Monitoring US Electric Monitoring US Electric Markets:Markets:

A Federal PerspectiveA Federal PerspectiveCharles WhitmoreCharles Whitmore

Office of Market Oversight and InvestigationOffice of Market Oversight and InvestigationFederal Energy Regulatory CommissionFederal Energy Regulatory Commission

Romania Plenty Partnership ProgramRomania Plenty Partnership ProgramBucharest, RomaniaBucharest, RomaniaFebruary 15, 2005February 15, 2005

Electric Markets Need Electric Markets Need Monitoring Monitoring

► Electricity is different from other commoditiesElectricity is different from other commodities Tight operational tolerances (no storage, moves at speed of light, Tight operational tolerances (no storage, moves at speed of light,

etc.)etc.) Very low elasticity of demand creates uniquely high volatility, Very low elasticity of demand creates uniquely high volatility,

opportunities for manipulationopportunities for manipulation Integration of grid creates very complicated market algorithmsIntegration of grid creates very complicated market algorithms Reliability challenge adds difficultyReliability challenge adds difficulty

► A similarity: relationship of physical and financial marketsA similarity: relationship of physical and financial markets

► When things go wrong, they can go very wrong - CaliforniaWhen things go wrong, they can go very wrong - California

► Key monitoring functionsKey monitoring functions Feedback mechanism to improve market systems over time Feedback mechanism to improve market systems over time

(Oversight)(Oversight) Ways to prevent bad actions (Investigation)Ways to prevent bad actions (Investigation)

A National System of Market A National System of Market Monitoring in the USMonitoring in the US

► Market Monitoring Units (MMUs) Market Monitoring Units (MMUs) Track detailed regional market operations in ISO regionsTrack detailed regional market operations in ISO regions Identify, help respond to problems as they ariseIdentify, help respond to problems as they arise

► FERC-OMOI FERC-OMOI Responsible for wholesale power markets and transmissionResponsible for wholesale power markets and transmission Track national issues and trendsTrack national issues and trends Monitor fuel input markets, especially natural gasMonitor fuel input markets, especially natural gas Monitor integration of various markets, including financialMonitor integration of various markets, including financial Undertake investigations and auditsUndertake investigations and audits Oversee ISOs and MMUsOversee ISOs and MMUs

► State Commissions State Commissions Oversee retail marketsOversee retail markets Regulate distributionRegulate distribution

► Commodities Futures Trading Commission (financial markets)Commodities Futures Trading Commission (financial markets)

► North American Reliability Council (reliability)North American Reliability Council (reliability)

FERC – What is it?FERC – What is it?

► CompositionComposition Five Commissioners Five Commissioners Staggered 5-year termsStaggered 5-year terms No more than three from any one partyNo more than three from any one party

► History and JurisdictionHistory and Jurisdiction 1919 – Hydroelectric projects (except those owned by 1919 – Hydroelectric projects (except those owned by

government entitiesgovernment entities 1935 – Interstate electric power sales and transmission (but 1935 – Interstate electric power sales and transmission (but

not siting)not siting) 1938 – Interstate natural gas sales and pipelines (including 1938 – Interstate natural gas sales and pipelines (including

siting)siting) 1953-1978 – Wellhead natural gas sales1953-1978 – Wellhead natural gas sales 1978 – Oil Pipelines1978 – Oil Pipelines

FERC OrganizationFERC Organization

FERC Reliance on MarketsFERC Reliance on Markets

► 1978-1993 - Natural gas restructuring1978-1993 - Natural gas restructuring

► Federal electric restructuring until 2000 Federal electric restructuring until 2000 1978: PURPA creates semi-competitive fringe market1978: PURPA creates semi-competitive fringe market 1992: EPAct creates case by case open access1992: EPAct creates case by case open access 1996: Order 888 requires general open access1996: Order 888 requires general open access 2000: Order 2000 strongly encourages RTOs2000: Order 2000 strongly encourages RTOs

