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Midwest Power Market Wasn't Manipulated, FERC Staff Says

September 28, 1998
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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 manipulation.

"...[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, they will develop ways to better manage their exposure to the risk of future price increases."

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 this report."

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 do that."

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 creditworthy."

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 flourish."

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."

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
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