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Watching the Watchers

Can RTO market monitors really be independent?
Fortnightly Magazine - July 15 2003

rather than utilities had initiated the process for complex reasons involving "must-run" contracts. As it became clear that generators lost while utilities gained by shifting load from the loosely capped DAM to the tightly capped RTM, MMIs came to excuse the utilities' actions as "defensive." 9 The PX's external monitors even devised a strategy utilities could use to make prices still lower. 10 The MMIs were aware that a competitive energy market with little evidence of market power covered the West, but they chose to view it as an obstacle to imposing price caps in California alone. 11

As the crisis grew the activities undertaken by MMIs changed. The ISO's internal monitors (who report to its general counsel) went beyond observing market conditions to calculating utility shortfalls in stranded cost recovery and their effects on shareholders. Its external monitor volunteered to calculate and allocate refunds due from generators, a job eventually performed by its internal monitor. 12 In 2001, state government took over most power purchases, but neither of the ISO's monitors commented on the presence of its representatives on the purchasing floor, or on available documentation that face-saving efforts by the state had led to higher prices and reliability problems. FERC finally ordered the state representatives off after a complaint from generators. 13

Virtual Bidding

Generators can directly counter buyers' efforts to cut the DAM price by selling into the RTM. In California, a scheduling coordinator could procure more power than required for its own load (while claiming otherwise) and sell the remainder in the RTM. Unlike California, other RTOs allow "virtual bidding" by financially eligible parties. One who expects a high RTM price can bid virtual demand into the DAM (with no expectation of delivery) and sell back to the RTM, but not without risk. One who expects the opposite can reverse those bids. Virtual bidding offers an ideal test case of independence. If considerations of economic efficiency rule, it will be a primary tool for arbitrage and risk management. If, instead, the interests of buyers loom larger, RTOs and their MMIs will be hostile to it.

Before returning to California, compare PJM and New York. 14 Prior to the opening of PJM's markets, Pennsylvania's utilities reached settlements to recover their costs of transition to retail competition. They retained generation and were free to make bilateral contracts. Most utilities outside of Pennsylvania continued under customary regulation and could pass on market prices. Virtual bidding began on June 1, 2000, the same date as the markets opened, with very minor implementation problems. PJM's MMI (an internal department) has told FERC that virtual bids have contributed importantly to the success of its markets, providing risk management and liquidity. 15

New York's utilities faced more uncertainty than PJM's and less than California's. At the opening of the New York ISO's markets (December 1999) they did not have PJM's near-certainty of stranded cost recovery, but low rates minimized risks from retail competition. Retaining generation and free to contract, they did not face California's spot market risks and stranded cost deadlines. At the outset only