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Power Pools & ISOs: Monitoring Market Power in a Restructured Industry
THE CALIFORNIA DEBATE OVER ELECTRIC RESTRUCTURING IS now nearly four years old. And though it is nearing its final stages (the opening is now set for March 31), some of the most important questions as to how this will work in practice are just emerging.
The original bargain had called for the state's three large investor-owned utilities to vest basic control of their transmission networks in the new independent system operator in exchange for maintaining combined ownership of generation and transmission assets (and for a good level of assured stranded cost recovery). That bargain didn't last, however, owing to concerns over market power.
With transmission access apparently resolved, one might have thought that most concerns over abuses of market power would dissipate. That assumption proved to be a dangerous illusion, however. Instead, there emerged a whole new set of regulatory concerns over "horizontal" market power. These concerns related to utility concentrations in generation, generation units strategically located to take advantage of or needed to relieve transmission constraints ("must-run" units in California's jargon). Concerns even arose that individual units could exercise market power in setting market clearing prices in auction markets by virtue of their typical placement on the supply curve. Similar concerns have been expressed in the ISO New England restructuring and surely will be raised in others.
Hence, even after agreement from the investor-owned utilities on the basics of vesting control of transmission in the ISO (effected through "transmission control agreements"), the California debate over IOU market power in generation continued unabated. The Federal Energy Regulatory Commission devoted a lengthy separate order to the issue in its late 1996 rulings on the basic concepts of the California restructuring proposal; and its only technical conference on the proposal (in January 1997) was devoted solely to these market power concerns. In its December 1996 order, with very little discussion, the Commission imposed a requirement that has enormous implications of how market power concerns will be addressed in restructuring situations. The ISO was ordered to file a "detailed monitoring plan," which includes how market power will be identified and mitigated and what information will be collected and submitted to the FERC.
Since then, regulators have imposed similar requirements on the three "tight" Northeast power pools (New England, New York and the Pennsylvania-New Jersey-Maryland Interconnection) in setting up restructuring proposals driven in large part by FERC's regulatory requirements under Order 888. At press time, the New England pool had made considerable progress in developing a market monitoring program analogous to California's. PJM was in the early stages of developing its proposed program under a tight FERC deadline. The New York pool had submitted a revised proposal to federal regulators.
How well will these programs work? The early evolution of the market surveillance programs in California and the northeastern pools, and perhaps in other jurisdictions such as Alberta, should tell us a great deal. Regulators clearly hope that these monitoring programs, through daily, detailed monitoring of transactions, will give them the ability to protect competitiveness and efficiency of markets never yet experienced or regulated.