► Federal electric efforts, 2000-PresenFederal electric efforts, 2000-Presen CaliforniaCalifornia Standard Market DesignStandard Market Design Incremental ImprovementIncremental Improvement Increased emphasis on market monitoringIncreased emphasis on market monitoring

RTO MapRTO Map

Going Forward: Going Forward: FERC’s Strategic PlanFERC’s Strategic Plan

1.1. Make Markets PossibleMake Markets Possible. Promote a Secure, . Promote a Secure, High-Quality, Environmentally Responsible High-Quality, Environmentally Responsible Infrastructure through Consistent PoliciesInfrastructure through Consistent Policies

2.2. Make Markets WorkMake Markets Work. Foster Nationwide . Foster Nationwide Competitive Energy Markets as a Substitute Competitive Energy Markets as a Substitute for Traditional Regulation.for Traditional Regulation.

3.3. Make Sure Markets Work.Make Sure Markets Work. Protect Protect Customers and Market Participants through Customers and Market Participants through Vigilant and Fair Oversight of the Vigilant and Fair Oversight of the Transitioning Energy Markets.Transitioning Energy Markets.

Objectives of Market Objectives of Market OversightOversight

► Objective 3.1: Provide vigilant and effective Objective 3.1: Provide vigilant and effective oversight of energy market operationsoversight of energy market operations Promote understanding of energy market operations and Promote understanding of energy market operations and

technologiestechnologies Assess and report on market and infrastructure conditions Assess and report on market and infrastructure conditions

using objetive benchmarksusing objetive benchmarks Encourage effective RTO and ISO MMUsEncourage effective RTO and ISO MMUs Identify and remedy problems with market structure and Identify and remedy problems with market structure and

operationsoperations

► Objective 3.2: Prevent market manipulation and Objective 3.2: Prevent market manipulation and enforce Commission rulesenforce Commission rules Investigate violations, impose remediesInvestigate violations, impose remedies Advocate enhanced penalty authorityAdvocate enhanced penalty authority

Office of Market Oversight and Office of Market Oversight and InvestigationInvestigation

► Created in 2002Created in 2002

► Key FunctionsKey Functions Oversight – Designed to provide vigilant and Oversight – Designed to provide vigilant and

effective oversight of energy market operationseffective oversight of energy market operations Investigations - Prevent market manipulation and Investigations - Prevent market manipulation and

enforce Commission rulesenforce Commission rules► AuditsAudits► EnforcementEnforcement

CommunicationsCommunications

Office of Market Oversight and InvestigationOffice of Market Oversight and Investigation

DirectorDivision of

Management & Communication

Division of Management & Communication

• Planning • Perf. Mgmt. • Budgeting • Facilitation • Speaking • Knowledge of industry

• Partnering

Deputy Director Market Oversight& Assessment

Deputy Director Market Oversight& Assessment

Deputy Director Investigations & Enforcement

Deputy Director Investigations & Enforcement

HotlineHotline

Division of Financial

Market Assessment

Division of Financial

Market Assessment

Division of Integrated

Market Assessment

Division of Integrated

Market Assessment

• Public Speaking • ADR • Phone Response

• Attorneys • Litigation • Investigation • Knowledge of financial markets • Enforcement • ADR Training • Paralegal

Division of EnforcementDivision of

Enforcement

Division of Operational

Investigations

Division of Operational

Investigations

Division of Technical

Investigations

Division of Technical

Investigations

• Forensic Auditors • Analytic ability • Statistical sampling • Documentation • Industry experience • Investigators • Examiners

• Gas Engineer • Electric Engineer • Mechanical Engineer • Quantitative Economist

• Engineers • Economists • Broad Industry Experience (Cross-Industry, Scenario, Regulatory Analysis; Market Microstructure Issues)

• Operations Research • Writing/Presentation Skills

• Policy Analysts

Market ScanningMarket

Scanning

• Strategic Analysts • Library Science

Division of Information Development

Division of Information Development

• Financial Analysts

• Accountants • Understanding of Investment

• Derivatives Markets

• Energy Trading

Market Oversight ProcessMarket Oversight Process

Emergency Team

8:30 AMDiscussions

Regular Insight Meetings

Chairman’s Weekly Brief

Surveillance Report, Short Studies

Emergency

Co

mm

issi

on

Feedback

Investigations & Audits

Mar

ket

Ove

rsig

ht

Human Contacts

Market Signals

Weekly Market Oversight Weekly Market Oversight Insights TimelineInsights Timeline

