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Power Pools & ISOs: Monitoring Market Power in a Restructured Industry

Fortnightly Magazine - March 1 1998

same time, however, these programs may create a new model for integrating traditional, state-imposed utility regulation with the principles of federal antitrust law. They necessitate a clear definition of relationships and procedures for interaction between these programs and federal and state regulators and antitrust enforcement agencies. They may even encourage federal and state agencies to re-examine their own respective roles and relationships in restructured electric markets (see sidebar, "Otter Tail's Odyssey").

One thing is already clear: These programs will have to be highly creative in developing the substance of their monitoring efforts, and regulators will have to be flexible in their responses. The debate in California over IOU market power in generation is still in flux.

The New Oversight:

Reasons and Realities

Two realities compelled the FERC to impose these self-monitoring functions. First, the FERC realized how little experience there was in operating the new auction markets, especially as envisioned in California. Second, FERC was concerned with the limited capability of the traditional regulatory agencies, and antitrust enforcement agencies, to monitor effectively market power abuses in these emerging auction markets.

Considering these realities, it's clear why the FERC issued its ground-breaking decision to entrust one the most sensitive regulatory issues to "frontline" self-regulation by entirely new industry institutions. The types of abuse that might concern regulators and market participants, and their relationship to market power, are undefined and may only emerge once these markets start operating. Many issues unfamiliar to electricity regulators will emerge. Traditional tools regulators have used to detect market power abuses, such as comparing prices with costs, may not be available. Regulators will turn to monitoring programs to develop the necessary analytical tools, data requirements and criteria for corrective action.

In developing its required "plan" for market monitoring, the California ISO had no direct precedent to follow. But one significant analogy did exist for the type of self-monitoring or market surveillance envisioned in the FERC order. %n1%n The Canadian province of Alberta had developed a similar surveillance program about a year earlier. %n2%n This system may have influenced the FERC's thinking in requiring monitoring in California and the northeastern pools. Certainly, the FERC's decision builds upon the concept of "frontline" regulation, which has been more broadly encouraged by the FERC for regional transmission groups and ISOs, but with one additional feature of great significance: These monitoring programs could also become, potentially, the frontline for antitrust enforcement.

Shaping the Details:

Bids, Prices and Data Collection

California and New England have now begun to shape the details of effective monitoring programs. Regulators are determining what data to gather, developing indicators to detect problems and to trigger further analysis and defining criteria to determine if a violation has occurred. In California's plan, the FERC wants more detailed standards for corrective action than the general "criteria" filed in the original plan: (1) practices indicating market power adversely affecting market operations; (2) gaming; and (3) "behavior that more generally undermines the efficiency, workability and reliability¼ of the markets."

The ISO and PX argued that these criteria are best refined while the new markets are