times, market prices can elicit demand response from certain customers
who are equipped to respond and, thus, help balance the system. When
bid and offer caps are in place, however, it is not always possible to
elicit the optimal level of demand or generator response.
    109. Some commenters argue that certain barriers to demand response
remain and that the Commission should not undertake any reform until
such barriers are removed. The Commission is taking several important,
concrete steps in this rulemaking to eliminate remaining barriers to
demand response that are indicated by the existing record to ensure
comparable and fair treatment of demand response resources. We
recognize, however, that some barriers may remain. That is why we are
requiring each RTO or ISO, as explained above, to undertake a further
study of this issue and report back to the Commission. However, even if
some barriers remain (certain of which may be subject to state
jurisdiction, not our jurisdiction), price remains an important factor
in encouraging demand response. Without prices that reflect the true
value of energy, we cannot expect the full integration of demand
response into organized markets. We therefore do not believe that
reforms in this area should be delayed until every barrier to demand
response, whether retail or wholesale, technological or regulatory, is
identified and addressed. We have, however, included as a primary
criterion for approving price reform during periods of operating
reserve shortage an adequate record demonstrating that provisions exist
for mitigating market power and deterring gaming behavior. These could
include, but are not limited to, use of demand resources to discipline
bidding behavior to competitive levels during periods of operating
reserve shortages.
    110. We recognize that not all customers are at present equipped to
respond to scarcity pricing. Nevertheless, putting rules in place that
allow the fraction of the load currently able to respond can have a
very positive effect on the market and help reduce prices for all.\104\
Further, with the modifications that this proposal anticipates, more
buyers would find it worthwhile to invest in technologies that allow
them to respond to prices. This group could include not only large
manufacturers and others buying directly from the RTO or ISO market,
but also ARCs, and LSEs which can implement retail demand response
programs designed to reduce load during reserve shortages.
---------------------------------------------------------------------------

    \104\ See 2006 FERC Staff Demand Response Assessment at 7. As
reported in the 2006 FERC Staff Demand Response Assessment, as
little as five percent of load responding to price may discipline
market prices.
---------------------------------------------------------------------------

    111. The Commission's proposed reforms are also intended to
increase reliability. Our proposal is limited to periods of true
scarcity (i.e., when there is a shortage of operating reserves). We
have a duty to implement rules that ensure adequate supplies. If the
price of energy during these periods is

artificially constrained, demand cannot respond efficiently and
therefore the likelihood of involuntary curtailments is increased.
Thus, demand resources may be a low cost resource that can be used to
meet operating reserves requirements at the lowest total cost of
maintaining reliability. Furthermore, by artificially capping prices,
the price signals necessary to attract new entry by both generation and
demand resources are muted and long-term resource adequacy is harmed.
    112. This is not merely a theoretical problem. In regions such as
PJM and New England, the Commission has found in prior orders that
existing energy and capacity markets did not encourage sufficient new
entry and that these regions therefore faced serious reliability
problems.\105\ The Commission adopted forward capacity markets in those
regions to avoid the threats to reliability and the real costs to our
economy of inadequate generation and demand resources. The reforms we
propose here can help to avoid these problems in other regions.
Moreover, as we explain below, in regions that already have such
capacity markets, the reforms proposed here can reduce the level of
revenues that must be recovered in such capacity markets.
---------------------------------------------------------------------------

    \105\ Devon Power, LLC, 115 FERC ] 61,340, order on reh'g, 117
FERC ] 61,133 (2006), appeal pending sub nom. Maine Pub. Utils.
Comm'n v. FERC, No. 06-1403 (DC Cir. 2007); PJM Interconnection,
LLC, 117 FERC ] 61,331 (2006).
---------------------------------------------------------------------------

    113. Some commenters appear to misunderstand our proposal and
suggest that we are proposing to lift the caps on generation in every
organized market. This is not correct. Only one of our proposals would
lift price caps on generators bidding energy into organized markets.
The other three would not do so, but rather would seek to better
reflect the value of energy during times of scarcity through other
means.
    114. In regions that have already adopted forward capacity markets,
the lifting of such price caps on energy would primarily shift revenues
from capacity markets to energy markets. In New England and PJM, the
revenues collected by generators in the energy market are deducted from
the revenues that need to be recovered in the capacity markets.
Moreover, by shifting the price signals from capacity markets to energy
markets, the Commission is encouraging greater demand response, as
demand response may face fewer barriers to participating in energy
markets than forward capacity markets.
    115. Finally, and most importantly, we are not proposing to change
the rules in each region without regard to the specific circumstances
facing that region. As we explain below, each region will be permitted
to demonstrate that its current rules do not need to be reformed
because they already adequately reflect the value of energy during
periods of scarcity.
    116. Other commenters raise market power concerns. We agree that we
have a duty to guard the consumer against exploitation by sellers with
market power and we will fulfill that duty. As we explain below, we are
proposing that market power issues be adequately addressed before any
reforms in this area are adopted.
    117. We now explain our proposal for reform in this area. We
propose to require each organized market to make a compliance filing,
within six months of a final rule in this proceeding, proposing any
necessary reforms to ensure that the market price for energy accurately
reflects the value of such energy during periods of scarcity (i.e., an
operating reserve shortage). Because there are regional differences in
market design, we will not mandate any one type of reform in this area.
Rather, each region may propose one of the four approaches described in
the ANOPR (and summarized further below) or it may propose a different
approach. Alternatively, a region may demonstrate that its existing
market rules already reflect the value of energy during periods of
scarcity and therefore do not need to be reformed.
    118. In recognition of the concerns of many commenters, we also
propose to adopt further requirements to ensure that any reforms in
this area are supported by adequate factual support and show how they
are designed to protect consumers against the exercise of market power.
First, each RTO or ISO proposing to reform or demonstrate the adequacy
of its existing market rules in this area must provide an adequate
factual record for the Commission to evaluate its proposal.
Specifically, the RTO or ISO should provide historical evidence in its
region regarding the interaction of supply and demand during periods of
scarcity and the resulting effects on the market price for energy. To
the extent this evidence indicates that the region's market rules are
inadequate during these periods, the RTO or ISO must then explain and
support why its proposed reforms are tailored to address those
inadequacies. This factual record will allow the Commission to
discharge its duty to ensure that any reform is necessary and narrowly
tailored to address the circumstances in that region.
    119. As a general matter, we will consider the factual record
compiled by the RTO or ISO to determine whether its proposal, or its
demonstration as to its existing market rules, would:
     Improve reliability by reducing demand and increasing
generation during periods of operating reserve shortage;
     Make it more worthwhile for customers to invest in demand
response technologies;
     Encourage existing generation and demand resources needed
during an operating reserve shortage to remain in business;
     Encourage entry of new generation and demand resources;
     Provide comparable treatment and compensation to demand
resources during periods of operating reserve shortages; and
     Have provisions for mitigating market power and deterring
gaming behavior, including, but not limited to, use of demand resources
to discipline bidding behavior to competitive levels during periods of
operating reserve shortages.
    120. We request comment on whether these criteria are appropriate
and whether there are additional criteria that we should consider in
evaluating a proposal for pricing during a period of operating reserve
shortage by RTOs and ISOs.
    121. Second, the Commission will require any RTO proposing reform
in this area to address the adequacy of any mitigation measures that
would be in place during periods of operating reserve shortage. We
recognize that many commenters have raised market power concerns and we
take those concerns seriously. However, we note that enhanced demand
responsiveness and increased entry by generators can help to mitigate
seller market power by lowering market prices.\106\ Moreover, we note
that generator bid and offer caps are not increased in three of the
four options proposed.\107\ These caps provide further protection
against the exercise of seller market power. Further, the Commission
notes that other market power mitigation measures remain in

place during times when operating reserves are insufficient. For
example, conduct and impact tests are applied in ISO-NE, NYISO, and
Midwest ISO. A pivotal supplier test is used in PJM. PJM and CAISO
mitigate bids by generators chosen out of merit order. Moreover, the
Commission intends to closely monitor market behavior during periods of
operating reserve shortage to ensure that market participants are
following market rules and to guard against the exercise of market
power.
---------------------------------------------------------------------------

    \106\ See B.F. Neenan et al., Neenan Associates, 2004 NYISO
Demand Response Program Evaluation, at E-5, (Feb. 2005); David B.
Patton, Potomac Economics, 2006 State of the Market Report--The
Midwest ISO, at 44 (May 2007).
    \107\ In the first approach, bid and offer caps would increase
for both sellers and buyers. In the second approach, bid and offer
caps for buyers would be increased, but bid and offer caps for
sellers would remain in place. In the third approach, based on a
demand curve for operating reserves, bid and offer caps would remain
in place for both sellers and buyers. In the fourth approach (which
proposes that payments to participants in an emergency demand
response program could set the market-clearing price), bid and offer
caps would again remain in place for both sellers and buyers.
---------------------------------------------------------------------------

    122. In addition, to ensure that we have an adequate record on the
issue of market power mitigation, we propose to solicit the views of
the Independent Market Monitor for each RTO or ISO region on any
proposed reforms in this area.
    123. We now briefly summarize the four approaches discussed in the
ANOPR and referred to above. As noted, however, these are not the only
approaches that may be considered. Under the first approach, RTOs and
ISOs would increase the energy supply offer caps and demand bid caps
above the current levels only during an emergency. For example, if
operating reserves drop below levels required in mandatory reliability
standards, then bid caps would be allowed to rise above existing caps.
As we described above, increasing energy supply offer and demand bid
caps would allow the market to clear at a price above the current (or
non-emergency) cap.\108\ Customers and LSEs could then decide whether
to purchase energy at the higher price, and those who place a higher
value on energy could continue to buy it while those who do not value
it as highly could reduce their demand. Thus, this proposal would allow
supply and demand to operate more efficiently to allocate limited
supply to those who value it the most.
---------------------------------------------------------------------------

    \108\ Under this proposal, the price and bid caps would be
removed in the real-time market during an operating reserve
shortage, but not necessarily in the day-ahead market. Thus, the
price and bid caps would be removed normally for only a fraction of
the spot market. In a severe shortage when the system operator is
aware that the day-ahead market will produce insufficient generation
for day-ahead energy and operating reserves, the price and bid caps
would also be removed for the day-ahead market.
---------------------------------------------------------------------------

    124. Under the second approach, RTOs and ISOs would increase bid
caps above the current level only for demand bids (i.e., the buyers'
offers to purchase a certain amount of energy at a given price) while
keeping generation bid caps in place. That is, a buyer would be allowed
to inform the RTO or ISO about how much energy it would purchase at
various prices above the current bid caps. These demand bids would be
allowed to set the market price if they clear the market. As with the
other approaches, the higher market price under this approach would
create an incentive for all buyers to lower their demands during an
emergency. Demand that is price-sensitive would be reduced until
available supply can meet the demand plus the need for operating
reserves. This proposal does not change any rules that govern how
demand response resources operate in the market.\109\
---------------------------------------------------------------------------

    \109\ We clarify that this approach refers to demand, not demand
response. That is, this proposal allows a buyer to submit a bid to
purchase energy at a price that exceeds the current bid cap. This
proposal in no way affects demand response resources that
participate in a program where they are paid some amount of money to
reduce their consumption.
---------------------------------------------------------------------------

    125. The third approach is for an RTO or ISO to establish a demand
curve for operating reserves. The RTO or ISO would establish market
rules that set real-time prices at specific pre-determined values
(typically above the market-wide offer and bid caps) during an
operating reserve shortage. The price level would increase with the
severity of the shortage. This approach will ensure that market prices
reflect tight conditions on the grid without altering any of the market
power mitigation restrictions on either supply offers or demand bids.
The Commission has already approved this option in the NYISO and ISO-NE
markets.\110\ These existing programs for pricing during reserve
shortages have been implemented and activated during periods of
operating reserve shortage in these regions. Moreover, the exposure to
higher prices would increase the incentive for load to engage in
hedging activities, and higher prices during shortages should attract
new generation. As long as the prices that are implemented during
reserve shortages are based on costs relevant to the market (such as
the cost of new peak generation entry), and the particular
characteristics of RTO and ISO regions, demand curves for operating
reserves should induce sufficient supply and demand responses. A
properly designed demand curve for operating reserves should also
alleviate concerns about administratively determined prices. As noted
above, the demand curve is a reflection of the costs of entering the
energy market and indicates the prices suppliers would expect to be
paid to provide that energy to the market. Thus, while the demand curve
is administratively determined, it is based on market conditions.
---------------------------------------------------------------------------

