1. Monitoring US Electric Markets: A Federal Perspective Charles Whitmore Office of Market Oversight and Investigation Federal Energy Regulatory Commission Romania Plenty Partnership Program Bucharest, Romania February 15, 2005

2. Electric Markets Need Monitoring ► Electricity is different from other commodities  Tight operational tolerances (no storage, moves at speed of light, etc.)  Very low elasticity of demand creates uniquely high volatility, opportunities for manipulation  Integration of grid creates very complicated market algorithms  Reliability challenge adds difficulty ► A similarity: relationship of physical and financial markets ► When things go wrong, they can go very wrong - California ► Key monitoring functions  Feedback mechanism to improve market systems over time (Oversight)  Ways to prevent bad actions (Investigation)

3. A National System of Market Monitoring in the US ► Market Monitoring Units (MMUs)  Track detailed regional market operations in ISO regions  Identify, help respond to problems as they arise ► FERC-OMOI  Responsible for wholesale power markets and transmission  Track national issues and trends  Monitor fuel input markets, especially natural gas  Monitor integration of various markets, including financial  Undertake investigations and audits  Oversee ISOs and MMUs ► State Commissions  Oversee retail markets  Regulate distribution ► Commodities Futures Trading Commission (financial markets) ► North American Reliability Council (reliability)

4. FERC – What is it? ► Composition  Five Commissioners  Staggered 5-year terms  No more than three from any one party ► History and Jurisdiction  1919 – Hydroelectric projects (except those owned by government entities  1935 – Interstate electric power sales and transmission (but not siting)  1938 – Interstate natural gas sales and pipelines (including siting)  1953-1978 – Wellhead natural gas sales  1978 – Oil Pipelines

5. FERC Organization

6. FERC Reliance on Markets ► 1978-1993 - Natural gas restructuring ► Federal electric restructuring until 2000  1978: PURPA creates semi-competitive fringe market  1992: EPAct creates case by case open access  1996: Order 888 requires general open access  2000: Order 2000 strongly encourages RTOs ► Federal electric efforts, 2000-Presen  California  Standard Market Design  Incremental Improvement  Increased emphasis on market monitoring

7. RTO Map

8. Going Forward: FERC’s Strategic Plan 1. Make Markets Possible. Promote a Secure, High-Quality, Environmentally Responsible Infrastructure through Consistent Policies 2. Make Markets Work. Foster Nationwide Competitive Energy Markets as a Substitute for Traditional Regulation. 3. Make Sure Markets Work. Protect Customers and Market Participants through Vigilant and Fair Oversight of the Transitioning Energy Markets.

9. Objectives of Market Oversight ► Objective 3.1: Provide vigilant and effective oversight of energy market operations  Promote understanding of energy market operations and technologies  Assess and report on market and infrastructure conditions using objetive benchmarks  Encourage effective RTO and ISO MMUs  Identify and remedy problems with market structure and operations ► Objective 3.2: Prevent market manipulation and enforce Commission rules  Investigate violations, impose remedies  Advocate enhanced penalty authority

10. Office of Market Oversight and Investigation ► Created in 2002 ► Key Functions  Oversight – Designed to provide vigilant and effective oversight of energy market operations  Investigations - Prevent market manipulation and enforce Commission rules ► Audits ► Enforcement  Communications

11. Office of Market Oversight and Investigation Director Division 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 Hotline 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 Enforcement Division 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 Scanning Market Scanning Strategic Analysts Library Science Division of Information Development Division of Information Development Financial Analysts Accountants Understanding of Investment Derivatives Markets Energy Trading

12. Market Oversight Process Emergency Team 8:30 AM Discussions Regular Insight Meetings Chairman’s Weekly Brief Surveillance Report, Short Studies Emergency Commission Feedback Investigations & Audits Market Oversight Human Contacts Market Signals

