243. North Carolina Electric Membership states that if the
Commission adopts the proposed rule on price reform during shortage
periods, the Commission should adopt additional criteria to protect
consumers against the exercise of market power, similar to the minimum
protections included in the PJM shortage pricing settlement.\339\ It
suggests that the Commission should also require RTOs and ISOs to show
that any shortage pricing will: (1) Protect consumers in the most
vulnerable and smallest load pockets where access to available
resources is significantly constrained even in non-shortage conditions;
(2) define explicit triggers for when shortage prices will apply; (3)
ensure that the extra revenues received by generators will be included
in the energy and ancillary service revenue offset to capacity market
clearing prices paid in forward capacity markets; and (4) require that
RTOs and ISOs work with stakeholders to develop a program for setting
prices during a power shortage that is acceptable to all.\340\
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    \339\ North Carolina Electric Membership at 12-13.
    \340\ Id. at 12.
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    244. Similarly, PG&E states that the proposed criteria should be
expanded to include the following: (1) A demonstration that any
proposed market rule changes are cost effective, including an
evaluation of the impact on reliability and an estimation of the cost
of the program; (2) an evaluation that the operating reserve shortage
pricing mechanism is adequately coordinated with other key market
mechanisms; and (3) an assessment of the readiness of demand response
programs that will be called upon to reduce the number and severity of
shortage pricing events and help mitigate market power.\341\
---------------------------------------------------------------------------

    \341\ PG&E at 13.
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    245. TAPS asserts that the Commission needs to strengthen the
factual showing that RTOs and ISOs must make with respect to shortage
pricing reforms. It states that each RTO's or ISO's compliance filing
should include the following: (1) Market power analysis specifically
addressing scarcity conditions, including pivotal supplier, market
share, and the delivered price test; (2) an analysis of whether demand
response successfully mitigates market power, including empirical
evidence, such as critical loss analyses; (3) market power analyses
addressing the ability of generation owners to withhold demand
response; (4) a demonstration that the RTO has methods for mitigating
market power that are effective during shortage periods, for any
resources, demand or generation, that can affect prices; (5) an
analysis of whether there is enough demand response available to
respond under scarcity conditions, given reliance on demand response
for capacity reserves and ancillary services; and (6) prepared
statistics on past power shortages and expectations of future power
shortages.
ii. Commission Determination
    246. In this Final Rule, the Commission adopts the proposal to
require each RTO or ISO to support its proposed reform in shortage
pricing or its demonstration of the adequacy of its existing rules with
adequate factual support. 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, and that
it is designed to protect consumers against the exercise of market
power. The Commission here adopts the six criteria proposed in the
NOPR, as modified below, and will use these six criteria to consider
whether the factual record compiled by the RTO or ISO meets the
requirements adopted in this Final Rule.
    247. After further review of the criteria identified in the NOPR,
we revise the criteria. The RTO or ISO must describe how its proposal
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 to
continue to be relied upon during an operating reserve shortage;
     Encourage entry of new generation and demand resources;
     Ensure that the principle of comparability in treatment of
and compensation to all resources is not discarded during periods of
operating reserve shortage; and

     Ensure market power is mitigated and gaming behavior is
deterred during periods of operating reserve shortages including, but
not limited to, showing how demand resources discipline bidding
behavior to competitive levels.
    248. The criteria we adopt are not significantly different from the
criteria proposed in the NOPR. Our intention in revising the criteria
is to further clarify what we expect from an RTO's or ISO's compliance
filing.\342\ Under the revised criteria, we expect an RTO or ISO to
explain how its market rules will reduce or avoid periods of operating
reserve shortages as well as how its market rules will reliably reduce
demand and increase generation during periods of operating reserve
shortage. Nothing in this Final Rule dictates the particular market
rules or mechanisms an RTO or ISO must adopt. For example, we do not
require regions that have not adopted a capacity market to develop such
markets. We are intentionally providing latitude to the RTOs and ISOs
to work with their stakeholders to determine the appropriate mechanisms
for their regions and then explain how those mechanisms meet the
revised criteria.
---------------------------------------------------------------------------

    \342\ For example, the third criterion in the NOPR sought an
explanation of how the market rules encourage existing generation
and demand resources needed during an operating reserve shortage to
``remain in business.'' Upon review, the Commission is concerned
that this could have been read to require shortage pricing
provisions that would subsidize or give preferences to resources to
ensure they ``remain in business.'' Instead, our intention is for
the RTO or ISO to explain how its shortage pricing proposal,
together with existing market rules,encourages existing generation
and demand resources to be available in an emergency. Similarly, the
fifth criterion in the NOPR could have been read to limit comparable
treatment and compensation for all resources to periods of operating
reserve shortage. Because neither of these implications was our
intention, we clarify the wording of these criteria.
---------------------------------------------------------------------------

    249. Some commenters propose expanding or modifying the criteria.
However, we conclude that the following suggestions are already either
explicitly part of the required filing or are implicitly required. For
example, North Carolina Electric Membership suggests a specific
criterion that the Commission should adopt to protect consumers against
the exercise of market power. Such a requirement, however, is already
implicit in the required analysis of market power mitigation adopted
here. Requiring that energy and ancillary services revenues be
accounted for in the settlement of capacity market payments also is
already an explicit requirement for existing capacity markets. Further,
all RTOs and ISOs have established procedures by which market rule
changes are developed, which generally include consultations with their
stakeholders. We expect that RTOs and ISOs will work with their
stakeholders to develop any new proposed rules and decline to make this
an explicit criterion.
    250. Similarly, the changes requested by PG&E are already addressed
in the six criteria, as modified above. We note that an explicit
requirement to evaluate the effect of a rule change on reliability is
not needed. We are firmly of the opinion that the changes mandated in
this Final Rule will increase system reliability by inducing additional
response by demand- and supply-side resources and that RTO and ISO
compliance will not result in a decrease in reliability. Second,
requiring an explicit accounting of the costs of the program will not
be included. We do not see the usefulness of this exercise. While there
will be costs involved, the long-term benefits of maintaining grid
reliability are evident.
    251. As to when these pricing rules would go into effect, it is
when the RTO or ISO has an operating reserve shortage. The reliability
standards of the North American Electric Reliability Corporation, which
have been approved by the Commission, or of other authorized
reliability body, specify system operating reserve requirements, and
these standards are well known to system operators such as RTOs and
ISOs, as well as to the many stakeholders who helped develop them. The
level of operating reserves required by the reliability standards
depends on the characteristics of each system and cannot be correctly
reduced to a single number that applies to every system, such as seven
percent of peak load. Further, if we were to repeat the reliability
standard definition here in our regulations, it would be cumbersome for
reliability organizations to improve their definition of operating
reserve requirements over time without also having to seek a change in
our regulations. We find that this is the best definition of when these
price reforms apply; we do not adopt a second, different definition,
here, because having two definitions of operating reserve shortage
would only cause confusion for system operators.
    252. We decline to accept all other suggested criteria because they
would represent a level of burden to the RTO or ISO that would exceed
the benefit of doing the analysis.
    253. We find that the criteria proposed in the NOPR, as modified
above, are sufficient to show whether a region's proposed changes to
its existing market rules meet the requirements of this rule, while
protecting consumers from market power.
d. Phase-In of New Rules
    254. In the NOPR, the Commission stated that each RTO or ISO may
also consider a ``phase-in'' of its specific emergency pricing method
over a period of years, giving three years as an example. This would
serve to introduce customers gradually to pricing increases during an
emergency and allow them to develop ways to reduce demand and avoid
higher prices.\343\
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    \343\ NOPR, FERC Stats. & Regs. ] 32,628 at P 128.
---------------------------------------------------------------------------

i. Comments
    255. Duke Energy states that while it prefers that any shortage
pricing program start immediately, if a phase-in is deemed worthwhile,
this phase-in should not be indefinite.\344\ EEI also states that these
rule changes may best be implemented through a phase-in, provided that
it is not protracted.\345\ It also notes that it is appropriate for the
Commission to allow such a phase-in to be linked to key factors such as
the deployment of advanced metering. Old Dominion supports a phase-in
of emergency pricing.
---------------------------------------------------------------------------

    \344\ Duke Energy at 11.
    \345\ EEI at 20.
---------------------------------------------------------------------------

    256. FirstEnergy supports the Commission's proposed phase-in
approach because it can allow the Market Monitor to evaluate the market
reform, mindful of any unintended consequences including the exercise
of market power and gaming.\346\
---------------------------------------------------------------------------

    \346\ FirstEnergy at 12.
---------------------------------------------------------------------------

    257. Industrial Consumers recommends that the Commission require a
phase-in period of at least three to five years, together with
benchmarks that measure the ability of specific market factors to
protect consumers from the exercise of market power at the time of
shortages. It urges that the shortage price levels only be allowed to
increase in conjunction with and proportional to four benchmarks: (1)
Measured and verified amount of new net incremental demand response
resources entering the market; (2) net incremental reductions in
congestion, whether through enhancement of generation or transmission
resources, in the zones where such shortage pricing is implemented; (3)
sustained increases in the volume of load hedged in long-term forward
markets; and (4) development of credible forward price curves of power
delivered at RTO and ISO hubs published in support of the third
benchmark that are regularly relied upon by market participants.\347\
---------------------------------------------------------------------------

    \347\ Industrial Consumers at 19.