    \110\ The Commission approved market rules for NYISO and ISO-NE
that include a demand curve for operating reserves that sets the
real-time market price when operating reserves are low. New York
Indep. Sys. Operator, Inc., 106 FERC ] 61,111 (2004); New England
Power Pool and ISO New England Inc., 115 FERC ] 61,175 (2006). See
David B. Patton & Pallas LeeVanSchaik, 2006 Assessment of the
Electricity Markets in New England (June 2007); David B. Patton &
Pallas LeeVanSchaik, 2006 State of the Market Report New York ISO
(July 2007).
---------------------------------------------------------------------------

    126. Under the fourth approach, an RTO or ISO would amend its
market rules to set the market-clearing price for all supply and demand
response resources dispatched equal to the payment made to participants
in an emergency demand response program.\111\ Since the emergency
demand response programs are only called during an emergency when
demand needs to be reduced quickly, they should be the marginal
resource and set the market-clearing price. Without such a rule, demand
response payments are made to those demand response resources that
respond to the RTO's or ISO's call to reduce load, yet prices are still
set by the generation resource with the highest running costs (or at
the price cap). This proposal would set the market-clearing price by
the actual marginal reliability resource, the demand response resource.
For example, if participants in emergency demand response programs were
paid $500/MWh to reduce their consumption when directed, then the $500/
MWh payment would set the market-clearing price in the zones where the
program was active.
---------------------------------------------------------------------------

    \111\ RTOs and ISOs would have to amend their market rules on
unit commitment and settlement to adjust wholesale energy prices
outside the normal clearing process.
---------------------------------------------------------------------------

    127. This rulemaking approach to demand response is directed at all
RTOs and ISOs to ensure that all meet certain basic demand response
goals. However, we do not intend to alter current RTO and ISO shortage
pricing programs if the compliance filings satisfy us that the current
programs meet the intent of this requirement. Some RTOs and ISOs have
already dedicated considerable resources to develop various shortage-
pricing programs. These programs have been developed through
established stakeholder processes in the RTOs and ISOs and have been
approved by the Commission and determined to be just and reasonable.
Thus, the requirement proposed here may be satisfied by a filing
demonstrating that the RTO or ISO already has a Commission-approved
approach for pricing during periods of operating reserve shortage that
meets the requirements previously discussed (i.e., in P 117, 118 and
120).
    128. Each RTO or ISO may also consider a ``phase-in'' of its
specific

emergency pricing method, over a period of years (e.g., three years).
This phase-in period can gradually introduce customers to price
increases during an emergency and allow them to develop ways to reduce
demand during an emergency to avoid high prices. We note that the
phase-in may be linked to key factors such as the deployment of the
advanced metering needed to implement their proposed method, provided
the phase-in period is not protracted. However, the full deployment of
advanced metering is not a requirement for the implementation of
emergency pricing as price and demand responsiveness can be achieved
without such a prerequisite.

B. Long-Term Power Contracting in Organized Markets

    129. In the ANOPR, the Commission offered for comment three
proposals intended to facilitate long-term contracting in organized
markets, along with questions about whether to modify Electric
Quarterly Reports (EQR) data requirements to facilitate long-term
contracting. Following review of the comments, the Commission proposes
to require that ISOs and RTOs dedicate a portion of their Web sites for
market participants to post offers to buy or sell electric energy on a
long-term basis. The Commission will consider reasonable additional
steps in response to comments on this NOPR, and continues to encourage
ISOs and RTOs to work within their authorities with stakeholders to
facilitate long-term power contracting.
1. Background
    130. Long-term power contracts are an important element in a
functioning electric power market. Forward power contracting allows
buyers and sellers to hedge against the risk that prices may fluctuate
in the future. Both buyers and sellers should be able to create
portfolios of short, intermediate, and long-term power supplies to
manage risk and meet customer demand. Long-term contracts also improve
price stability, mitigate the risk of the abuse of market power, and
provide a platform for investment in new generation and transmission.
    131. As the Commission noted in the ANOPR, an organized market
region naturally should facilitate long-term contracting by eliminating
pancaked rates for long distance power sales, eliminating loop flow
problems within its footprint, and ensuring reliable transmission
operation over a large area. RTO and ISO transmission services also
expand the size of the markets available to buyers and sellers of long-
term power contracts, and provide independent and unified transmission
scheduling and operation services over a large area.
    132. While most of the comments submitted in response to the ANOPR
and testimony from parties at the Commission's technical conference on
May 8, 2007 agree as to the importance of long-term contracts, opinions
vary as to the extent of a problem with long-term contracts in the
market and its causes. Many customers argue that issues of market
design and over-reliance on the spot market have driven up prices,
making long-term contracting difficult. On the other hand, many power
sellers believe that markets are operating well, but parties are unable
to reach long-term contracts due to differing price expectations and
differing assessments of long-term risk.
    133. The Commission has already taken action in other areas to
facilitate long-term contracting. In Order No. 681, the Commission
adopted a Final Rule on long-term transmission rights for organized
market regions designed to assure availability of long-term
transmission at a predictable cost.\112\ The Commission then adopted
transmission planning reforms in Order No. 890 to provide an open and
transparent process for wholesale entities and transmission providers
to plan for the long-term needs of their customers. Interconnection
rules for large, small and wind generators in Order Nos. 2003, 2006 and
661 have improved the interconnection process and provide for
interconnection with network integration service to facilitate long-
term reliance on new generation.\113\ The Commission has also reformed
capacity markets in several regions to shift reliance from short-term
purchases to forward markets held sufficiently in advance of delivery
(e.g., three years) to be more consistent with the time necessary to
construct new generation.\114\
---------------------------------------------------------------------------

    \112\ Long-Term Firm Transmission Rights in Organized
Electricity Markets, Order No. 681, FERC Stats. & Regs. ] 31,226
(2006), order on reh'g, Order No. 681-A, 117 FERC ] 61,201 (2006).
    \113\ Standardization of Generator Interconnection Agreements
and Procedures, Order No. 2003, FERC Stats. & Regs. ] 31,146 (2003),
order on reh'g, Order No. 2003-A, FERC Stats. & Regs. ] 31,160,
order on reh'g, Order No. 2003-B, FERC Stats. & Regs. ] 31,171
(2004), order on reh'g, Order No. 2003-C, FERC Stats. & Regs. ]
31,190 (2005), aff'd sub nom. Nat'l Ass'n of Regulatory Util.
Comm'rs v. FERC, 475 F.3d 1277 (DC Cir. 2007); Standardization of
Small Generator Interconnection Agreements and Procedures, Order No.
2006, FERC Stats. & Regs. ] 31,180, order on reh'g, Order No. 2006-
A, FERC Stats. & Regs. ] 31,196 (2005), order granting
clarification, Order No. 2006-B, FERC Stats. & Regs. ] 31,221
(2006), appeal pending sub nom. Consolidated Edison Co. of New York,
Inc., et al. v. FERC Docket No. 06-1018, et al; Interconnection for
Wind Energy, Order No. 661, FERC Stats. & Regs. ] 31,186, order on
reh'g, Order No. 661-A, FERC Stats. & Regs. ] 31,198 (2005).
    \114\ Devon Power, LLC, 115 FERC ] 61,340, order on reh'g, 117
FERC ] 61,133 (2006), appeal pending sub nom. Maine Pub. Utils.
Comm'n v. FERC, No. 06-1403 (DC Cir. 2007); PJM Interconnection,
LLC, 117 FERC ] 61,331 (2006).
---------------------------------------------------------------------------

2. The Need for Commission Action
    134. As noted above, long-term power contracts are an important
element of a working market. They enable buyers and sellers to manage
risks, they promote stability in pricing, and they provide a solid
foundation for the financing of new generation. Despite this
importance, both buyers and sellers perceive that it is increasingly
difficult to enter into long-term contracts, and that fewer long-term
contracts are being signed as a result.
    135. The Commission believes that further transparency in long-term
electric energy markets would facilitate efforts by both sellers and
buyers to incorporate long-term contracts as an essential part of their
energy portfolios. This is especially true for new market participants
that may not be aware of the full range of contract options available
to them, including the full range of potential contract counterparties.
During the panel on long-term contracting at the second Commission
competition conference, a representative from PJM stated that he had
spoken to what he termed ``smaller players'' who indicated that they
were willing to contract for power but were unaware of who the
available counterparties were.\115\ These ``smaller players'' said that
they would be interested in a bulletin board on the PJM Web site that
would facilitate networking.\116\
---------------------------------------------------------------------------

    \115\ Transcript of Conference at 187, Conference on Competition
in Wholesale Power Markets, Docket No. AD07-7-000 (May 8, 2007).
    \116\ Id.
---------------------------------------------------------------------------

    136. While the market has the most important role to play in
disseminating information, an RTO or ISO can play an important role in
promoting greater transparency and liquidity in long-term power
markets, and thus help reduce possible over-reliance on its spot
markets. The information systems it operates are well suited for making
such information available to the parties in its region.\117\ As
discussed below, several commenters support having RTOs and ISOs
provide a section of their Web sites for a long-term contract bulletin
board, which they believe would be a useful tool in assisting parties
in finding interested

counterparties and facilitating long-term contracts.
---------------------------------------------------------------------------

    \117\ See id. at 117.
---------------------------------------------------------------------------

    137. In light of these comments and our own observation, the
Commission will take action in this area. We do so because of the
importance of long-term contracts to a working market and because we
believe greater transparency in the market will facilitate such long-
term contracts. We therefore propose that regional organizations play a
supporting role in encouraging voluntary contracting by providing an
online forum in which potential buyers and sellers may exchange
information.
3. Preliminary Proposals in the ANOPR
    138. Given the importance of long-term contracts, in the ANOPR the
Commission requested comment on any concrete steps it could take to
facilitate voluntary long-term power contracting in organized market
regions.\118\ Specifically, the Commission solicited comment on whether
it should encourage greater market transparency by requiring RTOs and
ISOs to post information that could facilitate long-term contracts,
such as aggregate information on long-term contract prices and
quantities, and if so, how the information could be reported so that it
protects the confidentiality of individual contracts. The Commission
also asked whether disseminating other information, such as estimates
of transmission constraints and long-term congestion costs, would be
helpful to long-term contracting.
---------------------------------------------------------------------------

    \118\ The Commission noted, however, that it was mindful of the
limits of its jurisdiction in seeking comment on this issue, as the
Commission cannot compel buyers and sellers to enter into long-term
contracts. The Commission also noted that the purchasing practices
of LSEs are often dictated by state policies, not those of this
Commission.
---------------------------------------------------------------------------

