Lax FERC Enforcement Allows Abuse to Persist
Market-power abuse in the electric industry often goes "unnoticed"
by FERC because enforcement of the rules under Order 888, which are "frequently
opaque," is mostly left up to the transmission owners themselves,
according to consulting firm Tabors Caramanis & Associates in Cambridge,
Any "evidence of the bending of the rules is virtually impossible
to assemble and there has been little evidence of a willingness of the
FERC to respond to any but the most egregious of violations," wrote
Tabors President Richard D. Tabors and Narasimha Rao, senior analyst, in
a working paper, entitled "Transmission Markets: Stretching the Rules
for Fun and Profit."
"The result has been that transmission providers have had a very
low risk of detection and an even lower risk of punishment for 'bending,
folding or mutilating' the spirit or the reality of the rules of open transmission
access," they said.
Ron Rattey, a staff member in FERC's fledgling Office of Markets, Tariffs
and Rates (OMTR), referred to the Tabors paper in a scathing memorandum
he wrote earlier this month accusing the Commission of being "impotent"
in its ability to monitor the electric industry. Specifically, he said
FERC wasn't collecting the necessary transactional data to detect and shield
electric market participants from market-power abuses (See NGI, June 19).
But Tabors and Rao suggest the problem lies more with the existing regulatory
structure, than with the type of data that FERC is collecting from the
As an example of market abuse, vertically integrated transmission providers
"can and very likely did exploit the market rules profitably"
during the summer of 1999, causing the price spikes in the Midwest, the
Tabors' paper said. They "learned to profit largely within the [FERC]
rules for open access and market operations by effectively foreclosing
competition and limiting access to key markets to the benefit of their
marketing and generation affiliates."
Yet "auditing such behavior to determine improper usage would require
an extensive amount of information that is not available in the public
domain to market participants," according to Tabors and Rao. This
behavior has been allowed to persist for three reasons: 1) transmission
providers, especially those which cover a large geographic area and are
security coordinators under the rules of the North American Reliability
Council (NERC), have the ability to exercise monopoly control; they "control
all the knobs" of the transmission system; 2) transmission providers
that are part of a vertically integrated utility have an "implicit
incentive" to shield their generation affiliates from external customers;
and 3) the market's reliance on self-enforcement of FERC's Order 888 rules.
In Tabors' and Rao's estimation, the solution is not for the Commission
to collect different data on the electric market --- as Rattey suggested
--- but rather they believe the existing regulatory structure needs to
be changed. It "would require a prohibitive amount of real-time information
to monitor and enforce [the] rules" of the current structure, they
"The most pragmatic" solution is requiring that all transmission
transactions use the OASIS [Open Access Same-time Information System] structure
--- removal of the native load exclusion. This will bring far greater accuracy
to the setting of ATC [available transmission capacity] when all players
must use this information source to schedule all transactions," they
"At the other end of the spectrum are the hard decisions, the complete
separation of transmission from generation, load and merchant functions.
If the goal is to 'get the incentives right,' we have argued that a large,
regional for-profit transmission company (a TransCo) that owns and operates
the system is the preferred structure," the Tabors working paper noted.
"While open to considerable debate, the TransCo option centralizes
the operational control, provides an incentive structure that assures equal
quality of service for all market participants and provides both observability
and regulatory efficiency.....The only questions remaining are what alternatives
will be chosen, how long we will have to wait before we see the end of
the transition and how much market abuse will occur in the interim."
The Tabors report can be accessed at http://tca-us.com/Publications/TCA%20Papers.htm