Power Pools & ISOs: Monitoring Market Power in a Restructured Industry
in operation; the FERC apparently accepted this "bottoms up" approach of developing only data requirements and monitoring indices at first. In their informational filings with FERC last fall, the ISO and power exchange submitted tentative but detailed lists of the types of data and indices that might prove critical. A sampling of these requirements shows how much this monitoring function will diverge from traditional regulatory or antitrust analysis of market power:
DATA REQUIREMENTS. Includes information on market clearing prices, supply bids, withdrawals and redeclarations during bidding cycles, transmission constraints, market shares of players under different conditions, historical unit costs and availability, and "vulnerable periods" (e.g., congestion; seasonal variations in outputs, imports and demand and facility outages).
MONITORING INDICES. Indicators include market clearing prices (the frequency with which specific players in different markets have set market prices); bidding strategies of participants (i.e., their correlation with setting market clearing price and strategies under different market conditions); market concentrations based on actual, real-time data for each condition (e.g., peak- and off-peak, congestion); unit outages; and unexpected congestion.
These data and indices might yield instances of what the economic experts testifying at the FERC's January 1997 Technical Conference described as "anomalous market behavior." This term includes, they elaborated, the withholding of generation capacity normally offered in a competitive market, unexplained redeclarations of generator availability or pricing and bidding patterns out of sync with prevailing market conditions.
What About Bilateral Markets?
One of the most difficult policy issues California will have to deal with is how far to monitor for market power and other abuses in the large, complex bilateral markets and other voluntary exchanges that may emerge. These markets will compete with the ISO and PX administered markets. The preservation of "existing contract rights" (em an article of faith for many stakeholders (em is almost absolute and, for those who choose not to play in the new auction markets, theoretically perpetual. FERC has rejected even minor derogations from these rights to simplify the functioning of the auction markets.
But how can the California ISO and PX ensure a fair and efficient market without monitoring the bilateral markets and other competing exchanges? It is not clear whether the PX and ISO even possess the mechanisms and legal authority to monitor such a market. The FERC doesn't appear deterred, however, since it has required the ISO and PX to file proposals on how they will monitor bilateral markets. Because IOUs are required to market all their power through the PX energy market and the ISO-administered ancillary markets for the first four years, apparently, the FERC does not believe this matter is urgent. That may change as large-scale IOU divestitures of generation capacity occur.
Any effort to monitor bilateral markets and other exchanges will surely prove controversial. Some players will likely resist even the collection of basic market data, the starting point of analysis.
This issue will likely factor in most other U.S. jurisdictions where it is unlikely that mandatory trading pools (such as those in England & Wales and other jurisdictions abroad) will be imposed to the exclusion