Effective monitoring and mitigation in the organized wholesale electric power markets

Abstract

The organized wholesale electric power markets in the United States are characterized by structural market power, and would not produce competitive results absent administrative intervention. Market power mitigation is a fundamental and permanent part of the market design for the organized wholesale electricity markets. Market power mitigation is essential to FERC’s policy of relying on competition to regulate electric wholesale power prices, consistent with its mandate under the Federal Power Act. Controversy has arisen about how to ensure that the markets clear on the basis of offers that have been determined to be competitive. Specifically, the issue is what institution and function is best situated to provide the initial critical determination about whether a participant’s offer is competitive. Despite recent clarification of FERC policies on the market monitoring function, the roles of market administrators and market monitors are a potential source of confusion and counterproductive institutional conflict. The FERC should refine and clarify its policy in this area by according exclusive responsibility to institutional, independent market monitors to monitor participants’ conduct and the potential for the exercise of market power through ex ante review of cost-based offers used in market power mitigation, subject to review by FERC.