► MondayMonday 10:00 – Meet with Financial markets team for their Insights from week before10:00 – Meet with Financial markets team for their Insights from week before 12:00 – Meet with Natural Gas markets team12:00 – Meet with Natural Gas markets team 2:00 – Meet with Electric markets team2:00 – Meet with Electric markets team 4:30 – Director of Market Oversight triages market team Insights4:30 – Director of Market Oversight triages market team Insights

► TuesdayTuesday 1:30 – Director on Market Oversight meets with all team members to discuss which 1:30 – Director on Market Oversight meets with all team members to discuss which

Insights might go forward to the Chairman, which might be used in other ways. Insights might go forward to the Chairman, which might be used in other ways. Team members flesh out what they know.Team members flesh out what they know.

4:30 – Director of Market Oversight decides on which Insights to use that week.4:30 – Director of Market Oversight decides on which Insights to use that week.► WednesdayWednesday

Team members update their items, provide background, contextTeam members update their items, provide background, context Production workProduction work

► ThursdayThursday 9:30 – Director of Market Oversight meets with Chairman9:30 – Director of Market Oversight meets with Chairman 1:00 – Director of Market Oversight meets again with all team members, reports on 1:00 – Director of Market Oversight meets again with all team members, reports on

meeting with Chairman, including any follow-upsmeeting with Chairman, including any follow-ups► FridayFriday

Collate Items still live from the week to feed the following week’s processCollate Items still live from the week to feed the following week’s process

Some Key PointsSome Key Points► Staff needs clear guidance on what sources to check routinely.Staff needs clear guidance on what sources to check routinely.

► Staff needs a dedicated effort to help them build contracts with other Staff needs a dedicated effort to help them build contracts with other key players.key players.

► Feedback is crucial at all levels of the processFeedback is crucial at all levels of the process Chairman meetings crucial to establishing mutual understanding; direct Chairman meetings crucial to establishing mutual understanding; direct

one-on-one contact very important – doesn’t need to be for a long timeone-on-one contact very important – doesn’t need to be for a long time Staff meetings crucial for the same reason.Staff meetings crucial for the same reason. Team meetings necessary to make sure people in related markets know Team meetings necessary to make sure people in related markets know

what the others are findingwhat the others are finding

► Need to have multiple outlets for informationNeed to have multiple outlets for information

► Weekly effort encourages staff to seek important stories, not wait for Weekly effort encourages staff to seek important stories, not wait for themthem

► This effort feeds all Oversight productsThis effort feeds all Oversight products

Market Oversight ProductsMarket Oversight Products► Chairman’s Weekly BriefChairman’s Weekly Brief

One-page, about eight points each weekOne-page, about eight points each week Each bullet short – invites conversation, not just conveys informationEach bullet short – invites conversation, not just conveys information Balance of subjectsBalance of subjects

► Surveillance ReportSurveillance Report Every three weeksEvery three weeks All Commissioners, in large (closed) meetingAll Commissioners, in large (closed) meeting ContainsContains

► Six to seven key developmentsSix to seven key developments► One in-depth storyOne in-depth story► About 50 pages of background charts About 50 pages of background charts

► Seasonal Assessments – designed to lay out the most important likely developments Seasonal Assessments – designed to lay out the most important likely developments during the following six months, helps focus attention, effortduring the following six months, helps focus attention, effort

► State of the Markets – annual review of developments in each market during the past State of the Markets – annual review of developments in each market during the past year.year.

► Special studies, often in response to major market events (price spikes, unexpected Special studies, often in response to major market events (price spikes, unexpected price moves, etc.)price moves, etc.)

