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As Prices Worsen, FERC Lets Power Market 'Run Wild'

As Prices Worsen, FERC Lets Power Market 'Run Wild'

While FERC's ability to monitor the electric power market has faltered, a report by a Commission task force has found that the level of price spikes for wholesale power has grown progressively higher over the past couple of summers, with the biggest increases being seen in the eastern half of the nation.

Instead of acting aggressively and decisively to put an end to market-power abuses, which many believe are largely to blame for the sharp price run-ups, a veteran FERC staffer contends the Commission is letting the power market "run wild."

"While the highest confirmed hourly electricity price in 1998 was $7,500/MWh," compared to an average of $30/MWh in the summer of 1997, "we have evidence of multiple transactions during the summer of 1999 with prices between $8,000-$9,502/MWh," wrote Ron Rattey, a staff member with FERC's new Office of Markets, Tariffs and Rates (OMTR), in a scathing memo earlier this month (see NGI, June 19).

He assailed the Commission for being spineless in its effort to obtain access to pertinent electric market data compiled by the North American Electric Reliability Council (NERC), which he said was essential to determine the role that market-power abuse played in contributing to the price volatility in the summer wholesale electric market.

Average wholesale daily power prices rose 50-80% in all regions of the United States between 1997 and 1999. The most pronounced increases in wholesale daily prices were seen in the East (60% to 275%), Rattey said, while wholesale prices in the West rose on average between 6% and 53% during the period that spanned three summers.

Interestingly, these findings fly in the face of the Department of Energy's report that says retail electric prices have fallen continuously over the past three years. This is "an apparent conundrum when related to the [volatility of] wholesale prices which I cannot yet fully explain," noted Rattey, who was both a member of FERC's Midwest Price Spike team in the summer of 1998 and the interim Electric Markets Monitoring team in the summer of 1999 and reported on their findings. Also of interest is the fact that FERC senior staff has yet to review the interim team's report.

Overall wholesale power price spikes were "more frequent and more widespread" in the summer of 1999 than during the prior summer period, he noted, and did not appear to be the result of increased market competition. In fact, "on days when prices spiked during summer 1999, wholesale prices in contiguous markets diverged significantly - not something one would expect under competitive supply and demand conditions," Rattey said.

Wholesale energy prices in the New England ISO and especially the Pennsylvania-New Jersey-Maryland (PJM) pool were much more volatile last summer than in the summer of 1998, he noted.

"Weather, generation and transmission capacity shortages, and inelastic demand undoubtedly influenced wholesale prices during [the] summer of 1999, but regulatory policies (of FERC and NERC) and the behavior of specific utilities also had impacts on prices," Rattey said. Due to the lack of access to NERC market data, FERC staff was hard-pressed to estimate how much generation outages contributed to the price spikes.

Transmission constraints and related NERC transmission load-reducing policies, which were approved by FERC, had "adverse impacts" on wholesale prices during the summer of 1999, he noted. As a result, "market traders faced significant problems in obtaining current and accurate information about the status of transmission path availabilities." And while Cinergy Corp. was widely cited for its "egregious" behavior in the market during that period, Rattey reported "at least 10 others were asked by NERC and the regional councils to explain their behavior during the audit hours." Market-design flaws and market-power abuses were identified in all of the operating ISOs during the summer of 1999 --- California, PJM and New England, he said.

Current prices in both the forward and futures markets suggest that another "tumultuous summer" is in store for the wholesale power market in the Eastern Interconnect, Rattey said, and that is why it's so important for the Commission to gain access to NERC's "real data on physical electric generation and transmission supply and demand." Rattey wrote his now-infamous memorandum following a May 25 visit with NERC in which it denied FERC access to the information, even though Commission staff pledged to sign a confidentiality agreement.

FERC, a governmental agency, has been prevented from obtaining this "precious NERC data," he fumed, while a number of other parties --- 76 utilities, regional councils and others --- with "top secret clearances" have access to it. The Commission proposed that it be allowed access after eight days when the utility signatories to NERC's confidentiality agreements, which parties must sign to gain entry to the NERC market data, can pass the information along to their merchant marketing affiliates. "The team that visited NERC during the summer of 1999 asked about [this]. NERC staff said they would get back to us. I've been waiting."

Lacking this information, FERC hasn't been able to determine the extent that market abuses were responsible for the price spikes in the summers of 1998 and 1999, said Rattey, and it won't be able to do so in the future. As a result, the electric generation and transmission markets have "run wild and unrestrained" over the last couple of summers.

Any data that NERC does release to FERC is usually scant. For example, with respect to the price spikes of June 25-26, 1998, NERC sent FERC staff in August of that year "incomplete and widely variable responses to a data request that was negotiated down from one to two months of data to less than one week's worth," Rattey lamented. When he phoned NERC to get "clarifications and more complete responses," he noted NERC staff called senior Commission officials to complain that he was harassing them.

Also missing the boat has been FERC's Open Access Same-time Information System (OASIS), which was supposed to provide the electric market with information on transmission owners' prices and availability of their transmission capacity. Except for a few OASIS sites, "it is nearly impossible for anyone to use OASIS to obtain pertinent data for overseeing transmission market behavior and assessing how well the markets are working," he noted. Rattey included with his memorandum a paper entitled "Transmission Markets: Stretching the Rules for Fun and Profit," authored by Richard D. Tabors and Narasimha Rao of the firm, Tabors Caramanis & Associates in Cambridge, MA, which also sees the wholesale power market as operating virtually unchecked. (See separate story, this issue)

Rattey says it's time for FERC to "get serious about looking for market failures and abuses and 'kicking some butt' where needed." This lack of serious FERC oversight that the power industry enjoys is why transmission-owning utilities are having to be dragged kicking and screaming to join ISOs and regional transmission organizations (RTOs), he noted.

"The current situation around the country is that if a utility is in an ISO, its behavior is closely monitored. Outside of the ISOs --- i.e. in most of the Eastern and Western Interconnections --- no one is watching. Now do you wonder why utilities are not jumping to join an RTO. The longer they can push off an RTO decision, the longer they can operate without scrutiny."

He urged the Commission to take some action with respect to the NERC market data.

A mandatory requirement for data submission, however, could require a rulemaking process or legislative intervention. Knowledgeable sources say the fact that Chairman James Hoecker is a lame duck with little power to force new initiatives is part of the problem. Hoecker's term as a member of the Commission officially expires June 30, although he may continue to serve until the current Congress adjourns in October.

The administration renominated Hoecker, a Democrat, last November, but the Republican-led Senate has failed to confirm his nomination. It has been reported that Hoecker has offered to serve an interim term until a new president can choose his successor, but there has been no evidence of a response to that offer.

The loss of its chairman while the Commission is facing some of its greatest challenges in deregulating natural gas and electric markets this summer and in the coming winter could have dire consequences for the energy markets and consumers. FERC already is short one commissioner. No replacement has been named for Commissioner Vicky Bailey, who departed last February to become president of PSI Energy, Cinergy's utility subsidiary.

Susan Parker, Ellen Beswick

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