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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

financial exchanges to respond quickly to unusual market events. This contributes to minimizing unusual market events in the first place.

A challenge ahead, as market monitoring methods and processes mature, is how FERC will enable market monitors to more quickly respond to market events in a manner that sustains participant confidence and minimizes the kind of out of control politicizing of market activity that occurred in California. After all is said, the question going forward is how can the institutional drag coefficient be reduced? The answer lies in a combination of methods used for monitoring and the relative degrees of "self-regulatory" freedom RTOs are given by FERC.

The Detection Kit: Balancing and Other Modes of Mitigation

The FERC staff's emphasis on mitigation is a well-reasoned approach, especially given the early stage of evolution of electricity markets. Even a standard market design, as FERC is now in the process of creating, will be subject to continuous change. Distinctive regional characteristics will drive some changes. The iron law of manipulation will drive other changes. Refinements in knowledge and experience will drive changes as well.

Since "you don't know what you don't know," real market experience will be a principal source of information and practice that will inform monitors and FERC about flaws and failures in electricity markets. For instance, these outcomes may not be the result of abusive market behavior as much as an ill-conceived incentive structure, poorly thought out assumptions, or just plain bad analysis underlying specific elements of market design. market mitigation, therefore, is an important mode of review and analysis to be encouraged as complementary to any focus.

In fact, and mitigation are two sides of the same coin. For the most part, initiatives stem from analysis of data. The effort is intentionally preemptive. mitigation stems from analysis of data and results in a market rule change or design revision. The obvious main difference is that methods attempt a preemptive strike, while is focused on a reactive correction.

These methodological perspectives would be even more effective if some form of real time monitoring on operating floors were adopted as well. Like trading floors where people interact with each other, operating floors are hubs for voice and data interactions between controllers and market participants. Informal and familiar relationships easily lapse into unintentional passing of sensitive information that may advantage one participant over others. If monitors had a real time presence on the operating floor, some of the potential for unintentional collusive behavior could be spotted and preempted in real time. In doing so, the need for a more prolonged or mitigation might be minimized.

There are other related steps FERC might consider taking. First, review the extent to which trading data must be treated confidentially. Under present market designs, a degree of confidentiality must be preserved to enable free market behaviors. However there are tradeoffs between the benefit of confidentiality and transparency. Transparency has two important components in electricity markets. Transparency of process is essential because it ensures that market participants and stakeholders have a real voice in the evolution of RTO