduct an internal assessment of the  effectiveness and applicability of these to FERC; and (3) develop an action  plan to use the appropriate tools, flexibilities, and strategies to recruit and  hire needed expertise.
Since our prior report, FERC has expanded its use of some existing human  capital flexibilities to improve its ability to recruit and retain employees.  One example is FERC’s student loan repayment program. As one of the first  federal agencies to employ this flexibility, FERC has used a total of  $331,499 to help 41 employees repay their student loans. Participants in the  program commit to staying at FERC for a minimum of 3 years. According to  FERC officials, this program has been particularly successful in retaining  attorneys, who often have high student loan debt. In addition, FERC has  expanded its use of recruitment and retention bonuses. For example, FERC  offered 10 retention bonuses in 2002 compared with 2 in 2001. FERC has  also given 75 recruitment bonuses of around $3,000 to $4,000 each to  attract qualified employees. As noted earlier, OMOI has typically offered  larger recruitment bonuses than other FERC offices because of the  specialized skills required to effectively monitor competitive energy  markets.
In addition, according to FERC’s human resources manager, the agency’s  senior human resources officials have identified additional human capital  flexibilities that could prove useful in attracting and retaining quality  employees and have assessed their applicability to FERC. However, the  Chairman of FERC has not yet decided which, if any, of these additional  flexibilities FERC will seek approval for from the Office of Personnel  Management, the Office of Management and Budget, or the Congress. As  part of their assessment, FERC officials examined the flexibilities in use at  agencies including the Internal Revenue Service, the Federal Aviation  Administration, the Securities and Exchange Commission, and the  Transportation Security Agency to identify lessons learned and strategies  for acquiring additional flexibilities. Senior FERC human resources  officials said that they may look to acquire many of the same flexibilities  currently available to the Securities and Exchange Commission, a similar  regulatory agency. However, these officials also noted that FERC may have  more difficulty obtaining approval for the additional flexibilities because of  its relatively low attrition rate, an average of 7 percent since 1995. In  contrast, the Security and Exchange Commission, which has a turnover  rate of around 30 percent, uses compensation-based programs, such as  special pay rates, more actively than other government agencies.
section_title: Conclusions
paragraphs: OMOI has made a credible start toward establishing an oversight and  enforcement capability for competitive energy markets. Significantly, the  office recognizes that additional efforts are needed and has under way or is  planning a number of initiatives, including expanding its activities, further  identifying its information needs, and improving its working relationships  with the market monitoring units. While these initiatives are important to  OMOI’s success, the activities that the office needs to engage in, the  information and other resources it needs to carry out these activities, and  the working relationships it needs to establish with others depend on the  role that it has defined for itself to achieve its mission. At this point, OMOI’s  role lacks clarity in several respects. For example, OMOI has not explicitly  and directly related its role and activities to the agency’s responsibility for  ensuring just and reasonable prices nor decided at what level of detail it  will review the markets. In addition, OMOI has not clearly defined market  power, although market power is a major oversight concern and an issue  that OMOI has to make sure is adequately addressed. Moreover, OMOI has  not explicitly defined how it will work with others inside and outside of  FERC that either share energy market oversight responsibilities or have  related responsibilities.
OMOI is a new office with unique and broad responsibilities for overseeing  the nation’s energy markets. As such, its first months have been a learning  experience as it hired its staff and began to carry out its activities. Thus, we  do not disagree with the office’s decision to begin its work with few formal  processes and written procedures as it, in effect, was developing and  testing them. However, after almost a year, OMOI has added more staff, and  its oversight activities are becoming more complex. Establishing formal  processes and developing written procedures are important to help ensure  that they are systematic, understood, and implemented effectively. Formal  processes and written procedures also help provide assurances to OMOI’s  stakeholders that the office has fully thought through and is systematically  monitoring today’s energy markets.
