PowerFacts

The Bare Essentials: Market Monitoring

The implementation of Market Monitoring Units (MMU) and Independent Market Monitors (IMMs) is an important element of the Commission's program to foster competitive wholesale electricity markets. These units offer the Commission, state regulators and all market participants an additional level of insurance that an independent transmission provider is providing non-discriminatory transmission service. Currently, formal MMUs function only in the organized wholesale electricity markets - Regional Transmission Organizations and Independent System Operators (RTOs/ISOs). As evidenced in the Federal Energy Regulatory Commission's (FERC or the Commission) 2006 State of the Markets Report, these organized markets offer far more transparency than the traditional bilateral markets. This is due in part to the oversight offered by the MMUs. While market monitors' purpose is the same in every market, the role and protocols among MMUs differ currently. The need for consistent, transparent rules and protocols among all MMUs is critical to the development of well functioning national wholesale electricity market.

EPSA believes that any MMU must be independent of the market operator, perform its functions on a regional basis, assure transparency and confidentiality, allow for due process, and be limited to monitoring without enforcement authority. The MMU should provide adequate information to FERC so that it can ensure markets are operating properly and efficiently, and that there is sound price formation. While the MMU should report to FERC on certain market information and possible violations, enforcement of violations or investigation into improper behavior must be left to the Commission. Additionally, the MMU should work with the states with respect to matters under their jurisdiction and in accordance with protocols agreed upon by stakeholders in the region.

The primary role of a MMU should be to serve as an early detection system. If market rules are no longer promoting competition, or supply and demand is getting out of balance, the MMU, through periodic market reviews and reports, can bring these concerns to light. The MMU should monitor the behavior of all market participants, as well as - importantly - the market operator itself, to: (a) detect abuse of the rules; (b) when necessary, compile evidence of those abuses for FERC; (c) monitor the operation of the system to ensure operational decisions are not adversely or inappropriately impacting market options or price formation, and (d) where appropriate, work with market participants to recommend changes to market rules to allow the market to work more reliably and efficiently.

Independent market monitoring should be an integral part of all regional wholesale electricity markets, including the vertically-integrated bilateral markets, as it provides policymakers with increased transparency and a warning system that can assist their efforts. MMUs can detect discrimination, increase open access and ensure incentives are provided for adequate infrastructure. An independent market monitor would be well positioned to identify and recommend changes to the Commission, as well as the transmission operator and stakeholders. The monitor would identify and suggest changes covering not only market power abuse by all market participants, but also monitor the actions of the entity responsible for implementing the market rules and administering transmission-related functions. In all regions, the MMU should monitor the provision of ancillary services, transmission access and any balancing services to ensure that all market participants and electricity products are treated fairly and equally. As in the existing organized markets, investigation and enforcement must be in the hands of FERC.

Key elements of a market monitoring program should include:

• The MMU should be independent of the transmission provider, assure transparency and confidentiality in its processes, allow for due process, and be limited to monitoring without enforcement authority.

• The MMU should assess the behavior of the market operator and market participants, and when necessary, compile evidence of any problems or abuses for review by FERC.

• The primary role of the MMU should be to serve as an early warning system. The MMU, through periodic market reviews and reports, should raise concerns to the Commission about supply and demand imbalances, infrastructure investment, or RTO rules or operations which are impeding well-functioning markets.

• The MMU should (a) detect abuse of the rules; (b) when necessary, compile evidence of those abuses for review by FERC; (c) monitor the operation of the system, and (d) where appropriate, work with market participants to recommend changes to market rules.

• The MMU's scope should include regional and interregional markets.

• Market monitoring should include certain fundamental principles in all regional markets subject to FERC approval.

• The MMU must have transparent procedures for monitoring all market participants, including the transmission provider.

• The MMU should audit transmission provider functions on a regular basis to ensure compliance with transmission provider tariffs and procedures and to ensure adequate stakeholder participation.

• Market monitoring is not a substitute for structuring markets and rules properly.

• Investigation and enforcement should be left to the Commission.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.