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ii. Commission Determination
    258. The Commission will allow an RTO or ISO to phase in any new
pricing rules for a period of a few years, provided that this period is
not protracted. Any phase-in period must be justified as part of the
RTO's or ISO's overall proposal to change its pricing rules. No RTO or
ISO is required to use a phase-in period, and we will not adopt by rule
a requirement that any such phase-in be tied to certain benchmarks as
Industrial Consumers and EEI propose. However, an RTO or ISO in
consultation with its stakeholders, may propose to tie the phase-in
period to certain benchmarks, and we will consider these in the
compliance filing. We caution, however, that it should not choose to
tie implementation to benchmarks that will not be met over a few years.
This would not be consistent with our requirement that the phase-in
period must not be protracted.
6. Reporting on Remaining Barriers to Comparable Treatment of Demand
Response Resources
    259. In the NOPR, the Commission recognized that further reforms
may be necessary to eliminate barriers to demand response in the
future. The Commission did not wish to delay the adoption of the
specific reforms proposed in the NOPR while the Commission and the
industry continue to study and consider other advances in this area.
Rather, the proposed reforms were to proceed while the Commission and
stakeholders studied what additional efforts were necessary and
developed a record to support further reform.
    260. The Commission directed staff to hold a technical conference
to consider the following issues for demand response participation in
the wholesale markets: (1) Whether there are barriers to comparable
treatment of demand response that have not previously been identified,
and what they are; (2) potential solutions to eliminate any potential
barriers to comparable treatment of demand response; (3) appropriate
compensation for demand response; and (4) the need for and the ability
to standardize terms, practices, rules and procedures associated with
demand response, among other things.\348\
---------------------------------------------------------------------------

    \348\ NOPR. FERC Stats. & Regs. ] 32,628 at P 95. The technical
conference was held on May 21, 2008. See infra note 12.
---------------------------------------------------------------------------

    261. In the NOPR, the Commission also proposed to require each RTO
and ISO to assess and report on the barriers to comparable treatment of
demand response resources that are within the Commission's
jurisdiction, including those listed above. The RTOs and ISOs would be
required to submit their findings and any proposed solutions, along
with a timeline for implementation to address barriers, to the
Commission within six months of the Final Rule's publication in the
Federal Register. The Commission also proposed to require the
Independent Market Monitor for each RTO or ISO to provide its views on
this issue to the Commission. To ensure that minority views are
adequately represented, the Commission proposed to require that the RTO
or ISO identify any significant minority views in its filing.
    262. The Commission sought comment on the proposed approach to
identify and assess remaining barriers to comparable treatment of
demand response as well as any particular issues or areas that should
be addressed in the RTO and ISO reports.
a. Comments
    263. A number of commenters indicate their support for the
Commission's intention to continue to address barriers to demand
response resources, and/or the Commission's proposal to require each
RTO and ISO to report on the barriers they currently perceive.\349\
Some offer suggestions for how the Commission should proceed toward
this goal.
---------------------------------------------------------------------------

    \349\ E.g., Exelon at 9; Pennsylvania PUC at 12; PG&E at 11;
Public Interest Organizations at 8; Reliant at 6; and Steel
Producers at 6.
---------------------------------------------------------------------------

    264. For example, APPA cautions the Commission, as it seeks to
remove barriers to demand response resources, not to unintentionally
endanger existing and planned demand response and energy efficiency
programs at the retail level.\350\ EnerNOC is encouraged by the
Commission's objective to continue its oversight, to review and approve
implementation of reforms for demand response programs and to consider
future reforms.\351\ However, it believes the Commission's continued
involvement and active engagement may be necessary to eliminate
barriers to demand response resources.
---------------------------------------------------------------------------

    \350\ APPA at 51.
    \351\ EnerNOC at 22.
---------------------------------------------------------------------------

    265. EEI agrees that the Commission should not delay the adoption
of specific reforms for demand response while the Commission and
industry stakeholders evaluate additional reforms in this area.
However, EEI suggests that the Commission provide additional
specification of the parameters of these studies, suggesting that the
Commission clarify that such studies should not ignore existing work
and should be conducted in a cost-effective manner. EEI also urges the
Commission to have RTOs and ISOs study whether demand response is cost-
effective and to quantify benefits.\352\
---------------------------------------------------------------------------

    \352\ EEI at 18.
---------------------------------------------------------------------------

    266. Regional entities report that they are already engaged in some
of the issues the Commission described. With regard to future demand
response reforms, the ISO/RTO Council says that it is working to
develop standards for incorporating small demand response resources
into organized markets, and that it is actively engaged with NAESB to
standardize measurement and verification protocols.\353\ These efforts,
in combination with the Commission's technical conference, in which the
ISO/RTO Council participated, should benefit future discussions on
barriers, pricing, and standardization. The ISO/RTO Council looks
forward to sharing the results of its standardization initiative.
---------------------------------------------------------------------------

    \353\ ISO/RTO Council at 8.
---------------------------------------------------------------------------

    267. Midwest ISO supports the Commission's approach to identifying
additional demand response barriers and solutions, and states that many
issues regarding barriers and solutions to demand response resources
are already being addressed as part of the Midwest ISO's ongoing
emergency demand response and long-term resource adequacy
proceedings.\354\ Through the rest of 2008, the Midwest ISO's Demand
Response Working Group will facilitate many activities to further
identify measures to advance demand response resources.
---------------------------------------------------------------------------

    \354\ Midwest ISO at 14-15.
---------------------------------------------------------------------------

    268. NYISO agrees that this Final Rule should not mark the end of
the Commission's efforts in the demand response area and that further
improvements and additional enhancements should be explored. NYISO has
no objection to preparing the post-Final Rule report that the NOPR
proposes.\355\
---------------------------------------------------------------------------

    \355\ NYISO at 3.
---------------------------------------------------------------------------

    269. SPP notes that it is currently studying what further reforms
are necessary to eliminate barriers to demand response in its organized
markets. This process is done through its working groups and task
forces as well as participating in groups such as the ISO/RTO
Council.\356\
---------------------------------------------------------------------------

    \356\ SPP at 6.
---------------------------------------------------------------------------

    270. The California PUC believes that two important areas that
could be improved are the evaluation of the cost-effectiveness of
demand response and how it impacts load. The California PUC is working
with stakeholders on both of these issues. The California PUC would

also like to see more effective load-shifting and the technology that
allows for that to be encouraged to a greater degree.\357\
---------------------------------------------------------------------------

    \357\ California PUC at 20.
---------------------------------------------------------------------------

    271. Old Dominion supports the Commission's proposal to continue
discussions on demand response through RTO and ISO studies and suggests
that RTOs and ISOs be required to identify all minority views and not
just ``significant minority views'' as currently required by the NOPR.
Old Dominion sees lack of telemetry, high implementation costs,
institutional barriers related to cost recovery, insufficiently
detailed business rules, and demand response gaming as impediments to
demand response that should be discussed further.\358\
---------------------------------------------------------------------------

    \358\ Old Dominion at 16-19.
---------------------------------------------------------------------------

    272. Old Dominion also suggests that each RTO and ISO should be
directed to work with its stakeholders to develop by a specific date a
prioritized list of barriers to demand response and a timeline for
developing solutions to the same; that demand response should be
considered in the transmission planning process in accordance with
engineering-based transmission planning principles; and that
implementation of demand response should be evolutionary in accordance
with the sufficiency and certainty of business rules and availability
of necessary measurement and verification infrastructure. Similarly,
California DWR asks the Commission to require RTOs and ISOs to provide
a listing of barriers identified by market participants, state or local
regulators, the RTO or ISO market monitor, and the RTO or ISO itself;
further, the RTOs and ISOs would provide information on their response
to each barrier and let the Commission know if additional action is
needed.\359\
---------------------------------------------------------------------------

    \359\ California DWR at 37.
---------------------------------------------------------------------------

    273. Public Interest Organizations recommend that the Commission
schedule a technical conference in each region to address both general
and region-specific barriers.\360\ Public Interest Organizations also
recommend that RTOs and ISOs be required to: (1) Assess the potential
of other demand-side resources in their control areas, including demand
response, energy efficiency, and environmentally benign and efficient
behind-the-meter distributed generation; (2) analyze and quantify all
local and regional benefits as well as costs and risks of demand side
resources available to address grid needs; and (3) assess and report on
the longer-term impacts of demand resource participation on wholesale
price levels and volatility, grid congestion, and system reliability.
---------------------------------------------------------------------------

    \360\ Public Interest Organizations at 8.
---------------------------------------------------------------------------

b. Commission Determination
    274. The Commission adopts the requirement that each RTO or ISO
assess and report on any remaining barriers to comparable treatment of
demand response resources that are within the Commission's jurisdiction
and to submit its findings and any proposed solutions, along with a
timeline for implementation, to the Commission within six months of the
Final Rule's publication in the  Federal Register. We further adopt the
requirement that each RTO's or ISO's Independent Market Monitor must
submit a report describing its views on these issues to the Commission.
To ensure that minority views are adequately represented, the
Commission requires that the RTO or ISO, in its report, identify any
significant minority views; this does not, however, require reporting
every opinion of every individual stakeholder.
    275. The Commission appreciates the many thoughtful comments
received in response to this proposal. RTOs and ISOs have a duty to
remove unreasonable barriers to treating demand response resources
comparably with other resources and the required report will help RTOs,
ISOs, and the Commission to identify and address such barriers. The
report should identify all known barriers, and provide an in-depth
analysis of those that are practical to analyze in the compliance time
frame given and a time frame for analyzing the remainder. As commenters
have noted, this should include (but is not limited to) technical
requirements as well as performance verification limitations. It need
not contain, however, a formal cost-benefit analysis of each barrier
and a proposal to overcome it. Public Interest Organizations suggest
that RTOs and ISOs might hold regional conferences on this topic, and
while we agree this may have merit, we leave to each region the means
of developing its report.
    276. Energy efficiency and distributed generation are valuable
resources, as commenters point out; however, the scope of this rule is
limited to removing barriers to comparable treatment of demandresponse
resources in the organized markets. Hence, we will not require RTOs and
ISOs to study these resources in the report we require. Nevertheless,
nothing here precludes RTOs and ISOs from analyzing barriers to energy
efficiency measures and distributed generation in their markets and
proposing revisions to their tariffs that integrate these measures into
their markets.

