Midwest Power Market Wasn't Manipulated, FERC Staff Says
Capitol Hill lawmakers, federal and state regulators and a
number of power industry representatives last week indicated that
the results of the FERC staff inquiry into the pricing turmoil in
the Midwest power market were a vindication of their original
suspicions. Staff proved once and for all, they said, that
electricity restructuring was not the culprit behind the price
spike in late June, and it found nothing that smacked of market
"...[W]hile there were allegations of market manipulation, the
[FERC staff] team was unable to conclude that the regional pricing
abnormalities were attributable in any measurable way to
misconduct, self-dealing or manipulation," Chairman James Hoecker
said last Thursday during an oversight hearing before the Senate
Energy and Natural Resources Committee, where the results of the
long-awaited staff team report were released. Although it found no
"direct evidence" linking the price spike to market manipulation,
staff noted that it did uncover some questionable practices.
It cited two specific practices - the use of swaps to circumvent
maximum tariff rates and the use of brokers to create false
impressions of the current price in the market - as especially
troublesome. "Neither of the practices appears to be a direct cause
of the price spike, but both diminish confidence that market
institutions are working in a fair and nondiscriminatory manner,
and appear to be potentially questionable."
Commissioner Jolynn Barry Butler of the Ohio Pubic Utility
Commission said its staff also was conducting a review of the
Midwest price spike, but that the evidence so far didn't point to
any manipulation. "From our informal conversations to date, I doubt
that there will be a finding [by] the Ohio staff that inappropriate
utility behavior occurred..." Although a number of large industrial
customers had their service interrupted in late June, it appears
that the utilities in Ohio followed their interruptible protocols
in their tariffs "to the letter," she said.
The Electricity Consumers Resource Council (ELCON), which
represents large industrial power users, was "fairly comfortable"
with staff's finding that manipulation wasn't a factor, said John
Hughes, director of technical affairs. He advised, however, he
still believes that some "subtle gaming" involving utilities'
regulated and unregulated affiliates took place in June. "While
this...might have been legal, it might not have been really the
type of behavior that we'd expect in a real competitive market."
The Edison Electric Institute (EEI), whose members are large
investor-owned utilities, was extremely pleased with staff's
conclusion "on that score," said spokesman Jim Owen. "It reinforces
what we had said all along, which was our members, the transmission
owners, were doing the very best to play by the rules and give
everyone access to the system."
In another significant finding, FERC staff concluded that the
"particular combination of events" that led to the extreme nature
of the power price spike in June were "quite unusual," and were
"not likely to recur." Still, Hoecker told lawmakers, "neither the
staff team nor I underestimate the possibility that [some sort of]
pricing abnormalities may occur in the future."
Staff believes the operational problems that triggered the June
price spike - such as generation and transmission constraints -
will continue to plague the power industry at least in the short
term, which could allow other price abnormalities to occur, but it
added that the market conditions that aggravated this summer's
pricing situation - ineffective short-term buying strategies and
failure to closely review creditworthiness of power marketers -
already are being addressed by the power industry. "This suggests
that market factors have already begun to act to reduce price
spikes, and can be predicted to do so in the future," staff said.
Although the power market will continue to be volatile, the
lessons learned by the market and its participants from the June
price spike will help to prevent future prices from reaching such
lofty levels, according to the staff report.. "[A]s buyers and
sellers gain experience in the emerging...market, they will develop
ways to better manage their exposure to the risk of future price
Hoecker told the Senate panel that he believes the unprecedented
prices were "at least exacerbated and perhaps caused by the
continued balkanization of transmission planning and system
operations." To correct this, he said regulators need to strongly
encourage the formation of independent system operators (ISOs) and
other regional transmission institutions. He asked lawmakers to
clarify the Commission's authority with respect to ISOs as part of
its legislation to restructure the retail power industry.
Sen. Dale Bumpers (D-AR) also voiced strong support for ISOs.
"If we had had in place...a national system of independent system
operators to deregulate the transmission lines in this country [in
June], a lot of this would have been avoided."
