# Presentation: 666758

## Southeast Europe Electricity Market Monitoring Workshop – Athens, Greece

**Roles and Approaches to Market Monitoring from the USA**
**Regulator’s Perspective**
**Susan J. Court**
**Federal Energy **
**Regulatory Commission**
**4 October 2005**

**Notes:**
Market monitoring in the USA is a term that applies generally to the process in which Federal and state agencies, as well as market participants, watch what is happening in the energy markets to ascertain whether there are any anomalies or other distortions that need to be corrected within the bounds of their respective jurisdictions.  FERC, for example, has promulgated several sets of market rules (e.g., open access regulations, market behaviour rules, codes and standards of conduct, market based rate orders), and oversees compliance with those rules, which includes audits and investigations.  It maintains a hot line, in fact, to which market participants can report violations of the rules. 

## U.S.A. Market Monitors

-     FERC-approved market monitors (called Market Monitoring Units or MMUs in FERC orders) are non-government persons or entities who watch and observe the organized _wholesale_ markets  to identify ineffective market rules and tariff provisions, identify potential anti-competitive behaviour by market participants, and provide the comprehensive market analysis critical for informed policy decision making.

**Notes:**
Market monitoring in the USA is also a term of legal art within the context of the organized electric energy markets operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs).  The RTOs/ISOs are non-profit corporations that operate the bulk power transmission systems and administer energy markets in certain regions or states in the US.  They sell their services pursuant to tariffs filed with FERC.  

Commission-approved market monitors – called Market Monitoring Units (MMUs) in FERC orders – watch and observe organized wholesale markets to identify ineffective market rules and tariff provisions, identify potential anti-competitive behaviour by market partic-pants, and provide the comprehensive market analysis critical for informed policy decision making. 

Note re Terminology:  The Commission refers to the market monitors it approves as MMUs. MMU is used interchangeably to refer to a person or a group of persons (either within RTO or an outside consulting firm).  The RTOs use a variety of terms – IMM (Independent Market Monitor), IMA (Independent Market Advisor).  MMU is most frequently used by RTOs to refer to their INTERNAL monitoring staff.

Regardless of what they are called, Commission-approved market monitors have been a critical function associated with organized markets in the USA since the inception of the concept of RTOs/ISOs. 

## U.S.A. Organized Markets

**Notes:**
Today, there are six RTOs/ISOs regulated by FERC, and one (ERCOT) regulated by the Texas Public Utilities Commission.  Together, these organized markets – as they are called in the USA – affect 2/3 of the country’s economy. 

PJM Interconnection serves 51 million people in all or parts of Delaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region's transmission grid; administers a competitive wholesale electricity market, the world's largest; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. The Midwest ISO manages one of the world's largest energy markets covering 15 states and one Canadian province; administers Day-Ahead, Real-Time and Financial Transmission Rights markets as well as Locational Marginal Pricing at over 1,400 nodal locations; utilizes a market-based platform for grid congestion management; operates 97,000 miles of transmission lines. NE ISO: responsible for the day-to-day reliable operation of New England's bulk power generation and transmission system with an installed capacity of 32,000 megawatts; oversight administration of the region's $7.25 billion wholesale electricity marketplace, comprised of more than 260 market participants; and management of a comprehensive regional bulk power system planning process;  NYISO: administers the state's wholesale energy markets, operates the state's high voltage electric transmission system. The NYISO's market volume was $7.3 billion in 2004. Southwest Power Pool, Inc. has service area with over 33,000 miles of transmission lines and a gross plant investment approaching $4 billion. SPP is a group of 45 electric utilities serving more than 4 million customers across all or parts of eight southwestern states. This membership is comprised of investor owned utilities, municipal systems, generation and transmission cooperatives, state authorities, wholesale generators, and power marketers.  CAISO: California’s restructured electricity industry is complex, with traditional utilities, private generating companies and state agencies each playing a variety of roles and carrying different responsibilities. The ISO is the impartial operator of the state’s wholesale power grid—maintaining reliability and directing the electron traffic on the transmission superhighway that connects energy suppliers with the utilities that serve 30 million Californians.

## Legal Framework

**Order No. 2000**, FERC Stats.& Regs. ¶ 31,089 (2000) set forth principles to inform market monitoring plans to be filed by RTOs as part of their tariffs.  *See also* 18 C.F.R. § 35.34.
**Individual RTO orders**, *e.g*., *ISO NE*, 106 FERC ¶ 61,280 (2004) and *SPP*, 106 FERC ¶ 61,110 (2004)  expanded and refined Order No. 2000 principles and accepted tariff provisions.  See also **http://www.iso-ne.com/regulatory/tariff/sect_ 3/app a%20_(after_7-22-05_order).DOC; ****http://www. pjm.com/ documents/ downloads/ agreements/tariff.pdf**; **http://www.nyiso. com/public/webdocs/ documents/tariffs/ market services/att_h.pdf (sample tariff sections)**;  **http://www.ferc.gov/ industries/electric/indus-act/rto/handbook.asp** (**RTO Handbook**).
**Market Behavior Rules****,** 105 FERC ¶ 61,218 (2003), *order on reh’g*, 107 FERC ¶ 61,175 (2005)  modified market based rate tariffs and allowed MMUs to enforce specific rules expressly set forth in RTO tariffs.
***EPSA v. FERC***, 391 F.3d 1255 (D. C. Cir. 2004)  limited FERC communication with MMUs in contested proceedings per the *ex parte* rules.
**Policy Statement on Market Monitoring Units**, 111 FERC ¶ 61,267 (2005)  specified protocols for MMUs to make referrals to FERC for alleged tariff and Market Behavior Rules violations.