B. Long-Term Power Contracting in Organized Markets

    277. In this section of the Final Rule, the Commission establishes
a requirement that RTOs and ISOs dedicate a portion of their Web sites
for market participants to post offers to buy or sell electric energy
on a long-term basis. This requirement is designed to improve
transparency in the contracting process to encourage long-term
contracting for electric power. The Commission requires each RTO or ISO
to submit a compliance filing describing actions the RTO or ISO has
taken, or plans to take, to comply with the requirement and providing
information on the bulletin board the RTO or ISO has chosen to
implement.
1. Background
    278. Long-term power contracts are an important element of 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 can also
improve price stability, mitigate the risk of market power abuse, and
provide a platform for investment in new generation and transmission.
    279. As the Commission noted in the NOPR, having an organized
market in a region 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.\361\ 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.
---------------------------------------------------------------------------

    \361\ NOPR, FERC Stats. & Regs. ] 32,628 at P 130.
---------------------------------------------------------------------------

    280. 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.\362\ 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 provided a uniform and
transparent interconnection process and provided for interconnection
with network integration service to facilitate long-term reliance on
new generation.\363\ 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.\364\
---------------------------------------------------------------------------

    \362\ 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).
    \363\ 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).
    \364\ Devon Power, LLC, 115 FERC ] 61,340, order on reh'g, 117
FERC ] 61,133 (2006), aff'd in part and rev'd in part sub nom. Maine
Pub. Utils. Comm'n v. FERC, 520 F.3d 464 (DC 2008); PJM
Interconnection, LLC, 117 FERC ] 61,331 (2006).
---------------------------------------------------------------------------

    281. The Commission did not find that there is a fundamental
problem with long-term contracting for electric power, either inside or
outside of organized markets. The interest among buyers and sellers in
engaging in long-term contracting fluctuates depending upon the balance
of resources and demand in the market for power. Interest among buyers
for long-term arrangements was low when excess generation was readily
available. Although demand for long-term contracting by buyers has
increased as reserve margins have shrunk, buyers are still able to
enter into long-term contracts. These contracts may be at higher prices
than in the past, but this is a result of market factors, such as
changes in fuel prices and shifting supply and demand. Finding no
fundamental problem preventing parties from contracting on a long-term
basis, the Commission proposed to limit its action in this proceeding
to improving transparency in long-term contracting in organized
markets.
    282. In the NOPR, the Commission stated that further transparency
in long-term electric energy markets would facilitate efforts by both
sellers and buyers to include long-term contracts in their energy
portfolios. This is especially true for 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. While
the market has the most important role to play in disseminating
information, an RTO or ISO can also promote greater transparency and
liquidity in long-term power markets,\365\ and thus help reduce
possible over-reliance on spot markets. In the NOPR, the Commission
proposed 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.\366\
---------------------------------------------------------------------------

    \365\ Transcript of Conference at 117, Conference on Competition
in Wholesale Power Markets, Docket No. AD07-7-000 (May 8, 2007).
    \366\ NOPR, FERC Stats. & Regs. ] 32,628 at P 137.
---------------------------------------------------------------------------

2. Commission Proposal
    283. In the NOPR, the Commission proposed to require that RTOs and
ISOs dedicate a portion of their Web sites for market participants to
post offers to buy or sell electric energy on a long-term basis.\367\
The Commission stated that the proposal for an RTO or ISO Web site
``bulletin board'' for posting long-term offers to sell or buy electric
energy is designed to facilitate the long-term contracting process by
increasing the transparency of the availability of potential sellers
and buyers for market participants. The Commission did not propose to
mandate the specific type of bulletin board that each RTO and ISO must
post, but proposed to require each to work with its stakeholders to
design a solution that works for its market participants.\368\ The
Commission also encouraged RTOs and ISOs to work with stakeholders to
facilitate long-term power contracting.
---------------------------------------------------------------------------

    \367\ Id. P 155.
    \368\ Id. P 156-57.
---------------------------------------------------------------------------

    284. The Commission proposed to require RTOs and ISOs 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 RTO or ISO has taken or plans to take to comply with the
long-term contracts bulletin board requirement and provide information
on the bulletin board the RTO or ISO has chosen to implement.\369\
---------------------------------------------------------------------------

    \369\ Id. P 158.
---------------------------------------------------------------------------

    285. The Commission also sought public comment on a number of
questions related to its proposal, including comment on minimum
necessary features and processes for the Web page and the proposal that
the RTO or ISO should not be responsible for the content of the offers
on its bulletin board. Further, the Commission solicited comment on
provisions for the disclaimer of liability by the RTO or ISO and by
market participants.\370\
---------------------------------------------------------------------------

    \370\ Id. P 159.
---------------------------------------------------------------------------

3. Comments
    286. A majority of commenters either support \371\ or do not object
\372\ to the Commission's proposal to require RTOs and ISOs to
implement bulletin boards to facilitate long-term power contracts. Most
commenters note that the Commission should not impose conditions on the
format of the bulletin board, but should instead leave the creation to
RTOs and ISOs in conjunction with their stakeholders.\373\ Some
commenters also state that the Commission should act to ensure that
RTOs or ISOs should not be held liable for postings on their bulletin
boards.\374\ For instance, NYISO states that the Commission should
allow posted disclaimers against liability by the RTOs on their
bulletin board Web sites. Midwest ISO also requests that the Commission
provide assurance that RTOs and ISOs will not be exposed to antitrust
liability for providing a contracting forum. Finally, commenters
generally believe that the cost of a bulletin board will be low for
RTOs and ISOs.\375\
---------------------------------------------------------------------------

    \371\ See, e.g., APPA at 72; DC Energy at 8; EEI at 4; Exelon at
15; LPPC at 4; Midwest ISO at 18; NEPOOL at 19-20; New York PSC at
4; NIPSCO at 15; NRECA at 47; NSTAR at 5; NYISO at 11; OMS at 7;
Pennsylvania PUC at 16; Steel Producers at 10; and Xcel at 11.
NIPSCO notes that its support is contingent on the bulletin boards
having common elements or generic features across all organized
markets, and the boards not burdening the RTO.
    \372\ See, e.g., Ameren at 29-30; EPSA at 12; FirstEnergy at 12;
Indianapolis P&L at 4; Industrial Coalitions at 32-35; Industrial
Customers at 21; North Carolina Electric Membership at 13-15; Ohio
PUC at 16; Old Dominion at 19-20; OMS at 7-8; PJM at 2; and TAPS at
3.
    \373\ See, e.g., Ameren at 30; APPA at 72; CAISO at 19; DC
Energy at 9; EEI at 20; EPSA at 12; Exelon at 15; NEPOOL
Participants at 19-20; North Carolina Electric Membership at 13-15;
NYISO at 12; Old Dominion at 19; PJM at 2; and Xcel at 11.
    \374\ See, e.g., Ameren at 30; CAISO at 19; Exelon at 15;
Midwest ISO at 18; NRECA at 48; NYISO at 12; Ohio PUC at 16; Reliant
at 11; and SPP at 7.
    \375\ See, e.g., Ameren at 30; CAISO at 19; EEI at 20; Midwest
ISO at 18; and PJM at 2.
---------------------------------------------------------------------------

    287. Those commenters who do not support the Commission's proposal
generally argue that a bulletin board would be an unnecessary
requirement. Both CAISO and California Munis state that CAISO is busy
with other projects, and that a bulletin board would be low

on the list of necessary items.\376\ CAISO is concerned over the
proposed deadline for implementation, and argues that any deadline
should be after the launch of its MRTU. It also believes that regions
should be allowed to be flexible on whether to develop bulletin boards
and how many features the board should have. California PUC agrees that
a federal requirement is unnecessary, and that the Commission should
authorize, rather than require, action on bulletin boards. SPP also
advocates that the Commission should make its proposal a voluntary one,
rather than a regulatory requirement. Some commenters, such as EPSA,
NIPSCO, Ohio PUC, Steel Producers and North Carolina Electric
Membership, who do not object to the proposal, indicate that they do
not believe that bulletin boards will have a significant effect on
long-term contracting. FirstEnergy indicates that, although it does not
object to the proposal, it believes that sufficient information on the
market is already provided by private companies and thus RTOs do not
need to be further involved. Reliant states that bulletin boards would
not resolve any of the current impediments to long-term contracts, as
there are already sufficient mechanisms in the market to provide
information for buyers and sellers.
---------------------------------------------------------------------------

    \376\ CAISO at 19; California Munis at 18.
---------------------------------------------------------------------------

    288. Commenters' suggestions for implementing the bulletin board
requirement include: (1) A requirement that posts should not be viewed
as binding offers but rather as voluntary postings; \377\ (2) a
suggestion that price information not be required in postings to the
bulletin board; \378\ (3) a requirement that any significant costs of
the bulletin board should be borne by its users; \379\ (4) an expansion
of the data posted to include percentage and volume of bilaterally
contracted energy; \380\ (5) an expansion of the bulletin board to
cover other products such as ancillary services; \381\ (6) a
requirement that RTOs and ISOs collect and disseminate information on
the usefulness of bulletin boards; \382\ (7) a requirement that
bulletin boards provide common elements or generic features across all
organized markets; and (8) a mandated cost analysis of the bulletin
board by the RTO/ISO.\383\
---------------------------------------------------------------------------

    \377\ Ameren at 30-31.
    \378\ Xcel at 11-12.
    \379\ CAISO at 18-20; EEI at 21.
    \380\ Industrial Coalitions at 33-35.
    \381\ NEPOOL Participants at 18-21.
    \382\ Pennsylvania PUC at 16.
    \383\ Old Dominion at 19-20.
---------------------------------------------------------------------------

    289. Midwest ISO states that it already has an early version of a
portal in place on its Web site, and that it would involve minimal
costs to create a bulletin board for long-term contracts. Midwest ISO
recommends that, as an intermediate measure prior to the implementation
of a web portal, contracting parties provide essential terms--including
price, quantity, term, and receipt and delivery points--to the RTO or
ISO and fill out a form indicating the data they wish to be kept
confidential.\384\
---------------------------------------------------------------------------

    \384\ Midwest ISO at 19.
---------------------------------------------------------------------------

    290. NEPOOL Participants raises some legal and other issues for the
Commission to consider when developing its bulletin board requirement.
These include: (1) Ensuring that postings are not considered binding
offers under the Uniform Commercial Code; (2) not allowing the board to
substitute for regulated markets; and (3) ensuring that the same
antitrust and market manipulation rules that apply to market behavior
also apply to activity on the bulletin board.\385\
---------------------------------------------------------------------------