Although FERC’s recently completed human capital plan begins to lay the  foundation for the agency to strategically manage its human capital, it does  not yet contain key elements that could increase the likelihood that the  plan will be effective. It generally does not identify specific activities,  resources, and milestones to implement the human capital objectives. It  also does not contain results oriented performance measures that can help  FERC measure progress toward achieving these objectives. Setting out  specific activities, resources, and milestones provide a clearer road map for  achieving the plan’s objectives and more clearly defines the organizational  commitment needed for the plan’s implementation. Moreover, without  results oriented measures, FERC will be unable to determine whether its  initiatives are leading to better outcomes and achieving the desired effects,  such as whether its workforce is better able to meet the challenges posed  by competitive energy markets.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that FERC’s oversight of competitive energy markets is  comprehensive and resources are effectively directed, we recommend that  the Chairman of FERC more clearly define OMOI’s role in overseeing the  nation’s energy markets by taking the following actions:   Explicitly describe OMOI’s activities relative to carrying out the agency’s  statutory requirements to ensure just and reasonable prices and to  preventing market manipulation.
Explicitly establish the level of detail at which OMOI will routinely  review market transactions to carry out its oversight activities.
Delineate how other FERC offices and other organizations, including  the market monitoring units and other federal agencies, share in and  contribute to OMOI’s mission and establish expectations for how they  will work together.
To help ensure that OMOI carries out its role systematically and effectively,  we recommend that the Chairman of FERC direct OMOI to establish formal  processes and written procedures for its key activities.
To strengthen FERC’s human capital plan, we recommend that the  Chairman of FERC revise the agency’s plan to (1) identify specific  activities, resources, and time frames to implement the human capital  initiatives and (2) provide results-oriented measures to track the agency’s  progress in implementing the initiatives and evaluate their effectiveness.
section_title: Agency Comments
paragraphs: We provided FERC with a draft of this report for review and comment. In  his written comments, the Chairman of FERC generally agreed with the  report’s conclusions and recommendations. Specifically, the Chairman  stated that the report offers valuable advice for additional improvement  and accomplishment and that, in general, he agrees with the report on the  steps that are needed next to more clearly define the role of market  monitoring and expand the agency’s human capital initiative. The Chairman  further stated that he agrees that it is now time to formalize and document  many of OMOI’s processes. The complete text of FERC’s comments on our  draft report is presented in appendix IV.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to other appropriate  congressional committees; the Chairman, FERC; the Director, Office of  Management and Budget; and other interested parties. We also will make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841. Key contributors to this report are listed in appendix V.
section_title: Scope and Methodology
paragraphs: To determine FERC’s progress in establishing an oversight and  enforcement capability for competitive energy markets, we focused our  review on the formation and operation of OMOI. We reviewed pertinent  FERC documents, including annual reports, budget requests, strategic and  annual performance plans, reports, speeches, and congressional testimony  by the FERC Chairman, commissioners, and other officials relating to  energy market oversight. We also reviewed OMOI documents, including  OMOI divisions’ strategic plans, market oversight reports, enforcement  reports, and information related to OMOI’s staffing levels and budget. In  addition, we interviewed OMOI managers at the division head level and  above, including the director and deputy directors of the office. We also  obtained the views of the heads of the four market monitoring units that  were operating at the time of our review on OMOI’s progress in establishing  a market oversight and enforcement capability at the national level.  Furthermore, we drew on our prior work in the areas of electricity and  natural gas markets.
In addition to our document review and interviews, we conducted a survey  of OMOI staff, up to and including those at the director and deputy director  level. The survey was conducted using a self-administered electronic  questionnaire posted on the World Wide Web. We sent E-mail notifications  to 92 OMOI staff beginning on March 24, 2003. We then sent each employee  who was surveyed a unique password by e-mail to ensure that only  members of the target population could participate in our survey. We  closed the survey on April 11, 2003, having received a total of 80 responses,  for an overall response rate of 87 percent. A copy of this survey with the  quantitative results can be found in appendix II.
While our survey results are generalizable to the current OMOI population  as described above, the practical difficulties of conducting surveys may  introduce errors into the results. Although we administered our survey to  all known members of the population of OMOI employees, and thus our  results are not subject to sampling error, nonresponse to the entire survey  or individual questions can introduce a similar type of variability or bias  into our results—to the extent that those not responding differ from those  who do respond in how they would have answered our survey questions.  We took steps in the design, data collection, and analysis phases of our  survey to minimize population coverage, measurement, and data- processing errors, such as checking our population list against known  totals of employees, pretesting and expert review of questionnaire  questions, and follow-up with those not immediately responding.
