After allegations of management interference led PJM to replace its internal market monitoring unit with an independent monitor in 2008, FERC had an opportunity to prohibit other RTOs from using the internal structure. Because it chose not to do so, the temptation for RTO officials to muzzle their MMUs remains.

Second in a Series

By Rich Heidorn Jr.

Joe Bowring and David Patton often disagree, as anyone who has watched a FERC technical conference featuring the two independent market monitors can attest.

But while the two — both Ph.D. economists — may clash over seams issues or the virtues of forward capacity markets, they are 100% in agreement on the need for independence in market monitoring.

“I don’t know how we would do this job effectively if we weren’t independent,” said Patton, whose Potomac Economics provides market monitoring for MISO, ISO-NE, NYISO and ERCOT and has done occasional work for CAISO and SPP.

“You cannot do your job as a market monitor if you’re not independent, if you’re not free to criticize the RTO and its members, if you’re told to pull your punches,” agreed Bowring, whose Monitoring Analytics serves as PJM’s monitor.

Stormy Beginning

Monitoring Analytics was born in 2008, after Bowring — then a PJM employee — complained at a FERC technical conference that then PJM President Phil Harris and his allies were attempting to muzzle him. Bowring accused PJM management of censoring his reports, preventing him from presenting his views to a stakeholder committee, raiding his staff and threatening to disband the MMU altogether.

“PJM has made it clear that, from management’s perspective, the market monitor is first an employee of PJM with all the duties of an employee including obeying management orders, i.e. following the chain of command,” Bowring told the commission. “Based on my experience, it is not possible, as a practical matter, to maintain the independence of the MMU while leaving the control of personnel decisions, including hiring, firing, reviews and promotions, with RTO management.”

State consumer advocates, the PJM Industrial Customer Coalition and several electric cooperatives filed a request for a show cause order requiring PJM to answer Bowring’s allegations (EL07-56). State regulatory commissions and the Organization of PJM States Inc. (OPSI) followed about a week later with a complaint seeking a FERC investigation (EL07-58).

“The independence of the PJM MMU is of paramount importance because a wholesale market that is not competitive and not resistant to market power allows market participants to exercise market power and demand monopoly prices from customers to the detriment of the public,” the OPSI complaint said.

Following a FERC review of 2,700 pages of documents produced in response to data requests, CEO Harris resigned and FERC approved a settlement between PJM and Bowring. (See State Regulators: FERC Investigation into Bowring Allegations Fell Short.)

The settlement called for Bowring — who previously worked at New Jersey’s Board of Public Utilities and Division of Rate Counsel — to form an independent company, which was awarded a six-year contract as PJM’s market monitor (EL07-56, EL07-58).

The PJM Board of Managers was given limited authority over the monitor — specifically, the power to review its budget and to decide whether to retain or replace the firm at the end of the initial term.

2013 Skirmish with PJM Board

The settlement did not end all conflicts. Both Bowring and PJM Board Chair Howard Schneider are strong-willed personalities and can be blunt when they disagree. Bowring also disagrees frequently and forcefully with PJM officials at stakeholder meetings.

Tensions flared anew in 2013 when the board attempted to issue a request for proposals to shop for potential alternatives to Bowring’s firm after the initial six-year term.

It’s doubtful the RFP would have generated many responses. Market monitoring requires an analytical infrastructure that few firms possess, and many of those that do would be prevented from bidding because they have market participants as clients. When the Public Utility Commission of Texas issued an RFP last year for monitoring of ERCOT, only incumbent Potomac Economics submitted a bid.

Nevertheless, state regulators, industrial consumers and cooperatives reacted with alarm to the draft RFP, saying it contained language that would undermine the independence and quality of the monitoring function. They sent letters to the board praising Monitoring Analytics’ performance and threatening to protest to FERC.

The board dropped the RFP in response to the outcry, signing a new contract with Monitoring Analytics running through 2019. (See PJM, Monitoring Analytics Sign New Contract.)

At the OPSI annual meeting in October 2013, Bowring and Schneider symbolically buried the hatchet. The two shared the dais with then-Maryland Public Service Commissioner Lawrence Brenner, chairman of OPSI’s Market Monitoring Committee, who had intervened in the contract dispute.

Brenner said he was happy to be able to call Bowring the “current and future market monitor,” prompting Schneider to interject — “current and future king” — with a chuckle.

“He has managed to annoy just about everybody in this room,” Robert Hanna, then president of the BPU, said of Bowring. “To me that’s a very good sign. He’s not in the tank for anybody. He does it in a principled way and he lets you know the basis.”

Patton not Shy About Criticizing Clients

David Patton hasn’t gotten involved in such drama since founding Potomac Economics in 2001 after stints at the Department of Energy and FERC.

But like Bowring, he has not been shy in criticizing the grid operators that hired him.

Patton’s first client was NYISO, followed in 2003 by ISO-NE and ERCOT in 2005. His firm also has done work for CAISO and SPP. It employs more than two dozen employees, most in its Fairfax, Va., headquarters, with several others in Texas and at MISO headquarters.

