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Fingerprinting the Invisible Hands

Opaque markets inflate power prices.

Fortnightly Magazine - July 2009

price of those who employ high profits, their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. 3

Adam Smith touches on the theme of secrecy a number of times, for in general he opposed business combinations that enforce such rules as detriments to competition. 4

Since the mid-1990s, transparency in North America’s electricity markets has decreased dramatically. While the traditional pre-filed contracts at FERC, retail rate cases, and open outcry markets were hardly perfect, the transition of 50 percent of the wholesale electricity markets in the United States and Canada to highly opaque, administered markets has reduced our ability to understand wholesale prices. Secrecy in administered markets ranges from a high level in MISO and PJM where the bids, bidders, and price resolution are secret, to ERCOT where bids and bidders are made public only after two months. 5

In general, the high level of secrecy has been adopted from the example in California. This is ironic since California has suffered from the secrecy that allowed such market schemes as Ricochet, Death Star, Load Shift, and Get Shorty. 6 All of these would have been impossible without the shield provided by the rules in place at the California Independent System Operator.

Surprisingly little discussion has taken place concerning the lack of transparency at RTOs. FERC has adopted a slightly inconsistent policy of allowing the ISOs to define their own levels of secrecy—generally without public discussion or justification—while retaining traditional transparency rules for utilities in FERC’s Form 1s and energy trading in the commission’s Electric Quarterly Reports . FERC’s 2008 final order in RM07-19-000 and AD07-7-000 provide offhand guidance concerning transparency at the RTOs:

Our proposal to reduce the lag time for release of offer and bid data to three months was supported by most commenters. Some commenters requested a shorter lag time or immediate release. Others proposed the release of additional information, such as system lambda… Our proposal cuts the current lag time for most RTOs and ISOs in half. Because this is a substantial change, RTOs and ISOs should become accustomed to the new release time and observe its effects before committing to an even shorter time. However, as we proposed in the NOPR, we permit the RTOs and ISOs to propose a shorter time, with accompanying justification, or a longer time of four months if they can demonstrate a collusion concern. Alternatively, they may propose an alternative mechanism if release of a report were otherwise to occur in the same season as reflected in the data. These