After allegations of management interference led PJM to replace its internal market monitoring unit with an independent monitor in 2008, FERC had an opportunity to prohibit other RTOs from using the internal structure. Because it chose not to do so, the temptation for RTO officials to muzzle their MMUs still exists.

First in a Series

By Rich Heidorn Jr.

The independence concerns raised by former SPP market monitors John Hyatt and Catherine Mooney resulted in part from FERC’s compromises in Order 719, its 2008 rule spelling out market monitoring units’ duties and their relationships with their RTOs (RM07-19, AD07-7). (See related story, SPP Squelching MMU Independence, Former Monitors Say.)

FERC said the rules, which updated a 2005 policy statement, were needed to “improve the performance and transparency of organized RTO and ISO markets.” They prohibited RTO management from supervising their MMUs, and required, in most instances, that MMUs report directly to their RTOs’ board of directors.

But the commission rejected protections urged by some stakeholders — allowing RTOs to choose their structures and declining to provide job security protections for MMU employees.

RTO Choice on Structure

The commission allowed each RTO to decide through its stakeholder process whether it will have an external or internal MMU, or a hybrid structure using both. FERC also declined to remove MMUs from any oversight by the RTOs.

The commission ruled that the RTO boards would supervise market monitoring functions and that RTO management representatives on the board “be excluded from this oversight function.” However, it permitted MMUs to report to management “for administrative purposes, such as pension management, payroll and the like.”

“Removing the MMU from reporting to management will give it the separation needed to foster independence,” the commission said, promising to revisit the decision “if occasion demands.” However, it declined to conduct periodic reviews, as requested by the Federal Trade Commission.

Both internal and external monitors can face conflicts of interest, the commission noted. As the market operator, the RTO is one of the players a monitor is expected to critique. So are market participants, who are essentially the RTO’s constituents, with the ability to leave or switch RTOs.

Inherent Tension

Order 719 acknowledged this, citing the “inherent tension between [market] mitigation and the RTO or ISO goal of promoting new markets.”

An external monitor that is too critical could find itself unemployed when it comes time to renew its contract. In 2013, some PJM board members considered seeking a new monitor before state regulators pressured them to renew the RTO’s contract with Monitoring Analytics.

An internal MMU, on the other hand, can face peer pressure and management interference.

The commission also rejected a proposal by the American Public Power Association, Exelon and the Pennsylvania Public Utility Commission that it use the settlement that created PJM’s independent monitoring structure as a “best practice.”

“The provisions of that agreement were specific to one RTO and represented a negotiated balancing of interests,” the commission said. “It would be inappropriate to impose the specifics of that settlement on all other RTOs and ISOs.”

Core Duties

The Transmission Access Policy Study Group, an association of transmission-dependent electric utilities in 35 states, recommended that the “core” MMU duties — reviewing market performance, identifying ineffective market rules and making confidential referrals to the commission — be assigned exclusively to the external monitor in hybrid structures.

FERC disagreed.

“This solution might impose upon the RTO or ISO an MMU structure that it does not want,” the commission said, insisting its requirement that the monitors performing the core functions report to the board was sufficient. “This solution allows the RTO or ISO to structure its MMU function in the way it deems most suitable, while also ensuring that the market monitor that performs the core MMU functions enjoys the independence from management that reporting to the board accomplishes.”

It also rejected the Public Utility Commission of Ohio’s proposal that monitors report to a federal-state board independent of both the management and boards of RTOs. “Not only does an arrangement of this type raise jurisdictional concerns, it is difficult to see how such a potentially cumbersome structure could oversee MMUs in a timely and responsive manner. … Should the reforms we adopt in this final rule fail to achieve the needed independence we envision for MMUs, we will not hesitate to rectify the situation.”

Employee Protections

Some commenters proposed that major changes in MMU status, such as termination of employment, be subject to FERC review, a requirement included in the contracts that PJM, MISO, ISO-NE and SPP (which then had a hybrid structure) signed with outside monitors. The commission, however, said it did not want to impose “a ‘one size fits all’ requirement on the remaining RTOs or ISOs absent their consent.”

