June 4, 2002 — An independent review of the competitive performance of New England’s deregulated wholesale electricity market found that the New England market is workably competitive, producing little evidence of the deliberate withholding of generating resources from the marketplace.
The study, conducted by Dr. David Patton of Potomac Economics, Ltd., who serves as Independent Market Adviser to ISO New England, is consistent with studies commissioned by ISO New England throughout the last year to assess the competitive performance of the New England electricity market.
“The results are reassuring… This study again demonstrates that New England’s wholesale market is workably competitive,” said Gordon van Welie, President and CEO of ISO New England Inc., which oversees the region’s electric power system and wholesale power exchange. “The New England market has done well to get these competitive outcomes given the less than perfect market rules. But to achieve greater efficiency, we must proceed to an improved market design that will result in a better market for all stakeholders.”
This latest report sought to identify attempts to exercise “market power” that result from the withholding of generating supplies from the market to raise market prices. Generation can be withheld either physically, by declaring supplies unavailable, or economically, by raising bid prices. The study used an empirical analysis to differentiate normal competitive behavior from anti-competitive withholding of resources.
The report also evaluated a small number of high-priced hours during the summer of 2001 when wholesale energy prices were significantly elevated. The study sought to determine the extent to which certain factors may have contributed to inflated price levels in these hours, including existing market rules and procedures as well as ISO actions and market participant actions under these rules and procedures.
The report found that prices in the majority of these hours accurately reflected market conditions. In many of these hours, there were actual shortages of generating resources during times of peak demand. The study found “no clear evidence that physical or economic withholding substantially contributed to inflating the energy prices in these hours.”
In other high-priced hours, the New England Power Pool (NEPOOL) external transaction market rules in effect during 2001 may have resulted in very high prices during some periods when a deficiency of resources did not exist. A previous study by Dr. Patton, An Assessment of Peak Energy Pricing in New England During Summer 2001,showed that in certain hours prices were actually depressed because of inefficient market rules.
These inefficiencies have been addressed through market rule reforms recently implemented by ISO New England for the summer of 2002 and through improvements to energy-transaction scheduling with New York. Further improvements to the pricing process will come through ISO New England’s implementation of locational marginal pricing and Standard Market Design (SMD) in the near future.
“It is essential to establish efficient prices–especially under peak conditions,” said van Welie. “Market rules that are consistently fair and encourage competition benefit market participants and consumers alike and provide critical incentives for investment in the bulk power system. Through market-rule reforms this year, the implementation of SMD, and the identification of transmission bottlenecks that hinder the transfer of power, we continue to refine New England’s robust market system.”
Dr. Patton cautioned that discrete instances of market power–particularly in certain market locations with few competitors that are isolated by transmission constraints–cannot be discounted. This underscores the continued need for ISO New England’s market monitoring and mitigation function.
“Market monitoring is critical as market rules change and wholesale electricity markets continue to be defined,” said van Welie. “Every day, the ISO must be vigilant in ensuring the rules and practices within the marketplace are unfailingly fair and competitive.”
ISO New England uses a portfolio of tools to gauge whether market power is being exercised, and throughout the past year the ISO enhanced its ability to identify and deter efforts to manipulate the electricity markets. These steps include increasing the size of its internal Market Monitoring and Mitigation Group, hiring an Independent Market Adviser to the Board of Directors, and retaining independent experts to provide extended market analysis capabilities.
Reports released over the past year that assess the competitive performance of the New England market include Understanding New England Generating Unit Availability; An Assessment of Peak Energy Pricing in New England During Summer 2001; and An Empirical Assessment of the Competitiveness of the New England Electricity Market.
In addition, the ISO New England Market Monitoring and Mitigation Group issues its Annual Market Report every August. These reports and the latest Competitive Assessment of the Energy Market in New England can be found on the ISO New England Web site at www.iso-ne.com.
ISO New England Inc. is the not-for-profit corporation responsible for the day-to-day reliable operation of New England’s bulk generation and transmission systems with an installed capacity of more than 28,000 megawatts. In addition to operating the bulk power grid, ISO New England is the administrator of the region’s wholesale electricity marketplace and the Open Access Transmission Tariff on behalf of the New England Power Pool.