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The Commission: The Market's Eye-in-the-Sky?

FERC's plan to expand into energy market-monitoring faces many challenges.
Fortnightly Magazine - March 15 2002

Placing FERC's authority as an umbrella over market monitoring is a well-reasoned advance in the market monitoring state of the art. Given the politicizing of market monitoring in California, stemming from the price excursions of 2000 and the fallout that continues to complicate both the California markets and the Western U.S., FERC staff's vision is a necessary, if not inevitable, shift of emphasis.

Market Abuse & Speed-of-Light Markets: Will FERC Be Fast Enough?

The practical working relationship between market monitors and FERC involves frequent interaction through informal meetings and the submission of reports, as FERC requires. Market monitors also report to ISO and RTO boards and senior managers, providing information about market performance as well as raising issues concerning the efficiency of market operations, including identification of market power related problems.

In cases where evidence of deliberate market abuse by one or more market participants is identified, monitors may take simple steps on their own. For example, sending warning letters or other forms of notice to the alleged violator(s) is one option, or they may refer the problem to FERC or the Department of Justice.

This model of market monitoring fits well within the jurisdictional sphere of FERC's disciplinary powers, such as imposing sanctions or other penalties on market participants, are limited by the Federal Power Act. FERC appropriately emphasizes its authority to use rate making and to define market standards and practices, given its limited powers to sanction and penalize.

Unfortunately, the nature of competitive markets, particularly in organized exchange environments like RTO day-ahead, real-time, ancillary services, and congestion markets, is that they move very quickly and are difficult to control. Current market monitoring methods and processes are far from fleet of foot.

For example, the California electricity crisis began with significant price excursions in May 2000. The California ISO (CAISO) market monitoring staff produced quick reviews of the initial events, but a thorough examination of price excursions did not come out until the middle of August. 4 The monitor's public report concluded that massive exercise of market power had occurred.

The California Power Exchange's (CalPX) market monitor produced some initial commentary and graphic information to the California Electricity Oversight Board (EOB) in June 2000, but a thorough analysis of price excursions through the summer of 2000 did not come out until late September 2000. 5 In its report, the CalPX market monitor concluded that there was no basis for allegations of market abuse, because price excursions could be almost entirely explained by fundamental market forces, such as changes in gas prices, power supplies, and other Western wide rare events.

Other investigations, including those conducted by the California Electricity Oversight Board and the state legislature, occurred during the same time period. Most importantly, FERC conducted its own investigation into price excursions in California and produced a report consistent with the CalPX findings, even later in the year than the CalPX report. 6

With conflicting conclusions amongst monitors, FERC's findings and related orders were vital to regaining order in California markets. But during the period when monitors were doing their analysis and