    139. The Commission also solicited comment on whether it should
require or encourage efforts to develop new standardized forward
products and whether standardized products would facilitate long-term
contracting. The Commission inquired about what role it should play,
whether the Commission should encourage RTOs or ISOs to play an active
role in this area (or whether that would place them in a position of
undertaking commercial functions), and whether this was a role better
played by NAESB or other industry groups.
    140. Third, the Commission asked whether it should require ISOs and
RTOs to dedicate a portion of their Web sites for market participants
to post offers to buy or sell power long-term. The Commission asked
whether this proposal would prove helpful, or whether it was a service
that would be better provided by the market.
    141. Finally, the Commission requested comments on whether it
should consider any modification of the data requirements of the EQR-
for example, to report the start date, term, and end date of long-term
power contracts-to provide information that would make transparent the
average prices of long-term power contracts of various terms and
vintages.
4. Comments on the ANOPR Proposals and Questions
    142. Commenters filed extensive comments agreeing with the
Commission on the importance of long-term contracts in a functioning
market. They differ, however, on the nature and extent of the problems
with long-term contracting, what measures would best address the
problems, and whether the Commission should attempt to deal with the
various problems by requiring RTO or ISO actions.
    143. Most commenters recommend against most of the actions proposed
by the Commission in the ANOPR, which address the problems through
regulations applicable to RTOs or ISOs. Some of these commenters argue
that market participants and the private sector should address concerns
over long-term contracting opportunities, while others argue that the
Commission can improve long-term contracting opportunities by
addressing larger structural issues, identified below.
    144. The preliminary proposal to require RTOs and ISOs to reserve a
section of their Web sites for parties to post offers to buy or sell
power under long-term contracts has the most support, although most
commenters do not necessarily support making this a regulatory
requirement. A minority of commenters support this proposal--some
strongly--including several RTOs and ISOs, state regulators, wholesale
sellers, many small wholesale buyers, and Joint Consumer Advocates.
Commenters indicate that such a Web site would be useful for many
market participants, particularly new market participants, and would
help facilitate long-term contracting. Midwest ISO and PJM indicate
that they have already begun working on posting such discussion boards
on their Web sites, and other RTOs and ISOs such as SPP indicate
support for providing space on their Web sites to post such offers.
    145. Commenters opposed to this proposal indicate that the market
already adequately performs this function, and that the RTOs and ISOs
should be able to determine on their own whether to have a Web site
section for bulletin board postings. EEI and Duke Energy note that PJM
once had a bulletin board for similar purposes that fell into disuse,
likely due to a lack of interest from market participants. Many
commenters, such as EPSA, argue that RTOs and ISOs should be allowed to
determine, in consultation with stakeholders, what to post on their Web
sites. Some commenters state that legal issues may arise from having
RTOs or ISOs post information, including concerns over confidentiality
and potential liability for the posting of incorrect information, and
that these issues should be addressed before any action is taken. The
New England Conference said that it supports a regional, voluntary
solution, where regional working groups would be created to discuss
measures to increase information sharing.
    146. Commenters offer little support for the ANOPR proposal to
require RTOs and ISOs to develop new standardized forward products.
Those few commenters supporting the proposal believe that new products
would assist customers in developing long-term contracts. Some
commenters, such as the New York PSC and NRG, offer qualified support
for the concept of improved forward products, but state that the
Commission should encourage RTO or ISO participation in developing such
products rather than require their development by the RTOs and ISOs
themselves.
    147. A large majority of commenters oppose this proposed
requirement. They say that the market already supplies standardized
products, and that it is better equipped to do so than RTOs or ISOs.
EEI notes that it already has a process for developing standardized
products that involves working with market participants to adjust to
changes in the market. Many commenters also note that long-term
contracts vary considerably from transaction to transaction, making
standardized products difficult to develop unless they are quite
general and so less useful than they are for short-term transactions.
Finally, some commenters note that this proposed requirement would be
an undue burden to ISOs and RTOs.
    148. Most commenters argue strongly against adopting the ANOPR's
preliminary proposal to require ISOs and RTOs to post information on
long-term contract prices and quantities. They argue that this proposed
requirement is unnecessary, is possibly counterproductive, and would
create additional expense for the ISO or RTO. A few, such as BlueStar
and DC Energy, support the proposal, arguing that it would increase
transparency in the market, which would lead to greater liquidity and
increased long-term

contracting. Some ISOs and RTOs also indicate that they would be
willing to post information if directed to do so, but that
confidentiality concerns would need to be addressed. Many commenters
think that the requirement would not be useful because of the wide
variation in long-term contract provisions and the time lag between
contracting and posting of the information.\119\ Others, such as the
OMS, argue that the data collection requirement would unduly burden
RTOs and ISOs. The burden would be unnecessary, according to PG&E,
PSEG, Allegheny, Ameren and others, because the market and trade press
already provide sufficient data. Finally, many commenters point to a
concern over the confidentiality of data and the possibility that
posted data could be used to game the market.
---------------------------------------------------------------------------

    \119\ See Pepco at 13; New England Power Generators at 8; Dynegy
at 3.
---------------------------------------------------------------------------

    149. Only a few commenters address the Commission's request for
comments on whether we should consider modifications to the information
collected on long-term contracts in the EQR. These commenters are
generally opposed to having the Commission modify the EQR data
reporting requirements. Although SUEZ Energy supports increased
reporting requirements, arguing that it would create increased
transparency for providers of retail service, most commenters believe
that the information in the EQR is already sufficient and that any new
information requirements could have negative effects on confidentiality
or markets. For instance, Old Dominion notes that modifying EQR data
could reveal competitive information and result in reduced forward
liquidity for physical transactions.
    150. The Commission also requested comments on additional steps
that it could take to promote long-term contracting opportunities. Many
commenters point to the importance of contract certainty, long-term
stability of market rules and regulatory policies, and proper market
design in supporting long-term contracting, although comments vary on
how best to provide for these elements. For instance, Old Dominion
argues that the Commission should reaffirm its commitment to
incremental changes to market design to prevent instability. PSEG notes
that the Commission should resist changing tariffs and should not
revise contracts under FPA section 206, where either the buyer or
seller has miscalculated risks.
    151. A majority of commenters indicate that structural impediments
to long-term contracting prevent market participants from fully
utilizing long-term contracts as part of their energy portfolios.
Impediments cited include differences between buyers and sellers in
assessing the appropriate long-term price and assessing long-term
risks, over-reliance on spot markets, market design, and regulatory
uncertainty. Many commenters, such as FirstEnergy, point to buyers' and
sellers' inability to agree on a long-term price as the real problem
with long-term contracts. Some commenters suggest that the Commission
should review over-reliance on the spot markets, which, they assert,
affects forward prices and creates a disincentive for parties to engage
in long-term deals.
    152. Commenters also propose a variety of more fundamental
approaches for the Commission to consider for dealing with long-term
contracting. Some commenters argue that the Commission should take a
more sweeping look at the markets as a whole, noting that problems with
long-term contracting are merely a symptom of market inefficiency.
These include a request for an investigation of RTO markets and
mandating long-term contracting through dedicating portions of
transmission lines for long-term arrangements or requiring entities to
have a percentage of their portfolios as long-term contracts.
    153. Two commenters, American Forest and Portland Cement
Association, et al., include fairly detailed proposals to address
problems with the incentives for long-term contracting. American
Forest's proposal, the Financial Performance Obligation (FPO), appears
to require every generating unit that receives a capacity payment to
financially guarantee the delivery of energy to the real-time market at
or below a specified strike price in any hour in which it is dispatched
by the RTO to provide service. American Forest maintains that the FPO
would connect capacity and energy markets and would provide a hedge to
load by shifting short-term risk of market volatility in energy markets
to suppliers. It argues that the linked real-time market clearing price
and capacity price that would result from the FPO would provide an
incentive for suppliers to take steps, such as long-term contracting,
to hedge short-term volatility, and prevent suppliers from double
recovering revenues from capacity and energy payments. Portland Cement
Association, et al.'s proposal offers an alternative market design
framework, Forward Capacity and Energy Market, suggesting that a
combination of competitive and administrative procedures could be used
to obtain the lowest-cost combination of fixed and variable costs while
preserving the locational economic signals of Locational Marginal
Pricing. It argues that the proposed framework also would establish
economic incentives for both buyers (e.g., LSEs and large customers)
and suppliers to negotiate long-term bilateral contracts.
    154. A significant number of commenters state that the Commission
should take no action on the long-term contracting topic, but should
instead leave any long-term contracting solution to the market.
5. Proposed Reforms
    155. The Commission proposes to require ISOs and RTOs to dedicate a
portion of their Web sites for market participants to post offers to
buy or sell power on a long-term basis. We are not proposing here the
other potential actions considered in the ANOPR and are not proposing
to address in this docket the other long-term contracting issues raised
by some commenters.
    156. The proposal for an RTO/ISO Web site ``bulletin board'' for
posting long-term offers to sell or buy is designed to facilitate the
long-term contracting process by increasing the transparency of
available sellers and buyers for market participants. Providing a place
for buyers and sellers to offer long-term power transaction
opportunities should alleviate concerns about sellers and buyers being
unable to find one another and should encourage more long-term
contracting and improve efficiency in the market at little cost.
Improving information flow can only increase liquidity among buyers and
sellers. The Commission believes that this requirement will not be
burdensome for ISOs and RTOs to implement.
    157. The Commission does not propose to mandate the specific type
of bulletin board that each ISO and RTO must post, but will require
each to work with its stakeholders in designing a solution that works
for its market participants. We have in mind, however, an RTO/ISO
bulletin board that would allow persons to post offers to sell or buy
without making the RTO or ISO responsible for the content of the
offers. We are encouraged that some ISOs and RTOs have already
undertaken this effort.
    158. The Commission proposes to require ISOs and RTOs to make a
compliance filing within six months of the date of publication of the
final rule in the Federal Register. This filing should explain the
actions the ISO or RTO has taken to comply with the long-

term contracts bulletin board requirement and provide information on
the bulletin board the ISO or RTO has chosen to implement.
    159. The Commission seeks public comment on its proposal not to set
by rule the specific type of bulletin board that each ISO and RTO must
post. This includes comment on whether any features are important
enough to specify generically, such as the structure for the webpage,
the extent to which the ISO or RTO must seek feedback on its web
design, or whether the ISO or RTO or the market participant must post
the information. Further, we seek comment on our assumption that the
costs involved with implementing the proposal are minimal and should be
recovered in the same manner as other Web site costs. In addition, the
Commission solicits comment on the proposal that the RTO or ISO should
not be responsible for the content of the offers on its bulletin board.
Is a Web site that includes a clear disclaimer adequate to protect RTOs
and ISOs from liability, or should the Commission take additional
action? Do market participants that post offers but fail to reach
agreement with counterparties on contract terms and conditions have any
liability issues?
    160. As we noted earlier, PJM recently has conducted a series of
forums on long-term contracts to gather information and facilitate the
exchange of ideas.\120\ We encourage similar efforts by other RTOs or
ISOs, and the ISO/RTO Council. We encourage RTOs and ISOs already
working on solutions to these issues to take appropriate steps to
ensure timely implementation of reasonable solutions as soon as they
are ready. The Commission also directs Commission staff to perform an
analysis of the level of long-term contracting in organized market
regions.
---------------------------------------------------------------------------

    \120\ More information on the PJM forums is available at http://
www.pjm.com/committees/stakeholders/drs/ltc.html.
---------------------------------------------------------------------------

    161. In addition, while we appreciate the proposals of American
Forest and Portland Cement Association, et al. to resolve disincentives
to conduct long-term contracting, we have concerns that various aspects
of the proposals, such as the impact of the proposal on capacity
markets, would require additional development, review and consideration
before it would be ripe for inclusion in a rulemaking. The shift of
revenues from the spot market to some form of forward obligation or
hedging option that could occur with the FPO may well have advantages,
but this shift may create new concerns among LSEs and others about
capacity market operations and price levels. To help develop a greater
level of understanding of the proposals we direct staff to conduct a
technical conference in a separate proceeding to examine the FPO and
Portland Cement Association, et al.'s alternative market designs and
related issues.

C. Market-Monitoring Policies

    162. This section of the NOPR proposes regulations implementing
market monitoring policies.
1. Background
    163. Market monitors have played an integral role in the organized
electric markets since the latter's inception, providing valuable
reporting and analysis services not only to the Commission, but also to
RTOs and ISOs, to market participants, and to state commissions. In
light of their importance, the Commission has required that all RTOs
and ISOs incorporate a market monitoring function.\121\
---------------------------------------------------------------------------

    \121\ Regional Transmission Organizations, Order No. 2000, FERC
Stats. & Regs. ] 31,089 at 31,155 (1999), order on reh'g, Order No.
2000-A, FERC Stats. & Regs. ] 31,092, at 30,993 (2000), aff'd sub
nom. Pub. Util. Dist. No. 1 of Snohomish County, Washington v. FERC,
272 F.3d 607 (DC Cir. 2001).
---------------------------------------------------------------------------

    164. The span of years over which market monitors have now been in
existence has given the Commission and others in the industry a track
record upon which to evaluate the appropriate roles MMUs should play
and the protections that might be adopted to assist them in performing
those roles. In this NOPR, we propose reforms for MMUs designed to
improve their abilities to monitor and report on the operation of
organized wholesale electric markets.
2. Prior Commission Actions Regarding Market Monitoring
    165. The Commission undertook its first generic consideration of
market monitoring in Order No. 2000, which required an RTO to include
market monitoring as one of its minimum functions and to submit a
market monitoring plan as part of its RTO proposal.\122\ The Order did
not, however, impose a specific MMU structure on the RTOs. The
Commission noted in Order No. 2000 that while MMUs were not intended to
supplant Commission authority, they should be designed in such a way as
to provide the Commission with an additional means of detecting market
power abuses, market design flaws and opportunities for improvements in
market efficiency.\123\ The Commission ordered RTOs to incorporate in
their market monitoring plans certain standards to be met by the MMUs,
which included ensuring objective information about the markets that
the RTO operates or administers, proposing appropriate action regarding
opportunities for efficiency improvement, identifying market design
flaws or market power abuses, and evaluating whether market
participants comply with market rules.\124\ The Commission observed
that the information to be gleaned from market monitoring would be
beneficial not only to the Commission, but also to state commissions
and market participants.\125\
---------------------------------------------------------------------------