To determine FERC’s progress in improving agencywide human capital  management, we reviewed pertinent FERC documents, including the  agency’s human capital plan and information related to the agency’s  training, human capital flexibilities, and performance management  programs. In addition, we interviewed senior human resources officials at  FERC, including FERC’s Executive Director. We conducted our work  between October 2002 and June 2003 in accordance with generally  accepted government auditing standards.
section_title: GAO Survey of Current FERC Employees in the Office of Market Oversight and Investigations
paragraphs: This appendix contains the questions and responses from our survey of  Federal Energy Regulatory Commission (FERC) employees in the Office of  Market Oversight and Investigations. Responses are expressed as a  percentage of those responding to the survey.
The U.S. General Accounting Office (GAO), an independent agency of Congress, is conducting a follow-up review of  management issues at the Federal Energy Regulatory Commission (FERC).  As part of our study, we are soliciting the  views of the FERC staff in the Office of Market Oversight and Investigations to obtain their opinions about a variety of  topics relating to the work of the FERC.
Most of the questions in this survey can be answered by checking boxes or filling in blanks.  Space has been provided at  the end of the survey for any additional comments.  The survey should take about 20 minutes to complete.
GAO will take steps to prevent the disclosure of individually identified data from this survey.  Only GAO staff assigned  to this study can access and view your responses.  No one at the FERC will see your individual responses.
The username and password associated with the survey is included only to allow you to access the survey and enter your  responses, and to aid us in our follow-up efforts.  Survey results will be reported in summary form.  If individual  answers are discussed in our report, no information will be included that could be used to identify individual  respondents.
If you have any questions or are experiencing difficulties responding  to the questionnaire, please contact Adam  Hoffman at (202) 512-6667 or hoffmana@gao.gov or Jason Holliday at (202) 512-4582 or   hollidayj@gao.gov.
Your participation is very important and we urge you to complete this survey.  We cannot provide meaningful  information to the Congress on these issues without your frank and honest answers.
Thank you for your time and assistance.
Please refer to the following definitions when completing this survey:  Office - Refers to the Office of Market Oversight and Investigations (OMOI)
Division - Refers to a division within OMOI such as the Division of Energy Market Oversight, Division of                    Management and Communication, etc.
The objective of this section is to obtain general information about your current position with FERC.  1.  How long have you been employed by FERC, including its predecessor, the Federal Power Commission?  (Check one.)  19%     Less than 6 months  20%   More than 20 years  2.  Which of the following generally describes your current area of work?  (Check one.) 13%     Economist (Industry, Financial, etc.)
Engineer (Electrical, Mechanical, Petroleum, etc.)
38%     Energy Industry Analyst  11%     Other Analyst (Financial, Budget, Operations Research, Program Management, etc.)
If you checked "None of the above", please enter your current area of work in the space provided.
The objective of this section is to obtain information about OMOI's effectiveness in meeting its mission goals and  objectives.
In general, how clear or unclear to you are each of the following?  (Check one in each row.)  a. FERC's overall mission/goals and objectives  b. OMOI's goals and objectives  c. Your division's goals and objectives  d. Your current duties and responsibilities  In general, with regard to oversight and enforcement of wholesale electricity markets, overall, how effective or ineffective is OMOI in doing the following:    (Check one in each row.)  a.  Monitoring wholesale electricity markets to  determine whether prices are just and reasonable  b.  Analyzing spikes in wholesale electricity prices  c.  Responding appropriately to the causes of  d.  Detecting market power abuses in wholesale  e.  Correcting detected market power abuses in  electricity market structure and rules  g.  Remedying problems concerning wholesale  electricity market structure and rules  h.  Resolving complaints and disputes among  electricity market participants quickly and fairly  Enforcing violations of FERC's requirements  relating to wholesale electricity markets  Please enter any other issue regarding the oversight and enforcement of wholesale electricity markets that   you feel should have been listed above concerning OMOI's level of effectiveness.