    \385\ NEPOOL Participants at 20.
---------------------------------------------------------------------------

    291. NSTAR states that it is concerned that data from the bulletin
board containing prices for long-term power could influence market
prices. Accordingly, it asks the Commission to consider additional
requirements to ensure that information posted on the boards is from a
representative cross-section of market participants, to reduce the
impact of the bulletin board on market prices.\386\
---------------------------------------------------------------------------

    \386\ NSTAR at 5-6.
---------------------------------------------------------------------------

    292. Industrial Customers state that the Commission should define
``long-term'' as substantially more than one year and consistent with
building cycles of new or expanded production capacity. They argue that
any entity making construction decisions on new facilities needs
knowledge of prices going forward to make investment decisions.
    293. Many commenters argue that the Commission did not address in
its proposed regulations the actual causes behind the lack of long-term
contracts in the market. Several commenters point to the structure of
markets within the RTO system, which they assert causes an over-
reliance on spot markets and a lack of long-term contracts. They say
this structure includes LMP pricing, which provides a disincentive for
producers to contract for lower prices on a long-term basis. For
instance, APPA points to studies including one performed by Synapse
Energy Economics, Inc., indicating that there are structural barriers
to long-term contracting in the organized markets. Other commenters
point to the need for stability of market rules and uncertainty about
climate change policies as key factors in keeping parties from
contracting on a long-term basis.\387\ Reliant indicates that the issue
is actually a difference in perceptions between buyers and sellers
about the appropriate price of energy and the allocation of risk
between the buyers and sellers. NRECA points to several other issues
that affect long-term contracting in organized markets, including price
volatility, price risk, delivery risk and resource availability. Ohio
PUC echoes some of these concerns, noting that risks with recovering
capital costs are preventing new generation from being built in states
with retail access, and that unpredictable congestion charges and
uncertainty surrounding the working of RTO markets are also hurting
long-term contracting.
---------------------------------------------------------------------------

    \387\ See, e.g., SoCal Edison-SDG&E at 4; EPSA at 11-12.
---------------------------------------------------------------------------

    294. Commenters suggest several actions that the Commission should
take to remedy these broader concerns. Commenters, including NRECA,
Industrial Coalitions and Blue Ridge, ask the Commission to do its own
investigation of the bilateral contracting process and over-reliance on
the spot markets. North Carolina Electric Membership notes that a
requirement of ``full support'' from stakeholders for more complex RTO
or ISO market design changes may increase the stability and
predictability to these markets, which may facilitate longer term
contracting. Constellation states that the Commission should promote
rules to encourage contracting across seams and take measures to
provide sufficient transparency, information and regulatory certainty
to manage transactional risk. Cogeneration Parties argue that the
Commission should take action to improve price transparency in
organized markets, and assist in the creation of standard products and
contracting terms for long-term contracting. SoCal Edison-SDG&E argue
that local measures to improve regulatory stability would do more to
support long-term contracting than a Commission rulemaking. They point
to the California PUC proceeding to develop long- term resource
adequacy requirements as one such local measure, and argue that the
Commission should focus on the merits of individual RTO or ISO
proposals rather than a nationwide rulemaking. Finally, TAPS notes that
an important way to facilitate long-term contracts is to ensure that
load-serving entities can access necessary transmission resources.

However, TAPS is concerned by recent orders indicating that the
Commission may relieve RTOs of certain responsibilities they have under
Order No. 681 \388\ to plan for resource adequacy and maintain
simultaneous feasibility of financial rights. It argues that if the
Commission is serious about facilitating long-term contracts, it should
require RTOs and ISOs to live up to the letter and spirit of Order No.
681.
---------------------------------------------------------------------------

    \388\ 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).
---------------------------------------------------------------------------

    295. Several commenters call on the Commission to hold a technical
conference and require a stakeholder process to address the lack of
certain financial hedging instruments so as to reduce price uncertainty
for long-term contracts. For instance, both California Munis and SMUD
argue that buyers in CAISO lack options-type instruments for hedging
LMP congestion costs and lack a means to hedge against the cost of
marginal losses. Providing these hedges, they argue, would encourage
long term contracting.
    296. Commenters raise a variety of other issues related to long-
term contracting. Midwest Energy states that it is concerned about the
impact of a Day-2 market on long-term contracts, and appreciates that
the Commission is not imposing Day-2 market structures on all RTOs and
ISOs.
    297. California PUC notes that it is presently addressing long-term
contracting within its procurement proceedings. For instance, under the
California PUC's Resource Adequacy program, all California PUC
jurisdictional LSEs are required to procure necessary capacity on a
year-ahead basis. Additionally, California PUC requires LSEs to
identify longer-term needs and procure energy necessary to meet those
needs through a request for offer process that includes both long and
short-term contracts. California PUC questions the Commission's legal
basis for intervening in long-term contracting, stating that the NOPR
does not explain the statutory authority for the Commission's proposed
involvement in long-term energy supply contracts between generators and
LSEs. It notes that FPA section 215 does not authorize the Commission
to set or enforce compliance with standards for resource adequacy, and
that EPAct 2005 ``expressly retains state authority to assure the
reliability of the energy supply within their jurisdictions.'' \389\ It
seeks assurance that the Commission does not intend to exercise
jurisdiction over the wholesale energy market as a method of indirectly
modifying California's reliability processes.
---------------------------------------------------------------------------

    \389\ California PUC at 28 (citing 16 U.S.C. 824o(i)).
---------------------------------------------------------------------------

    298. Both New York PSC and NARUC state that the Commission should
not attempt to standardize long-term contracts. NARUC argues that
standardization would hurt state policy objectives such as integrated
resource planning, renewable portfolio standards and resource adequacy
requirements. New York PSC notes that any standardized forward products
should be developed through the RTO or ISO stakeholder process.
    299. PJM notes that it held a stakeholder forum in January 2008 to
discuss greater opportunities for long-term contracting in PJM. This
forum resulted in identification of areas for future action, which
included: (1) Education of policy makers and the public on the need for
new infrastructure; (2) improved coordination of various agency and
regulatory decision makers on market issues; (3) predictability and
stability in regulatory rules; (4) improvements in siting for
transmission and generation; (5) ways of steering revenue to increase
the amount of new generation; (6) more effective demand response
programs to increase market elasticity and reduce potential for
exercise of market power; (7) a portfolio of purchases to vary prices
and terms for state-sanctioned auctions; (8) further examination of
existing market models such as the AF&PA proposal; and (9) additional
credit support for parties interested in long- term contracting,
through methods such as syndication of credit risk and government
guarantees.\390\
---------------------------------------------------------------------------

    \390\ PJM at 3-4.
---------------------------------------------------------------------------

    300. Finally, APPA notes that although it appreciates the effort
that PJM put into holding its long-term contracting forums, APPA
understands that no concrete proposals for improving long-term
contracting have emerged as a result of the forums. Accordingly, APPA
cannot endorse the idea of similar efforts by other RTOs as suggested
by the Commission in the NOPR, given the scarce resources of RTOs and
market participants. Instead, APPA supports preparation of an in-depth
analysis of long-term contracting practices for each RTO region by the
RTO's MMU, given the MMU's knowledge of conditions ``on the ground.''
This analysis should consider impediments to long-term contracting and
measures that could be taken to support long-term contracts of
sufficient length to support the building of new generation.
4. Commission Determination
    301. We will require each RTO and ISO to dedicate a portion of its
Web site for market participants to post offers to buy or sell power on
a long-term basis. The Commission defines ``long-term'' as one year or
more for the purposes of this rule, but RTOs and ISOs may include
offers for contracts of less than a year on their Web sites as well.
The Web site should allow both buyers and sellers to post and read
offers for long-term power transactions. A majority of commenters
support this proposal, and we conclude that greater transparency from a
bulletin board for long-term power sales will benefit long-term
contracting.
    302. We are convinced by the comments that the costs involved for
creation and upkeep of the bulletin board are likely to be minimal and
are justified by the increased transparency for potential sellers and
buyers, and should thus be recovered similarly to other Web site costs.
A few commenters suggest that bulletin board costs should be borne by
its users. If an RTO or ISO in consultation with its stakeholders
believes that costs of the bulletin board will be significant, it may
explain in its compliance filing how it plans to recover the costs,
including whether it plans to charge users of the bulletin board.
    303. The Commission is not mandating any specific form for the Web
site beyond the requirements above. We will instead leave the
implementation to RTOs and ISOs and their stakeholders. This discretion
includes decisions over the type and amount of data to be posted by
participants, whether participants must include a proposed price in
their posting, as well as password and security requirements.
Commenters who have specific suggestions about the form and content of
the Web site bulletin boards, or concerns over cost issues, should
raise these suggestions with their RTOs or ISOs through the stakeholder
process. The compliance filing of each RTO or ISO will provide an
opportunity for interested persons to comment to the Commission on each
RTO's and ISO's method of compliance, such as the legal and other
concerns raised by NEPOOL Participants and others. The Commission does
not find it necessary to make a generic determination about these
concerns.
    304. The Commission agrees with commenters that RTOs and ISOs
should not be held liable for the postings of contracting parties.\391\
Significant

liability protection for message board operators is already provided
under federal law by the safe harbor provisions of the Communications
Decency Act.\392\ We anticipate that these provisions will apply to
RTOs and ISOs. Consistent with comments received, however, we encourage
RTOs and ISOs to post a disclaimer on their Web sites indicating that
they are not responsible for the content posted by users, and outlining
the terms and conditions under which users may post offers to buy or
sell under long-term agreements.
---------------------------------------------------------------------------

    \391\ The Commission does not see why having such a bulletin
board should necessarily expose an RTO or ISO to antitrust
liability, as suggested by Midwest ISO. However, the Commission
suggests that RTOs and ISOs explain any such concerns in their
compliance filings.
    \392\ 47 U.S.C. 230(c)(1) (``No provider or user of an
interactive computer service shall be treated as the publisher or
speaker of any information provided by another information content
provider.''). See, e.g., Universal Commun. Sys. v. Lycos, Inc., 478
F.3d 413 (1st Cir. 2007) (dismissing a suit against a content
provider for liability for posts on a community message board based
on the safe harbor provisions of the Communications Decency Act).
---------------------------------------------------------------------------

