The top energy regulator in the land is clear on where the power industry is headed. Vertically integrated utilities have to get serious about relinquishing control of their transmission assets. And regional planning organizations must take control of transmission operations. A strong wholesale power market is our future - and the pain of the Aug. 14 massive power failure will not divert policy makers from that objective.

When Patrick Wood III sketches his vision of the future of electric power, don't doubt that he speaks for the Bush administration. The president picked two men to chair the significant post of chairman of the Federal Energy Regulatory Commission in the first year of his presidency. Bush tried out Mississippian Curt Hebert Jr. in the job before jettisoning him in favor of his personal friend, Wood, who was successful in orchestrating energy deregulation back in Texas while Bush was governor. Wood, who has labored on offshore oil rigs as well as in the law library of Harvard University, was named to the Texas public utility commission in 1995. The engineer and lawyer was born in Port Arthur, Texas.

In a wide-ranging interview with Transmission & Distribution World magazine in late August, the commissioner discussed in detail the implications of the power blackout and the future of federal energy policy. His comments, edited for clarity:

ROSENBERG: What's your top priority today as FERC chairman?

WOOD: Seeing the lights go on.

ROSENBERG: How can that best be accomplished?

WOOD: The priority is what it always has been, which is reliable electricity at reasonable rates. That's been our mission for really 70 years. The way to do that is to make sure that we have sufficient infrastructure, balanced rules of the road and oversight of the markets. My budget is about 50 percent on the infrastructure piece, and 25 percent on each of the other two pieces.

ROSENBERG: Where are you in the process right now of blanketing the country with strong regional transmission organizations, RTOs?

WOOD: We are, in fact, tomorrow having our fifth of 11 regional conferences at each of the RTOs or proposed RTOs, to really ascertain where we are within each region. And what we're doing, is just going to each of these regions and going through several points.

The first one is the regional independent grid operation.

Two, the regional transmission planning process.

Three, fair cost allocation for transmission, state commissioners provide the leadership on that. This debate is come into high relief in the past couple of weeks of more and more people have started focusing on what does it take to get investment in the grid.

Item four is market monitoring and market power mitigation. This is really the market oversight piece of what we do.

Number five is spot markets — spot energy markets for real time.

Number six is transparency and efficient congestion management, as opposed to old system. We need to have firm transmission rights, so that people know who gets saddled with the cost of congestion and who doesn't. So having rights to the system means you don't have to pay for congestion, because you punitively did not cause it.

And then the last item is resource adequacy

So those kind of have a lot of different aspects. But that's really the features of the wholesale market. We've discussed these issues in Boston, Atlanta and Chicago. In September we're doing Florida, Phoenix. In October we're doing New York. In November we're doing California. And we've still got left to schedule the RTO West.

So that's what we're doing to further competitive markets. We go in now while we're waiting to get some guidance from Congress. We're going forward with our gameplan on a region-by-region basis and having the individual RTOs come in make the filings to bring themselves into compliance with the FERC policies.

ROSENBERG: The overarching principle is you want five strong RTOs to emerge from this?

WOOD: No, probably be closer to 10. At least initially.

ROSENBERG: Why 10?

WOOD: That's where we are. We've tried to go to five, but quite frankly got a substantial pushback from that. I'd rather get 90 percent of the benefits of markets and get them today, as opposed to waiting for the utopia moment when we would get 100 percent and never get there.

ROSENBERG: What authorities should the states retain overseeing the power grid? And what power is needed to be held by FERC?

WOOD: Well, we're not too far off of it now, curiously, despite all the heat. The state siting authorities have generally worked to get needed transmission built.

The one rub comes if you've got transmission that benefits a broader region than just one state. Empirical evidence has shown that can work around. FERC should have some sort of back stop authority in cases where those projects don't go forward so that they get a hearing at the federal level. We might also decide that they shouldn't go forward because of the environmental or landowner concerns, just like we do in natural gas. But, you know, if there is a regional project that needs to happen, it ought to be looked at on a regional benefits and cost basis.

So, that's the one issue I think probably would be a change from the current approach. The House energy legislation provides for such a change.

ROSENBERG: Why has the level of investment in the grid been so inadequate?

WOOD: Nobody knew after competition came along how they were going to get their money back. Secondly, a utility that also owns wires but also owns generation may not want to upgrade its grid because its competitors on the generation side may benefit.

That's why we really have pushed independent system operators, ISOs and RTOs as a solution to get rid of that very strong incentive to not upgrade the grid on the thought that other people may benefit, and thereby, you know, compete against your own generation.

ROSENBERG: Three years ago, the Bush administration unveiled a major energy program. Had it been adopted, do you think we would have avoided the outage?

WOOD: Yes. The new investment that would have been stimulated by a stable market platform and by the issues identified in the Department of Energy's 2002 transmission study — a mix of smart grid technology and of new power lines needed to support regional — inter-regional trade. Those two things, had we been able to move faster, might have helped, if not prevent the occurrence, at least prevent it from spreading so broadly.

