FERC Filings

Market Monitoring

EPSA Post-Technical Conference Comments (Docket No. AD07-8-000)

<center>UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION</center>


REVIEW OF MARKET ) Docket No. AD07-8-000
MONITORING POLICIES )
<center>

POST-TECHNICAL CONFERENCE COMMENTS OF THE
ELECTRIC POWER SUPPLY ASSOCIATION</center>

The Electric Power Supply Association (EPSA) appreciates the opportunity to submit these comments in response to the Federal Energy Regulatory Commission's (FERC or Commission) April 5, 2007 Technical Conference held to review the Commission's general policies regarding market monitoring. EPSA recognizes and applauds the Commission's inquiry into market monitoring policy and practice in various wholesale electricity markets. On the day of the conference, EPSA submitted a two-page policy paper outlining the organization's central policy positions, or "Bare Essentials," concerning Market Monitoring Units (MMUs) and Independent Market Monitors (IMMs) and their role in assisting the Commission's program to foster competitive wholesale electricity markets. In addition to those basic policy positions, EPSA submits these comments to address the discussion that occurred during the April 5th Market Monitoring Conference.


I. COMMENTS

A. Oversight of RTO Operations

As mentioned by several panelists in both written and oral remarks in this proceeding, including Derek Bandera of Reliant Energy, Gloria Ogenyi of Conectiv Energy and Gary Sorensen of PSEG, all member companies of EPSA, MMUs must monitor the operation of the RTO. RTO operational decisions, particularly regarding price formation, are vital to the Commission's objectives for well-functioning competitive markets. Key considerations include operating protocols and how tariff provisions, business manuals and related procedures are interpreted. Unless properly implemented, RTO operator decisions can artificially distort price signals. For instance, cost-based or non-market/out of market procedures for energy and ancillary service products distort, and often suppress, market price signals and lead to non-economic dispatch.

Further, system operators can interfere with legitimate price signals and transparency. As Mr. Bandera explained, in 2006 there were instances in which severe heat waves caused power supply shortages. These critical conditions should have resulted in market price signals that reflected those temporary shortage conditions. However, the price signals that occurred were not consistent with, or did not properly reflect, the power shortages. In an apparent overabundance of caution to maintain reliable operations, RTO operators made dispatch and out of market operational decisions that dampened price signals during extreme conditions. Such RTO interventions, along with automated mitigation mechanisms, however well-intentioned, can actually undermine an important market activity: setting and sending accurate price signals.

While reliability of the electricity grid is of the utmost concern to all market participants, RTOs should bring transparency to operations in order to properly incent contracting practices, investment decisions and demand response products. Operator decisions that improperly balance reliability and market functions pose a serious threat to legitimate price formation in wholesale power markets. Hence, a key function of the Market Monitoring Unit should be to monitor operational information and analyze the operational decisions and practices that impact market outcomes, particularly in critical situations.

B. Independence of an MMU

As presented by numerous panelists at the April 5th conference, the independence of the Market Monitor is extremely important. To ensure independence, the Commission should look at tariff provisions that clarify the role of the MMU and codify the relationship between the MMU and an RTO's staff, management and Board. Certainly, the terms and conditions of the MMU's employment, whether the MMU is an outside consultant or an internal RTO employee, should require FERC's review and approval. However, it is not necessary to go one step further and treat regional market monitors as FERC as employees. Instead, the enforcement and market monitoring responsibilities of the Commission are enhanced by the independent analysis and oversight offered by the regional MMUs.

Regarding the independence of the MMU, Chairman Kelliher noted that the Commission must consider independence along a continuum. Certainly, the Market Monitor must be sufficiently independent to undertake his or her oversight and monitoring responsibilities without undue influence or pressure from any entity, including the RTO staff and management.

C. The Responsibilities of an MMU

Market Monitors should be tasked with oversight, monitoring and analyses, but any enforcement actions or official investigations must be referred to, and conducted by, the Commission. As often noted during the conference, the MMU, with access to information on RTO operations and market participant behavior, should sound the alarm that calls in the Commission as the cop on the beat to investigate and address alleged anti-competitive practices, behavior or improper market operations. This enforcement authority cannot be delegated to the MMU or the RTO through its MMU.

However, the MMU must have sufficient authority to respond to market conditions at critical times or during critical conditions. In such instances, the list of tools available to the RTO, or to the RTO's MMU, must be set forth in the RTO's tariff and should include actions that do not automatically or necessarily suppress energy prices. Indeed, RTOs and MMUs should make every effort to avoid undue market interventions. Artificial price suppression undermines transparency and deprives market participants of the critical price signals that ensure long-term reliability. While MMUs play an important role in addressing localized market power concerns at certain times, they are not authorized to interfere in legitimate market activity to artificially suppress market prices, nor should they be so authorized. Such disruptions to price formation will discourage investment and market participation, and promote an over reliance on Reliability Must Run (RMR) mechanisms that may damage the marketplace more deeply and permanently than temporary price increases.

In order to achieve the necessary balance, MMU procedures must be transparent. While EPSA recognizes that MMUs must have some access to confidential bid and operational data, that data must only be made available to the RTO and the Commission in a manner that protects competitors’ risk management or pricing positions. In no event should this data be made available to other regulatory agencies if they are not willing to maintain the confidential nature of the material in the same manner as the RTO and the Commission.


II. CONCLUSION

Accordingly, while MMUs and IMMs play an important role in RTO areas, EPSA urges the Commission to expand their scope to ensure that RTO operational decisions and mitigation mechanisms promote market transparency and do not artificially suppress price signals, or otherwise interfere with legitimate market activity.

Respectfully Submitted,
_______________________________________
Nancy Bagot, Vice President of Regulatory Policy
Electric Power Supply Association
1401 New York Avenue, NW, 11th Floor
Washington, DC 20005
(202) 628-8200

April 19, 2007

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