13. Weekly Market Oversight Insights Timeline ► Monday  10:00 – Meet with Financial markets team for their Insights from week before  12:00 – Meet with Natural Gas markets team  2:00 – Meet with Electric markets team  4:30 – Director of Market Oversight triages market team Insights ► Tuesday  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. Team members flesh out what they know.  4:30 – Director of Market Oversight decides on which Insights to use that week. ► Wednesday  Team members update their items, provide background, context  Production work ► Thursday  9:30 – Director of Market Oversight meets with Chairman  1:00 – Director of Market Oversight meets again with all team members, reports on meeting with Chairman, including any follow-ups ► Friday  Collate Items still live from the week to feed the following week’s process

14. Some Key Points ► Staff needs clear guidance on what sources to check routinely. ► Staff needs a dedicated effort to help them build contracts with other key players. ► Feedback is crucial at all levels of the process  Chairman meetings crucial to establishing mutual understanding; direct one-on-one contact very important – doesn’t need to be for a long time  Staff meetings crucial for the same reason.  Team meetings necessary to make sure people in related markets know what the others are finding ► Need to have multiple outlets for information ► Weekly effort encourages staff to seek important stories, not wait for them ► This effort feeds all Oversight products

15. Market Oversight Products ► Chairman’s Weekly Brief  One-page, about eight points each week  Each bullet short – invites conversation, not just conveys information  Balance of subjects ► Surveillance Report  Every three weeks  All Commissioners, in large (closed) meeting  Contains ► Six to seven key developments ► One in-depth story ► About 50 pages of background charts ► Seasonal Assessments – designed to lay out the most important likely developments during the following six months, helps focus attention, effort ► State of the Markets – annual review of developments in each market during the past year. ► Special studies, often in response to major market events (price spikes, unexpected price moves, etc.) ► Short Studies

16. Investigations: Audits ► Purpose: Assess how companies complying with Commission rules or perform other important activities.  Can be for a targeted company  Or a single issue in many company  Doesn’t necessarily imply any particular suspicion ► Operational Audits  Looks at company behavior  Examples ► Withholding of capacity ► Posting of information ► Compliance with affiliate rules ► Financial Audits  Looks at financial behavior  Accounting issues generally  Could include cross-subsidy issues, for example

17. Investigations: Audits ► Result is report to the Commission ► Can lead to action for the company  Clean bill of health  Required or recommended change in company practices  Further investigation by Enforcement ► Can lead to Commission changes  Is a rule working as expected?  Are rules changes needed? ► Is working to make the industry aware that the Commission is on the beat. Significant deterrent effect for bad behavior.

18. Investigations - Enforcement ► Purpose is to find wrongdoing and respond to it as forcefully as appropriate and legal ► Can include full array of legal techniques ► Is usually conducted confidentially – publicity would be unfair to those who turn out to be innocent ► Can lead to penalties  Disgorgement of illegal profits  Measures to prevent recurrence  In rare cases, civil penalties or referral to Justice Department  Share prices

19. Communications ► The Regulatory Community  With MMU  With States  With Other Federal Agencies ► Market Participants  Traditional communication  Hot Line  Reaching out ► Experts and Others

20. OMOI Accomplishments Jan 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 CFTC Market Surveillance 1 st Market Surveillance Report 1 st Seasonal Assessment report FERC Re-organization: OMOI Official FERC California Office Opens 1 st Winter Assessment Report Hotline Promotion Launched Critique of CPUC Report Issued Transco and Nicor Settlements Calif Anomalous Bidding/Physical Witholding Handoff to OMOI Price Reporting Policy Statement Cleco Settlement BLACKOUT* Reliant Settlement Standards of Conduct Order Behavior Rules Order Winter Assessment Duke Settlement 1 st State of the Markets Report ISO/RTO Monitors Present 1 st 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 1 st Price Index Technical Conference OMOI Fellows Lectures Begin * OMOI does not claim the blackout as an accomplishment.

21. Thank You Write or call: Charles Whitmore Senior Market Advisor Federal Energy Regulatory Commission 888 First St. NE Washington, DC 20426202-502-6256 Charles.whitmore@ferc.gov