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Watching the Watchers

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

utilities could shift loads between the DAM and RTM. Prices persistently differed, but New York ISO's external monitor believed that physical transactions alone could equalize them and that virtual trading could increase their divergence. 16 Studies by generators and others (not MMIs) favoring virtual bids were met by objections from utilities and resistance from the New York Public Service Commission, which saw them only as increasing rates. After a long and complex process, virtual bidding began on Nov. 1, 2001. Since then, the ISO has reported that virtual bids have fostered price convergence, particularly in transmission-constrained areas around New York City. Intervention or mitigation of virtual bids has never been required, and the ISO's external MMI has stated that their volume is large enough to thwart moderate exercises of market power. 17

California's utilities had greater problems than New York's, having made a legislative bargain that froze retail rates, restricted purchases to spot markets, and provided little time for transition cost recovery. The comparison, however, is consistent. With little organized resistance, PJM and its monitors endorsed virtual bidding instantly. California's monitors concentrated on keeping prices low and tolerated exercise of market power by purchasers. They criticized underscheduling of loads by non-utilities and refused to consider virtual bidding. Now, however, the economics and politics have changed, and the ISO's external monitors support virtual bidding as part of a market redesign that will bring efficiency and lower prices. 18

Rethinking Monitoring

Calling an RTO or MMI independent does not make it so. The closer to an RTO (and the farther from FERC) a monitor is, the more questionable its independence. Even California's Electricity Oversight Board has made the observation:

Internal market monitoring units serve the interests of the organization, which cannot be expected to be aligned with the needs of regulatory agencies for objective and comprehensive market monitoring. 19

Minority reports by MMIs may be nonexistent because such reports will seldom serve the interest of their RTOs. In ordinary organizational life, management accepts consensus reports because it knows the range of views that went into them. MMI reports are written for FERC rather than management, and FERC cannot see the range of opinions they are considering. Unlike ordinary managements, the commission also will have a harder time understanding the balance of power that gives a report one slant rather than another.

Finding smarter experts is not a solution, since most MMIs are top-heavy with good professionals. Numerous economists whose competence and integrity are beyond question work for every sort of utility and intervenor, and they often make coherent counter-arguments to those of monitors. Why not make some of them monitors and get a mix of experts that reflects the differing professional opinions that work in the industry?

Possibly the biggest mistake is to assume that "independence" taken by itself has special value. Instead consider a stakeholder RTO board whose constituencies can each name a member of the MMI. Economists really do agree on a lot of issues, and there would be good reasons for FERC to take unanimity in a stakeholder-appointed group quite seriously.