November 15, 2001
Markets Behaving Badly
To understand 'gaming,' be a gamer.
FERC Staff Member: What sort of behavior is wrong?
Charles J. Cicchetti:* I'm not certain. When we tried to understand 'gaming' [in California], we discovered there was underscheduling and underbuying - arbitrage between two markets, the PX and ISO. This arbitraging did not seem so bad until a shortage emerged.
Marji Philips: I hate to say 'gaming' is bad. You want us to be gaming. You want us to make money. Otherwise, you won't have enough generation. As traders, we are the ones who are taking the risks. So you want to give me room to play my portfolio.
Sonny Popowski: You want these folks to be creative, but not gaming. You need something like the infield fly rule in baseball.
Cicchetti: Get the rules right and then enforce the rule. ... There are some things that monitors should do and some things that someone should do but not the monitor. ... But you do need an independent cop on the beat. The market monitor should be policing and booking after the arrest. The market monitor should be a lean, mean fighting machine.
Craig R. Roach: You should rely on antitrust law. Now collusion, that would be wrong. Price fixing? That would be wrong also. But if you face a price cap in Market X, and you can get a higher price in Market Y, that's legitimate. Somebody making a bet that there is a shortage may actually be protecting a group of ratepayers.
Anjali Sheffrin: I disagree. Antitrust standards are too lenient. The Federal Power Act requires a higher standard -rates must be 'just and reasonable.' That's not the same thing.
Philips: The proceedings should be confidential until the accused has been convicted. ... But I can tell you that it's a matter of great speculation among us traders when we hear that there has been a confidential settlement between the RTO, the market monitor, and the trader.
Popowski: I think it's a little dangerous to keep the public in the dark for so long, as Marji states. I think the burden of proof should be on the trader.
Cichetti: Is the market monitor working for the RTO, like a private corporate security force, or is it working for the FERC? In California, the market monitoring function was designed to be an internal force-to bring the matter to the ISO board, which would then propose a tariff change to FERC. [But] Anjali makes a good point. If you think that the just and reasonable standard trumps the standard of fair market value, then I think you need the market monitor to report to you [FERC].
Philips: I want to clarify that when I said 'gaming,' I only meant 'gaming' in the sense of pursuing all available opportunities.
* Charles J. Cicchetti holds the Miller Chair in Government, Business, and the Economy, at the University of Southern California, Los Angeles. Marji Philips is a power trader from the Exelon Power Team. Sonny Popowski is the Pennsylvania consumer Advocate. Craig R. Roach is a principal with Boston Pacific Co., consultants. Anjali Sheffrin is director of market analysis at the California Independent System Operator. This transcript is reconstructed from a reporter's rough notes and is believed to be substantially accurate in all material respects.
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