To what extent should the independent system operator (ISO) and the spot market (Power Exchange) remain separate? Thinking about how the ISO must operate leads to certain conclusions....
The Commission: The Market's Eye-in-the-Sky?
FERC's plan to expand into energy market-monitoring faces many challenges.
There are three important challenges FERC's vision of market monitoring face. First, the market consequences of a significant institutional "drag coefficient" when addressing problems of market power or, more generally characterized, market abuse. Second, balancing and modes of mitigation and considering more immediate complementary tools. As well as, third, addressing the relative emphasis on FERC regulation and RTO self-regulation.
In the Federal Energy Regulatory Commission's (FERC) Dec. 17, 2001 paper, , the staff writes that RTOs "need to establish a process for developing periodic reports on prices, volumes, supply, demand, liquidity, and ownership structure and concentration of these markets." 1 FERC staffers go on to say reports should be sent concurrently to FERC and the RTO without the RTO's prior review. FERC's vision is that monitors will work together-and with FERC-to establish common market performance measures. The focus of monitoring would include attention to barriers to entry and whether demand is being satisfied efficiently.
FERC staffers write that monitors would recommend structural and rules changes that would benefit market performance. They argue that rules change proposals should be vetted through a public process in order to promote market transparency. Monitors should be independent of the RTO, but work inside the RTO and be funded by the RTO. There should be an independent reporting relationship to FERC as well as informal reporting to the management of the RTO.
They also assert RTO recommendations regarding rules changes, or more important market mitigation measures that should be applied (rather than ), should be made to FERC. FERC staff indicates that mitigation measures may not be stringent in order to allow for demand responsiveness to essentially "mitigate the mitigation." In conjunction with this focus, FERC staff argues for a standard market power mitigation plan for all RTOs. The logic is that through such means, monitors would be implementing a Commission-approved mitigation plan, "rather than mitigating market power on its own initiative." 2
This most recent posture by FERC staff is consistent with the approach that FERC has taken since the start up of ISOs in the United States several years ago. But there are important nuances in the staff paper that indicate a refinement in FERC staff's view of market monitoring.
First, there is clear emphasis on the importance of independence. In particular, the most significant aspect of FERC staff's vision is the specific linkage of the monitoring function to FERC authority. While always a critical pillar in the practice of market monitoring, FERC proposes formalizing the direct reporting relationship to FERC and eliminating any direct reporting line within RTOs. Second, FERC proposes a more explicit emphasis on mitigation in lieu of other methods. Third, there is an emphasis on a lighter-handed response to market power problems if there is evidence of potential new entry or enhanced demand responsiveness.
FERC staff's approach can already be seen in the most recent Midwest ISO order. The basic tenants of the FERC staff's vision paper appear prominently in the Commission's reaction and directions to the MISO market monitor. 3