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Proper authority and market monitoring and mitigation could make the system work.
Fortnightly Magazine - September 15 2003

as defined by the agency. 5 In Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) regulated markets, the violators of the rules can be made to pay for all damages incurred by other participants in the markets-criminal and civil penalties and liability under civil suits brought by those harmed. Those innocent of market rule violations who were induced to sell by high market prices may rely on the finality of transaction.

Regulators Need the Right Tools

Given the differences in approaches and outcomes between price and behavior regulation, what should regulators and policy-makers do? Notwithstanding the various efforts to retard or stop completely the march of FERC's standard market design, the consensus of Congress, as well as FERC, appears to remain that competition is a more effective mode of regulation than price setting. Thus, from a federal perspective, if the market is to be the primary regulator for an essential commodity highly susceptible to price manipulation, the natural path is to move promptly to regulation under a scheme analogous to that which has worked reasonably well to regulate financial and commodity futures markets.

Moreover, it seems unlikely that states will be able to forestall for long the move to competitive markets, given the rapid regionalization of the industry. In short, the current industry structure and need for regulation is increasingly more like that of securities and commodities sales and their exchanges rather than rate-of-return regulation.

The analogies to more traditional commodities and securities are not, however, without flaws. In particular, both the CFTC and SEC rely substantially on self regulating organizations, or "SROs"-the National Association of Securities Dealers (NASD) for securities and the National Futures Association (NFA) for commodities. No statutory authority for SROs exists under the FPA. Moreover, while RTOs, independent system operators (ISOs), and their organized markets are, in effect, exchanges, stock or commodity exchanges are different. In particular, those organized markets comprise members that are regularly both buyers and sellers. When exchanges establish rules and enforce them, there exists within each participant and the collective whole a vested interest in making the rules balanced and enforceable because anything one gives, one can easily get in the next transaction. The participants themselves have every reason, therefore, to write reasonable rules and, in general, to honor the Golden Rule. 6

Electricity markets today lack the ingredients needed for the Golden Rule to be meaningful. The ultimate buyers of electricity (and their wholesale middlemen) need electricity in real-time. Suppliers have similar limitations on the ability to produce electricity in highly variable amounts or to store it. Most buyers are not also equally sellers, and vice versa. In fact, functional unbundling (and, in some states, mandatory corporate unbundling) has made this even less true than in the past. This means that regulators (FERC and the states) will have a more difficult job in the early years of commodity/security-type regulation-because they will have to ensure that the rules emulate ones that truly equal exchange participants would have written. Most importantly, regulators (and legislators) will need to resist the urge, when the