    305. In response to comments from NSTAR, the Commission is not
persuaded to forego the advantages of posting long-term contract term
proposals just because an entity might attempt to use the bulletin
board inappropriately. Further, we see no reason to mandate in this
proceeding specific limits on types of posting on RTO or ISO Web sites.
However, any attempt by posters to use this new feature to manipulate
the market price or market price indices will be subject to Commission
penalty or referral to other agencies having jurisdiction.\393\
---------------------------------------------------------------------------

    \393\ See Price Discovery in Natural Gas and Electric Markets,
104 FERC ] 61,121, at P 38 (2003).
---------------------------------------------------------------------------

    306. In response to the concerns raised by California PUC, New York
PSC and NARUC, the Commission notes that it is not taking any action at
this time to standardize long-term contracts, nor does the Commission
intend this bulletin board posting requirement to be a reliability
standard, to set a resource adequacy requirement, or to infringe on
state regulatory jurisdiction.
    307. We anticipate that this requirement will enhance transparency
and help foster long-term contracting without standardizing RTO and ISO
approaches or intruding unduly into matters more appropriate for
markets and the private sector. The comments provide strong support for
the bulletin board proposal, and do not persuade us that there is any
reason to delay implementation of this requirement, despite CAISO's
request that we postpone it until after MRTU is complete. Some of the
other requirements commenters propose would require more
standardization and set requirements that are better left to the free
market and to the private sector. We do not wish to delay or undermine
this process by imposing too many requirements. Therefore, the
Commission will not require in this rulemaking other actions related to
long-term contracting recommended by some commenters.
    308. As discussed in the NOPR, many of the broader issues
commenters raise herein regarding the structure and functionality of
organized markets are beyond the scope of this proceeding and would
require further development to be ripe for inclusion in a
rulemaking.\394\ The Commission further explored many of the issues
during the recent technical conference held to discuss the proposals of
American Forest and Portland Cement Association, et al. \395\ The
Commission continues to review the information it received at the
technical conference for possible action.
---------------------------------------------------------------------------

    \394\ NOPR, FERC Stats. & Regs. ] 32,628 at P 153, 161.
    \395\ Supplemental Notice of Technical Conference, Capacity
Markets in Regions with Organized Electric Markets, Docket No. AD08-
4-000 (April 25, 2008).
---------------------------------------------------------------------------

    309. RTOs and ISOs are required to make a compliance filing within
six months of the date of publication of this rule in the Federal
Register. The filing should explain the actions the RTO or ISO has
taken or plans to take to comply with the long-term contracts bulletin
board requirement and provide information on the bulletin board the RTO
or ISO has chosen to implement. The Commission appreciates concerns of
commenters that RTOs and ISOs, such as CAISO, have market reforms in
progress, and these entities may take into account the timetable of
reforms in progress when developing their compliance plans. We find
that the compliance period of six months is an adequate time to make
any necessary adjustments to planned reforms and explain them in the
compliance filings.

C. Market-Monitoring Policies

    310. In this section of the Final Rule, the Commission makes
reforms to enhance the market monitoring function and thereby improve
the performance and transparency of organized RTO and ISO markets. The
two principal areas addressed are the independence and functions of the
MMU, and information sharing. The Final Rule requires tariff provisions
that will remove the MMU from the direct supervision of RTO or ISO
management, and requires, in most instances, that the MMU report
directly to the RTO or ISO board of directors.
    311. The Final Rule also imposes obligations on the RTOs and ISOs
to provide the MMU with adequate tools with which to carry out its
duties. The Final Rule broadens the reporting duties of the MMU,
clarifies that it is to refer to Commission staff any instances of
misconduct by the RTO or ISO, as well as by a market participant, and
expands the MMU's referral obligations to include perceived market
design flaws as well as instances of tariff or rule violations.
    312. In the area of mitigation, the Final Rule separates the duties
of internal and external MMUs in the case of RTOs and ISOs that employ
a hybrid structure, and provides that for non-hybrid MMUs, mitigation
by the MMU should center on retrospective mitigation and the
calculation of inputs required for the RTO or ISO to conduct
prospective mitigation. Given the critical nature of MMU duties, the
Final Rule requires RTOs and ISOs to include in their tariffs ethical
standards for their MMUs. The Final Rule also requires RTOs and ISOs to
consolidate all of their MMU provisions into one section of their
tariffs.
    313. In the area of information sharing, the Final Rule expands the
category of recipients for the information gathered by the MMU, and
broadens MMU reporting requirements. It also expands the abilities of
state commissions to obtain additional and more tailored information
from MMUs, while preserving confidentiality protections. The Final Rule
also reduces the lag time for the release of offer and bid data.
1. Background
    314. Since the inception of organized energy markets, the
Commission has required RTOs and ISOs to employ a market monitoring
function. MMUs have consistently played a vital role in reporting on
the state of the markets and ferreting out wrongdoing by market
participants. In May of 2005, the Commission issued a Policy Statement
on Market Monitoring Units,\396\ which set forth the tasks MMUs were
expected to perform, and established a procedure for MMU referral of
suspected violations to Commission staff.
---------------------------------------------------------------------------

    \396\ Market Monitoring Units in Regional Transmission
Organizations and Independent System Operators, 111 FERC ] 61,267
(2005) (Policy Statement).
---------------------------------------------------------------------------

    315. Concerns raised by interested entities in the context of
individual RTOs and ISOs led the Commission to undertake a generic
examination of MMUs at a technical conference held on April 5,
2007.\397\ At that conference, the

issues receiving the bulk of the attention centered on the perceived
need for, and suggested methods of achieving, independence on the part
of MMUs so they can perform their assigned functions, and the content
and proper recipients of the MMUs' market data and analysis. These
issues accorded with the Commission's perception of the areas within
the market monitoring function that needed review and strengthening.
---------------------------------------------------------------------------

    \397\ Notice and Agenda for the Conference, Review of Market
Monitoring Policies, Docket No. AD07-8-000 (Mar. 30, 2007).
---------------------------------------------------------------------------

    316. In the ANOPR and the NOPR, the Commission proposed numerous
reforms designed to strengthen MMU independence and broaden information
sharing by the MMUs. Many of these proposed reforms have been carried
forward to this Final Rule, while others have been modified or, in a
few cases, eliminated, based on the comments received from interested
entities. The resulting reforms set forth in the Final Rule provide the
MMUs with enhanced ability to monitor the markets and provide
interested entities with the ability to receive additional market
information, thereby improving market performance and transparency.
2. Independence and Function
    317. In the NOPR, the Commission acknowledged the importance of MMU
independence, and stated that there are several means by which to
balance independence and accountability. The Commission proposed a
balanced and flexible approach that 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.
a. Structure and Tools
i. Commission Proposal
    318. The Commission proposed 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
declined to remove MMUs from oversight by their RTOs and ISOs, as the
MMU's principal duties involve monitoring RTO and ISO markets and
advising the RTO or ISO on market performance. The Commission noted
that the fact that MMUs also have reporting obligations to outside
parties does not change their relationship with the RTOs and ISOs,
which are, by Commission policy, required to maintain a market
monitoring function.
    319. The Commission further proposed 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 Commission
noted that the RTO or ISO should, in addition, 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
or ISO data, be kept within the MMU's exclusive control.
ii. Comments
    320. Constellation states the Commission's proposals are on the
right track.\398\ Dominion Resources and EPSA agree.\399\ Potomac
Economics states that the Commission's proposals appear generally to be
consistent with the nature of the existing relationship between Potomac
Economics and the Midwest ISO, which allows Potomac Economics
sufficient independence to monitor both the market participants and the
market operator. Further, Potomac Economics, the Midwest ISO and state
regulators all see the current structure as providing needed
independence while ensuring responsiveness to regional needs.\400\
---------------------------------------------------------------------------

    \398\ Constellation at 16.
    \399\ Dominion Resources at 8; EPSA at 12-13.
    \400\ Potomac Economics at 7-8.
---------------------------------------------------------------------------

    321. Most commenters agree that the Commission should allow each
RTO or ISO to determine its own structural relationship with its MMU
through its stakeholder process.\401\
---------------------------------------------------------------------------

    \401\ Ameren, California PUC, EEI, EPSA, FirstEnergy, and North
Carolina Electric Membership.
---------------------------------------------------------------------------

    322. PG&E endorses the use of hybrid MMU structures (internal MMU
reporting to RTO or ISO management and external MMU reporting to the
RTO or ISO board), but emphasizes the RTO or ISO must meet the
following conditions: (1) both MMUs must have access to all data and
the ability to request data and information from market participants if
needed to perform market analysis functions; (2) both MMUs should
cooperate in assessing any issues regarding the markets, including
sharing identification of market problems developed by either MMU, and
sharing complaints or requests for investigation raised by any market
participant to either MMU; and (3) both MMUs must have adequate
resources and authority to refer matters to the Commission and its
Office of Enforcement.\402\
---------------------------------------------------------------------------

    \402\ PG&E at 14-15.
---------------------------------------------------------------------------

    323. Industrial Consumers believe the Commission should mandate the
hybrid structure for all RTOs or ISOs, reasoning that the external MMU,
if not dependent for its main salary or contract on services performed
for the RTO or ISO, is presumed to be independent. It cites the
California ISO's Market Surveillance Committee as a successful
example.\403\
---------------------------------------------------------------------------

    \403\ Industrial Consumers at 21.
---------------------------------------------------------------------------

