[Federal Register Volume 70, Number 116 (Friday, June 17, 2005)]
[Notices]
[Pages 35247-35249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11935]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL05-1-000]


Policy Statement on Market Monitoring Units

Issued May 27, 2005.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy statement.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
issuing this policy statement is to provide guidance on the coordinated 
roles and responsibilities of the Commission and market monitoring 
units (MMUs) associated with Independent System Operators (ISOs) and 
Regional Transmission Organizations (RTOs).

DATES: May 27, 2005.

FOR FURTHER INFORMATION CONTACT: Ted Gerarden (Technical Information), 
Office of Market Oversight and Investigations, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. 
(202) 502-6187. [email protected]. Lodie White (Legal Information), 
Office of General Counsel--Markets, Tariffs & Rates, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. 
(202) 502-6193. [email protected].

SUPPLEMENTARY INFORMATION 

Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.

Market Monitoring Units in Regional Transmission Organizations and 
Independent System Operators; Policy Statement on Market Monitoring 
Units

    1. The purpose of this policy statement is to provide guidance on 
the role of market monitoring units (MMUs) associated with Independent 
System Operators (ISOs) and Regional Transmission Organizations (RTOs). 
MMUs perform an important role in assisting the Commission in enhancing 
the competitiveness of ISO/RTO markets. Competitive markets benefit 
customers by assuring that prices properly reflect supply and demand 
conditions. MMUs monitor organized wholesale markets to identify 
ineffective market rules and tariff provisions, identify potential 
anticompetitive behavior by market participants, and provide the 
comprehensive market analysis critical for informed policy decision 
making. This policy statement provides guidance on the coordinated

[[Page 35248]]

roles and responsibilities of the Commission and the MMUs.
    2. In order to achieve the stated purpose of enhancing the 
competitive structure of the ISO/RTO markets, MMUs perform several 
valuable tasks:
     To identify ineffective market rules and tariff provisions 
and recommend proposed rule and tariff changes to the ISO/RTO that 
promote wholesale competition and efficient market behavior.
     To review and report on the performance of wholesale 
markets in achieving customer benefits.
     To provide support to the ISO/RTO in the administration of 
Commission-approved tariff provisions related to markets administered 
by the ISO/RTO (e.g., day-ahead and real-time markets).
     To identify instances in which a market participant's 
behavior may require investigation and evaluation to determine whether 
a tariff violation has occurred, or may be a potential Market Behavior 
Rule \1\ violation, and immediately notify appropriate Commission staff 
for possible investigation.
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    \1\ Investigation of Terms and Conditions of Public Utility 
Market-Based Rate Authorizations, 105 FERC ] 61,218 (2003), order on 
reh'g,107 FERC ] 61,175 (2004).
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    3. Good market rules are essential to efficient wholesale markets 
in which competing suppliers have incentives to meet the customers' 
needs for reliable service at the least cost. ISO/RTO markets are 
operationally complex. MMUs should have access to data and other 
resources to evaluate participant behavior and responses in these 
markets. As such, MMUs should evaluate the market-specific responses of 
individual market participants to existing or proposed market rules and 
tariff provisions. It is therefore critical that the MMU consistently 
and impartially evaluate the existing ISO/RTO rules and tariff 
provisions, including mitigation and their effects on the economic 
signals sent to market participants. However, it is the responsibility 
of the ISO/RTO to make section 205 filings, rather than the MMU.
    4. Wholesale market design flaws can present perverse incentives 
that may result in unintended inefficient or unreliable operations, but 
which may not be manifested for many months or years. It is critical 
that the MMU provide the ISO/RTO and the Commission with its 
perspective and expertise in the development of market rules and tariff 
provisions. It is also essential that the MMU work proactively in 
identifying market design flaws, and provide assistance to the ISO/RTO 
in developing appropriate rule changes that will promote reliable and 
efficient operation of the wholesale markets. While the Commission is 
responsible for ensuring just and reasonable rates, the Commission does 
benefit from the expertise of the ISO/RTO to provide the tariff filings 
to the Commission that help ensure that the market rules in place work 
effectively and to ensure that customers receive the full benefits of 
competitive wholesale markets. In response, the Commission makes every 
