FTC Staff Comments on Electric Utility Market Monitoring

In response to a request from the Federal Energy Regulatory Commission (FERC), the staff of the Federal Trade Commission today submitted a comment about FERC’s policy conference on independent system operators (ISOs). ISOs are nonprofit entities established to operate the transmission grid in a region in order to enhance competition and improve reliability. As the electric utility industry restructures, FERC has requested public comments about a number of matters, including competition and market structure issues.

Today’s comment, which represents the views of the staff of the Bureau of Economics, outlined four concerns about ISOs performing market power monitoring and mitigation tasks in general. Market power monitoring and mitigation in this context refers to efforts by ISOs to 1) gather information about pricing and output decisions of electicity generating firms, 2) use this information to detect market power (raising prices above competitive levels), and 3) apply sanctions in an attempt to stop such firms from exercising market power in the future.

As the FTC noted in previous comments, there are four areas of concern about the use of behavioral rules by ISOs to prevent anticompetitive pricing and curtailments of output:

1. The exercise of market power by independent system operators may be difficult to detect and document. For example, the comment notes that the need to balance supply and demand in electricity markets continuously and precisely makes electricity trades vulnerable to subtle and short-lived anticompetitive actions that are likely to make fully effective monitoring complex and costly.
2. FERC-imposed behavioral rules for ISO market power mitigation will not eliminate incentives to exercise market power and, therefore, are likely to be less than fully effective.
3. Market power monitoring and mitigation rules create a risk that certain competitive behavior will be misidentified as anticompetitive, thus chilling competition and increasing administrative and litigation costs.
4. Focusing on behavioral remedies may divert attention from structural remedies that have the potential to address market power with greater certainty and lower costs to consumers.

Today’s comment represents the views of the staff of the FTC’s Bureau of Economics and not necessarily the views of the FTC or any individual Commissioner. The Commission vote to authorize its staff to file the comment was 5-0.

Copies of today’s comment and previous comments (see news releases dated August 8, 1995; May 6, 1996; February 9, 1998) are available from the FTC’s web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202- 382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. V980007)