Market modeling in monitoring and mitigation of U.S. electricity markets

Summary form only given. Under the Federal Power Act, the US Federal Energy Regulatory Commission has to ensure that prices in the wholesale markets for power are "just and reasonable." This has been interpreted as meaning that suppliers cannot exert excessive market power. Here we focus on generation market power. In US regulatory practice, there are two primary types of ex ante generation market power screening and mitigation: the relatively standardized, long-term horizontal market power screening of applications for "market-based rates" and mergers; and the more diverse regional rules for spot offers of energy and ancillary services into the centralized RTO and ISO day-ahead and real-time auctions for power. Each of these methods has a mitigation rule if the supplier "fails" the screen. If the screens themselves fail - that is, produces a false negative - the regulator may resort ex post to determination of refunds to compensate buyers for exposure to seller market power, as took place in California following the price spikes of 2000-01. There are constant developments in these regulatory applications of market power monitoring and mitigation and their relationship to market design. The goal is to reduce the potential for regulatory errors, which we can categorize as either Type I errors, or false positive, or Type II errors, or false negative. This paper shows some large scale examples as applied to a hypothetical merger and market-based rates case. The paper also makes the case that such models could also be used in transmission constrained RTO markets to trigger spot offer price controls reflecting market conditions at each point in time.