In general, with regard to oversight and enforcement of wholesale natural gas markets, overall, how effective or ineffective is OMOI in doing the following:     (Check one in each row.)  a.  Monitoring wholesale natural gas markets to  determine whether prices are just and reasonable  b.  Analyzing spikes in wholesale natural gas prices  c.  Responding appropriately to the causes of  wholesale natural gas price spikes  d.  Detecting market power abuses in wholesale  e.  Correcting detected market power abuses in  natural gas market structure and rules  g.  Remedying problems concerning natural gas  h.  Resolving complaints and disputes among  natural gas market participants quickly and fairly  Enforcing violations of FERC's requirements  relating to wholesale natural gas markets  Please enter any other issue regarding the enforcement and oversight of wholesale natural gas markets that you feel  should have been listed above concerning OMOI's level of effectiveness.  6.  Would you agree or disagree with the following statements as they relate to management/resources issues   in OMOI?   (Check one in each row.) a.  Top OMOI management has established effective  processes and procedures to oversee wholesale  electricity markets.  b.  Top OMOI management has established effective  processes and procedures to enforce wholesale  electricity market rules.  c.  Top OMOI management has established effective  processes and procedures to oversee wholesale  natural gas markets.  d.  Top OMOI management has established effective  processes and procedures to enforce wholesale  natural gas market rules.  e.  My immediate manager(s) provides clear and  concise direction.
Top management has clearly defined what role  OMOI is going to play in monitoring markets.
Staffing levels in OMOI are satisfactory.  h.  The employee skill mix in OMOI is adequate.
Information technology support and services are  satisfactory.  j.  OMOI maintains a strong focus on achieving the  FERC's  mission.  k.  OMOI has set clear performance expectations.  l.  OMOI is able to retain quality employees.
Please enter any other issues regarding management/resources issues in OMOI you feel should have been listed above.    7.  Would you agree or disagree with the following statements as they relate to data/knowledge requirements issues   in OMOI?     (Check one in each row.)
Staff understands what data are required to  effectively oversee wholesale electricity markets.
Staff understands what data are required to  effectively enforce wholesale electricity market  rules.
Staff understands what data are required to  effectively oversee wholesale natural gas markets.
Staff understands what data are required to  effectively enforce wholesale natural gas market  rules.
Staff has adequate access to data on electricity market performance.
Staff has adequate access to data on natural gas market performance.
Staff has adequate knowledge of, or experience with  overseeing competitive electricity markets.
Staff has adequate knowledge of, or experience with  enforcing market rules in competitive electricity markets.
Staff has adequate knowledge of, or experience with  overseeing competitive natural gas markets.
Staff has adequate knowledge of, or experience with  enforcing market rules in competitive natural gas markets.
Staff understands the integration of gas and  electricity markets.
Staff understands the relationship between financial  markets and energy markets.  8.  Would you agree or disagree with the following statements as they relate to authority issues in FERC?    (Check one in each row.)
FERC should have authority to enforce reliability  rules for electricity.
FERC should have additional authority to require  submission/sharing of data from Independent  System Operators.
FERC should have additional authority to levy  penalties.
FERC should have additional authority to collect  necessary data to oversee energy markets and  enforce market rules.
Please enter any other issues regarding authority issues in FERC you feel should have been listed above.
When answering the next question, please recall how we defined division earlier in the survey:  Division - Refers to a division within OMOI such as the Division of Energy Market Oversight, Division of                    Management and Communication, etc.  9.  Thinking about your current division in OMOI, would you agree or disagree with the following statements?  (Check one in each row.) a.  My division has clearly defined its goals and  objectives.  b.  My division currently has adequate staff to do its  work.  c.  The staff in my division have the skills needed to do  their jobs well.
Please enter any other issues regarding your current division in OMOI you feel should have been listed above. 10.  In your opinion, would additional training in the following subject areas assist you in overseeing   energy markets and enforcing market rules?  (Check one in each row.)  a.  Basic economic principles/definitions  Statistical software packages such as SAS or  g.  Understanding how financial markets interact  with energy markets (including trading,  hedging, derivatives, and financial instruments)
In the space provided, please enter any other training that you believe would assist you in overseeing energy markets and  enforcing market rules.
