Is Market Monitoring a Substitute for Regulation in Restructured Wholesale Electricity Markets?

Lon L. Peters, Reed College

Abstract

Over ten years ago, wholesale electricity markets in many parts of the U.S. were fundamentally restructured. Vertically integrated electric utilities were replaced by centrally designed and administered auctions repeated on a regular basis. Federal oversight was relaxed, as the Federal Energy Regulatory Commission relied (and continues to rely) largely on reports by “market monitors” regarding the competitive conditions in these new markets. A review of the monitors’ reports during the first few years of this new approach reveals that fundamental concepts of economic theory, especially regarding the structure, conduct, and performance of markets, were either ignored or misapplied. As a result, markets were declared “competitive” despite clear evidence to the contrary. FERC’s reliance on these monitors was misplaced.