Hoecker formed the staff team in July to investigate the
circumstances that led to the unprecedented power prices amid
industry cries that utilities had manipulated the prices during the
June 25-26 period. On those days, staff reported electric prices
rose from a $25 per MWh range to as much as $2,600 per MWh, with at
least one hourly price reaching $7,500 per MWh on June 25.
In its report, staff chalked up the exorbitant, yet
"short-lived" power price increases to planned and unplanned
generating outages, prolonged and unseasonably hot temperatures,
transmission constraints, a lack of "clear, current and reliable"
short-term price signals, defaults on power sales contracts, and
the "simple inexperience" of some market participants in dealing
with these circumstances. Despite the high prices, staff noted
system reliability was maintained throughout the Midwest. "No
blackouts occurred." And except for a "smaller flare-up in July,"
power prices in the Midwest have since returned to normal.
Another key reason for the price spike was the fact that
construction of new generation capacity in the Midwest has failed
to keep pace with the "substantial growth" in peak electricity
demand in the region, Hoecker noted. "These factors have caused
Midwest utilities to depend more and more over time on purchases of
power from other regions to meet peak demand." Part of the problem,
Bumpers noted, is that utilities and independent power producers
are "essentially frozen" from adding new generation capacity
until they know "what the rules of the road will be" with respect
to electricity restructuring.
ELCON's Hughes blamed the Midwest generators themselves,
specifically their failure to operate capacity when it was needed
the most. "They're not very good at generation. They're just lousy
managers," he said of the Midwest utilities. "That's what the
problem was. If those generators had been running when they should
have been, there would have been no need for this investigation or
No Direct Intervention
Contrary to the pleas of some industry sectors, staff said its
conclusions did not justify FERC taking the extreme step of
imposing price caps on sellers of electricity with market-based
rates, nor did they necessitate the Commission getting involved in
the setting of standards for creditworthiness for power marketers
or require it to take other direct action that might "control or
stifle the operation of the market."
Sen. Richard Durbin of Illinois took issue with staff's finding
on creditworthiness. "...I don't think it is unreasonable to have a
threshold requirement before anyone is licensed to be a power
marketer in the United States," he said, adding that he wasn't
advocating re-regulation of the industry, but rather simply "basic
standards" for power traders. FERC "exercises almost no oversight
to ensure that power marketers are financially responsible..." If
Congress wants the Commission to do creditworthiness tests,
countered Bumpers, "we ought to give them authority or direction to
Like FERC, EEI's Owen believes assessing the creditworthiness of
power marketers should be left up to industry. "Individual traders
and players in the market really need to take it upon their own
part to do the very best they can to make sure their partners are
In a "white paper" also issued last week, the Electric Power
Supply Association (ESPA) agreed with the FERC staff that the price
volatility in the Midwest market did not warrant "drastic
measures," such as a mandated cap on the price for power. "Price
caps and other forms of intervention would only serve to weaken
this rapidly developing market," said ESPA Executive Director Lynne
H. Church. "What lawmakers and regulators - both federal and state
- need to do is bolster this market by allowing full competition to
Still, staff believes there are actions the Commission could and
should take. It recommended that FERC re-examine its monitoring
activity to assess whether new competitive markets are functioning
properly. "Improved monitoring methods would permit the Commission
to better detect whether any manipulation of wholesale markets or
unduly discriminatory transmission practices are occurring," it
said. Toward this aim, staff suggested that FERC "formalize its
working relationships and data-sharing arrangements with [the North
American Electric Reliability Council] and the network of
control-area operators and security coordinators."
Additionally, the report called for staff to review how to
"maximize compliance" with the requirements and policies of Orders
888 and 889, including standards of conduct, and prevent any
attempts to manipulate the market or circumvent the Commission's
rules governing the interstate electric industry. Staff also thinks
FERC and industry should consider developing real-time reporting of
the prices for and availability of wholesale power and interstate
transmission, and take further steps to create regional independent
system operators. Lastly, staff recommended that FERC, state
regulators, NERC and other entities "maintain open communication on
ways to use their respective authorities or organizations to help
ensure that power markets function efficiently."