effort to act in a timely manner on such filings, and has recently 
announced procedures to assure expeditious Commission action when 
necessary to ensure smooth functioning of wholesale markets.\2\
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    \2\ See Guidance Order on Expedited Tariff Revisions for 
Regional Transmission Organizations and Independent System 
Operators, 111 FERC ] 61,009 (2005).
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    5. Organized markets work best to benefit customers when the market 
rules and tariff provisions governing ISO/RTO-administered markets and 
contained in the ISO/RTO tariff are clearly understood by and followed 
by market participants. MMUs should therefore vigilantly monitor 
participant behavior. For this reason, the Commission has determined 
that ISOs/RTOs may administer compliance with tariff provisions only if 
they are expressly set forth in the tariff; involve objectively 
identifiable behavior; and do not subject the seller to sanctions or 
consequences other than those expressly approved by the Commission and 
set forth in the tariff, with the right of appeal to the Commission.\3\ 
Such penalties, however, must be designed to be a clear deterrent to 
unwanted behavior, without being so high as to be unnecessarily 
punitive.\4\
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    \3\ In California Indep. Sys. Operator Corp., 106 FERC ] 61,179 
(2004), the Commission stated that as long as there are appeal 
rights to the Commission, MMUs may administer certain objective 
behavior-related tariff provisions and to charge specified, 
Commission-approved penalties for such tariff violations. However, 
where policy issues are implicated or the question of whether a 
tariff violation has occurred cannot be determined objectively 
pursuant to Commission-approved tariff provisions, it is the 
Commission's statutory responsibility to address the question.
    \4\ See California Indep. Sys. Operator Corp., 106 FERC ] 61,179 
(2004), order on reh'g, 107 FERC ] 61,118 (2004); see also 
California Indep. Sys. Operator Corp., 109 FERC ] 61,087 (2004), 
order denying reh'g, 109 FERC ] 61,089 (2004).
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    6. Beyond the objectively identifiable, Commission-approved tariff 
provisions that are administered by the ISO/RTO, there may be 
situations in which actions of a market participant require 
investigation and evaluation to determine whether a violation occurred, 
or in which the provisions of the tariff do not specifically address 
undesirable market behavior. If, in the course of monitoring 
participant behavior, the MMU finds that an action by a market 
participant may require investigation and evaluation, or may be a 
potential violation of a market rule contained in an ISO/RTO-filed 
tariff, or may be a violation of the Market Behavior Rules, the MMU 
should notify the Commission staff.\5\ In this way the Commission will 
act in cases where market participants' behavior falls outside of the 
limited area of objectively identifiable, specific penalty rule 
violations the ISO/RTO may administer.\6\
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    \5\ See Appendix A for protocols MMUs should follow in bringing 
referrals to the Commission.
    \6\ Where the Commission undertakes the enforcement of matters 
referred to it by the MMU, the Commission will exercise its 
discretion to determine the appropriate remedy for violations, 
applying the policies and principles set forth in Investigation of 
Terms and Conditions of Public Utility Market-Based Rate 
Authorizations, 105 FERC ] 61,218 (2003) (Market Behavior Rules 
Order), order on reh'g, 107 FERC ] 61,175 (2004).
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    7. The MMU should monitor and regularly report on performance and 
structure of the electricity market within the ISO/RTO region. 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. An in-depth review should include an evaluation of 
market prices of ISO/RTO-administered products (e.g., real-time and day 
ahead energy markets, locational marginal prices, and ancillary 
services) and specifically determine the extent to which the prices 
reflect competitive outcomes, not market power abuses. The MMU should 
also be responsible for providing an analysis of the structural 
competitiveness of the wholesale markets and a determination of 
effectiveness of bid mitigation rules to remedy potential exercise of 
market power. In addition, the MMU should evaluate the effectiveness of 
the markets in signaling needed investment in generation, transmission, 
and demand response infrastructure. Market signals for additional 
investment are only valuable to customers to the extent that the 
signals can reasonably result in the needed market investment response. 
Thus, it is imperative that the MMU also identify any potential 
barriers that may impede the market's ability to provide needed 
investments. In all instances, the MMU should be proactive in 
recommending changes to the ISO/RTO.


