A staff team of the Federal Energy Regulatory Commission said itfound no “direct evidence” that market manipulation contributed tothe spike in electricity prices in the Midwest market last June,but it did uncover some questionable practices. Moreover, itconcluded that the pricing turmoil was a rare event that wouldn’tlikely occur again.

In a report that’s due to be released during a Senate EnergyCommittee hearing today, Commission staff identified two practices- the use of swaps to circumvent maximum tariff rates and the useof brokers to create false impressions of the current price in themarket – as troublesome. “Neither of the practices appears to be adirect cause of the price spike, but both diminish confidence thatmarket institutions are working in a fair and nondiscriminatorymanner and appear to be potentially questionable.”

In another significant finding, FERC staff also concluded thatthe combination of factors that led to the extreme nature of thepower price spike in June were “quite unusual,” and were “notlikely to recur” in the future. Still, it predicted the powermarket will continue to be volatile. However, the staff said that”as buyers and sellers gain experience in the emerging…market,they will develop ways to better manager their exposure to the riskof future price increases.”

Chairman James Hoecker set up the staff team in July toinvestigate the circumstances that lead to the unprecedented powerprices amid industry cries that utilities had manipulated theprices during the June 25-26 period. On those days, staff reportedelectric prices rose from a $25 per MWh range to as much as $2,600per MWh, with at least one hourly price reaching $7,500 per MWh onJune 25.

In its report, staff chalked up the exorbitant, yet”short-lived” power price increases to planned and unplannedgenerating outages, prolonged hot temperatures, transmissionconstraints, a lack of “clear, current and reliable” short-termprice signals, defaults on power sales contracts, and the “simpleinexperience” of some market participants in dealing with thesecircumstances. Despite the high prices, staff noted systemreliability was maintained throughout the Midwest. “No blackoutsoccurred.” And except for a “smaller flare-up in July,” powerprices in the Midwest have since returned to normal.

Contrary to the pleas of some industrial power buyers, staffsaid the report’s conclusions did not justify FERC taking theextreme step of imposing price caps on sellers of electricity withmarket-based rates, nor did they call for the Commission to getinvolved in the setting of standards for creditworthiness for powermarketers or take other direct action that might “control or stiflethe operation of the market.”

In a “white paper” issued Tuesday, the Electric Power SupplyAssociation (ESPA) similarly concluded that the price volatility inthe Midwest market did not warrant “drastic measures,” such as amandated cap on the price for power. Nor, it added, should theprice spikes delay the formation of a fully competitive electricitymarket. “Price caps and other forms of intervention would onlyserve to weaken this rapidly developing market,” said ESPAExecutive Director Lynne H. Church. “What lawmakers and regulators- both federal and state – need to do is bolster this market byallowing full competition to flourish.”

Still, staff believes there are actions the Commission could andshould take. It recommended that FERC re-examine its monitoringactivity to assess whether new competitive markets are functioningproperly. “Improved monitoring methods would permit the Commissionto better detect whether any manipulation of wholesale markets orunduly discriminatory transmission practices are occurring,” itsaid. Toward this aim, staff suggested that FERC “formalize itsworking relationships and data-sharing arrangements with [the NorthAmerican Electric Reliability Council] and the network ofcontrol-area operators and security coordinators.”

Additionally, the report called for staff to review how to”maximize compliance” with the requirements and policies of Orders888 and 889, including standards of conduct, and prevent anyattempts to manipulate the market or circumvent the Commission’srules governing the interstate electric industry. Staff also thinksFERC and industry should consider developing real-time reporting ofthe prices for and availability of wholesale power and interstatetransmission, and take further steps to create regional independentsystem operators. Lastly, staff recommended that FERC, stateregulators, NERC and other entities “maintain open communication onways to use their respective authorities or organizations to helpensure that power markets function efficiently.”

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