US Electric Markets - Turning back the clock to the 1990's or moving forward into the 21st century?
The current fundamental design of US electric markets came to fruition under FERC's administrative guidance from 2000-2007. From 2000-2007 FERC required certain market features be implemented across all of the electric markets in the US, also known as RTO's or ISO's. Prior to this, all organized US electric markets certainly had standards, and one might even say they each loved standards, specifically, their own. Transacting across and between markets was a nightmare, as there was little standardization between markets, but FERC successfully required the RTO's and ISO's to implement a substantial amount of standardization from 2000-2007.
Unfortunately, from 2007 onwards, standardization took a backseat, and the modus operandi of FERC changed to that of each regional US electric market setting their own standards. As this took hold, it slowly whittled away at the standardization achieved from 2000-2007 as well as Federal primacy in wholesale power markets. All ISO's/RTO's are effectively structured as mutuals, similar to the way equity and futures exchanges were structured prior to going public. However, unlike say CME, NYMEX, ICE, the membership voting structure in most ISO's/RTO's is dominated by incumbent wholesale utilities and their affiliates rather than the large number of small companies that worked in competition at CME/NYMEX/ICE (aka locals or market makers). In other words, the very groups that were forced, kicking and screaming, into de-regulation, effectively control the voting process for changes at US electric exchanges and control the markets that are supposed to be neutral trading grounds. As a result, when FERC changed its stance around 2007, those groups naturally used their dominance to their advantage by promoting policies that attempted to shift costs to third parties, such as independent trading houses, and delayed further implementation of standardization and transparency initiatives. Very simple, logical, and necessary features, such as settling markets at the same intervals that electricity is priced at, or billing at reasonable intervals, were delayed, or voted down until FERC was forced to intervene.
Furthermore, these groups have been aided and abetted in certain markets by a biased yet supposedly independent market monitor, whose pecuniary interests are vested with these incumbents. Specifically, the independent market monitor's company is paid a via a fixed multi-million dollar contract regardless of the amount of work it does. This skews its interests towards limiting market activity, which would generate additional monitoring work but no corresponding increase in compensation. Furthermore, rather than open the monitoring contract to bid every five years, certain ISO's/RTO's simply award the contract on a no-bid basis to the incumbent monitoring company.
However, there have been signs that FERC is slowly waking up to the need to assert itself again. FERC Order in Docket EL16-6-001: Requiring allocation of FTR uplift to load, FERC Order Docket EL14-37-000: Requiring PJM to justify its treatment of financial transactions, and the subsequent finding that PJM's rule application is not just and reasonable, and FERC NOPR Docket RM17-2-000: Uplift Cost Allocation and Transparency: Requiring US Electric Markets to Implement Cost Allocation that is transparent, just, and reasonable, all issued at around the start of this year, have all been well thought out and reasoned orders that attempt to create fair, transparent markets. More interestingly, they were ordered while FERC was temporarily under the leadership of a Democratic Chairman, Cheryl LaFleur, who has shown herself to be a balanced commissioner who understands market forces. It would be highly disturbing if the new FERC Chairman chose to revert back to having each ISO/RTO act as its own fiefdom with the incumbents entrenching themselves further and throwing up barriers to competition, rather than completing standardization and increasing transparency.
Another common feature is that the RTO's/ISO's have implemented these orders or responded to these orders kicking and screaming. Their membership is starting to become concerned at the recent tack taken by FERC towards actively asserting Federal primacy and moving towards standardization which would strip them of a fiefdom to shift costs, to the point that they are filing pre-emptive end runs with FERC.
Electric markets have shortfalls in revenue from time to time based on their inherent design, these extra costs are allowed to be allocated by the electric markets based on their own methodologies. Given that electric markets are effectively mutuals with membership dominated by incumbent utilities and their affiliates, they naturally want to either shift these costs to third parties or make them cost recoverable from their rate base. The incumbents' dominance of the voting procedures at ISO/RTO's allows them to implement policies towards this end or to prevent policies that would challenge these shifts.
More recently, one of the largest US electric markets, PJM, which is based out of the Phildaelphia, PA area, recently filed two FERC dockets ER18-86-000 and ER18-88-000 that are a thinly veiled attempt at an end-run around EL14-37-000 and RM17-2-000, FERC orders which intend to have the Northeast and California US electric markets adopt equitable cost causation, similar to that used by MISO and ERCOT, the two most efficient markets in the US which run electric markets in the Midwest, the Gulf, and Texas.
Hopefully, FERC is not foolish enough to fall for this attempted end-run. NOPR RM17-2-000 can be implemented as furthering standardization of the rules, started and partially implemented under the 2000-2007 FERC administration but allowed to largely gather dust for the last decade.
We have seven electric markets, all of which have diverged from the standardization efforts from 2000-2007 to the point that transacting in one is very different from transacting in another. In all other nations with deregulated electricity there is one set of rules (e.g. EU nations, Australia, New Zealand). When transacting in a US commodity, there aren't 7 different exchanges with 7 different sets of rules, there are at most 2 with almost identical rules. Without FERC's administrative guidance, we do not get standardization. Everyone loves standards...their own, and furthermore, everyone loves standards that benefit their market dominant group, in this case incumbent utilities and their affiliates. Hopefully the current FERC administration can complete the work started nearly two decades ago.