    \122\ Prior to this first generic consideration of market
monitoring, the Commission addressed market monitoring in connection
with individual RTO/ISO proposals. See Pacific Gas and Electric Co.,
77 FERC ] 61,265 (1996), order on reh'g, 81 FERC ] 61,122 (1997),
order on clarification, 83 FERC ] 61,033 (1998) (requiring the ISO
to file a detailed monitoring plan and listing minimum elements for
such a plan); Pennsylvania-New Jersey-Maryland Interconnection, 81
FERC ] 61,257 (1997) (PJM Formation Order) (requiring PJM to develop
a market monitoring program to evaluate market power and design
flaws).
    \123\ Order No. 2000, FERC Stats. & Regs. ] 31,089 at 31,156.
    \124\ Id.
    \125\ Id.
---------------------------------------------------------------------------

    166. The Commission next addressed the role of market monitors in
its 2003 Order Amending Market-Based Rate Tariffs and
Authorizations.\126\ The Commission clarified the duties of MMUs in
connection with enforcement matters, directing that MMUs refer
compliance issues to the Commission \127\ and limiting direct
enforcement action by the MMUs to objectively identifiable and
sanctioned behavior expressly set forth in the RTO/ISO tariffs.\128\ In
its subsequent Order on Rehearing, the Commission clarified that MMU
personnel were not a substitute for Commission enforcement staff.\129\
Instead, MMUs were to provide information to the Commission and its
staff, so that the Commission could take appropriate action under the
FPA.
---------------------------------------------------------------------------

    \126\ Investigation of Terms and Conditions of Public Utility
Market-Based Rate Authorizations, 105 FERC ] 61,218 (2003) (Market
Behavior Rules Order), order on reh'g, 107 FERC ] 61,175 (2004)
(Market Behavior Rules Rehearing Order).
    \127\ Market Behavior Rules Order, 105 FERC ] 61,218 at P 184.
    \128\ Id. P 182.
    \129\ Market Behavior Rules Rehearing Order, 107 FERC ] 61,175
at P 165.
---------------------------------------------------------------------------

    167. In May of 2005, the Commission issued a Policy Statement on
Market Monitoring Units,\130\ identifying four tasks which MMUs perform
for which they need access to data and other

resources.\131\ In an Appendix to the Policy Statement, the Commission
set forth detailed Protocols for the MMUs to follow in referring
potential tariff or Market Behavior Rule violations to the
Commission.\132\
---------------------------------------------------------------------------

    \130\ Market Monitoring Units in Regional Transmission
Organizations and Independent System Operators, 111 FERC ] 61,267
(2005) (Policy Statement).
    \131\ Id. P 2-3. These functions were: (1) To identify
ineffective market rules and tariff provisions and recommend
proposed rule and tariff changes to the ISO or RTO that promote
wholesale competition and efficient market behavior; (2) to review
and report on the performance of wholesale markets in achieving
customer benefits; (3) to provide support to the ISO or RTO in the
administration of Commission-approved tariff provisions related to
markets administered by the ISO or RTO; and (4) to identify
instances in which a market participant's behavior may require
investigation and evaluation to determine whether a tariff violation
has occurred, or which may be a potential Market Behavior Rule
violation, and immediately notify appropriate Commission staff for
possible investigation.
    \132\ Id. at Appendix A. The Market Behavior Rules extant at the
time of the Policy Statement have since been in part rescinded, with
the remainder codified. See Conditions for Public Utility Market-
Based Rate Authorization Holders, Order No. 674, FERC Stats. & Regs.
] 31,208 (2006) (Order No. 674). Rescinded Market Behavior Rule 2
has been replaced by the Commission's Anti-Manipulation Rules. See
Prohibition of Energy Market Manipulation, Order No. 670, FERC
Stats. & Regs. ] 31,202 (Order No. 670), order denying reh'g, 114
FERC ] 61,300 (2006).
---------------------------------------------------------------------------

    168. In 2006, PJM Interconnection, LLC (PJM) filed proposed
revisions to the MMU sections of its tariff, with the general aim of
conforming its tariff to the provisions of the Policy Statement.\133\
Several parties filed comments, arguing that PJM's tariff should
contain a clear statement of the MMU's independence and should set
forth all the rules relevant to the responsibilities and functions of
the MMU. In the Commission's Order on Rehearing and Compliance Filing,
we noted that these concerns were of a generic nature and not
necessarily limited to PJM.\134\
---------------------------------------------------------------------------

    \133\ PJM Interconnection, LLC, 116 FERC ] 61,038 (2006) (PJM
Tariff Order).
    \134\ PJM Interconnection, LLC, 117 FERC ] 61,263, at P 19
(2006) (PJM Tariff Rehearing Order).
---------------------------------------------------------------------------

3. The Need for Commission Action
    169. The concerns raised by intervenors in the PJM case impressed
upon the Commission the need to undertake a generic examination of
MMUs, to see if their roles could be enhanced so as to improve the
efficiency and transparency of organized wholesale electric markets. To
that end, the Commission announced that we would hold a technical
conference to explore the issues raised by the commenters.\135\
---------------------------------------------------------------------------

    \135\ Id. P 20.
---------------------------------------------------------------------------

    170. The Commission held the technical conference on market
monitoring policies on April 5, 2007. At the conference, the
Commissioners heard from interested commenters on several general
subjects.\136\ Two principal issues received the bulk of attention from
the commenters at the technical conference. Those were: (i) The need
for, and suggested methods of achieving, independence on the part of
MMUs so they can perform their assigned functions; and (ii) the content
and proper recipients of the market data and analysis developed by the
MMUs. These issues are in accord with our own observations of areas
within the market monitoring function that need reform. For that
reason, we have included proposals in this NOPR designed to strengthen
market monitoring and thereby enhance the performance and transparency
of organized RTO/ISO markets.
---------------------------------------------------------------------------

    \136\ These subjects included: the development of the concept
and functions of market monitoring, the MMUs' role with respect to
the Commission, the MMUs' role with respect to ISOs and RTOs, and
the MMUs' role with respect to the various stakeholders such as
states, generators, transmission providers, and customers. See
Second Notice of Technical Conference, Review of Market Monitoring
Policies, Docket No. AD07-8-000 (March 9, 2007).
---------------------------------------------------------------------------

4. Proposed Reforms
    171. The Commission advanced proposals in the ANOPR that responded
to the concerns expressed by commenters at the technical conference and
that reflected the Commission's own observations formed from working
within the framework of the existing market monitoring provisions.
These proposals were designed to strengthen market monitoring by
safeguarding MMU independence and fostering useful and transparent
market analysis. The Commission sought comment on the proposals, which
fell within the two general areas of (i) independence and function and
(ii) information sharing. In this NOPR, the Commission analyzes the
comments received and presents revised proposals.
a. Independence and Function
    172. In the ANOPR, the Commission acknowledged the importance of
independence on the part of MMUs, and stated that there are several
means by which to balance independence and accountability. The
Commission proposed a balanced and flexible approach to the problem
which included oversight protection, tariff safeguards and tools, the
elimination of conflicts of interest, and certain changes in the
functions MMUs are expected to perform. The Commission solicited
comments on the proposed changes.
i. Structure and Tools
(a) Preliminary Proposals in the ANOPR
    173. The Commission declined in the ANOPR to propose a ``one size
fits all'' approach to the structure of MMUs, noting that there was no
appreciable difference among the performance of the market monitors
that could be attributed to whether they were external (an independent
contractor who is hired by the RTO or ISO) or internal (one whose
personnel are employees of the RTO or ISO). Therefore, the Commission
proposed that it be left to the discretion of each RTO or ISO to decide
whether it should have an internal MMU, an external MMU, or a hybrid
MMU (consisting of both an internal market monitor and an external
market monitor).
    174. To ensure that MMUs would have adequate tools with which to do
their job, the Commission proposed requiring each RTO or ISO to include
in its tariff a provision imposing upon itself the obligation to
provide its MMU with access to market data, resources, and personnel
sufficient to enable the MMU to carry out its functions. We also
proposed that RTOs and ISOs include a tariff provision directing the
MMU to report to the Commission any concerns it has with inadequate
access to market data, resources, or personnel, and to describe the
steps it has taken with the RTO or ISO to resolve these concerns.
(b) Comments on the ANOPR Proposals and Questions
    175. The overwhelming bulk of the commenters agreed with the
Commission's proposal and opposed imposition of a ``one size fits all''
approach. A few favored one or the other structure. Exelon, Strategic
Energy, and Suez favored an external model, on the grounds it could
best ensure independence.\137\ NJBPU favored an internal model, at
least with respect to PJM.\138\
---------------------------------------------------------------------------

    \137\ Exelon at 25; Strategic Energy at 13; Suez at 9.
    \138\ NJBPU at 1-2.
---------------------------------------------------------------------------

    176. There was also limited support for an alternative reporting
structure. The Ohio PUC proposed that MMUs report to federal-state
boards,\139\ and the FTC suggested the Commission consider the costs
and benefits of alternative arrangements, which presumably would
involve a structure other than an employment or contractual
relationship between the MMU and the RTO or ISO.\140\
---------------------------------------------------------------------------

    \139\ Ohio PUC at 9-14.
    \140\ FTC at 16-17. No particular alternative arrangement was
suggested.

---------------------------------------------------------------------------

    177. APPA stated that the real issue to be resolved is not
structure but assuring the independence of the MMU. It proposed ``rules
of the road'' to accomplish that objective, most of which have to do
with providing the MMU with adequate tools with which to do its
job.\141\ Joint Consumers Advocates also proposed specific MMU
principles, most involving oversight or tools.\142\
---------------------------------------------------------------------------

    \141\ APPA at 72-73.
    \142\ Joint Consumer Advocates at 16-19.
---------------------------------------------------------------------------

    178. Most commenters supported the Commission's proposal that RTOs
and ISOs include in their tariffs a requirement that they must provide
the MMU with adequate tools with which to do its job.\143\ Some stated
that access to resources must be full and unfettered.\144\ Others,
while generally supporting the proposal, called for budgetary and cost
containment provisions.\145\ The North Carolina Commission proposed
transparency of budget, with any disputes being made subject to
Commission review.\146\ Some commenters proposed that the MMU's offices
be located on the premises of the RTO or ISO.\147\ The PJM MMU argued
for control over its own data repository.\148\ EEI stated it did not
believe a tariff provision requiring the MMU to report to the
Commission any concerns it has with adequacy of resources was needed,
as MMUs are in regular contact with the Commission and can convey any
concerns they may have in this regard.\149\
---------------------------------------------------------------------------

    \143\ See, e.g., Ameren at 36-37; Duke Energy at 20; FirstEnergy
at 10; NYISO at 16; Ohio PUC at 12-14; Portland Cement at 17; Xcel
at 23.
    \144\ American Forest at 45; APPA at 70; The Alliance at 17.
    \145\ EEI at 42; EPSA at 4; Mirant at 11; North Carolina
Commission at 7; Pepco at 15; PJM Power Providers at 8; PSEG at 17;
Reliant at 16.
    \146\ North Carolina Commission at 7.
    \147\ See, e.g., NYISO at 20; North Carolina Commission at 6.
    \148\ PJM MMU at 10.
    \149\ 149 EEI at 43.
---------------------------------------------------------------------------

(c) Commission Proposal
    179. The Commission agrees with the bulk of the commenters that the
nature of the MMU structure is not determinative of either independence
or quality of performance, and proposes that each RTO and ISO decide
for itself, through its appropriate stakeholder process, whether it
will have an external, internal or hybrid MMU structure. The Commission
also declines to remove MMUs from overview by their RTOs and ISOs; the
MMU's principal duties involve monitoring RTO/ISO markets and advising
the RTO or ISO on market performance. The fact that MMUs also have
reporting obligations to outside parties does not change the
relationship they have with the RTOs and ISOs, which are, by Commission
policy, required to maintain a market monitoring function. It is also
doubtful that an alternative outside structural arrangement, such as
reporting to a federal-state board, could as effectively replicate the
existing close exchange of data between the RTO or ISO and the MMU,
which all acknowledge is vital if the MMU is to properly perform its
duties.
    180. The Commission further proposes that each RTO or ISO include
in its tariff a provision imposing upon itself the obligation to
provide its MMU with access to market data, resources, and personnel
sufficient to enable the MMU to carry out its functions. The RTO or ISO
should, in addition, also be mindful of these obligations in developing
its market monitoring budget. Furthermore, to ensure independence of
the MMU and its analyses, the RTO or ISO tariff should specifically
provide that the MMU shall have access to the RTO's or ISO's database
of market information. The tariff should also specify that any data
created by the MMUs, including reconfiguring of the RTO/ISO data, be
kept within the exclusive control of the MMU.
    181. The Commission declines to micro-manage the RTO/ISO
relationships with their MMUs to the extent of requiring that MMU
offices be located on the RTO/ISO premises. We are of the view that
concerns of this type, as well as appropriate budgetary constraints,
are best worked out on an individual basis.
    182. The Commission has reconsidered its ANOPR proposal regarding
inclusion of a tariff provision directing the MMU to report to the
Commission any concerns it has with inadequate access to market data,
resources, or personnel, or to describe the steps it has taken with the
RTO or ISO to resolve these concerns. The inclusion of such a
requirement may suggest that the Commission anticipates non-compliance
on the part of the RTOs and ISOs, whereas the opposite is true.
Furthermore, as EEI notes, adequate mechanisms are already in place for
the MMU to bring any concerns it may have to the Commission's
attention, including the complaint process, referrals to the
Commission's Office of Enforcement, and informal discussions with
Commission staff.
ii. Oversight
(a) Preliminary Proposals in the ANOPR
    183. The Commission noted that an inherent tension exists in a
structure that requires MMUs to report to RTO/ISO management yet, at
the same time, perform evaluations and issue reports that may be
critical of that management. We stated that it could be difficult for
an MMU to discharge these oversight and reporting obligations
effectively unless it had some degree of independence from RTO/ISO
management. The Commission proposed that each RTO and ISO, in addition
to maintaining a market monitoring function, be required to have its
MMU, whether internal, external, or a hybrid combination of the two,
report either directly to the RTO's or ISO's board of directors or
directly to a committee of independent board directors.\150\ The ANOPR
sought comment on the Commission's authority to impose this type of
requirement on RTOs and ISOs, as well as on the proposal itself.
---------------------------------------------------------------------------

