Electricity Market Monitoring and the Economics of Regulation

Abstract

Restructuring of wholesale electricity markets in the U.S. has brought new institutions known as Regional Transmission Organizations (RTO) and Market Monitoring Institutions (MMI) that oversee competition in the energy markets that they operate. Both regulators and external observers have viewed MMIs as impartial observers intended to police these exchanges against the exercise of market power. The economics of regulation generally questions (but does not always reject) public interest interpretations on grounds that interest groups use politics and regulatory procedure to shape institutions to their advantage. MMIs in fact originated as a strategic move by California’s large utilities in connection with that state’s restructuring, intended to advantage them against competitors. The responses of MMIs to the economically efficient practice of “virtual bidding” in RTOs differed with the relative strengths of different interests in the governance of those organizations. As policy, the Federal Energy Regulatory Commission should re-examine its endorsement of MMIs and consider centralizing their functions.