[[Page 35249]]


    By the Commission.
Linda Mitry,
Deputy Secretary.

Appendix A--Protocols on MMU; Referrals to the Commission for 
Enforcement

    1. In the Market Behavior Rules Order, the Commission concluded 
that it is appropriate for ISOs/RTOs to administer certain matters 
that concern market behavior (with appeal rights to the Commission) 
if the behavior is objectively identifiable and set forth in the 
ISO/RTO tariff and for which the violations have clear Commission-
approved sanctions that are set forth in the tariff.\7\ All other 
aspects of tariff related enforcement, as well as enforcement of the 
Market Behavior Rules,\8\ are the responsibility of the 
Commission.\9\ The Commission also stated that it is the obligation 
of the MMU to inform the Commission of potential Market Behavior 
Rule violations and any violations of the ISO/RTO tariff that the 
Commission has not allowed the ISO/RTO to resolve in the first 
instance.\10\ In that regard, the Commission further noted that the 
Commission Staff would develop ``appropriate triggers for referring 
compliance issues to the Commission.'' \11\
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    \7\ Market Behavior Rules Order at P 182.
    \8\ See id. at Appendix A. The six Market Behavior Rules adopted 
in the Market Behavior Rules Order address: (1) Unit operations; (2) 
market manipulation; (3) communications; (4) reporting; (5) record 
retention; and (6) tariff-related matters.
    \9\ Id. at P 185. If, however, the Market Behavior Rules overlap 
with clearly stated tariff provisions for behavior which is 
objectively identifiable and for which the violations have 
Commission-approved sanctions, then the Commission will defer to the 
MMU in the first instance, subject to possible review.
    \10\ Id. at P 184.
    \11\ Id. See also California Indep. Sys. Operator Corp., 106 
FERC ] 61,179 at PP 44, 101 (2004).
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    2. In addition to providing that the Commission will enforce the 
Market Behavior Rules, the Market Behavior Rules Order placed a 90-
day time limit on responding to allegations of violations of the 
Market Behavior Rules.\12\ The Commission must act, by initiating an 
investigation, within 90 days ``from the date it knew of an alleged 
violation of its Market Behavior Rules or knew of the potentially 
manipulative character of an action or transaction.'' \13\ Knowledge 
on the part of the Commission is defined as including a call to the 
Commission's Hotline alleging inappropriate behavior or 
communication with the Commission's Enforcement Staff.
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    \12\ Id. at P 148.
    \13\ Id.
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    3. The following protocols are for the purpose of implementing 
and effectuating referrals by the MMUs to the Commission of: (1) 
Alleged tariff violations that the Commission has not allowed the 
ISOs/RTOs to administer and resolve in the first instance; and (2) 
alleged violations of Market Behavior Rules.\14\ It is important to 
understand that the referral protocols set forth below are not 
intended to affect, and should not affect in any manner, the regular 
and ongoing communications and dialogue that the MMUs have with 
Commission Staff about a variety of market-related matters and 
issues, including the status of the markets and activities of the 
market participants.\15\ In addition, ongoing communications between 
the ISO/RTO staff and Commission Staff who are on-site at the 
various ISOs/RTOs, as in the case for California ISO, Midwest ISO 
and Southwest Power Pool, should not be affected. These protocols 
are solely addressed to referrals to the Commission of Market 
Violations. As is the case with any matter that may be the subject 
of an investigation, the Commission will determine whether and to 
what extent to conduct an investigation.
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    \14\ We will, hereinafter, refer to both these alleged tariff 
violations and alleged Market Behavior Rules violations as ``Market 
Violations.''
    \15\ Id. at P 184.
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    Protocols:
    4. Protocol No. 1. An MMU should make a referral to the 
Commission in all instances where the MMU has reason to believe that 
a Market Violation may have occurred. While the MMU need not be able 
to prove that a Market Violation has occurred, the MMU should 
provide sufficient credible information to warrant further 
investigation by the Commission. Once the MMU has obtained 
sufficient credible information to warrant referral to the 
Commission, the MMU should immediately refer the matter to the 
Commission and desist from independent action related to the alleged 
Market Violation[s].\16\
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    \16\ It is noteworthy that the Commission's 90-day time period 
in which to open an investigation regarding a Market Behavior Rule 
violation may begin with a communication other than a referral from 
the MMU since, as noted earlier, a call to the Hotline or any 
communication with the Commission's Enforcement Staff alleging a 
Market Behavior Rule violation will start the 90-day time period. 
(See Market Behavior Rules Order at P 148). If, however, the 
triggering communication was from the MMU, the MMU should make a 
referral, to the extent it determines one is warranted, as soon as 
practicable so that Enforcement has the benefit of the referral 
prior to the time it must take action--i.e., within the 90 days of 
the initial communication.
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    5. Protocol No. 2. All referrals to the Commission of alleged 
Market Violations should be in writing, whether transmitted 
electronically, by fax, mail, or courier. The MMU may alert the 
Commission orally in advance of the written referral, but the 
Commission will not act without a written referral.
    6. Protocol No. 3. The referral should be addressed to the 
Commission's Director of the Enforcement Division of the Office of 
Market Oversight and Investigation, with a copy also directed to 
both the Director of the Office of Market, Tariffs and Rates and the 
Commission's General Counsel.
    7. Protocol No. 4. The referral should include, but is not 
limited to, the following information:
    (a) The name[s] of and, if possible, the contact information 
for, the market participants that allegedly took the action[s] that 
constituted the alleged Market Violation[s];
    (b) The date[s] or time period during which the alleged Market 
Violation[s] occurred and whether the alleged wrongful conduct is 
ongoing;
    (c) The specific Market Behavior Rule[s] and/or tariff 
provision[s] that were allegedly violated;
    (d) The specific act[s] or conduct that allegedly violated the 
Market Behavior Rule or tariff;
    (e) The consequences in the market resulting from the act[s] or 
conduct, including, if known, an estimate of economic impact on the 
market;
    (f) If the MMU believes that the act[s] or conduct constituted 
manipulative behavior in violation of Market Behavior Rule 2, a 
description of the alleged manipulative effect on market prices, 
market conditions, or market rules;
    (g) Any other information that the MMU believes is relevant and 
may be helpful to the Commission.
    8. Protocol No. 5. Following a referral to the Commission, the 
MMU should continue to notify and inform the Commission of any 
information that the MMU learns of that may be related to the 
referral, but the MMU should not undertake any investigative steps 
regarding the referral except at the express direction of the 
Commission Staff. However, this does not mean the MMU cannot 
continue its monitoring functions and make recommendations to the 
ISO/RTO, stakeholders, and the Commission on tariff changes that may 
be necessary.

[FR Doc. 05-11935 Filed 6-16-05; 8:45 am]
BILLING CODE 6717-01-P