**Notes:**
Order No. 2000 – FERC did not specify a particular approach as the concept was new.  Required a plan to be filed with an RTO application.  The plans were subject to the following principles: designed to ensure that there is objective information about the RTO markets and a vehicle to propose appropriate action regarding any opportunities for efficiency improvement, market design flaws, or market power identified by that information; provide for evaluation of the behavior of market participants, including transmission owners, if any, in the region to determine whether their behavior adversely affects the ability of the RTO to provide reliable, efficient and nondiscriminatory transmission service; provide for a periodic assessment of how behavior in markets operated by others (e.g., bilateral power sales markets and power markets operated by unaffiliated power exchanges) affects RTO operations and how RTO operations affect the efficiency of power markets operated by others; provide for reports on opportunities for efficiency improvement, market design flaws and market power abuses in the markets the RTO operates and administers also must be filed with the Commission and affected regulatory authorities.

Note: TARIFF is a term of legal art in USA.  It is a compilation of the rates, terms and conditions of services, and contracts of the utility – and does not refer to a charge or fee.

Expansion in Individual RTO orders: plan must include appropriate market power mitigation measures to address market power problems, such as physical withholding of supplies, economic withholding of supplies, reporting on availability of units, factual accuracy of information submitted to RTO, obligation of market participants to provide info to MMU; cooperation of market participants in investigations or audits conducted by MMU; provide for periodic reports by MMU, including performance metrics, on RTO performance; assist in enforcing certain tariff matters re market behaviour.

Market Behaviour Rules order identified six rules to be observed by holders of market based rate authority, and provided that MMU could help enforce compliance with those rules if clearly a tariff violation and must refer seeming violation of rules otherwise.
1.  Unit Operation.  Generator must comply with Commission approved rules of applicable power market re scheduling and maintenance.  
2.  Market manipulation: Actions without a legitimate business purpose that are intended to or foreseeably could manipulate prices are prohibited.  Express: wash; transactions predicated on false information; artificial congestion relief; collusion.
3. Information: Provide accurate information to FERC, ISOs, RTOs and MMUs.
4. Reporting: Voluntary price reporting to index developers must be done according to Price Index Policy Statement.
5. Record Retention: Retain relevant pricing records for three years.
6. Tariff Matters: Do not violate code of conduct or Order 889 standards.
      Note: No. 2 covers physical (not offering available supply in order to raise the market clearing price) and economic withholding (bidding available supply at a sufficiently high price in excess of the supplier’s marginal costs and opportunity costs so that it is not called on to run and hwer, as a result, the market clearing price is raised. 

Policy Statement reinforced this MMU function, and provided protocols for referral.  

Note: new law expanded scope of FERC’s penalty authority to cover, inter alia, violations of the market behaviour rules, and increased the amount of penalty to $1 million – which could be imposed per violation per day for length of conduct.  

## Principles and Protocols

**Principles**:
- RTOs must have Market Monitoring Plan in their tariffs.
- MMUs:
- must assist in fairly implementing the market monitoring plan;
- may be RTO employees or outside consultant or both;
- must be independent from market players;
- must vigilantly observe market, identify ineffective market rules and tariff provisions, watch out for anti-competitive activities, report to FERC and state agencies, and make appropriate recommendations;
- may bring anti-competitive activities to attention of anti-trust authorities;
- may enforce compliance with clearly identified RTO tariff provisions, and may institute prescribed measures to mitigate market power;
- must identify any violation of RTO tariff or Market Behavior Rules and refer violations to FERC.
**Protocols**: referrals of alleged tariff and Market Behavior Rules violations must be based on credible evidence in writing to FERC Enforcement chief; referrals will be addressed within 60 days.

**Notes:**
Independence: the MMUs are usually internal staff, who are to be as independent as possible from management; plus outside IMMs or IMAs will be financially and in some instances professionally independent from RTO.  FERC also has personnel located on site at three RTOs – CAISO, SPP, and MISO.  These are not the market monitors contemplated by orders/rules/tariffs. 

Reports to FERC on state of the market must be at least annual but may be more often.  E.g., NYISO does quarterly reports.  For this purpose, they have authority to collect data from market participants.

Market Power Mitigation: mitigation to remedy conduct that is significantly inconsistent with competitive conduct and would result in a substantial change in one or more prices in the market; actions or transactions without a legitimate business purpose and intended to or could manipulate market prices, market conditions, or market rules.  Most plans call for the MMU to contact the party engaged in the seemingly anti-competitive behaviour and request an explanation.  

Type of behaviour that may warrant mitigation – physical or economic withholding of an electric facility and uneconomic production from an electric facility.  MMUs use various indices and screens to detect such market power behaviour.  

If explanation that MMU receives is unsatisfactory, then MMU may (depending on tariff) issue a demand letter requesting market participant to discontinue non-compliant action and if doesn’t get satisfactory response, refer matter to next level (e.g., Members Committee) and then to regulatory authorities; 

OR may mitigate by unilaterally reducing the bid prices that generators and marketers submit to sell power;  restricting bids, obligating party to pay for operating reserves, or use a default bid to re-calculate the market clearing price.  NY ISO – for NYC -- uses software (Automated Mitigation Procedures or AMP) that reviews bids submitted by generators into the day-ahead market and automatically and quickly mitigates bids if specific thresholds for both bidding conduct and market impact are crossed.  In real time, conduct and impact thresholds are used to trigger bid caps as well.  Some RTO tariffs allow MMU to impose financial penalties as a result of market power.  

Note: MMUs’ investigations may not be impeded.  MMUs have access to confidential information. 

Note: challenge is to ensure that reaction is to exercise of market power and not simply a true scarcity of supply.  Otherwise,  needed investment might be discouraged by market signals being skewed.  

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