    324. Most commenters agree that the Commission should require each
RTO or ISO to include a tariff provision imposing on 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. They
also agree that to ensure the MMU's independence, the MMU should have
access to the RTO's or ISO's database of market information. Further
they agree that any data created by the MMUs should be kept within the
exclusive control of the MMU.\404\ Three commenters state that the
Commission should consider the provisions of a recent settlement
agreement it approved as constituting ``best practices.'' \405\
Further, APPA states that the Commission must specifically incorporate
all of the MMU-related provisions of the PJM MMU Settlement Order into
the Final Rule because the provisions now appear in a settlement
agreement and have no precedential value.\406\ CAISO asks the
Commission to clarify that ``exclusive control'' means that an MMU has
the right to keep data it creates within its control, but has the
option to share such data. CAISO states it appears this right is
implicit in the Commission's proposal, but the Commission should make
it explicit.\407\ Reliant suggests that the Commission should clarify
that MMUs should have full access to RTO or ISO operational information
to determine if RTO operational decisions are negatively impacting
appropriate price signals.\408\
---------------------------------------------------------------------------

    \404\ Ameren, APPA, Exelon, California Munis, CAISO, EPSA,
FirstEnergy, Industrial Consumers, ISO New England, Midwest Energy,
Midwest ISO, Old Dominion, Pennsylvania PUC, PJM Power Providers,
Reliant, and SPP.
    \405\ APPA, Exelon and Pennsylvania PUC (citing Allegheny
Electric Cooperative, Inc., et al. v. PJM Interconnection, LLC, 122
FERC ] 61,257 (2008) (PJM MMU Settlement Order)).
    \406\ APPA at 6-7, 78-80.
    \407\ CAISO at 12-13.
    \408\ Reliant at 13.
---------------------------------------------------------------------------

    325. APPA and Ohio PUC state that MMU offices should be at the RTO
or ISO site.\409\ APPA, California PUC and TAPS believe that the
Commission should require a tariff provision

directing an MMU to report to the Commission any concerns it has with
inadequate access to market data, resources, or personnel.
---------------------------------------------------------------------------

    \409\ APPA at 80-81; Ohio PUC at 23.
---------------------------------------------------------------------------

iii. Commission Determination
    326. The Commission adopts the NOPR proposal that each RTO or ISO
should decide for itself the structural relationship it desires for its
MMU. Regional variances and preferences in this regard should be
respected, and we decline to mandate any one structure for the MMU
function.
    327. We therefore reject the suggestion from Industrial Consumers
that we mandate a hybrid-type MMU structure consisting of both an
internal and an external monitor. While the hybrid structure can
provide many benefits, we have not observed that any RTOs or ISOs with
purely internal or external MMUs suffer deficiencies in performance as
a result. Nor would a hybrid MMU necessarily be more or less
independent than an internal or an external MMU: Hybrid MMUs receive
funding from their RTOs or ISOs, just as do internal and external MMUs.
Neither Industrial Consumers nor other commenters have presented
examples of dysfunctional MMUs, much less a dysfunction that can be
attributed to a particular organizational structure.
    328. We also adopt the NOPR proposal that RTOs and ISOs include
provisions in their tariffs: (1) Obliging themselves to provide their
MMUs with access to market data, resources and personnel sufficient to
enable them to carry out their functions; (2) granting MMUs full access
to the RTO or ISO database; and (3) granting MMUs exclusive control
over any MMU-created data. Without the proper tools, it would be
impossible for MMUs to perform their functions.
    329. We clarify, in accordance with CAISO's request, that MMUs may
share data under their exclusive control, subject to pertinent
confidentiality provisions. We also clarify, as requested by Reliant,
that access to the RTO or ISO database includes access to RTO or ISO
operational information.
    330. We decline to adopt as ``best practices'' the provisions of
the recent settlement agreement entered into by PJM and a number of
interested parties concerning the structure, function and independence
of PJM's MMU (PJM/MMU Settlement Agreement).\410\ The provisions of
that agreement were specific to one RTO, and represented a negotiated
balancing of interests. It would be inappropriate to impose the
specifics of that settlement on all other RTOs and ISOs, and especially
to do so without notice and the opportunity to comment. However, we
observe that the PJM/MMU Settlement Agreement is in accord with our
determinations in this Final Rule regarding the appropriate MMU
structure and tools.\411\
---------------------------------------------------------------------------

    \410\ See PJM MMU Settlement Order, 122 FERC ] 61,257.
    \411\ In the event of any inconsistencies, the requirements
imposed in this Final Rule, which have the force of regulation,
would control. Indeed, the PJM/MMU Settlement Agreement itself so
acknowledges, as the Commission noted in its order approving the
settlement. Id. P 24.
---------------------------------------------------------------------------

    331. We decline to require that MMU offices be at the RTO or ISO
site. While such a location may well have its advantages, it is also
possible that, in this age of electronic communications, other forms of
access may be satisfactory. In any event, this is a level of detail
that is best worked out on a case-by-case basis.
    332. We find it unnecessary to require inclusion of a tariff
provision directing the MMU to report to the Commission any concerns it
may have with inadequate access to market data, resources or personnel.
As we noted in the NOPR, there are already adequate mechanisms for the
MMU to bring any noncompliance in this regard to the Commission's
attention.\412\
---------------------------------------------------------------------------

    \412\ NOPR at P 182.
---------------------------------------------------------------------------

b. Oversight
i. Commission Proposal
    333. The Commission proposed in the NOPR 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
proposed that management representatives on the board be excluded from
this oversight function. However, the Commission noted that, if RTOs
and ISOs deem it appropriate, they may have the MMU report to
management for administrative purposes, such as pension management,
payroll and the like. The Commission also proposed that, if an RTO or
ISO has a hybrid MMU structure with two market monitoring bodies, an
internal and an external one, the RTO or ISO may have the internal
market monitor report to management with respect to both its market
monitoring and administrative functions, and the external market
monitor report to the board. The Commission rejected the suggestion
that the MMU should report to a body outside of the RTO or ISO
structure.
    334. The Commission also declined to impose a blanket requirement
that major changes in MMU status, such as termination of employment, be
made subject to Commission review. Such requirements are included in
the contractual arrangements of certain RTOs or ISOs, but the
Commission rejected imposing a ``one size fits all'' requirement on the
remaining RTOs or ISOs absent their consent.
ii. Comments
    335. Commenters addressing the subject generally agreed that an MMU
should report to an RTO or ISO board rather than to management.\413\
APPA cautions that an RTO or ISO board must be prepared to take
appropriate oversight action when an MMU reports to it.\414\ FTC states
that given the importance of MMU independence and recent concerns in
this area, the Commission may wish to earmark this topic for periodic
review, including an analysis of best practices both in the United
States and abroad.\415\
---------------------------------------------------------------------------

    \413\ American Forest, APPA, CAISO, DC Energy, EPSA, FTC,
Industrial Consumers, ISO New England, LPPC, Midwest ISO, New York
PSC, North Carolina Electric Membership, NRECA, NYISO, Old Dominion,
PJM Power Providers, Reliant, SPP and TAPS.
    \414\ APPA at 81.
    \415\ FTC at 30.
---------------------------------------------------------------------------

    336. With respect to the proposed exception for hybrid MMUs, five
commenters support the proposal.\416\ For hybrids, most commenters
agree that the internal monitor may report to management if the
external monitor reports to the board. Another commenter, DC Energy,
opposes this proposal, arguing that all market monitors should report
to the board to ensure independence. TAPS states that the mix of duties
between internal and external market monitors varies from region to
region, with the external market monitor being ``weak'' in some cases
and the internal market monitor performing the essential duties. TAPS
proposes that the Commission require that the external market monitor
be responsible for the MMU duties spelled out in the NOPR (e.g.,
identifying ineffective market rules, reviewing the performance of the
market, and making referrals to the Commission).
---------------------------------------------------------------------------

    \416\ CAISO; California PUC; EEI; NYISO; and Reliant.
---------------------------------------------------------------------------

    337. On the issue of reporting to a body other than the RTO or ISO,
Ohio PUC believes that an external MMU should report to the RTO's or
ISO's board of directors only as an interim step. It states that the
Commission's long-term goal should be total MMU independence, with the
MMUs reporting as consultants to a Federal-State Joint Board on Market
Monitor Oversight or to some other form of a joint-board construct,
manned by a Commissioner and state commissioner

or their designees. Ohio PUC believes this construct would provide MMU
autonomy and relieve the board of directors of the RTO or ISO from
arbitrating disputes between an RTO or ISO and the MMU.\417\
---------------------------------------------------------------------------

    \417\ Ohio PUC at 16-21.
---------------------------------------------------------------------------

    338. Four commenters disagree with the Commission's proposal not to
impose a blanket requirement that major changes in the MMU's employment
arrangements be subject to Commission review and approval.\418\ APPA
states that substantial changes such as contract termination and
renewal for external market monitors, or major changes in employment
arrangements for internal market monitors, should be subject to
Commission review and approval. It also suggests that the Commission
adopt the pertinent provision of the PJM/MMU Settlement Agreement as a
``best practice,'' reasoning that this would give MMUs a measure of job
security that might allow them to be more independent in their
assessments.\419\ California PUC and Steel Producers agree that
significant relational changes should be subject to Commission review,
including changes to the structure of an MMU or the dismissal of key
MMU personnel.\420\ TAPS states that Commission review of important
changes would provide a backstop to ensure MMU independence, and would
give market participants and the Commission a mechanism to assess
whether an RTO or ISO has fulfilled its obligations toward the MMU. It
argues that the Commission has not provided a valid reason not to
require approval of such MMU changes.\421\
---------------------------------------------------------------------------

