The Federal Energy Regulatory Commission’s landmark Order 2000 established the minimum characteristics and functions for a grid operator to become a regional transmission organization more than 20 years ago. One such function was market monitoring, described in the order as an important tool for ensuring that transactions or operations are not unduly discriminatory or preferential and do not provide opportunities for the exercise of market power. A 2005 Commission Policy Statement on Market Monitoring Units (also referred to as MMUs) emphasized the importance of the market monitors in ensuring that the markets are providing benefits to consumers: “Since these markets ultimately exist for the benefit of customers, the MMU should focus on how efficiently the markets are responding to customers’ needs for reliable electricity supply at the lowest long run cost to customers.”
Each year, the RTO and independent system operator market monitors issue reports on the wholesale markets operated by these entities. These assessments offer comprehensive data - altogether the reports issued in 2019 total about 2,200 pages. The Commission also provides annual State of the Market reports and has issued reports on performance metrics provided by the RTO/ISOs, but these resources provided limited amounts of data.
In many ways, these reports are extremely valuable. The topics covered include the market costs to participants, the exercise of market power, cost recovery for new and existing units, fuel diversity, and the role and earnings of financial participants. The annual assessments also provide detailed recommendations for changes to the markets.
Despite this wealth of information, there are inconsistencies and gaps in the data, and the Commission does not provide a common set of guidelines or best practices for the market monitors. A careful review of the 2019 reports, providing data for 2018, showed that:
- The market monitors provide little or no data on transmission costs, and only two include transmission costs as part of the all-in cost.
- There is generally no data on the ownership and funding of generating capacity. Knowing how much generation is owned by or under long-term contracts with integrated utilities with an obligation to serve customers versus merchant entities that rely on market revenue provides important context for evaluating the markets.
- The net revenue analysis for new units is not always reported alongside data on whether there is a capacity surplus or deficit. Net revenue that exceeds the Cost of New Entry alongside a surplus of capacity is an indicator of earnings beyond what is needed for efficient price signals and additional costs borne by consumers.
- Not all market monitors report on how revenue earned by existing units compares to their avoidable costs.
- Not all RTO/ISO market monitors report the price-cost markup, a useful indicator of competition, consistently.
- Although the energy markets are found to be competitive overall, several market monitors found that the exercise of market power could occur within certain constrained geographic areas and during certain hours. More data on price spikes would help shed light on if certain circumstances create the potential for exercise of market power.
- Not all market monitors break down profits from virtual trading and financial transmission rights by financial and physical entities. Market monitors that provide this data generally show significantly greater profits accruing to financial entities.
- It’s unclear whether financial entity participation in the RTO/ISO markets provides benefits.
A more comprehensive and consistent set of data on the RTO/ISO-operated markets would better ensure the market monitors uphold the Commission’s vision to benefit consumers. The Commission can play an important role by issuing more comprehensive annual state of the market reports, expanding the performance metrics, and establishing best practices for the RTO/ISO market monitors.
Read more about this evaluation in Measuring the Performance of Wholesale Electricity Markets
Scan a summary of the data evaluation in What is the State of the Markets?