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FERC Probe Finds No Effort to Manipulate New MISO Market

FERC last Thursday terminated a preliminary investigation into supply offers by power market participants during the Midwest Independent Transmission System Operator (MISO) market launch earlier this year, accepting staff's conclusions that bid offers examined were the result of market start-up and communications problems and did not represent willful efforts to manipulate the new electricity market.

FERC Chairman Joseph Kelliher noted that "there were a lot of concerns" about some of the bids exceeding reference price thresholds during the start up of MISO markets this spring. "There were actually a pretty large number of bids that exceeded the reference price thresholds, but the staff ultimately found that there were no tariff violations and no evidence of market manipulation. For that reason, it's important to bring the investigation to a close and inform the public and the industry of the results of the Commission's investigation." FERC will be releasing a public report highlighting the results of the probe, he said.

The report "does also highlight [that] there were some problems in the calculation of reference prices by the independent market monitor and it's useful for us to look at that and see what lessons we can learn from that experience," he added. Thursday marked the first open meeting at FERC with Kelliher as chairman of the Commission.

"I think that this was obviously an historic event -- the opening of this market," added FERC Commissioner Suedeen Kelly. "Our first job is to protect customers and that on occasion requires us to look at market activities. Sometimes there's a tension between zealous oversight and overzealous interference and this investigation drew the appropriate balance between the two," she said.

"I hesitate to raise the specter of California, but I'm committed to never having a California-type implosion occur and I think that our oversight in this case at the beginning probably should have happened in California...maybe we would have been able to head things off," Kelly added.

FERC Commissioner Nora Brownell queried staff on "what is the sufficient amount of time for training and trials." In response, a Commission staff member said that "there were various levels of information exchanges that went between the [MISO] market monitor and the market participants."

The staff member said that "the month before the market actually commenced, there [were] a couple of tests that occurred. And, as a result of those, I think the number of generation units that were being flagged fell from, I think, 260 or so to 111."

He said that "it's difficult to say exactly how much more additional time would have further resulted in a decline in the number of units being flagged. Certainly, perhaps another month would have helped, but it's difficult to pin a precise number on that." The staff member added that additional market trials "would have helped, but it wouldn't have solved all the problems."

Brownell suggested that "we take this report, we get comments and specific recommendations and maybe start a working group with MISO and our staff to really fine tune this." She said that "even though every region is different...it would be nice to be able to translate our experience."

Kelly, meanwhile, referenced a yet-to-be-released report being worked on by CERA examining restructuring benefits. "Although that report hasn't been issued yet...they are finding preliminarily that there's been significant savings to consumers in the Midwest," she said.

The MISO formally launched its new competitive wholesale power market on April 1. As a transition to a fully operating market in the MISO, the Commission-approved MISO tariff required that market participants offer energy at cost during April and May.

The tariff also directed MISO's Independent Market Monitor (IMM) to establish cost-based reference levels for each generating unit. In approving these arrangements for the first two months of the MISO market launch, the Commission required the IMM to report offers in excess of 10% above the reference cost levels for possible enforcement action.

In early April, the IMM notified the Commission that a number of market participants were making offers in excess of the 10% above reference levels threshold. The Commission commenced a preliminary investigation to determine whether any market participants were willfully violating the MISO tariff or were manipulating markets and, if so, whether enforcement action against any market participants was warranted.

The Commission's enforcement staff evaluated voluminous data responses from 45 MISO members, discussed the cost-based procedures and requirements directly with representatives of each of the 45 companies and held extended conferences with three market participants with particularly large numbers of offers referred to the Commission. FERC staff also screened MISO data to examine patterns of offers made by market participants and studied the effects of offers during the market start period on the adjusted reference prices governing mitigation as of June 1, 2005.

Based upon the evidence gathered, the Commission's enforcement staff concluded that the offers above reference cost levels referred to the Commission:

The Commission noted that the process of carrying out the planned cost-based offers during the first two months of the MISO market launch proved more complicated than was expected.

A FERC staff member noted at the Commission's latest open meeting that the investigation "did yield useful information on the practical problems encountered by the MISO, the market participants and the market monitor that will be helpful in structuring future market launches."

Among the lessons cited by the FERC staff member are that "a cost-based system is a demanding one for market participants and the market monitor. Market participants and the market monitor must dedicate sufficient time and personnel resources to such efforts. In particular, sufficient time must be provided for trial and error efforts to reconcile market monitor and market participant estimates of generation costs and for market participants to learn how to accurately model costs in supply offers."

In addition, he said that the market monitor "should also take steps to more accurately distinguish possibly problematic offers to be reported to" FERC's Office of Market Oversight and Investigations (OMOI) "from offers merely reflecting unexpected problems that accompany the launch of a new market."

The OMOI report on the investigation will be made available on the Commission's website at www.ferc.gov.

MISO is headquartered in Carmel, IN, and independently operates the electricity grid and related wholesale power market in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, Ohio, Pennsylvania, South Dakota, Wisconsin, and Manitoba, Canada.

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