While FERC’s ability to monitor the electric power market hasfaltered, a report by a Commission task force has found that thelevel of the price spikes for wholesale power has grownprogressively worse over the past couple of summers, with thebiggest increases being seen in the eastern half of the nation.
Instead of acting aggressively and decisively to put an end tomarket-power abuses that many believe are largely to blame for thesharp price increases, a veteran FERC staffer contends theCommission 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 1999with prices between $8,000-$9,502/MWh,” wrote Ron Rattey, a staffmember with FERC’s new Office of Markets, Tariffs and Rates (OMTR), ina scathing memo earlier this month. (see Daily GPI, June 19) He assailed the Commission forbeing spineless in its effort to obtain access to pertinent electricmarket data compiled by the North American Electric ReliabilityCouncil (NERC), which he said was essential to determine the role thatmarket-power abuse played in contributing to the price volatility inthe summer wholesale electric market.
Average wholesale daily power prices rose 50% to 80% in allregions of the United States between 1997 and 1999. The mostpronounced increases in wholesale daily prices were seen in theEast (60% to 275%), Rattey said, while wholesale prices in the Westrose on average between 6% and 53% during the period that spannedthree summers.
Interestingly, these findings fly in the face of the Departmentof Energy’s report that says retail electric prices have fallencontinuously over the past three years. This is “an apparentconundrum when related to the [volatility of] wholesale priceswhich I cannot yet fully explain,” noted Rattey, who was both amember of FERC’s Midwest Price Spike team in the summer of 1998 andthe interim Electric Markets Monitoring team in the summer of 1999and reported on their findings. Also of interest is the fact thatFERC senior staff has yet to review the interim team’s report.
Overall wholesale power price spikes were “more frequent andmore widespread” in the summer of 1999 than during the priorsummer, and did not appear to be the result of increased marketcompetition. In fact, “on days when prices spiked during summer1999, wholesale prices in contiguous markets diverged significantly— not something one would expect under competitive supply anddemand conditions,” Rattey said.
Wholesale energy prices in the New England ISO, and especiallythe Pennsylvania-New Jersey-Maryland (PJM) pool, were much morevolatile last summer than in the summer of 1998, he noted.
“Weather, generation and transmission capacity shortages, andinelastic 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, FERCstaff was hard-pressed to estimate how much generation outagescontributed to the price spikes.
Transmission constraints and related NERC transmissionload-reducing policies, which were approved by FERC, had “adverseimpacts” on wholesale prices during the summer of 1999, he noted.As a result, “market traders faced significant problems inobtaining current and accurate information about the status oftransmission path availabilities.” And while Cinergy Corp. waswidely cited for its “egregious” behavior in the market during thatperiod, Rattey reported “at least 10 others were asked by NERC andthe regional councils to explain their behavior during the audithours.” Market-design flaws and market-power abuses were identifiedin 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 suggestthat another “tumultuous summer” is in store for the wholesalepower market in the Eastern Interconnect, Rattey said, and that iswhy it’s so important for the Commission to gain access to NERC’s”real data on physical electric generation and transmission supplyand demand.” Rattey wrote his now-infamous memorandum following aMay 25 visit with NERC in which it denied FERC access to theinformation, even though Commission staff pledged to sign aconfidentiality agreement.
FERC, a governmental agency, has been prevented from obtainingthis “precious NERC data,” he fumed, while a number of otherparties — 76 utilities, regional councils and others — with”top secret clearances” have access to it. The Commission proposedthat it be allowed access after eight days when the utilitysignatories to NERC’s confidentiality agreements, which partiesmust sign to gain entry to the NERC market data, can pass theinformation along to their merchant marketing affiliates. “The teamthat 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 theextent that market abuses were responsible for the price spikes inthe summers of 1998 and 1999, said Rattey, and it won’t be able todo so in the future. As a result, the electric generation andtransmission markets have “run wild and unrestrained” over the lastcouple of summers.
Any data that NERC does release to FERC is usually scant. Forexample, with respect to the price spikes of June 25-26, 1998, NERCsent FERC staff in August of that year “incomplete and widelyvariable responses to a data request that was negotiated down fromone to two months of data to less than one week’s worth,” Ratteylamented. When he phoned NERC to get “clarifications and morecomplete responses,” he noted NERC staff called senior Commissionofficials to complain that he was harassing them.
Also missing the boat has been FERC’s Open Access Same-timeInformation System (OASIS), which was supposed to provide the electricmarket with information on transmission owners’ prices andavailability of their transmission capacity. Except for a few OASISsites, “it is nearly impossible for anyone to use OASIS to obtainpertinent data for overseeing transmission market behavior andassessing how well the markets are working,” he noted. Rattey includedwith his memorandum a paper entitled “Transmission Markets: Stretchingthe Rules for Fun and Profit,” authored by Richard D. Tabors andNarasimha Rao of the firm, Tabors Caramanis & Associates inCambridge, MA, which also sees the wholesale power market as operatingvirtually unchecked. (see Daily GPI, June23)
Rattey says it’s time for FERC to “get serious about looking formarket failures and abuses and ‘kicking some butt’ where needed.”The lack of serious FERC oversight that the power industry enjoysis why transmission-owning utilities are having to be draggedkicking and screaming to join ISOs andregional transmissionorganizations (RTOs), he noted.
“The current situation around the country is that if a utilityis in an ISO, its behavior is closely monitored. Outside of theISOs — i.e. in most of the Eastern and Western Interconnections— no one is watching. Now do you wonder why utilities are notjumping to join an RTO. The longer they can push off an RTOdecision, the longer they can operate without scrutiny.”
He urged the Commission to take some action with respect to theNERC market data.
A mandatory requirement for data submission, however, couldrequire a rulemaking process or legislative intervention.Knowledgeable sources say the fact that Chairman James Hoecker is alame duck with little power to force new initiatives is part of theproblem. Hoecker’s term as a member of the Commission officiallyexpires June 30, although he may continue to serve until thecurrent Congress adjourns in October.
The Clinton administration renominated Hoecker, a Democat, lastNovember, but the Republican-led Senate has failed to confirm hisnomination. It has been reported that Hoecker has offered to servean interim term until a new president can choose his successor, butthere has been no evidence of a response to that offer.
The loss of its chairman while the Commission is facing some ofits greatest challenges in deregulating natural gas and electricmarkets this summer and in the coming winter could have direconsequences for the energy markets and consumers. FERC already isshort one commissioner. No replacement has been named forCommissioner Vicky Bailey, who departed last February to becomepresident of PSI Energy, Cinergy’s utility subsidiary.
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