    \150\ The ANOPR noted that this policy would mark a departure
from the holding in the PJM Tariff Order. PJM Tariff Order, 116 FERC
] 61,038 at P 38 (2006).
---------------------------------------------------------------------------

(b) Comments on the ANOPR Proposals and Questions
    184. The great preponderance of commenters agreed with the
Commission's proposal, stating that reporting to the RTO or ISO board
would give the MMU more independence than if the MMU were to report to
management.\151\ However, CAISO and NYISO propose that in the case of a
hybrid structure such as theirs (i.e., one which has both an internal,
employee-staffed MMU and an external, non-employee-staffed MMU), the
internal MMU be permitted to report to management, with the external
MMU reporting to the board.\152\ CAISO states that this reporting
arrangement ensures that the chief executive officer is attuned to the
needs of the MMU and that other employees in the organization are
committed to supporting its functions, while NYISO states that the
arrangement enables its internal market monitor to work closely with
the rest of company staff and have greater opportunities to review
real-time market operations. Others suggested that the MMU report to
management for administrative purposes (such as human resources and
payroll).\153\
---------------------------------------------------------------------------

    \151\ See, e.g., BP Energy at 29-30; BlueStar Energy at 6;
Dynegy at 4; EPSA at 45; FirstEnergy at 10; Industrial Consumers at
21; Joint Consumer Advocates at 19; Mirant at 11; NARUC at 10;
NEPOOL Participants at 28; Pepco at 15; Steel Producers at 18.
    \152\ CAISO at 3; NYISO at 26.
    \153\ EEI at 43; SoCal Edison-SDG&E at 10.
---------------------------------------------------------------------------

    185. A few commenters opposed any RTO or ISO reporting requirement
at all, preferring that the MMU report to the

Commission or to a joint federal/state board.\154\ NRECA proposed that
the Commission periodically audit the quality of the MMU's reports and
investigations,\155\ and TAPS proposed that any change in the MMU's
status, such as contract termination or renewal, be reviewed and
approved by the Commission.\156\
---------------------------------------------------------------------------

    \154\ See, e.g., OMS at 14-15; OPSI at 4-6; Ohio PUC at 9; North
Carolina Commission at 6.
    \155\ NRECA at 26.
    \156\ TAPS at 58.
---------------------------------------------------------------------------

    186. Reliant proposed that the MMU must report to a full cross-
section of the board.\157\ Conversely, other commenters felt that
management representatives on the board should be excluded from MMU
oversight.\158\ PJM agreed with the ANOPR proposal, but expressed
concern that the board might be given an oversight responsibility
without the authority to actually oversee the MMU.\159\ PJM states that
any approach that does not place responsibility in the Commission for
the functioning and performance of MMUs, while limiting the RTO's
ability to supervise or oversee the MMU, would ``raise serious legal
questions about the Commission's ability to limit a public utility's
management of its business.'' \160\ This conditional objection was the
only comment that suggested the Commission may not have the authority
to order the proposed reporting relationship.\161\
---------------------------------------------------------------------------

    \157\ Reliant at 16.
    \158\ OPSI at 4-6; Old Dominion at 22.
    \159\ PJM at 22-24.
    \160\ PJM at 24. PJM argues that the Commission does not have
jurisdiction over utility employment relationships or contracts with
service providers, on the grounds these functions do not constitute
``a sale for resale or transmission of electric power in interstate
commerce.'' PJM at n. 41.
    \161\ California PUC did not disagree that the Commission can
require MMUs to report to the RTO or ISO board, but requested the
Commission to set forth the basis for this authority and provide an
opportunity to comment. California PUC at 17.
---------------------------------------------------------------------------

(c) Commission Proposal
    187. The Commission proposes that the MMU, for purposes of
supervision over its market monitoring functions, should report to the
RTO or ISO board rather than to management. The Commission further
proposes that management representatives on the board be excluded from
this oversight function. However, the RTOs and ISOs, should they deem
it appropriate, may have the MMU report to management for
administrative purposes, such as pension management, payroll and the
like. Furthermore, the Commission is sympathetic to the desires
expressed by CAISO and NYISO to retain the advantages they see in their
hybrid reporting structures. Thus, if an RTO or ISO has two market
monitoring bodies, an internal and an external one, the Commission
proposes that the RTO or ISO may have the internal MMU report to
management with respect to both its market monitoring and
administrative functions, and the external MMU report to the board.
    188. The Commission, as noted above, finds little merit in the
suggestions that the MMU report to a body other than the RTO or ISO,
such as to the Commission or to a federal/state board. Commenters
afford no details as to how this structural arrangement could be
achieved, either from an economic, jurisdictional, or practical point
of view, or how such a potentially cumbersome structure as a joint
inter-governmental body could oversee MMUs in a timely and responsive
manner. The Commission itself will be adequately informed of the
results of MMU monitoring through the referral process and through the
various venues for the sharing of market information; this sharing of
market information applies as well to the states and other interested
bodies, who will thereby be adequately apprised of MMU performance and
can bring any concerns they may have in this regard to the RTO or ISO
or to the Commission.
    189. The Commission declines to propose a formal auditing procedure
for MMUs, but expects that their work product will be of the highest
quality. The Commission remains free to undertake an audit in any given
instance, should that appear to be appropriate, and any concerns
regarding the quality of MMU work product can always be brought to the
Commission's attention. The Commission also declines to propose a
blanket requirement that all changes in MMU status, such as contract
termination or renewal, be subject to Commission review and approval.
Although requirements of this type are currently contained in the
contractual arrangements of certain RTOs and ISOs,\162\ the Commission
declines to propose extending this requirement to all RTOs and ISOs, in
accordance with our reluctance to impose a ``one size fits all''
approach in structural areas. We believe the issue should be dealt with
on a case-by-case basis.
---------------------------------------------------------------------------

    \162\ E.g., Midwest ISO cannot terminate its agreement with its
market monitor (an independent contractor) without Commission
approval. Open Access Transmission and Energy Markets Tariff for the
Midwest Independent Transmission System Operator, Inc., Attachment
S-1, FERC Electric Tariff, Third Revised Volume No. 1, Second
Revised Sheet No. 1659 (2005). SPP cannot terminate its agreement
with its external market monitor without Commission approval.
Southwest Power Pool Open Access Transmission Tariff, FERC Electric
Tariff, Fourth Revised Volume No. 1, Attachment AJ, Sec.  11, Second
Revised Sheet No. 699 (2006). The same is true for ISO-NE.
Participants Agreement among ISO New England, Inc. and the New
England Power Pool, et al., Sec.  9.4.5.
---------------------------------------------------------------------------

    190. With respect to PJM's concern that it may be burdened with
oversight responsibility over MMUs without possessing full authority to
carry out that responsibility, the Commission notes that its reporting
proposal does nothing to increase the limitations on an RTO's or ISO's
authority over its MMU. For MMUs that currently report to management,
the proposal merely shifts oversight from management to the board.\163\
Furthermore, the monitoring functions of MMUs affect sales for resale
and the transmission of electric power in interstate commerce, and as
such are properly subject to Commission regulation to ensure MMU
objectivity. As we noted in Order No. 2000,\164\ the Commission has a
responsibility to protect against anticompetitive effects in
electricity markets,\165\ and an independent MMU is an important
element upon which we rely to safeguard such competition. Our proposal
maintains oversight authority within the RTO or ISO, while fostering
MMU independence through the elimination of direct management control.
For these reasons, the Commission believes the proposal strikes the
appropriate balance between MMU independence and RTO/ISO oversight.
---------------------------------------------------------------------------

    \163\ PJM cites Cal. Indep. Sys. Operator Corp. v. FERC, 372
F.3d 395 (DC Cir. 2004), in support of its concern. However, that
case involved FERC's attempt to replace existing CAISO board members
with a slate proposed by an independent search firm. Obviously,
alteration of the very composition of an RTO or ISO board is an
entirely different matter from a requirement that MMUs report to the
board, instead of to management. The latter requirement in no way
interferes with the internal composition of the board. Furthermore,
the cited case noted that if FERC concluded that CAISO lacked the
independence or other necessary attributes to constitute an ISO, it
need not approve CAISO as an ISO. Id. at 404. Similarly, it is the
Commission's view that the MMU may lack sufficient independence if
it reports to management, rather than to the board; thus we may
require RTOs and ISOs, as a condition of their continued RTO/ISO
status, to incorporate the proposed requirement in their tariffs.
    \164\ Order No. 2000, FERC Stats. & Regs. ] 31,089 at 31,155.
    \165\ See Gulf States Utilities v. FPC, 411 U.S. 747, 758-59
(1973).
---------------------------------------------------------------------------

iii. Functions
(a) Preliminary Proposals in the ANOPR
    191. Noting that the issue of independence is integrally related to
that of the functions MMUs are expected to perform, the Commission
proposed continuing the following existing functions of MMUs: (1)
Identifying ineffective market rules and

tariff provisions and recommending proposed rule and tariff changes;
(2) reviewing and reporting on the performance of the wholesale
markets; and (3) identifying and notifying the Commission staff of
instances in which a market participant's behavior may require
investigation. The Commission also proposed requiring the MMUs to
advise the Commission and other interested entities, in addition to the
RTO or ISO, of recommendations for rule or tariff changes; retaining
the existing Protocols (with appropriate updates) governing referral of
potential market violations to the Commission, which are included as an
Appendix to the Policy Statement; \166\ and expanding the subject
matter of such referrals to include suspected rule or tariff violations
committed by an RTO or ISO as well as by market participants, as well
as suspected violations of other Commission-approved rules and
regulations, such as Affiliate Restrictions \167\ and Standards of
Conduct.
---------------------------------------------------------------------------

    \166\ The Commission clarified that since issuance of the Policy
Statement, Market Behavior Rule 2, referred to in the Protocols, has
been rescinded and replaced by the Commission's Anti-Manipulation
Rules. Therefore, violations currently to be referred to the
Commission include conduct suspected of violating the Anti-
Manipulation Rules, as well as tariff violations and violations of
the remaining, codified Market Behavior Rules. See Order No. 674 and
Order No. 670.
    \167\ The previous term ``Code of Conduct'' has been replaced by
``Affiliate Restrictions'' in the final rule for Market-Based Rates
for Wholesale Sales of Electric Energy, Capacity, and Ancillary
Services by Public Utilities, Order No. 697, 72 FR 39,904 (July 20,
2007), FERC Stats. & Regs. ] 31,252 (2007).
---------------------------------------------------------------------------

(b) Comments on the ANOPR Proposals and Questions
    192. There was general agreement from commenters concerning
continuation of the three functions identified in the ANOPR. Several
commenters stated that MMUs should not themselves participate in
effectuating market design, although they should advise the RTO or ISO
on proposed weaknesses in the existing market design and make
suggestions for improving it.\168\ A few commenters opposed reporting
suspected RTO or ISO violations, arguing that this would impair the
frank exchange of information between RTO or ISO employees and the
MMU.\169\ However, most comments on the subject supported such
reporting, and several commenters suggested that such reporting be
expanded to include instances of inappropriate dispatch (either too
conservative or too aggressive) which, although not constituting tariff
violations, might nonetheless impair optimal market performance.\170\
---------------------------------------------------------------------------