“Should the situation arise in which an RTO or ISO terminates its MMU in such a way as to violate its tariff requirements concerning MMU independence, the commission will address such a violation on a case-by-case basis,” it said.

Order 719 in Summary

Below is a summary of Order 719’s requirements. Except in direct quotations, this article will use “RTOs” or “grid operators” to refer to RTOs and ISOs.

Functions

The commission limited MMU functions to three: evaluating the effectiveness of market rules, tariff provisions and market design elements (and proposing changes where needed); reporting on market performance; and referring suspected wrongdoing to the commission.

It also broadened the monitors’ reporting duties — requiring them to refer to the commission any misconduct by the grid operators as well as by market participants — and expanded their referral obligations to include market design flaws in addition to tariff and rule violations.

RTO Review of MMU Reports

FERC said RTOs may require their MMUs to submit reports in draft form for RTO review and comment but could not alter the reports “or dictate the MMU’s conclusions.”

“RTOs or ISOs need not require submission of draft reports, but if they do, input from knowledgeable employees may serve to strengthen the end product or catch errors of fact or reasoning,” the commission said. “In any event, the MMU is free to disregard any suggestions with which it disagrees.”

APPA opposed giving RTOs advance review of MMU reports, saying FERC should impose the same prohibition against such review as was included in the PJM-MMU settlement. The settlement resulted from Monitor Joe Bowring’s complaint at a FERC technical conference in 2007 that PJM ordered him — then a PJM employee — to modify the State of the Market Report and delayed the release of another MMU report because management disagreed with his conclusions.

Market Mitigation Role

The market mitigation role of external MMUs was limited to retrospective mitigation and the calculation of inputs required for the RTOs to conduct prospective mitigation. The separation was made because of concerns that an MMU would have a conflict of interest in proposing prospective market mitigation and then opining on how the resulting market rules worked. It also separated the duties of internal and external MMUs for RTOs with hybrid structures.

In its Notice of Proposed Rulemaking, FERC proposed that MMUs be removed from tariff administration, including market mitigation, “to free MMUs from a role that might make them subordinate to the RTO or ISO.” The proposal “engendered heated disagreement” by commenters, the commission said.

SPP, the Electric Power Supply Association, some industrial customers and several utilities supported the commission’s proposal. But more commenters opposed it, including Potomac Economics, other industrial customers and utilities, the Organization of MISO States, the National Association of Regulatory Commissioners and regulators from California, Maine, New York and Ohio.

The opponents said RTO officials who have designed and implemented the markets — and whose compensation may be based on market growth — may have a greater conflict of interest than the MMU. As FERC described the argument, RTOs would be disincented from imposing enforcement measures “on what in effect are their customers, or in refraining from mitigating a member that threatens to leave the RTO or ISO.”

FERC said it took seriously comments that “the MMU serves as a useful buffer between the RTO or ISO and the market participants, performing what is often viewed as a hostile act.”

Ultimately, the commission chose a compromise that it said “strikes the appropriate balance between allowing modified participation by the MMUs in mitigation, while protecting against the conflict of interest and subordination inherent in their unfettered participation.”

The commission said RTOs may allow their MMUs to conduct retrospective mitigation because it is only prospective mitigation — that which can affect market outcomes on a forward-going basis, such as altering the prices of offers —  that creates a potential conflict of interest for an MMU.

The commission also said the MMU may provide inputs required by the RTO to conduct prospective mitigation, including determining reference levels, identifying system constraints and calculating costs.

Information Sharing

The order required MMUs to report on market performance at least quarterly to commission staff, state commissions and RTO management and boards. MMUs must conduct regular conference calls for FERC, state commissions and RTO staff, as well as market participants.

It cut the lag time for the release of offer and bid data to three months from six but allowed RTOs to propose a shorter period — or, if the RTO demonstrates a collusion concern, it may propose a longer lag. The identity of market participants remained masked, although RTOs were permitted to propose a time period for eventual unmasking.

Requests for Information

State commissions were permitted to make “tailored” requests for information from the MMUs, limited to information regarding general market trends and the performance of the wholesale market. “If this limitation were not imposed, the MMU could rapidly become an unpaid consultant for the states, and would be unable to perform its core functions,” the commission said.