FERC’s Massey calls for strict electricity market oversight

By the OGJ Online Staff

HOUSTON, Aug. 23, 2001 – With electricity regulation moving from cost-based prices to market performance, the Federal Energy Regulatory Commission’s emphasis must shift to use of more analytical tools, said Commissioner William Massey.

He called for “tough-minded” investigation and correction of market flaws. All sophisticated commodity markets have time outs or so-called circuit breakers to prohibit market meltdowns, Massey noted.

Speaking to the California Manufacturers & Technology Association, Massey said he would look at such things as supplier concentration, the effect of market rules, and computer simulation among other characteristics to determine if the market is “workably competitive.”

“The task of ensuring reasonable prices must be addressed far differently in liberalized markets than under the old regime,” Massey said. “It is much harder now.”

The Democratic FERC commissioner said the market must be defined by energy prices, transmission capacity, and transmission prices, plus supply and demand. This will require analyzing “horizontal slices” of the supply curve at various load levels, such as peak, super peak, off peak, and shoulder periods to measure supplier concentration, Massey said.

“Computer simulation modeling is becoming essential to determining if markets are workably competitive,” he said. These models are useful because they take into account the interaction of market structure, market rules, and other market conditions such as demand responsiveness, to estimate supplier and customer response to prices, according to Massey.

From the California experience, regulators learned chaos should be expected to follow when a nonstorable commodity whose production costs vary substantially over the course of a day is purchased at the last minute.

It’s clear regulators must insist on a reasonable reliance on advance purchases, plus use of hedging instruments such as futures and forward contracts, as key to good market structure, Massey said. And to be clear, Massey said he wasn’t proposing over reliance on expensive long-term contracts.

Regulators also need to develop clear standards of acceptable market behavior. “We cannot expect players to follow rules that have not been posted,” Massey said. “We must also ensure markets are adequately monitored, and that the monitoring and policing task is equipped with the right data, and with sufficient manpower to do the job.”

Electricity’s unique characteristics – the inability to store it, for example – make the market “exceptionally” vulnerable to market power abuse, plus the potential for “breathtaking” price run-ups when supply is scarce, Massey said.

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