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.