1. Presented to: 23 rd National Regulatory Conference Marshall-Wythe School of Law Williamsburg, VA May 12, 2005 Energy Options in a Hybrid Market World William F. Hederman, Director Office of Market Oversight and Investigations Federal Energy Regulatory Commission WH-5/05/05

2. 2 Outline Review of FERC’s Strategic Plan Overview of Current State of Energy Markets Electric Power Markets: A Complex Mix Natural Gas Markets: A Regulatory Restructuring Success Interaction of Physical and Financial Energy Markets Key Issues/Market Outlook (Views expressed are Hederman’s not the Commission’s.)

3. 3 FERC Has 3-Prong Strategy Effective Rules Infrastructure Rules Enforcement Competitive Markets Just & Reasonable Outcomes Strategic Approach

4. 4 Energy Market Progress Requires: Integrity AND Public Confidence In That Integrity

5. 5 We Are Working To Empower Responsible Participants

6. 6

7. The Relevant Energy Markets Are Complex Natural Gas & Electric Market Space Gas Supply Trading Venues Futures (NYMEX) Electronic Platforms Bilateral Trading Voice Brokers Pipelines & Storage Players Delivered Market Physical Nat Gas Generation Transmission & Pumped Storage Delivered Market Phys Electric Power Gas to fuel power generation RTO’s & ISO’s Price Contributors -Fixed price buyers & sellers -Speculators Price Takers -Indexed price buyers & sellers Source: FERC-OMTR&OMOI 7 Nat Gas & Electric Derivatives Nat Gas & Electric Clearing

8. 8 Reading List Standards of Conduct Order Standards of Conduct for Transmission Providers, III FERC Stats. & Regs., Regulations Preambles  31, 155 (2003) (Order No. 2004), reh’g, III FERC Stats. & Regs., Regulations Preambles  31, 161 (2004) (Order No. 2004-A), reh’g, 108 FERC  61, 118 (2004) (Order No. 2004-B), reh’g, 109 FERC  61, 325 (2004) Order No. 2004-C), reh’g, 110 FERC  61, 320 (2005) (Order No. 2004-D) Behavior Rules Order Investigation of Terms and Conditions of Public Utility Market-Based Rate Authorizations 105 FERC  61, 218 (2003) (Market Behavior Rules Order) State of Markets Report January 2004 www.FERC.govwww.FERC.gov Summer Outlook, May 4, 2005 www.FERC.gov www.FERC.gov