► Short StudiesShort Studies

Investigations: AuditsInvestigations: Audits► Purpose: Assess how companies complying with Commission rules or Purpose: Assess how companies complying with Commission rules or

perform other important activities. perform other important activities. Can be for a targeted companyCan be for a targeted company Or a single issue in many companyOr a single issue in many company Doesn’t necessarily imply any particular suspicionDoesn’t necessarily imply any particular suspicion

► Operational AuditsOperational Audits Looks at company behaviorLooks at company behavior ExamplesExamples

► Withholding of capacityWithholding of capacity► Posting of informationPosting of information► Compliance with affiliate rulesCompliance with affiliate rules

► Financial AuditsFinancial Audits Looks at financial behaviorLooks at financial behavior Accounting issues generallyAccounting issues generally Could include cross-subsidy issues, for exampleCould include cross-subsidy issues, for example

Investigations: AuditsInvestigations: Audits► Result is report to the CommissionResult is report to the Commission

► Can lead to action for the companyCan lead to action for the company Clean bill of healthClean bill of health Required or recommended change in company practicesRequired or recommended change in company practices Further investigation by EnforcementFurther investigation by Enforcement

► Can lead to Commission changesCan lead to Commission changes Is a rule working as expected?Is a rule working as expected? Are rules changes needed?Are rules changes needed?

► Is working to make the industry aware that the Commission is Is working to make the industry aware that the Commission is on the beat. Significant deterrent effect for bad behavior.on the beat. Significant deterrent effect for bad behavior.

Investigations - EnforcementInvestigations - Enforcement

► Purpose is to find wrongdoing and respond to it as Purpose is to find wrongdoing and respond to it as forcefully as appropriate and legalforcefully as appropriate and legal

► Can include full array of legal techniquesCan include full array of legal techniques

► Is usually conducted confidentially – publicity would Is usually conducted confidentially – publicity would be unfair to those who turn out to be innocentbe unfair to those who turn out to be innocent

► Can lead to penaltiesCan lead to penalties Disgorgement of illegal profitsDisgorgement of illegal profits Measures to prevent recurrenceMeasures to prevent recurrence In rare cases, civil penalties or referral to Justice In rare cases, civil penalties or referral to Justice

DepartmentDepartment Share pricesShare prices

CommunicationsCommunications

► The Regulatory CommunityThe Regulatory Community With MMUWith MMU With StatesWith States With Other Federal AgenciesWith Other Federal Agencies

► Market ParticipantsMarket Participants Traditional communicationTraditional communication Hot LineHot Line Reaching outReaching out

► Experts and OthersExperts and Others

OMOI AccomplishmentsOMOI AccomplishmentsJan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Director Hired

Observed CFTCMarket Surveillance

1st Market Surveillance Report

1st Seasonal Assessment report

FERC Re-organization:OMOI Official

FERC CaliforniaOffice Opens

1st Winter Assessment Report

Hotline Promotion Launched

Critique of CPUC Report IssuedTransco and Nicor Settlements

Calif Anomalous Bidding/Physical Witholding Handoff to OMOIPrice Reporting Policy StatementCleco Settlement

BLACKOUT*

Reliant Settlement

Standards of Conduct OrderBehavior Rules OrderWinter Assessment

Duke Settlement

1st State of the Markets Report

ISO/RTO Monitors Present 1st Common Metrics

Price Index Survey Report

Summer Seasonal Assessment

Williams Settlement

Storage Data Settlements

Storage Data Technical Conference

New Auditors Join OMOI

Energy Engineering Ethics Conference(http://energyethics2004.nd.edu)

Jan

Feb

Mar

OMOI e-library

Summer Assessment

1st Price Index Technical Conference

OMOI Fellows Lectures Begin

* OMOI does not claim the blackout as an accomplishment.

Thank YouThank You

Write or call:Write or call:

Charles WhitmoreCharles WhitmoreSenior Market AdvisorSenior Market AdvisorFederal Energy Regulatory CommissionFederal Energy Regulatory Commission888 First St. NE888 First St. NEWashington, DCWashington, DC2042620426202-502-6256202-502-6256Charles.whitmore@ferc.govCharles.whitmore@ferc.gov