The objective of this section is to obtain your views on morale and the general work environment in OMOI.  11.  Overall, how would you characterize the current level of morale in OMOI?   (Check one.)  15%     Neither high nor low  No basis to judge  12.  Specifically, how satisfied or dissatisfied are you with each of the following communication issues as they relate   to your current work environment?    (Check one in each row.) a.  Communication between the Chairman and  b.  Communication between the Commissioners  (not including the Chairman) and OMOI  c.  Communication between OMOI's top  d.  Communication between different divisions  e.  Communication with offices within FERC  f.  Communication between management of  g.  Communication with other federal agencies  h.  Communication with state agencies  13.  Specifically, how satisfied or dissatisfied are you with each of the following cooperation issues as they relate   to your current work environment?    (Check one in each row.) a.  Cooperation between different divisions in  b.  Cooperation with offices within FERC other  c.  Cooperation between management of  d.  Cooperation with other federal agencies  e.  Cooperation with state agencies  f.  Cooperation with Market Monitoring Units  14.  Specifically, how satisfied or dissatisfied are you with each of the following leadership/change issues as they   relate to your current work environment?   (Check one in each row.) a.  Leadership provided by Commissioners and  b.  Leadership/supervision that I directly receive  from my division in OMOI  c.  Organizational changes within OMOI  d.  Changes in my job duties as a result of  15.  Specifically, how satisfied or dissatisfied are you with each of the following resources/rewards issues as they   relate to your current work environment?    (Check one in each row.) a.  Availability of resources (i.e., budget,  technology, staff, etc.) necessary to do my  b.  Availability of rewards for job performance  In the space provided, please enter any other issues related to your current work environment that you would   like to mention.    16.  Thinking about the issues covered in the previous few questions concerning your current work environment,   overall, how satisfied or dissatisfied are you with the work environment in OMOI?    (Check one.)  15%     Equally satisfied as dissatisfied   No basis to judge  17.  Do you plan to leave FERC through retirement or resignation, within one of the following time periods?  (Check one.)
1 to less than 2 years  2 to less than 3 years  3 to less than 5 years  I have no plans to leave FERC within the next 5 years  45%     Unsure at this time  The objective of this section is to obtain your views on the creation of OMOI.  18.  Were you employed by FERC before the creation of OMOI in 2002?   (Check one.) 64%     Yes    (Continue with question 19.) 35%     No    (Skip to question 21.)
No basis to judge    (Skip to question 21.) 19.  To what extent, if at all, do you believe that the creation of OMOI improved FERC's ability to oversee   energy markets overall and enforce market rules in energy markets?    (Check one in each row.) a.  Creation of OMOI improved FERC's ability to oversee  b.  Creation of OMOI improved FERC's ability to enforce  market rules in energy markets  20.  In your opinion, to what extent, if at all, has your work focus changed as a result of the creation of OMOI?    (Check one.)  24%     Changed to a very great extent  20%     Changed to a great extent  26%     Changed to a moderate extent  16%     Changed to little or some extent  12%     Has not changed at all  If your work has changed at all as a result of the creation of OMOI, please describe the changes in the space provided.
Here you are provided an opportunity to provide additional comments or suggestions.  21.  If you have any additional comments relating to any of the issues raised in this questionnaire, please enter them   22.  If you have any additional suggestions not noted elsewhere on this questionnaire about how FERC or OMOI can   improve operations, please enter them in the space provided.
Final Survey Question - Be sure to answer this when survey is complete.  23.  If you have completed the questionnaire, please check the "Completed" box below.        Please note:  You must answer "Completed" for your answers to be included.
Clicking "Completed" is equivalent to "mailing" your questionnaire.  It lets us know that you are finished, and that  you want us to use your answers.  It also lets us know not to send you any follow-up messages reminding you   to complete your questionnaire.
Thank you for your cooperation.
section_title: FERC’s Approach to Addressing Market Manipulation Schemes and Other Potentially Noncompetitive Actions
paragraphs: This appendix contains the Federal Energy Regulatory Commission’s  (FERC) response to our questions concerning how the agency’s new  market oversight approach will detect certain market manipulation  schemes, such as the ones used by the Enron Corporation, and other  potentially noncompetitive actions. (See table 5.)  For each of these  schemes or types of actions, Office of Market Oversight and Investigations  (OMOI) officials provided the (1) FERC office or other organization  responsible for detecting it, (2) type of oversight used, and (3) type/source  of data used. We received this information from OMOI officials in April  2003.
section_title: Comments from the Federal Energy Regulatory Commission
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the individuals named above, Adam Hoffman, Jason Holliday,  and Raymond Smith made key contributions to this report. Important  contributions were also made by Stuart Kaufman, Ellen Rubin, and Barbara  Timmerman.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO’s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to   e-mail alerts” under the “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs