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Independent Market Monitoring Independent Market Monitoring in the Midwest ISOin the Midwest ISO

Presented to:Presented to:

Federal Energy Regulatory CommissionFederal Energy Regulatory Commission

David B. Patton, Ph.D.David B. Patton, Ph.D.Independent Market MonitorIndependent Market Monitor

May 18, 2006May 18, 2006

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The Role of Market MonitoringThe Role of Market Monitoring

• Deregulation is premised on the benefits of replacing price regulation Deregulation is premised on the benefits of replacing price regulation with competitive forces to guide generation and transmission usage with competitive forces to guide generation and transmission usage in the short-term and investment decisions in the long-term.in the short-term and investment decisions in the long-term.

• Market monitoring is intended to help ensure that the markets Market monitoring is intended to help ensure that the markets operate competitively and efficiently so these benefits are realized.operate competitively and efficiently so these benefits are realized.

• In particular, market monitoring is designed to identify:In particular, market monitoring is designed to identify: Flaws in market rules that create inefficient incentives or gaming Flaws in market rules that create inefficient incentives or gaming

opportunities;opportunities; Potential efficiency improvements in the operation of the market;Potential efficiency improvements in the operation of the market; Market power;Market power;

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Independence of Market MonitoringIndependence of Market Monitoring

• In the Midwest, States and participants designed the market monitoring In the Midwest, States and participants designed the market monitoring function to be independent of the ISO – performed by an independent function to be independent of the ISO – performed by an independent entity (i.e., the independent market monitor or IMM).entity (i.e., the independent market monitor or IMM).

• Independence of the Market Monitor from the RTO is important due to Independence of the Market Monitor from the RTO is important due to its role in monitoring the RTO’s rules, procedures, and operations.its role in monitoring the RTO’s rules, procedures, and operations. Independent monitoring of the actions of the MISO was a high Independent monitoring of the actions of the MISO was a high

priority of the States and many participants. priority of the States and many participants. The actions of a market operator generally have a larger impact on The actions of a market operator generally have a larger impact on

the market outcomes than any single participant.the market outcomes than any single participant.

• Manual actions taken to maintain reliability can distort the market Manual actions taken to maintain reliability can distort the market outcomes -- the rules and operating procedures can often be modified outcomes -- the rules and operating procedures can often be modified to improve the consistency of the market and reliability requirements. to improve the consistency of the market and reliability requirements.

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The Role of Market MonitoringThe Role of Market Monitoring

• The market monitoring function requires an interdisciplinary team of The market monitoring function requires an interdisciplinary team of experts, including:experts, including: Economists, Economists, Power system engineers;Power system engineers; Generation engineers;Generation engineers; Software developers; and Software developers; and Other professionals with math and statistics .Other professionals with math and statistics .

• Potomac Economics currently has 14 staff to perform market Potomac Economics currently has 14 staff to perform market monitoring.monitoring.

• The market monitoring function also requires an extensive market The market monitoring function also requires an extensive market monitoring software system and data interfaces with the ISO.monitoring software system and data interfaces with the ISO.

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Market Monitoring ActivitiesMarket Monitoring Activities

• The monitoring function includes:The monitoring function includes: Real-time screening and analysis to identify circumstances that Real-time screening and analysis to identify circumstances that

require further investigation.require further investigation. Investigations of market operations or conduct identified through Investigations of market operations or conduct identified through

the daily screening or complaint processes.the daily screening or complaint processes. Periodic analysis and reporting;Periodic analysis and reporting;

• The market monitoring function does The market monitoring function does notnot include: include: Enforcement authority or powers delegated from FERC;Enforcement authority or powers delegated from FERC; Actions to compel participants to change their conduct;Actions to compel participants to change their conduct; Authority to change market rules or procedures; or Authority to change market rules or procedures; or Any other discretionary authority to affect market conduct or Any other discretionary authority to affect market conduct or

outcomes, with the exception of periodic adjustments to the outcomes, with the exception of periodic adjustments to the reference levels used in the mitigation measures.reference levels used in the mitigation measures.

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Real-Time Market MonitoringReal-Time Market Monitoring

• Effective real-time monitoring requires a highly automated software Effective real-time monitoring requires a highly automated software system to continuously receive data and screen the market results for:system to continuously receive data and screen the market results for: Attempts to exercise market power by withholding resources;Attempts to exercise market power by withholding resources; Running a generator uneconomically and causing a transmission Running a generator uneconomically and causing a transmission

line to become overloaded;line to become overloaded; Other inefficient conduct that may indicate potential market Other inefficient conduct that may indicate potential market

design flaws;design flaws; Operator actions or actions of control area operators that may Operator actions or actions of control area operators that may

undermine the efficiency of the market;undermine the efficiency of the market;

• The market monitoring system generates automated alerts sent to the The market monitoring system generates automated alerts sent to the beepers and emails of IMM staff to ensure real-time monitoring is beepers and emails of IMM staff to ensure real-time monitoring is effective on a 24-7 basis. effective on a 24-7 basis.

• The real-time market monitoring also includes the implementation of The real-time market monitoring also includes the implementation of prospective mitigation of economic withholding. prospective mitigation of economic withholding.

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Investigations and ComplaintsInvestigations and Complaints

• Investigations are most often triggered by the real-time monitoring, Investigations are most often triggered by the real-time monitoring, but can be initiated but can be initiated in response to requests from the States, FERC, in response to requests from the States, FERC, market participants, or the MISO staff or Board of Directors.market participants, or the MISO staff or Board of Directors.

• Investigations are often necessary to evaluate certain conduct that Investigations are often necessary to evaluate certain conduct that may or may not be anticompetitive. may or may not be anticompetitive.

For example, we conduct physical audits of certain generator or For example, we conduct physical audits of certain generator or transmission outages to identify physical withholding;transmission outages to identify physical withholding;

Although we consult with participants to gather information, we Although we consult with participants to gather information, we do not attempt to compel participants to change their conduct. do not attempt to compel participants to change their conduct.

• Investigations that indicate anticompetitive conduct or gaming will Investigations that indicate anticompetitive conduct or gaming will result in referrals to FERC under a) the sanction provisions of the result in referrals to FERC under a) the sanction provisions of the MISO tariff or b) enforcement provisions of the Energy Policy Act.MISO tariff or b) enforcement provisions of the Energy Policy Act.

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Periodic Reporting on Market PerformancePeriodic Reporting on Market Performance

• The primary product of the periodic reporting is an annual State of The primary product of the periodic reporting is an annual State of the Market report that contains:the Market report that contains: An assessment of the overall performance of the RTO markets;An assessment of the overall performance of the RTO markets; Recommendations for changes in the market rules or other Recommendations for changes in the market rules or other

provisions to improve the efficiency of the market; andprovisions to improve the efficiency of the market; and An evaluation of the conduct of market participants and An evaluation of the conduct of market participants and

recommendations regarding changes to the mitigation measures.recommendations regarding changes to the mitigation measures.

• We also report on the performance of the market to:We also report on the performance of the market to: To FERC staff in regular weekly and monthly meetings;To FERC staff in regular weekly and monthly meetings; The States on a quarterly basis and on specific topics as needed; The States on a quarterly basis and on specific topics as needed; The MISO Board on a monthly basis; andThe MISO Board on a monthly basis; and Market participant committees as requested;Market participant committees as requested;