Ex Post Market Monitoring in Electric Power Markets

Michael Giberson

The Twomey et al. paper on market monitoring notes that some of the various economic tools used to track market power in electric power markets are applied ex ante, while others are applied ex post. Ex ante tools are the more powerful tools, using the networked nature of the business to intercept opportunistic behavior before it skews market results. Elegant in principle, if hard to do with precision in practice.

Ex post methods are applied after the market results in an attempt to discover whether or not a party actually engaged in opportunistic behaviors. By operating after the fact, these tools potentially have access to more information and the time for thorough review. However, a cost that comes from working after the fact is that once the harm to the market is done, fully unwinding that harm can be impossible. The networked nature of the electric grid and the constant interrelatedness of power flows means that locally manipulated market results can have echoes throughout the market.

Ex ante mitigation mostly works in quiet. Market participants know the rules, which typically are approved by the government regulator, the market software implements the pre-approved rules more or less automatically, and the product is usually no more than a table or two in market’s annual report.

Ex post mitigation measures, on the other hand, can spill into public. See, for example, this story about a market power mitigation process making news in Texas.

The Kluge That We Need: Local Market Power Mitigation Measures

Michael Giberson

Among the presenters at the Harvard Electricity Policy Group session on market power monitoring, Speaker 4 was the one who had it all together. Note that the session summaries characterize the discussions but do not name names, so theoretically I can’t link the discussion to a person and I suppose doing so isn’t in the spirit of the thing. But Speaker 4, whoever he or she is, hit the nail on the head:

A major role for the market design process is to refine the local market power mitigation mechanism. It is the kluge that we’ll need.

Local market power mitigation mechanisms require a kluge because the theory and practice of market power mitigation in networks remains underdeveloped. That said, it is fair to say that both theory and practice related to monitoring for and mitigating local market power has improved substantially over the last decade or so.

I’ve found two solid, relatively brief surveys of the theory, such as it is, and practice of electric power market monitoring and market power mitigation. I’ll only comment about the first of the two here, a paper by Frank Wolak, and I’ll post about the other one – by Paul Twomey, Richard Green, Karsten Neuhoff, and David Newbery – at a later date.

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Musician Soccer Fans

Lynne Kiesling

While we’re on the subject, I was fishing around about soccer and found the EPL Talk blog, where there’s a neat post about musicians who are mad about soccer. A disproportionate share of those listed are Manchester City fans (as am I), including:

Johnny Marr (Manchester City). The former guitarist of The Smiths had trials at Manchester City and was approached by Nottingham Forest to play football.

One of my favorite bands, one of my favorite teams, one of my favorite places. Yes, I like Manchester very much.

I think the disproportionate Man City representation reflects the hotbed of musical creativity that Manchester is.

Soccernomics: MLS’s Growth Strategy

Lynne Kiesling

I don’t share Mike’s interest in basketball, so the NCAA tournament frenzy doesn’t do a whole lot for me. However, he and I both love soccer, and I’ve commented on the upcoming Beckham infestation of SoCal here and here.

Today’s Wall Street Journal has an article that discusses the MLS growth strategy to build on the existing base and this new global visibility (subscription required). What I find most economically interesting is the pursuit of what amounts to development joint ventures with other leagues:

But in the wake of Mr. Beckham’s signing, a number of developments point up U.S. soccer’s rising profile at home and overseas. Earlier this month, MLS announced a partnership with the Bundesliga, Germany’s top circuit, that calls for the leagues to establish closer promotional links and share expertise in areas like stadium construction, TV production and youth marketing. The German league has the highest average attendance in Europe, but its foreign TV revenue lags behind that of England’s Premier League and Spain’s La Liga.

In a statement, Bundesliga CEO Christian Seifert said the league has spent the past 18 months studying the American soccer market and was impressed with U.S. TV ratings for last year’s World Cup, which attracted an average of three million total American viewers on English and Spanish channels. (The final between France and Italy was watched by about 17 million U.S. viewers, outdrawing the final game of the 2006 World Series.) …

Arsenal, the 121-year-old London soccer franchise that inspired the best-selling book “Fever Pitch,” is also angling for a toehold in the U.S. Last month, the club announced an alliance with MLS’s Colorado Rapids, which is operated by Stan Kroenke, owner of the NBA’s Denver Nuggets and the NHL’s Colorado Avalanche. As part of the “strategic relationship,” the British team will establish a youth training center at the Rapids’ new facility in suburban Denver, send coaches to the U.S. to supervise clinics, and develop an Arsenal-branded youth tournament.

