Watching the Watchers

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

The Federal Energy Regulatory Commission (FERC) initiatives on regional transmission organizations (RTOs) and standard market design give new prominence to the market monitoring institution (MMI), a novel regulatory tool never before contemplated in legislation.1

FERC is requiring that all RTO applications include an MMI staffed by employees or external experts chosen by the RTO's governors. The MMI will evaluate market rules, observe regional trading, and regularly report to FERC. Commentators on the commission's proposed RTO rule had highly diverse views on the organization, functions, and sanctioning powers of MMIs. In response FERC has stated that it would be receptive to differences in MMI proposals that are justified by differences in regional markets.

MMIs already exist in all functioning RTOs and similar regional transmission entities, except in Texas, where one is being installed. Although experience is accumulating, FERC has never investigated their performance. It has yet to attempt a balanced determination of what MMIs can and should do, or whether they should exist at all. No regulatory institution has ever achieved so much centrality with so little forethought, and thus far there is little reason for optimism.

All RTOs have faced contentious and ambiguous market issues, but no MMI has ever produced a split decision. Either MMIs employ decidedly nonrandom samples of economists, or their reports are compromises that lose value because they do not make opposing opinions explicit to FERC.

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