A Regional Approach to Market Monitoring in the West

The West experienced very high wholesale power prices in 2000-2001 and debate continues about the extent to which these prices were the result of market fundamentals as opposed to market manipulation. Although the Federal Energy Regulatory Commission (FERC) eventually investigated claims of market manipulation in Western wholesale electricity markets, the situation prompted state regulators and policymakers that participate in the Western Interstate Energy Board Committee on Regional Electric Power Cooperation as well as some industry market participants to seek to develop some independent capability to monitor wholesale markets in the West. For a number of reasons, Western wholesale power markets are somewhat more opaque than those in some other parts of the country. For example, a substantial amount of electricity trade in the West occurs through bilateral markets, with a limited amount of information about transactions reported on electronic trading platforms. Also, many utilities in the West are essentially vertically integrated, tending to meet their incremental needs through investment and bilateral contracts rather than the shorter-term transactions that are typically the focus of market monitoring. The Western Interconnection outside of California and Alberta also does not have Regional Transmission Organizations (RTO) that administer short-term markets and transactions, collect and publish voluminous market data, and maintain formal market monitoring functions. In light of the special characteristics of Western markets, what kinds of market monitoring functions can be developed that work well for the West? This study examines the feasibility of West-wide market monitoring given readily available data. We explore two main analytic techniques for market monitoring: the econometric analysis of wholesale power prices and a particular type of production cost modeling. Of the two, we conclude that the econometric approach is likely to be more feasible and could be a useful addition to West-wide market monitoring efforts. Our focus on analytic techniques is intended to support discussions in the West on how the Western power market can be effectively monitored on a routine basis using a variety of analytic tools, information screens, and other market-monitoring resources. These larger and important institutional implications, including the relationship between FERC activities and those that would be sponsored in the West, were not part of the scope of our study.