Up to now, attempts to expand the domestic market through foreign collaborations have been, well, lame:

The Arsenal and Bundesliga deals are in sharp contrast to past U.S. efforts by foreign teams, which often tried to drum up interest with haphazard summer tours, says Paul Swangard, executive director of the University of Oregon’s Warsaw Sports Marketing Center. Now, “there’s a recognition that MLS is a viable piece of the global soccer business,” he says. “It’s a credibility statement for American soccer.”

Thinking about these transactions as development joint ventures provides some insights into profit-maximizing strategies for these leagues. At one level, they compete for labor inputs (players) and for consumers. So why would they want to collaborate through such development joint ventures? Because they realize that they will be competing for a larger pie if they can increase global demand for soccer. They also realize that if they all have more quality players from whom to choose, the quality of the game will go up in general, and they will all benefit.

Where is Cinderella?

Michael Giberson

Coyote Blog asks, “Where is Cinderella?

The first two rounds of the NCAA basketball championship have been played (round three is underway as I type), and nowhere to be seen is a surprise team like last year’s George Mason University.

The best answer I have seen is that of Phil Sheridan, in The Philadelphia Inquirer: Mid-majors that roar are winnowed out. While normally I’m not much for conspiracy theories, when the conspiracy fits with the interests of television and the dominant sports conferences … well, that’s a powerful aligning of interests.

Want to know what happened to Cinderella? I’d put the wicked stepsisters at the top of the list of suspects.

Wind Power & Water Power: So Happy Together

Michael Giberson

Earth, Wind & Fire may be a funky soul powerhouse band of the late 60s and early 70s, but in the Pacific Northwest the element that really gets them juiced is water. The region gets about 2/3rds of its electric power from hydroelectric dams. But as the region seeks to increase its electric power generation capability, perhaps they were inspired by these lines from EW&F:

Do you need a guide
To make you feel satisfied
Head to the sky
Will tell you why

Wind power may have many fine attributes as a power source, but steady predictability is not one of them. Water power, on the other hand, is often highly controllable. Proponents of wind in the Northwest say it is a match made in heaven.

(Lyrics from the EW&F song, which is itself titled “Earth, Wind & Fire” found here via Google, from EW&F’s Spirit album.)

Why do we have Electric Power Market Monitors?

Michael Giberson

The Harvard Electricity Policy Group regularly organizes meetings with some of the “best and the brightest” electricity policy thinkers and doers to kick around ideas, talk shop, see what’s new, and so on. About a year ago one of their topics was “Market Monitors: Dealing with Bad Guys, Bad Rules, or Both? What Powers Should they Have and How Should They be Exercised?” The session summary, which characterizes the discussion but doesn’t name names, contains a bundle of ideas about the role of market monitors in integrated (or “organized”) electric power markets.

Here’s one of the ideas that happens to be completely wrong:

Power markets are monitored because they used to be regulated, not because there’s something unique about [the] electricity market. It’s also because FERC has regulatory requirements for just and reasonable rates.

If these claims were true then we should expect to seek market monitors in other restructured or deregulated industries. Do we see anything quite like market monitoring in airlines? Trucking? Wholesale natural gas? Railroads? Telecommunications?

When I tried to come up with examples of institutions similar to power market monitoring, my examples were the credit card industry, stock exchanges, futures exchanges and the internet. The one overlap was telecommunications, but the example was of how the provision of information over the telecom network can help consumers avoid unwanted calls (by blocking opportunistic behavior by telemarketers). I think it is a reasonable example of “regulation by network”, but it doesn’t provide support for the view that “power markets are monitored because they used to be regulated.”

By the way, FERC continues to have obligations for the economic regulation of wholesale natural gas under the Natural Gas Act of 1938, but we don’t see “gas pipeline market monitoring.” So neither “used to be regulated” or continuing FERC requirements seem to explain the development of the RTO/ISO power market monitor.

My view isn’t exactly that “there’s something unique about the electricity market” either. Rather, as elaborated in postings here and here last week, I think there’s something about networks in general that potentially makes them especially effective as regulators – in the broad sense of that term – of opportunistic behavior. Whether networks in fact can be effective regulators depends upon the structure of the network, and how that structure affects the flow of transactions and information. In the case of electric power networks integrated with wholesale power markets, the structure is all there to support effective regulation by network.

And that, boys and girls, is why we have market monitors in the restructured wholesale power markets.