The firm’s role varies by region. At ISO-NE, for example, the internal monitoring staff of 20 handles day-to-day monitoring and market power mitigation; produces monthly, quarterly and annual markets reports assessing market competitiveness and making recommendations; and conducts investigations of participant behavior and refers violations to FERC’s Office of Enforcement. Patton’s firm produces monthly and quarterly reports for internal use and an annual public assessment critiquing market performance and making recommendations.

The company provides virtually all monitoring for MISO, NYISO and ERCOT. (The monitors work in ERCOT’s headquarters in Austin.)

New York shifted to an external monitor — from an internal MMU with an external market adviser — after FERC Order 719 in 2008. (See Order 719: FERC Balanced MMU Independence against RTO Autonomy.)

All recommendations from Potomac are considered in the NYISO’s annual project prioritization, a stakeholder process in which costs and benefits are weighed to determine the highest priority projects for the upcoming year.

Recommendations

It can take a while for monitors’ recommendations to result in changes — if ever. When MISO did a periodic review of Patton’s recommendations last August, 22 were pending, some dating back to 2005. (See What Happens to All Those MISO Market Monitor Recommendations?)

As of March, about one-quarter of Bowring’s recommendations between 1995 and 2015 had been fully adopted by PJM. (See Bowring Urges Return to ‘Fundamentals.’)

“This is the one job I can think [of] where an economist can not only just observe something they have no control over, but observe, draw conclusions and contribute to improving the performance of the market by making recommendations,” Patton said in an interview in his office. That, he said, “is extremely satisfying.”

“Because we’re independent of the RTO and the participants and FERC, we are in the position to be completely objective about what we see, what we think is right,” he continued. “We have no client that has an interest that we need to worry about. Our client is the market and our objective is to maximize the competitiveness and the efficiency of the market.”

Virtues of Independence

The RTO itself, Patton notes, is one of the entities the monitor is charged with policing. “Nobody affects the market more than the RTO does, with the decisions that they make as they operate the market; the reliability actions they take; the parameters they set in the software. And a lot of those actions are nonpublic; they can’t be observed by participants. So I’ve always viewed one of the most important jobs we have is to monitor what the RTO is doing and ensure that the RTO is following its own Tariff and not exceeding the authority provided under the Tariff, and not engaged in actions that could conceivably be deemed manipulative. … I don’t know how you would do that effectively as an internal market monitor.”

Patton said that independence also allows him to take positions that may be unpopular with stakeholders.

“We can get out in front and propose things that the stakeholders might come around [to], like the sloped demand curve, or that FERC, frankly, might take up and compel the RTOs to address,” he said.

Patton said internal MMUs are subject to what he called the “the customer satisfaction conflict.”

“Because RTOs are voluntary and FERC has not enforced a very high standard on entities that want to leave RTOs or switch RTOs, the RTOs have a pretty strong incentive to make their customers happy. Generally, that’s a really good thing. But a lot of what you do as a market monitor may make individual customers or groups of customers very unhappy,” Patton said.

Indeed, SPP saw Entergy spurn it for MISO in 2014, after acting as the company’s independent coordinator of transmission for more than seven years. MISO member American Transmission Systems Inc. moved to PJM in 2009, followed a year later by Duke Energy Ohio and Duke Energy Kentucky. Just last month, Dynegy called on Illinois legislators to approve a bill that would move Central and Southern Illinois to PJM from MISO. (See Dynegy Introduces Bill to Move All of Ill. Into PJM.)

“So I think it’s a benefit for the RTO and for us to be independent,” Patton continued. “If [the monitor] is a group of employees of the RTO, then it’s pretty easy for the customers to be upset with the RTO when something happens that they’re not happy with. So that conflict is nearly completely resolved by having the market monitor be independent.”

Patton has demonstrated his independence repeatedly in his criticism of MISO’s capacity market.

Most recently, he criticized the three-year forward capacity auction MISO has proposed for Southern Illinois’ Zone 4. (See MISO Board Orders Negotiation in Longtime Auction Disagreement.) ISO-NE and PJM use a similar construct.

“The economic theory underlying a three-year forward procurement is not sound,” he said. “The notion that … new participants can offer efficiently in that auction and have that guide their decision to invest when you’re giving them a one-year contract on a 40-year asset is” unproven.

He has long proposed that MISO switch from a vertical to a sloped demand curve.

At MISO’s Annual Meeting last June, Patton engaged in a debate with board members Michael Curran, Judy Walsh and Paul Feldman over the issue. (See MISO Monitor Debates Capacity Rules with Board.)

At the end of the meeting Curran thanked Patton for his analysis, but couldn’t resist a little jab. “You’re going to have a sloped demand curve on your tombstone.”

“Cause somebody’s going to kill me?” Patton responded, laughing nervously.

“No,” Curran said. “This is the Midwest. These are nice people.”

– Tom Kleckner, William Opalka and Amanda Durish Cook contributed to this article.