    \168\ See, e.g., Old Dominion at 23; OMS at 18; OPSI at 9; NY TO
at 15.
    \169\ NYISO at 25-26; CAISO at 7-8.
    \170\ Strategic Energy at 13.
---------------------------------------------------------------------------

    193. Several commenters opposed a requirement that MMUs report
suspected violations of the Standards of Conduct or Affiliate
Restrictions, arguing that the MMUs do not have expertise in this area
and should not be diverted from their main task of monitoring the
markets.\171\ A number of the comments suggested that the MMUs should
not audit for such violations, but should report them if they come
across them in the ordinary course of business.\172\ Similarly, some
commenters suggested that MMUs should not audit for suspected rule or
tariff violations by the RTOs or ISOs, but should report them if they
came across them in the ordinary course of business.\173\
---------------------------------------------------------------------------

    \171\ See, e.g., EEI at 45; EPSA at 47; Exelon at 26;
FirstEnergy at 10-11; Pepco at 17.
    \172\ Duke Energy at 23; NYISO at 25-26; ISO-NE at 8-9.
    \173\ ISO-NE at 8; Duke Energy at 22.
---------------------------------------------------------------------------

    194. The commenters generally supported reporting proposed tariff
or rule changes to other interested parties as well as to the RTO and
ISO, particularly mentioning market participants and stakeholders.\174\
NEPOOL Participants, however, cautioned that in certain instances this
might effectively broadcast the existence of a ``loophole'' that could
be exploited before a rule or tariff change could be accomplished.\175\
---------------------------------------------------------------------------

    \174\ See, e.g., Old Dominion at 23; Pepco at 16; Ameren at 13;
APPA at 76-77.
    \175\ NEPOOL Participants at 29-30.
---------------------------------------------------------------------------

(c) Commission Proposal
    195. The Commission notes that its proposals in the ANOPR did not
contemplate that the MMU make market design decisions itself, which are
within the purview of the RTO or ISO through stakeholder processes and
Commission approval, but rather that the MMU should advise the RTO or
ISO and the Commission in this area. It was also not the Commission's
intention that the MMU be required to seek out potential violations by
the RTO or ISO, or audit for Standards of Conduct or Affiliate
Restrictions violations. The Commission agrees that any proactive
investigations in these areas would divert the resources of the MMU
from its primary responsibilities and potentially embroil it in areas
not within its core expertise. Standards of Conduct and Affiliate
Restrictions violations in particular may be difficult to identify
without possession of specialized knowledge. Therefore, the Commission
agrees that any suspected violations in these areas need be referred
only if discovered in the ordinary course of the MMU's monitoring
duties. Any final determination as to whether a violation has occurred
would, of course, be the responsibility of the Commission.
    196. However, the Commission finds little merit in the suggestion
that our proposal to require MMUs to report suspected misconduct by
RTOs and ISOs would impair the frank exchange of information between
RTO or ISO employees and the MMU. Such an argument could equally be
applied to scrutiny by any independent entity and, taken to its logical
conclusion, would effectively exempt RTOs and ISOs from investigation.
Permitting such an exemption might encourage a culture of lax adherence
to rule and tariff requirements.
    197. The Commission agrees that an RTO or ISO could conduct
dispatch in such a way as to result in unnecessary market
inefficiencies, and therefore proposes that the MMU should advise
Commission staff of any substantial concerns it has along these
lines.\176\ With respect to broadening the reporting of proposed rule
and tariff changes to other interested parties as well as to the RTO or
ISO, the Commission finds merit in the concern that such broad
dissemination of information might make entities aware of a
``loophole'' that could be exploited before the necessary rule or
tariff change could be effected. For that reason, the Commission
proposes that an exception be made to the general rule of full
disclosure, which exception would provide that in the event the MMU
believes broad dissemination of such information in a given instance
could lead to exploitation, that it limit distribution of the
information to the RTO or ISO and to Commission staff, with an
explanation of why further dissemination should be avoided at that
time.
---------------------------------------------------------------------------

    \176\ If the MMU believes the dispatch practice rises to the
level of a tariff violation, the MMU should follow the procedures
outlined in the Protocols for referring market violations to the
Commission, which involve a written referral to the Office of
Enforcement with copies to the Office of Energy Market Regulation
and the Commission's Office of the General Counsel. Otherwise, its
concerns should be brought to the attention of the Division of
Energy Market Oversight in the Office of Enforcement.
---------------------------------------------------------------------------

    198. The Commission therefore proposes that the functions an MMU is
to perform include the following: (1) Evaluating existing and proposed
market rules, tariff provisions and market design elements for their
effectiveness, and recommending

proposed rule and tariff changes not only to the RTO or ISO, but also
to the Commission's Office of Energy Market Regulation staff and to
other interested entities such as state commissions and market
participants, with the caveat that the MMU is not to effectuate its
proposed market design itself (a task belonging to the RTO or ISO), and
with the further caveat that the MMU should limit distribution of its
identifications and recommendations to the RTO or ISO and to Commission
staff in the event it believes broader dissemination could lead to
exploitation, with an explanation of why further dissemination should
be avoided at that time; (2) reviewing and reporting on the performance
of the wholesale markets to the RTO or ISO, the Commission, and other
interested entities such as state commissions and market participants;
and (3) identifying and notifying the Commission's Office of
Enforcement staff of instances in which a market participant's
behavior, or that of the RTO or ISO, may require investigation,
including suspected rule or tariff violations, market manipulation,
inappropriate dispatch, and suspected violations of Commission-approved
rules and regulations.
    199. In furtherance of its goal of ensuring independent analysis on
the part of MMUs, the Commission also proposes that RTOs and ISOs
include a provision in their tariffs specifying that they may not alter
the reports generated by the MMUs nor dictate the conclusions reached
by the MMUs, although they may establish a reasonable mechanism for
review and comment on MMU reports while still in draft form. The
Commission believes this proposal will enable the MMU to receive
potentially helpful comment, while removing the ability of the RTO or
ISO to unreasonably influence or impede the MMU's analysis.
iv. Mitigation and Operations
(a) Preliminary Proposals in the ANOPR
    200. The Commission expressed concern about whether it was possible
for MMUs to maintain independence in evaluating and reporting on market
performance while at the same time providing support to the RTO or ISO
in the administration of its tariff, which often takes the form of MMU-
conducted market power mitigation. The Commission noted that because
the operation and mitigation functions performed by MMUs directly
affect market outcomes and performance, an inherent conflict arises
when an MMU reports on market outcomes that the MMU itself has
influenced. For these reasons, the Commission proposed requiring that
MMUs refrain from assisting the RTO or ISO in tariff administration,
from participating in RTO/ISO market operations such as mitigation, and
from taking direct actions to influence the market, and instead
concentrate on their role of providing market evaluation, reports, and
advice.
(b) Comments on the ANOPR Proposals and Questions
    201. As to the issue of tariff administration, there was
substantial, although not universal, agreement that this was a task
which properly falls within the purview of the RTO or ISO, not the MMU.
A few commenters took a middle position, suggesting that in a hybrid
structure, the internal MMU could be involved in tariff administration,
but not the external MMU.\177\ Some commenters requested clarification
as to what was envisioned in the concept of tariff administration.\178\
---------------------------------------------------------------------------

    \177\ EEI at 46; New York PSC at 11-12; NY TO at 16-17.
    \178\ See, e.g., OMS at 25-26; OPSI at 20-22; PSEG at 17-19.
---------------------------------------------------------------------------

    202. There was no such agreement on the proposal to remove MMUs
from mitigation, and this issue proved to be the most contentious one
in the entire market monitoring section. A substantial minority of
commenters concurred in the ANOPR proposal, agreeing that it
constituted a conflict of interest for the MMUs to conduct mitigation,
and stating that it would compromise the MMU's independence for it to
both evaluate market performance and conduct mitigation.\179\ A number
of market participants, such as Dominion Resources, FirstEnergy, Duke
Energy, Dynegy and Pepco, support the proposal. NCEMC, AWEA, and
Silicon Valley Power also support the proposal.
    203. EPSA stated that the MMU should not assist tariff
administration or market operations, including mitigation, on any
independent basis not clearly outlined in the tariff.\180\ EEI agreed
that there should be a functional separation between the MMUs and the
operational activities of the RTOs and ISOs, which EEI states can be
accomplished either by having the RTOs and ISOs perform operational
functions, or having the internal market monitor perform them.\181\
---------------------------------------------------------------------------

    \179\ See, e.g., Ameren at 39; Xcel at 24; Dynegy at 5; Duke
Energy at 23; EPSA at 45-46; Mirant at 13.
    \180\ EPSA at 45.
    \181\ EEI at 46.
---------------------------------------------------------------------------

    204. A majority of commenters, representing a spectrum of market
participants, consumer groups, and RTOs and ISOs, opposed the proposal
to remove the MMU from mitigation, and advanced a variety of reasons
against it.\182\ Several commenters, including Portland Cement, the
Pennsylvania PUC, OPSI and OMS, maintained that it would create an even
greater conflict of interest, because the RTO or ISO would have a role
both in rule development and implementation.\183\ Commenters also
stated that the RTO or ISO would be more heavily influenced than would
an MMU by market participants, upon whom it depends for its existence,
and that its employees have close personal relationships with market
participants and are often former employees of market
participants.\184\ OMS suggested RTO or ISO management might be
hesitant to perform a needed mitigation measure if the measure were to
affect a market participant with a credible threat to leave the RTO or
ISO.\185\ Potomac Economics suggested the RTO or ISO can be insulated
from market participant influence by having the MMU administer
mitigation, whereas if the RTO or ISO had responsibility for the task
it would face the full brunt of market participant displeasure and
influence.\186\ Midwest ISO and OPSI opined that consumers would feel
less confidence in the fair application of mitigation were the function
to be transferred to the RTO or ISO.\187\
---------------------------------------------------------------------------

    \182\ See, e.g., American Forest at 47-49; APPA at 74-77; BP
Energy at 31; California PUC at 21-23; Industrial Coalitions at 21-
23; Joint Consumer Advocates at 20-21; NARUC at 11; NEPOOL
Participants at 30-32; Northeast Utilities at 13-14; New England
Power Generators at 12-13; OMS at 23; OPSI at 13-19; Pennsylvania
PUC at 16-17.
    \183\ Portland Cement at 19; Pennsylvania PUC at 16; OPSI at 17;
OMS at 23.
    \184\ See, e.g., Portland Cement at 19.
    \185\ OMS at 23.
    \186\ Potomac Economics at 7-8.
    \187\ Midwest ISO at 25-26; OPSI at 13.
---------------------------------------------------------------------------

    205. Another argument against the proposal was voiced by the
Pennsylvania PUC, which stated that RTO and ISO managers have acquired
their primary expertise in transmission or generation operations and
have little expertise in economics.\188\ ISO-NE and TAPS suggested that
administering mitigation gives the MMU better familiarity with the
working of the market and assists it in performing its analytical
functions.\189\ Other commenters stated that most mitigation is non-
discretionary, and therefore would not draw the MMU into a substantial
conflict of interest as far as its analytic tasks are concerned.\190\
One commenter suggested that a technical

conference be convened to examine the issue.\191\
---------------------------------------------------------------------------

    \188\ Pennsylvania PUC at 16-17.
    \189\ ISO-NE at 10-12; TAPS at 59.
    \190\ See, e.g., Potomac Economics at 6.
    \191\ New England Conference at 19.
---------------------------------------------------------------------------

    206. The RTOs and ISOs, including ISO-NE, Midwest ISO, and NYISO,
were mainly opposed to removing the MMU from mitigation.\192\ CAISO
stated it had no opinion, but wanted clarification as to whether the
ISO or an independent entity would do the mitigation.\193\ SPP stated
it did not object, but indicated that it believed it would be in
compliance if its internal MMU administered the mitigation (which was
not the intent of the ANOPR proposal).\194\ PJM, whose market monitor
does not administer mitigation, supports the proposal.\195\
---------------------------------------------------------------------------

    \192\ ISO-NE at 9-12; Midwest ISO at 25; NYISO at 23-24.
    \193\ CAISO at 8.
    \194\ SPP at 10.
    \195\ PJM at 25-27.
---------------------------------------------------------------------------