ROSENBERG: What message do you have for utilities that continue to own transmission?

WOOD: Put your transmission into an independent operator, RTO or ISO. And participate in the regional planning process to expand the transmission grid. We'll work with you on getting needed returns to make it worthwhile for you to do so, as we have both done with current cases and propose to do on a more generic basis in our transmission pricing policy statement.

ROSENBERG: Turning to the wholesale side, what has been the lingering effect of Enron's implosion on creation of robust wholesale energy markets?

WOOD: There has been a greatly increased cost of capital to people who are building power plants as well as who are doing merchant activities in the marketplace.

The risks in that very important market facilitating role became very clear to investors. There's been an over-reaction to that risk. So, hopefully, we'll return back to a place in the middle where there's a realistic assessment of the risk of energy trading activities.

ROSENBERG: The volume of energy trading is way off. Do you have any hope that it'll come back to where it once was?

WOOD: Yes. I do, I think it will come back. It's not a question of if, it's a question of when, because it's a needed function that has to be performed. The alternative is the customers doing energy procurement themselves. Plenty of utilities figured out in the past 10 or 15 years that some are better at that than others and they might as well buy a service from somebody who can do it well.

ROSENBERG: The causes of the outage are still being studied and will be for some weeks and months to come. Still, what grid fixes will be a priority?

WOOD: I would rather wait to see what the outage report identifies as the issue here. There might be some specific things that come out of this once we ascertain the cause of the event and its propagation.

ROSENBERG: What about communications?

WOOD: Transparency of information not just about market information but about the grid is pretty darned important.

ROSENBERG: Parts of the country — the South and the Northwest — have enjoyed low power rates and they really don't want to use them. How can their political opposition to a strong national grid be overcome?

WOOD: I was intrigued by that — the low power rates thing. I looked at a Department of Energy study of the Eastern interconnect. Florida, Entergy and Southern were quite a bit higher than the lower-cost regions of the East. Every cost-benefit study has shown, in fact, that the power would flow into the South, not from the South. So, in fact, the lower-cost power is outside the South and would flow in.

The power in the Pacific Northwest is the lowest cost in the country, and that's a different issue.

ROSENBERG: So, why wouldn't they support a strong grid if it would bring in power? They don't want the competition?

WOOD: Well, would you if you had a big market share? I think it explains in a pretty straight up way what's going on.

ROSENBERG: What energy legislation would you like to see Congress pass this year?

WOOD: Reliability standards must be mandatory as opposed to voluntary. Some of the tax issues, which spur utilities to join RTOs and maybe even sell their transmission to an RTO — those are good things.

ROSENBERG: Are such measures likely to pass?

WOOD: I don't think they were before. I think they will be now.

There's greater public awareness that these markets are interconnected, and we need to not live in an artificial world where they're not. We have had competitive markets now for 10 years. Forty percent of the power being sold is sold from non-affiliated power companies. Wholesale competition is here to stay.

So, we've got to make it work. Any support that Congress would give us on that front would be welcome. It speeds the day of getting benefits to customers, rather than just to having lawyers litigate this for the next 10 years.

ROSENBERG: Is there any single proposal that would get transmission built fast?

WOOD: We must address the fair cost allocation for transmission. Once that gets figured out and the planning process gets understood and it kind of develops a rhythm of its own, you will start to see the transmission that's needed getting built. By and large, the utilities have done a pretty good job of getting reliability transmission built. It's really the transmission to support regional trade that has suffered, because of uncertainty about how the costs would be recovered.

The generator interconnections are getting built, and what I call short-term NERC (North American Reliability Council) reliability construction is getting done. It's that third category, which is to support regional trade, which has lagged for the reasons I stated earlier.

ROSENBERG: Is there anything that FERC can do today to spur investment capital to flow into build lines between states?

WOOD: We must use the bully pulpit of putting the spotlight on needed projects. The Department of Energy calls them nationally significant lines.

You know, the returns on equity that we've announced, I think have raised some interest. The big issue, though, is will those rates that we give be recovered from retail customers, who are paying the ultimate bill?

ROSENBERG: You've created five regional state advisory commissions? What are their chances of succeeding?

WOOD: What option do we have? I mean, we've heard pretty clearly, “FERC, we don't want you to do it”. This is the alternative. It'll get done one way or the other. But I'd much rather do it working with states.

ROSENBERG: What's your life been like the last few weeks?

WOOD: Not much of a vacation, I'll tell you that.

ROSENBERG: Did you bargain, you wouldn't be signing on for this?

WOOD: I thought it was just going to be a California clean up. Then we had Enron. Then we had the financial markets. We had 9/11. We had natural gas prices double. And now this.

ROSENBERG: The question of the hour is, what's next?

WOOD: God, I hope it's nothing. I would like to get a nice energy bill and have the commission work with the industry and customers to get it implemented. Everything should move forward and certainty returns. It's been turbulent for the last couple of years for everybody in this industry. I sure would like to see it settle down. We can't really have this kind of instability in an industry that's this critical to the economic health of everybody in a country this large.