    \418\ APPA; California PUC; Steel Producers; and TAPS.
    \419\ APPA at 82.
    \420\ California PUC at 34; Steel Producers at 11-12.
    \421\ TAPS at 49.
---------------------------------------------------------------------------

iii. Commission Determination
    339. We adopt the NOPR proposal requiring MMUs to report to the RTO
or ISO board of directors, with management representatives on the board
excluded from this oversight function. Removing the MMU from reporting
to management will give it the separation needed to foster
independence. If occasion demands, we will revisit this decision.
However, we decline to ``earmark'' it for periodic review as requested
by the FTC. We also adopt the NOPR proposal allowing RTOs and ISOs, if
they deem it appropriate, to permit the MMU to report to management for
administrative purposes, such as pension management, payroll and the
like.
    340. Commenters generally agreed with our proposed exception for
hybrid MMUs, in which we suggested that the internal market monitor may
continue to report to management, while the external market monitor
should report to the board. But TAPS points out that in some hybrid
structures, the most important functions of the MMU are performed by
the internal market monitor, with the external market monitor playing a
much ``weaker'' role. We agree that such a division of labor presents a
problem, and could result in the rule being swallowed by the exception.
    341. However, we decline to adopt TAPS's suggested solution of
requiring the external market monitor to assume responsibility for the
core MMU duties spelled out in this order (identifying ineffective
market rules, reviewing the performance of the markets, and making
referrals to the Commission). This solution might impose upon the RTO
or ISO an MMU structure that it does not want. Instead, we will require
that if the internal market monitor is responsible for carrying out any
or all of the above-cited core MMU functions, it must report to the
board (as must the external market monitor). This solution allows the
RTO or ISO to structure its MMU function in the way it deems most
suitable, while also ensuring that the market monitor that performs the
core MMU functions enjoys the independence from management that
reporting to the board accomplishes.
    342. Ohio PUC suggests that reporting to the RTO or ISO board
should be an interim step only, and that ultimately MMUs should report
to a Federal-State Joint Board on Market Monitor Oversight. Not only
does an arrangement of this type raise jurisdictional concerns, it is
difficult to see how such a potentially cumbersome structure could
oversee MMUs in a timely and responsive manner. It is also doubtful
that such an arrangement could effectively replicate the existing close
exchange of data between the RTO or ISO and its MMU. Should the reforms
we adopt in this Final Rule fail to achieve the needed independence we
envision for MMUs, we will not hesitate to rectify the situation.
    343. Several commenters propose that changes in the RTO/ISO/MMU
relationship, such as contract termination or the dismissal of key MMU
personnel, should be made subject to Commission review.\422\ We noted
in the NOPR that as of the date of its issuance, three of the RTOs and
ISOs had agreements in place that provided for such review.\423\ Since
that date a fourth has been added, that of PJM.\424\
---------------------------------------------------------------------------

    \422\ To the extent commenters request that structural changes
be made subject to Commission review, we note that such matters are
governed by tariff and any change to the MMU structure (such as
whether an MMU is internal, external or a hybrid) would require a
tariff filing.
    \423\ 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 1, Attachment AJ, Sec.  11, Second Revised Sheet No.
699 (2006). The same is true for ISO New England. Participants
Agreement among ISO New England, Inc. and the New England Power
Pool, et al., Sec.  9.4.5.
    \424\ Settlement Agreement and Explanatory Statement of the
Settling Parties, Docket Nos. EL07-56-000 and EL07-58-000 (December
19, 2007), Attachment M, PJM Market Monitoring Plan, III.F.3.e. This
agreement was approved by the Commission in the PJM MMU Settlement
Order.
---------------------------------------------------------------------------

    344. These RTOs and ISOs have voluntarily consented to such review.
In the absence of such consent, we decline to impose a blanket
requirement that RTOs and ISOs make their MMUs' contractual and
employment arrangements subject to Commission review. Should the
situation arise in which an RTO or ISO terminates its MMU in such a way
as to violate its tariff requirements concerning MMU independence, the
Commission will address such a violation on case-by-case basis.
c. Functions
i. Commission Proposal
    345. In the NOPR, the Commission proposed updating and expanding
the core tasks that our May 2005 Policy Statement on Market Monitoring
Units required MMUs to perform. We proposed that the MMU be responsible
for evaluating market rules, tariff provisions and market design
elements for their effectiveness, and proposing recommended changes;
reviewing and reporting on the performance of the wholesale markets;
and referring suspected wrongdoing to the Commission.
    346. In furtherance of its goal of ensuring independent analysis on
the part of MMUs, the Commission also proposed that RTOs and ISOs
include a provision in their tariffs specifying that they may not alter
the reports generated by the MMUs or dictate the conclusions reached by
the MMUs, although they may establish a reasonable mechanism for review
and comment on MMU reports that are still in draft form. The

Commission noted that this proposal will enable the MMU to receive
potentially helpful comments, while removing the ability of the RTO or
ISO to unreasonably influence or impede the MMU's analysis.
ii. Comments
    347. All but two commenters support the Commission's proposal
regarding the three core functions of an MMU.\425\ ISO New England
would add a fourth function, that of regular daily monitoring of the
wholesale market in order to obtain timely access to information that
would provide a broader context for evaluating particular types of
conduct, and that could speed and enhance detection of manipulative
behavior.\426\ TAPS would also add a fourth function, that of assessing
whether RTO benefits flow to consumers. It suggests that the MMU could
make this consumer-value assessment by examining, for example, whether
in LMP markets investment in transmission, generation and demand
response is occurring in areas with higher prices, and whether FTRs are
available, and are being used, to hedge transmission congestion costs
experienced by LSEs.\427\
---------------------------------------------------------------------------

    \425\ CAISO; California PUC; DC Energy; EEI; Industrial
Consumers; ISO New England; Midwest ISO; North Carolina Electric
Membership; NY TOs; PG&E PJM; Reliant; SPP; and TAPS.
    \426\ ISO New England at 18.
    \427\ TAPS at 51-52.
---------------------------------------------------------------------------

    348. CAISO requests clarification that when an MMU evaluates
existing and proposed market rules, the Commission expects it to employ
its best judgment about effective use of resources, and does not expect
a formal evaluation for every existing market rule.\428\ California PUC
agrees that an MMU should identify ineffective market rules and tariff
provisions and recommend proposed rule and tariff changes; however, it
suggests the MMU's participation be limited to an advisory role.\429\
NY TOs and PJM state that MMUs should evaluate changes, but should not
get involved in implementing changes.\430\ PG&E believes the Final Rule
should authorize MMUs to access data necessary to assess the impact of
behavior outside of an RTO's or ISO's geographic footprint, commenting
that such access is needed in California because the state is very
dependent on imports. It also states that MMUs should report on the
effectiveness and comprehensiveness of mitigation as part of their
duties, even when they are not themselves directly involved in
implementation of such mitigation.\431\
---------------------------------------------------------------------------

    \428\ CAISO at 14.
    \429\ California PUC at 34-35.
    \430\ NY TOs at 3; PJM at 6.
    \431\ PG&E at 15-16.
---------------------------------------------------------------------------

    349. Two commenters agree with the Commission's proposal that MMUs
should limit dissemination of information in those cases where
disclosure of a market design loophole could be exploited.\432\ APPA
believes MMUs should disclose such information at an appropriate time,
such as when tariff changes or software upgrades are adopted, in order
to maintain transparency.\433\ Reliant requests clarification as to
whether MMUs should provide the RTO or ISO, stakeholders and the
Commission with their views as to whether existing operations interfere
with appropriate market signals.\434\
---------------------------------------------------------------------------

    \432\ APPA; Reliant.
    \433\ APPA at 83.
    \434\ Reliant at 12-13.
---------------------------------------------------------------------------

    350. All three commenters addressing the subject agree that MMUs
should report violations of Standards of Conduct (18 CFR Part 158) or
Affiliate Restrictions rules (18 CFR 35.39) rules if uncovered in the
ordinary course of business.\435\ California PUC states that violations
should be referred to the appropriate state commission as well as to
the Commission.\436\
---------------------------------------------------------------------------

    \435\ California PUC; EPSA; and Midwest ISO.
    \436\ California PUC at 36-37.
---------------------------------------------------------------------------

    351. Commenters agree that RTOs should not be allowed to alter
reports generated by an MMU.\437\ APPA does not support a tariff
provision allowing MMUs to submit their reports in draft form to RTOs
for review and comment. It states that the Commission approved a
specific prohibition against such review in the PJM/MMU Settlement
Agreement, and should adopt such a prohibition in this proceeding.\438\
---------------------------------------------------------------------------

    \437\ APPA; NRECA; NSTAR; Old Dominion; PJM; and SPP.
    \438\ APPA at 83-84.
---------------------------------------------------------------------------

    352. Old Dominion suggests that if the MMU disagrees with a tariff
change that the RTO or ISO proposes to the Commission, the RTO or ISO
should file both its proposal and that of the MMU.\439\
---------------------------------------------------------------------------

    \439\ Old Dominion at 21-22.
---------------------------------------------------------------------------

iii. Commission Determination
    353. We adopt the MMU functions proposed in the NOPR, with
clarifying rewording. These functions expand and update the functions
already performed by MMUs in accordance with the Policy Statement and
codify the protocols for referrals to the Commission discussed
therein.\440\ The revised functions should provide MMUs with ample
authority to evaluate any needed changes to the markets and bring them
to the attention of concerned entities, to review and report on the
performance of the markets, and to refer suspected wrongdoing to the
Commission.
---------------------------------------------------------------------------

    \440\ Policy Statement, 111 FERC ] 61,267 at Appendix A.
---------------------------------------------------------------------------

    354. As we have previously acknowledged:

    MMUs perform an important role in assisting the Commission in
enhancing the competitiveness of ISO/RTO markets. Competitive
markets benefit customers by assuring that prices properly reflect
supply and demand conditions. MMUs monitor organized wholesale
markets to identify ineffective market rules and tariff provisions,
identify potential anticompetitive behavior by market participants,
and provide the comprehensive market analysis critical for informed
policy decision making.[\441\]
---------------------------------------------------------------------------

    \441\ Id. P 1.

---------------------------------------------------------------------------
    Thus, the MMU functions we adopt are as follows:

    (1) Evaluating existing and proposed market rules, tariff
provisions and market design elements, 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 tariff violations, suspected violations of
Commission-approved rules and regulations, suspected market
manipulation, and inappropriate dispatch that creates substantial
concerns regarding unnecessary market inefficiencies.