(c) Commission Proposal
    207. The ANOPR proposal to remove MMUs from tariff administration
was designed to strengthen their independence. The current practice of
allowing MMUs to support the RTOs and ISOs in tariff administration
necessarily makes their role subordinate to that of the RTOs and ISOs,
and thus weakens that independence. Furthermore, freeing MMUs from
tariff administration would allow them to objectively monitor the
markets, without the bias that might arise from their personal
involvement in tariff administration.
    208. Some commenters argue that RTOs and ISOs do not currently have
individuals qualified to carry out mitigation. If true, this condition
is simply a reflection of the fact that the RTOs and ISOs have not
needed to hire such personnel, since the MMUs were already performing
the task for them. If necessary, RTOs and ISOs could acquire the staff
needed to carry out mitigation functions, and once this was
accomplished the MMUs would be able to concentrate on their core job of
monitoring the markets, without the potential conflict of interest that
arises from reviewing their own mitigation.
    209. Several commenters contend that RTOs and ISOs are more
susceptible to influence from market participants than are MMUs, and
therefore would not be as diligent in performing mitigation. However,
mitigation is supposed to be nondiscretionary in nature. RTOs and ISOs,
as well as MMUs, are required to limit the administration of tariff
compliance to those provisions expressly set forth in the tariff,
involve objectively identifiable behavior, and do not subject the
seller to sanctions or consequences other than those expressly approved
by the Commission and set forth in the tariff, with the right of appeal
to the Commission.\196\ That being the case, any failure by the RTO or
ISO to carry out required mitigation would be readily apparent to the
MMU, whose job of monitoring the markets necessarily includes
determining whether mitigation has been properly performed. Any
persistent or substantial failure by the RTO or ISO in this regard
would constitute a tariff violation and, as such, should be referred to
the Commission's Office of Enforcement staff.
---------------------------------------------------------------------------

    \196\ Market Behavior Rules Order, 105 FERC ] 61,218 at P 182;
Policy Statement, 111 FERC ] 61,267 at P 5.
---------------------------------------------------------------------------

    210. The Commission therefore proposes that MMUs be removed from
tariff administration, including mitigation. Although we believe the
advantages of doing so outweigh the temporary transition pains that may
result, we are nonetheless sensitive to the many concerns raised by
those commenters who oppose the proposal. We therefore solicit comments
on the activities that would be needed to make the transition to RTO/
ISO-administered mitigation, on any difficulties the MMU might be
anticipated to experience in monitoring mitigation performed by the RTO
or ISO, and any additional sensitivities that commenters wish to raise
regarding the proposal.
v. Ethics
(a) Preliminary Proposals in the ANOPR
    211. The Commission proposed imposing certain minimum ethics
standards upon market monitor personnel, in particular prohibiting such
personnel from owning financial interests in any market participants.
The Commission noted that all existing RTOs and ISOs have some type of
conflict of interest or other ethics provisions, although not always in
their tariffs, and proposed standardizing such provisions and requiring
their inclusion in the tariffs themselves.
(b) Comments on the ANOPR Proposals and Questions
    212. Most commenters agreed that certain minimum ethical standards
should be imposed on MMU employees, citing in particular conflict of
interest provisions.\197\ Many argued that the RTOs and ISOs be allowed
the flexibility to develop their own provisions, in addition to the
core minimum set forth by the Commission.\198\ Some commenters thought
it unnecessary to include the standards in the tariffs, suggesting they
could be posted on the RTO or ISO Web site instead.\199\
---------------------------------------------------------------------------

    \197\ See, e.g., Duke Energy at 24; Old Dominion at 25; OMS at
27-28; OPSI at 22; Silicon Valley Power at 13; Steel Producers at
19.
    \198\ See, e.g., APPA at 77; EEI at 49; Midwest ISO at 28; NYISO
at 17; Pepco at 18-19.
    \199\ EPSA at 46; Exelon at 27.
---------------------------------------------------------------------------

(c) Commission Proposal
    213. The Commission agrees with the majority of the commenters that
ethical standards for MMU employees should be included in the RTO or
ISO tariff. Such inclusion would allow protest by intervenors and
permit Commission review and enforcement.
    214. In light of the fact that RTOs and ISOs currently impose
ethical standards on their MMUs, although not always in their tariffs,
and which in some cases are the same standards they apply to their
other employees, the Commission proposes that development of the
particular ethical standards to be applied to MMUs be left in the first
instance to the discretion of the RTOs and ISOs. However, the
Commission believes these standards should include certain minimum
requirements to be imposed on MMU employees, as follows: (i) Employees
shall have no material affiliation (to be defined by the RTO or ISO)
with any market participant or affiliate; (ii) employees shall not
serve as an officer, employee, or partner of a market participant;
(iii) employees shall have no material financial interest in any market
participant or affiliate (allowing for such potential exceptions as
mutual funds and non-directed investments); (iv) employees shall not
engage in any market transactions other than the performance of their
duties under the tariff; (v) employees shall not be compensated, other
than by the RTO or ISO, for any expert witness testimony or other
commercial services to the RTO or ISO or to any other party in
connection with any legal or regulatory proceeding or commercial
transaction relating to the RTO or ISO or to the RTO or ISO markets;
(vi) employees may not accept anything of value from a market
participant in excess of a de minimis amount, to be decided on by the
RTO or ISO; and (vii) employees must advise their supervisor (or, in
the case of the MMU manager himself, advise the RTO or ISO board) in
the event they seek employment with a market participant and must
disqualify themselves from participating in any matter that would

have an effect on the financial interest of such market
participant.\200\
---------------------------------------------------------------------------

    \200\ Some external MMUs may currently have business
associations which would be prohibited under these proposed minimum
requirements, such as unrelated consulting work for participants in
its RTO's or ISO's markets. If that is the case, the RTO or ISO
should propose a suitable transition plan in its compliance filing.
---------------------------------------------------------------------------

vi. Tariff Provisions
(a) Preliminary Proposals in the ANOPR
    215. The Commission proposed that each RTO and ISO set forth all
its provisions involving market monitoring in one section of its
tariff, noting that in order for MMUs to achieve transparency of
function, the detailed obligations imposed upon them must be made clear
and accessible, and also be subject to approval and enforcement by the
Commission.
(b) Comments on the ANOPR Proposals and Questions
    216. There was widespread support for this proposal, although some
commenters proposed that non-substantive MMU provisions be posted
instead on the RTO or ISO Web site.\201\ Duke Energy proposed that the
RTO or ISO be allowed to perform centralization of the tariff
provisions the next time it makes an amendment to its market monitoring
rules.\202\ The PJM MMU proposed that MMU provisions be included
elsewhere in the tariff as well as in the MMU section, if the context
so requires.\203\
---------------------------------------------------------------------------

    \201\ EPSA at 46; Pepco at 19.
    \202\ Duke Energy at 24.
    \203\ PJM MMU at 17.
---------------------------------------------------------------------------

(c) Commission Proposal
    217. In accordance with the bulk of the comments on this subject,
the Commission proposes that the RTOs and ISOs be required to include
in their tariffs, and centralize in one section, all their MMU
provisions. Including all MMU provisions in the tariff will ensure they
are subject to the compliance requirements that attach to tariff
provisions, and will give notice to interested parties, and thus an
opportunity to intervene, when a tariff filing is made. As noted in the
ANOPR, centralization of the MMU provisions has the obvious advantage
of clarity and ease of reference. The Commission also proposes that the
RTOs and ISOs include a mission statement for the MMU in the
introductory portions of the section. This statement should set forth
the goals to be achieved by the MMU, including the protection of both
consumers and market participants by the identification and reporting
of market design flaws and market power abuses.
    218. The Commission disagrees with the comment requesting that the
RTOs or ISOs be permitted to delay centralization until such time as
they may choose, or otherwise be required, to make an amendment to
their MMU rules. Such amendments will in all likelihood be required
after issuance of a final rulemaking in this proceeding, and in any
event the requirement should not be unduly onerous. Therefore, the
Commission proposes that the RTOs and ISOs centralize their MMU tariff
provisions when they make their compliance filings in connection with
this proceeding. The Commission also sees no reason to forbid the RTOs
and ISOs from posting MMU provisions elsewhere in their tariffs as well
as in their MMU sections, should clarity and context so require, as
long as appropriate cross-referencing is made.
b. Information Sharing
    219. The Commission advanced proposals in the ANOPR that responded
to requests of commenters at the technical conference for dissemination
of expanded market information, and to a broader group of recipients.
In particular, given the integral relationship between wholesale and
retail rates, the Commission acknowledged the need for information by
state commissions to assist them in performing their regulatory
functions. However, the Commission noted that since public disclosure
of certain information could harm market participants or could
facilitate collusion under some circumstances, it was necessary to
balance the need for information access with confidentiality concerns.
The Commission solicited comments on the proposed changes.
i. Enhanced Information Dissemination
(a) Preliminary Proposals in the ANOPR
    220. The Commission proposed enhancing the dissemination of
information in several areas. Specifically, the Commission proposed
that MMUs be required to report comprehensively on aggregate market and
RTO/ISO performance on a regular basis, but no less frequently than
quarterly, to Commission staff, to staff of interested state
commissions, and to the management and board of directors of the RTOs
or ISOs. Further, the Commission proposed that MMUs should be required
to deliver materials supporting their conclusions; make one or more of
their staff members available for a conference call with
representatives from the Commission, state commissions, and RTO or ISO;
and work cooperatively to develop any further materials which might be
useful to the Commission, to the state commissions and to the RTOs or
ISOs.\204\ Finally, the Commission proposed that offer and bid data,
without identification of the market participants and with a lag of
three months, be posted on the RTO or ISO Web site.
---------------------------------------------------------------------------

    \204\ The Commission clarified that such reports and meetings
were not intended to restrict the MMU from meeting individually with
Commission staff, staff of state commissions, market participants,
or other stakeholders, or sharing information with these various
constituencies, subject to appropriate restrictions on
confidentiality.
---------------------------------------------------------------------------

    221. The Commission requested comment on whether the proposal met
the needs of the state commissions and whether there were other kinds
of information needed by state commissions to fulfill their regulatory
responsibilities. The Commission further solicited comment on whether
there was a generic standard or test that could be used to determine
what specific information should be provided to state commissions.
(b) Comments on the ANOPR Proposals and Questions
    222. No comments were received proposing a generic standard or test
to determine the specific information that should be provided to state
commissions. There were relatively few comments identifying specific
types of data needed; \205\ rather, most commenters supporting greater
access argued that state agencies should receive all available market
information in order to assist them in their regulatory tasks.\206\
---------------------------------------------------------------------------

    \205\ The California PUC set forth a lengthy list of desired
market information, such as confidential and disaggregated data, bid
data, generator dispatch data, generator performance data, unit
commitment, scheduled and operational levels, and what units set
clearing prices. It cautioned, however, that California's needs are
specific to its market design and structure as a single state ISO,
and that data reporting protocols would vary from state to state.
California PUC at 27-30.
    \206\ See, e.g., FirstEnergy at 11; NARUC at 6; Massachusetts AG
at 5; Joint Consumer Advocates at 22; New York PSC at 13.
---------------------------------------------------------------------------

    223. There was substantial support for the proposal to require
quarterly reports and conference calls.\207\ Some commenters, however,
thought comprehensive reports would be too costly and unduly time
consuming.\208\ Pepco suggested that these quarterly

reports not be as extensive as the current annual reports, in order to
avoid an excessive drain on the money and resources of the MMUs.\209\
There was also concern that confidentiality protections be
observed.\210\ At least one commenter suggested that state attorneys
general be included in the process as well as state commissions, since
not all energy providers and consumers are associated with entities
regulated by state commissions.\211\ Some commenters, although
recognizing that inclusion of market participants in conference calls
would be unwieldy, proposed that they be included in the dissemination
of the reports.\212\
---------------------------------------------------------------------------

    \207\ See, e.g., BlueStar Energy at 6-7; Duke Energy at 26;
Industrial Consumers at 37; NEPOOL Participants at 32; New England
Conference at 19; North Carolina Electric Membership at 11; NRECA at
24; Old Dominion at 26.
    \208\ EEI at 50; EPSA at 48; Mirant at 15; Duke Energy at 26.
    \209\ Pepco at 19-20.
    \210\ Constellation at 19; J. Aron, Barclays, Morgan Stanley at
6; Old Dominion at 26.
    \211\ APPA at 84. See also LPPC at 15.
    \212\ See, e.g., Old Dominion at 26.
---------------------------------------------------------------------------

