Not much analytical work has be published looking at the role of market monitors in regional power markets. One of the few pieces to be published in the trade press was an article by Prof. Robert Michaels in Public Utilities Fortnightly, “Watching the Watchers: Can RTO market monitors really be independent?”
Writing in 2003, Michaels calls market monitoring institutions (MMIs) a “a novel regulatory tool never before contemplated in legislation,” and says “no regulatory institution has ever achieved so much centrality with so little forethought.”
Market monitoring is generally presented as a pro-consumer institution that complements government regulatory oversight. Michaels said in the case of the California Independent System Operator and the now-defunct Calfornia Power Exchange, history suggests an alternative interpretation.
Ideally, an MMI would originate in a structured regulatory rulemaking where representatives of all affected interests could provide their views. In reality, it arrived in a docket, and not as a response to concerns by potential victims of monopoly. California’s three large corporate utilities introduced MMIs in their 1996 application for market-based rates in the Power Exchange and ISO. … Numerous parties testified about market power, but none independently suggested that MMIs be formed. Apparently few found it strange that regulators would rely on a watchdog institution proposed by the utilities whose market power was at issue.
Michaels illustrates his views with an examination of market monitors’ views toward virtual trading — allowing traders the ability to submit “virtual” bids and offers into the day-ahead market that will be cashed out without delivery in the real-time market. Virtual trading is now generally recognized to be an efficiency-enhancing market element, but as Michaels illustrates it has a contentious past.
While he tells some useful tales, however, at the end of his article his dissatisfaction with market monitoring in California lead him to suggest abandoning the institutional innovation. The monitors he trusts, he says, reside at the Federal Energy Regulatory Commission in Washington, D.C., and not at the integrated regional power markets.
Obviously this is a brave position for someone from California to be taking, especially in 2003, with the memories of the California market design failures of 2000-01 still prominent. But I think Michaels is jumping to the wrong conclusion.
In regulating the opportunistic behavior that threatens to undermine the value of integrated regional power markets, federal government has a role but it isn’t as market monitor. FERC should be the enforcer of contracts, an arbiter of disputes, a levier of fines, a promoter of competition and protector of interstate commerce. For reasons I explained yesterday, the network itself is in principle well positioned to be the primary defense against opportunistic activity within the network.