Market-power abuse in the electric industry often goes”unnoticed” by FERC because enforcement of the rules under Order888, which are “frequently opaque,” is mostly left up to thetransmission owners themselves, according to consulting firm TaborsCaramanis & Associates in Cambridge, MA.

Any “evidence of the bending of the rules is virtuallyimpossible to assemble and there has been little evidence of awillingness of the FERC to respond to any but the most egregious ofviolations,” wrote Tabors President Richard D. Tabors and NarasimhaRao, senior analyst, in a working paper, entitled “TransmissionMarkets: Stretching the Rules for Fun and Profit.”

“The result has been that transmission providers have had a verylow risk of detection and an even lower risk of punishment for’bending, folding or mutilating’ the spirit or the reality of therules of open transmission access,” they said.

Ron Rattey, a staff member in FERC’s fledgling Office of Markets,Tariffs and Rates (OMTR), included the Tabors’ paper in a scathingmemorandum he wrote earlier this month accusing the Commission ofbeing “impotent” in its ability to monitor the electricindustry. Specifically, he said FERC wasn’t gathering the necessarytransactional data to detect and shield electric market participantsfrom market-power abuses (see Daily GPI, June 19). But Tabors and Rao suggest theproblem lies more with the existing regulatory structure, than withthe type of data that FERC is collecting from the power market.

As an example of market abuse, vertically integratedtransmission providers “can and very likely did exploit the marketrules profitably” during the summer of 1999, causing price spikesin the Midwest, the Tabors’ paper said. They “learned to profitlargely within the [FERC] rules for open access and marketoperations by effectively foreclosing competition and limitingaccess to key markets to the benefit of their marketing andgeneration affiliates.”

Yet “auditing such behavior to determine improper usage wouldrequire an extensive amount of information that is not available inthe public domain to market participants,” according to Tabors andRao. This behavior has been allowed to persist for three reasons:1) transmission providers, which cover a large geographic area andare security coordinators under the rules of the North AmericanReliability Council (NERC), have the ability to exercise monopolycontrol; they “control all the knobs” of the transmission system;2) transmission providers that are part of a vertically integratedutility have an “implicit incentive” to shield their generationaffiliates from external customers; and 3) the market’s reliance onself-enforcement of FERC’s Order 888 rules.

In Tabors’ and Rao’s estimation, the solution is not for theCommission to collect different data on the electric market — asRattey suggested — but rather they believe the existingregulatory structure needs to be changed. It “would require aprohibitive amount of real-time information to monitor and enforcerules” of the current structure, they said.

“The most pragmatic point of departure is requiring that alltransmission transactions use the OASIS [Open Access Same-timeInformation System] structure — removal of the native loadexclusion. This will bring far greater accuracy to the setting ofATC [available transmission capacity] when all players must usethis information source to schedule all transactions,” they said.

“At the other end of the spectrum are the hard decisions, thecomplete separation of transmission from generation, load andmerchant functions. If the goal is to ‘get the incentives right,’we have argued that a large, regional for-profit transmissioncompany (a TransCo) that owns and operates the system is thepreferred structure,” the Tabors’ working paper noted.

“While open to considerable debate, the TransCo optioncentralizes the operational control, provides an incentivestructure that assures equal quality of service for all marketparticipants and provides both observability and regulatoryefficiency…..The only questions remaining are what alternativeswill be chosen, how long we will have to wait before we see the endof the transition and how much market abuse will occur in theinterim.”

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