    224. There was substantial comment on the proposal to reduce the
lag period for offer and bid data to three months, with a majority
either favoring the Commission's proposal or not actively opposing
it.\213\ Some commenters stated that the lag period should be even
shorter than three months, arguing that such information is released in
Australia and the United Kingdom in close to real time, with no
apparent adverse effects.\214\ Others favored retention of the six-
month period.\215\ There was substantial support for something slightly
longer than three months, in order to avoid the problem of data release
within the same season; such release, it was argued, would provide
opportunities for collusion and market power abuse.\216\ EEI notes that
different RTOs and ISOs have reached differing conclusions as to the
appropriate lag time, and suggested that the Commission take into
account regional differences, with a lag time no greater than six
months and no less than three months.\217\
---------------------------------------------------------------------------

    \213\ See, e.g., Reliant at 22; PJM at 29; PSEG at 20; SMUD at
15; CAISO at 10; Connecticut and Massachusetts Municipals at 27; DC
Energy at 9; Massachusetts AG at 5; Midwest ISO at 29; NEPOOL
Participants at 33.
    \214\ Industrial Consumers at 37-38; TAPS at 61.
    \215\ See, e.g., Ameren at 42; Duke Energy at 26-27; Dynegy at
6; Industrial Coalitions at 24; NJBPU at 2; PJM MMU at 18.
    \216\ See, e.g., Dynegy at 6; NJPBU at 2; OMS at 35; OPSI at 29;
Old Dominion at 26.
    \217\ EEI at 52-53.
---------------------------------------------------------------------------

    225. Some commenters argued that masking the identity of the
participants harmed the smaller players, contending that the larger
players already have software programs which enable them to ascertain
the identities of the participants.\218\ OPSI supported maintaining
confidentiality by the aggregation of cost data,\219\ and Reliant
argued that bidding data should be masked to avoid matching offers with
the known output of the plant in question, thereby revealing the
identity of the participant.\220\
---------------------------------------------------------------------------

    \218\ Pennsylvania PUC at 18; TAPS at 62.
    \219\ OPSI at 30. OPSI includes reference price or unit
estimated cost data within the term.
    \220\ Reliant at 22. Reliant used the term ``bid data,'' which
the Commission assumes refers to offers, given the company's concern
over matching offers to unit output.
---------------------------------------------------------------------------

    (c) Commission Proposal
    226. The Commission declines to propose a generic standard or test
to determine the type of information that may be disseminated to state
commissions. Inasmuch as there was no support for such a standard, the
Commission believes the type of information to be released may most
fruitfully continue to be developed on a case-by-case basis, so long as
it generally consists of market analyses of the type regularly gathered
by the MMUs in the course of business, and so long as it remains
subject to appropriate confidentiality restrictions.
    227. The Commission proposes that market participants be included
in the dissemination of reports, which could be accomplished via
posting them on the RTO or ISO Web site. However, the Commission agrees
that including market participants on conference calls would be
unwieldy, and proposes limiting participation on such calls to
Commission staff, RTO and ISO staff, staff of interested state
commissions, and staff of state attorneys general should they express a
desire to attend.
    228. The Commission agrees that quarterly reports should not be as
extensive as the annual state of the market reports. Preparing overly
extensive reports would divert the attention of the MMUs from their
tasks of daily monitoring and of providing recommendations to the RTO
or ISO and the Commission regarding desirable rule and tariff changes.
The Commission also believes that the annual state of the market
reports have proven to be useful documents, and proposes that the RTOs
and ISOs include in their tariffs a requirement for the MMUs to produce
them, with the same dissemination (or broader, if desired) as the
quarterly reports.
    229. The Commission is persuaded by the comments that no harm
generally would result from shortening the current six-month lag
period.\221\ However, the Commission acknowledges that in some
instances release of such information in the same season could afford
opportunities for collusion.\222\ Therefore, the Commission proposes
that the time period for the release of offer and bid data be reduced
to three months, but that the RTO or ISO may propose a shorter period,
with accompanying justification. However, if the RTO or ISO
demonstrates a potential collusion concern, it may propose a four-month
lag period or, alternatively, some other mechanism to delay the release
of a report if the release were otherwise to occur in the same season
as reflected in the data.
---------------------------------------------------------------------------

    \221\ The Commission recently approved the request of ISO-NE and
NEPOOL to shorten the lag time for release of ISO-NE offer and bid
data from six months to roughly three months. ISO New England Inc.
and New England Power Pool, 121 FERC ] 61,035 (2007) (ISO-NE Bid/
Offer Order).
    \222\ In the ISO-NE Bid/Offer Order, we found that the
combination of ISO-NE's ability to expeditiously file for a rule
change if negative impacts on the market were experienced, and the
existing tariff language that masks the bid/offer data, adequately
protected against the risk of collusion.
---------------------------------------------------------------------------

    230. The Commission proposes retaining the practice of masking the
identity of participants when releasing offer and bid data. The
possibility raised by a few commenters that some players may be able to
surmise the identity of participants argues, if anything, for further
protection, not for less. The Commission further proposes that the RTO
or ISO include in its compliance filing a justification of its policy
regarding the aggregation or lack thereof of offer data and of cost
data, discussing the manner in which it believes its policy avoids
participant harm and the possibility of collusion, while fostering
market transparency.
ii. Tailored Requests for Information
(a) Preliminary Proposals in the ANOPR
    231. The Commission proposed that state commissions may make
reasonable requests for additional tailored information from the MMUs,
acknowledging that information such as general analyses of the market
and aggregated price data may assist state commissions in performing
their regulatory functions. The Commission stated that these requests
should be limited to information regarding general market trends and
performance, and not encompass information designed to aid state
enforcement or actions against individual companies. This restriction
was proposed in light of the limited resources of MMUs and the fact
that states have their own enforcement agencies which are more properly
employed for such tasks. However, the Commission proposed that a state
commission could, on a case-by-case basis, request that the Commission
authorize the release of otherwise proscribed data. The Commission
would then evaluate whether there was a

compelling need for the requested information, and decide whether
adequate protections could be fashioned for commercially sensitive
material.
(b) Comments on the ANOPR Proposals and Questions
    232. There was substantial support for the Commission's proposal to
allow state commissions to make tailored requests for information, with
the caveat that such requests should not be permitted to place too
great a burden on the workload of the MMUs.\223\ Several commenters
suggested this problem could be solved by limiting the information
provided by the MMU to that generated in the ordinary course of
business.\224\ Other commenters objected to the restriction prohibiting
the release of information designed for enforcement purposes, arguing
that the states have little other means of access to the necessary
information.\225\ A number of commenters cautioned that requests for
information must be accompanied by assurances of confidentiality.\226\
At least some RTOs and ISOs currently have provisions in their tariffs
governing the release of confidential information; \227\ however, OMS
asserts that such tariff provisions (at least with respect to Midwest
ISO) are so restrictive as to effectively bar the release of needed
information.\228\ Several commenters proposed that before an MMU be
allowed to release information pertaining to a particular market
participant, that the participant be given the opportunity to object
and to correct any inaccurate information proposed to be released.\229\
---------------------------------------------------------------------------

    \223\ See, e.g., Reliant at 19; PJM Power Providers at 10.
    \224\ See, e.g., PJM Power Providers at 10; Exelon at 28.
    \225\ NARUC at 9; Ohio PUC at 19.
    \226\ Constellation at 19; Joint Consumer Advocates at 22;
Midwest ISO at 30.
    \227\ See, e.g., Midwest ISO at 30; SPP at 11.
    \228\ OMS at 31.
    \229\ See, e.g., EEI at 51; FirstEnergy at 11; DC Energy at 8.
---------------------------------------------------------------------------

(c) Commission Proposal
    233. The Commission notes that entertaining tailored requests for
information from state commissions subjects the MMU to the risk that it
will be diverted from its core functions of monitoring the market and
making rule and tariff recommendations to the RTO or ISO. Therefore,
the decision as to whether to respond to such requests, assuming they
otherwise fall within acceptable parameters, should be made by the MMU,
in light of its budgetary and time limitations.
    234. The Commission continues to believe its proposed restriction
on information designed for enforcement purposes is a reasonable one.
Such requests would not only implicate serious confidentiality
concerns, they could overwhelm the MMU's workload, as they would likely
involve more detailed investigations than would be required for general
market information or for MMU referrals to the Commission. While states
may not have the tools and expertise to monitor the market as
effectively as can the MMUs, they do have access to resources to carry
out enforcement functions. Furthermore, the costs of state enforcement
should rightfully be borne by the states, not by the MMUs or RTOs and
ISOs. Therefore, the Commission proposes that MMUs may entertain
requests for information from state commissions, so long as such
information pertains to general market trends and performance, is not
designed to aid state enforcement or actions against individual
companies,\230\ and the MMU can accommodate such requests within its
budgetary and time constraints without jeopardizing its ability to
perform its core tariff-defined functions.
---------------------------------------------------------------------------

    \230\ However, if during the ordinary course of its activities
an MMU were to discover evidence of wrongdoing that was within a
state commission's jurisdiction, it is expected that the MMU would
report such information to the state commission.
---------------------------------------------------------------------------

    235. The Commission also believes that while confidentiality
provisions serve a useful purpose, they should not be drafted in such a
way as to impose unnecessary barriers to the dissemination of
information. Therefore, the Commission proposes that RTOs and ISOs
develop confidentiality provisions for their tariffs that will protect
commercially sensitive material, but which will not be so restrictive
as to permit the release of little if any information.
    236. The Commission also agrees that if requested information
pertains to specific market participants, other than offer and bid
data, that as a matter of fairness the named market participant should
be given notice and the opportunity to contest the information.
Therefore, the Commission proposes that the RTOs and ISOs include such
a provision in their tariffs.
    237. In the ANOPR, the Commission proposed permitting state
commissions to petition the Commission on a case-by-case basis for
information that does not fall within the proposed acceptable
parameters. This safety valve should alleviate state concerns that they
may be prevented from acquiring information for which they have a
compelling need, while also ensuring that the Commission will be able
to examine such requests in light both of state needs and the ability
to fashion adequate confidentiality protections. Therefore, the
Commission proposes that the RTOs and ISOs note the availability of
this exception in their tariffs.
iii. Commission Referrals
(a) Preliminary Proposals in the ANOPR
    238. The Commission stated that MMUs should continue to respect the
confidentiality of their referrals of suspected wrongdoing to the
Commission, and not disclose such referrals to other entities,
including state commissions. The Commission also expressed its
intention not to disseminate information regarding its investigations,
noting that the Commission's rules require that such information be
kept nonpublic unless the Commission authorizes, in any given case,
that it be publicly disclosed.\231\ The Commission noted, however, that
it intended to continue the practice of Commission staff providing the
MMUs with generic feedback regarding enforcement issues.
---------------------------------------------------------------------------

    \231\ 18 CFR 1b.9 (2007). Other exceptions include cases where
the information has been made a matter of public record in an
adjudicatory proceeding, and where disclosure is required by the
Freedom of Information Act, 5 U.S.C. 552 et seq. (2006).
---------------------------------------------------------------------------

(b) Comments on the ANOPR Proposals and Questions
    239. Comments were received on both sides of this issue, with state
representatives arguing for release of MMU referral information, for
the results of Commission investigations, and for disclosure of the
progress of Commission investigations.\232\ Other commenters
acknowledged the legal and policy considerations noted by the
Commission, and concurred in the need to maintain confidentiality.\233\
The California PUC, while stating that it understood the need for
confidentiality, proposed that in the event wrongdoing is discovered
that affects a state commission with appropriate jurisdiction, that
such commission should be notified of the wrongdoing.\234\ Some
commenters argued that state bodies have procedures in place to protect
confidentiality, and so should not be barred from receiving such
information from the MMUs and the Commission.\235\ Constellation,
however, cautions that these procedures may not protect disclosure from
Freedom of

Information Act (FOIA) requests or requests made under equivalent state
statutes.\236\
---------------------------------------------------------------------------

    \232\ See, e.g., California PUC at 32; Ohio PUC at 19; OMS at
37-38; OPSI at 31-32.
    \233\ See, e.g., Reliant at 19; Exelon at 29.
    \234\ California PUC at 32.
    \235\ See, e.g., New York PSC at 15; North Carolina Commission
at 7; OPSI at 32.
    \236\ Constellation at 19.
---------------------------------------------------------------------------

(c) Commission Proposal
    240. The Commission notes that the commenters that argued for the
release of referral and investigative information to such bodies as
state commissions did not generally address the substantial legal and
policy arguments against such release, other than to note that some
state bodies have confidentiality procedures (which may or may not
withstand FOIA-type requests). As the Commission observed in the ANOPR,
not only do Commission rules prohibit such release, but release could
impede the willingness of market participants to self-report and
otherwise cooperate in investigations, and could injure innocent
persons who might be erroneously implicated or adversely affected by
simply being associated with an investigation. Therefore, the
Commission proposes that the existing provisions regarding the