    355. We decline to add as a fourth function ISO New England's
proposal regarding daily monitoring of the wholesale market, as this
function is included in the existing requirement to review and report
on the performance of the wholesale markets.
    356. CAISO requests clarification that the Commission does not
expect an MMU to make a formal evaluation of every existing market
rule. We agree. The MMU's role is one of monitoring, not auditing, and
we do not expect it to

make a systematic and comprehensive review of every one of the
thousands of existing market rules. For this reason, we decline to
adopt TAPS's suggested fourth function of assessing whether RTO or ISO
benefits flow to consumers. Finally, we expect MMUs to be vigilant in
identifying problems and bringing them to the attention of the RTO or
ISO, the Commission, and other interested entities.
    357. We agree that the MMU's role in recommending proposed rule and
tariff changes is advisory in nature, and that the MMU should not
become involved in implementing rule and tariff changes (unless a
tariff provision specifically concerns actions to be undertaken by the
MMU itself). Both the filing of proposed rule and tariff changes, and
the implementation of rule and tariff changes, are within the purview
of the RTO or ISO. However, we do expect the MMU to advise the
Commission, the RTO or ISO, and other interested entities of its views
regarding any needed rule and tariff changes. Likewise, in the event an
RTO or ISO files for a proposed tariff change with which the MMU
disagrees, we expect the RTO or ISO to inform the Commission of that
disagreement, although not necessarily to include a written MMU
proposal with its filing.
    358. We also concur with PG&E that where data concerning activity
outside the geographical footprint of the RTO or ISO would be helpful
to the MMU in carrying out its functions, the MMU should seek out such
data. Likewise, where an MMU believes market design flaws interfere
with appropriate price signals, these flaws should be brought to the
attention of concerned entities. And, where information about a market
design flaw was not broadly disseminated because the MMU felt such
information could alert market participants to a market loophole, such
information can, and should, be provided once the danger of
exploitation of the loophole is past.
    359. The California PUC requests that violations of the Standards
of Conduct or Affiliate Restrictions should be reported to the
appropriate state commission as well as to the Commission. We decline
to adopt this proposal. These are violations of Commission rules, not
of state rules or statutes, and therefore the Commission is the proper
body to investigate them.
    360. We adopt the NOPR proposal that, by tariff, each RTO or ISO
may require its MMU to submit its report in draft form to the RTO or
ISO for review and comment, but may not alter the reports generated by
the MMU or dictate the MMU's conclusions. RTOs or ISOs need not require
submission of draft reports, but if they do, input from knowledgeable
employees may serve to strengthen the end product or catch errors of
fact or reasoning. In any event, the MMU is free to disregard any
suggestions with which it disagrees.
d. Mitigation and Operations
i. Commission Proposal
    361. In order to strengthen MMU independence, the Commission
proposed in the NOPR that MMUs be removed from tariff administration,
including mitigation. This proposal was designed to free MMUs from a
role that might make them subordinate to the RTO or ISO. The Commission
regulates public utilities, and it is the public utilities that we hold
accountable for tariff implementation. To the extent this function is
performed by MMUs, the MMUs are assisting the RTOs and ISOs in the
administration of their tariff, which places the MMUs in a subordinate
position to the RTOs and ISOs. The proposal was also designed to remove
the bias that might arise from the MMUs' analyzing the health of the
markets they themselves had affected. The Commission solicited comments
on the activities that would be needed to make the transition to RTO or
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 wished to
raise regarding the proposal.
ii. Comments
    362. Several commenters support the Commission's proposal to remove
MMUs from RTO and ISO tariff administration, including mitigation.\442\
However, many more oppose it.\443\
---------------------------------------------------------------------------

    \442\ Ameren; EPSA; FirstEnergy; Industrial Consumers; PG&E
PJM; Reliant; SoCalEdison-SDG&E and SPP.
    \443\ American Forest; California PUC; Indianapolis P&L
Industrial Coalitions; Maine PUC; NARUC; NEPOOL Participants; New
York PSC; North Carolina Electric Membership; Ohio PUC; Old
Dominion; OMS; Potomac Economics; and Xcel.
---------------------------------------------------------------------------

    363. The commenters who agree with the Commission's proposal
advance several arguments in support of it. Two entities cite two
conflicts of interest that may arise when an MMU is involved in
mitigation and tariff administration, the first occurring when an MMU
both evaluates market performance and conducts mitigation,\444\ and the
second occurring when an MMU assists in designing and finalizing a rule
for filing with the Commission and subsequently evaluates the
effectiveness of the rule in practice.\445\ Another commenter states
that an MMU should be limited to the three core functions the
Commission enunciated in the NOPR, leaving it free to advise the
Commission of perceived instances where the RTO or ISO itself has
failed to conduct economic dispatch in an efficient manner.\446\ Other
commenters state that the rules and actions related to mitigation
should be made explicit and, to the extent possible, be automated and
implemented via bright-line tests, in order to eliminate discretion in
their application.\447\
---------------------------------------------------------------------------

    \444\ Ameren at 33; PJM at 4-6.
    \445\ Ameren at 33; PJM at 5-6.
    \446\ FirstEnergy at 14-15.
    \447\ Reliant at 13; Potomac Economics at 8-9.
---------------------------------------------------------------------------

    364. The commenters who oppose the Commission's proposal advance
several arguments why RTOs and ISOs should not perform mitigation.
Commenters suggest that the RTO or ISO staff and personnel who have
designed and implemented the markets, and whose compensation is based
upon those tasks, may have a vested interest in not identifying or
correcting problematic behavior, and may have an interest in not
imposing enforcement measures on what in effect are their customers, or
in refraining from mitigating a member that threatens to leave the RTO
or ISO.\448\ Other commenters remark that removing the MMU from
mitigation activities may deprive the MMU of much of the hands-on
administrative interaction with participants that is essential to
consumer protection.\449\ One commenter suggests that a better way to
address the issue is to issue additional orders limiting discretion in
applying mitigation, rather than removing MMUs from mitigation
activities.\450\ Other commenters argue that moving mitigation
responsibility from an MMU to the RTO or ISO would deprive the MMU of
timely, first-hand access to crucial information that could speed and
enhance detection of manipulative behavior, noting that after-the fact
mitigation (settlement price adjustment) would not be a function of the
market that the MMU would be able to view once it was removed from
tariff administration.\451\ ISO New England states that mechanistic
application of mitigation criteria by RTOs or ISOs would not readily
address shifts in bidding behaviors, and that as market participants
continuously search for

more profitable bidding strategies, the discretion of a skilled MMU to
investigate unusual bidding behavior inhibits experimentation with
deviant strategies and enhances deterrence.\452\ ISO New England states
that the Commission's conflict of interest concern is inconsistent with
grounding MMU independence and objectivity in its code of conduct and
contractual obligations, and notes that the MMU has nothing to gain
financially from mitigation.\453\ ISO New England and Maine PUC state
that moving the mitigation activity to the RTO or ISO could require
additional operational staff to perform tasks that MMU employees can
accomplish on an integrated basis and more efficiently, thereby
increasing RTO or ISO costs.\454\ NYISO estimates that an additional
five to eight employees would be required because of the need to
duplicate some functions in order for the MMU to monitor the RTO or
ISO's conduct of mitigation.\455\
---------------------------------------------------------------------------

    \448\ American Forest at 6; California PUC at 37-38;
Indianapolis P&L at 4; Industrial Coalitions at 21-22; Midwest ISO
at 24-26; Ohio PUC at 24-25; and OMS at 16-17.
    \449\ American Forest at 7; ISO New England at 19-22; and NARUC
at 12-13.
    \450\ American Forest at 7.
    \451\ ISO New England at 20-21; Xcel at 12-13.
    \452\ ISO New England at 21.
    \453\ Id. at 21-22 (citing ISO New England Inc., 119 FERC ]
61,045, at P 123 (2007), reh'g granted in part and denied in part,
120 FERC ] 61,087 (2007)); NEPOOL Participants at 23 (citing ISO New
England Inc. 106 FERC ] 61,280, P 187 (2004), reh'g granted in part
and denied in part, 109 FERC ] 61,147 (2004); Order Authorizing RTO
Operations; 110 FERC ] 61,111 (2005); order on reh'g, 111 FERC ]
61,344 (2005); ISO New England Inc., 120 FERC ] 61,087, at P 52
(2007)).
    \454\ ISO New England at 22; Maine PUC at 7.
    \455\ NYISO at 16.
---------------------------------------------------------------------------

    365. Indianapolis P&L states that moving the mitigation function to
the RTO or ISO raises the potentially serious problem of retaliation,
because if RTO or ISO stakeholders disagree with the direction in which
the RTO or ISO wishes to move, the RTO or ISO could be tempted to use
the market mitigation power as a tool of persuasion.\456\ OMS states
that in the absence of a specific showing that an MMU is incapable of
applying mitigation measures appropriately, the Commission should
respect the decision of the RTO or ISO and stakeholders in this regard.
It also observes that RTOs and ISOs have greater incentive than MMUs
not to mitigate, as an entity might be inclined to withdraw from
membership in response. It does not regard a referral to the Commission
of an RTO's or ISO's failure to properly mitigate as a sufficient
remedy, as such referrals are kept confidential.\457\
---------------------------------------------------------------------------

    \456\ Indianapolis P&L at 4.
    \457\ OMS at 8-9.
---------------------------------------------------------------------------

    366. SoCal Edison-SDG&E support the Commission's proposal only if
the following conditions occur: (1) Adequate assurance of effective
mitigation is provided; (2) MMUs have full access to data used for
mitigation; and (3) MMUs are allowed to participate in all activities
used to develop mitigation rules and specific mitigated bid levels for
individual generators.\458\ PG&E supports it only if: (1) RTO and ISO
tariffs are modified to include sufficient staff resources to perform
mitigation; (2) mitigation staff are free from the influence of other
RTO staff; and (3) mitigation staff has the right to report to the
Commission and its Office of Enforcement any loopholes or deficiencies
in mitigation design or implementation.\459\
---------------------------------------------------------------------------

    \458\ SoCal Edison-SDG&E at 4.
    \459\ PG&E at 17.
---------------------------------------------------------------------------

    367. EEI, ISO New England, Maine PUC and New York PSC oppose the
proposal for cases where the RTO or ISO has a hybrid MMU
structure.\460\ Midwest ISO opposes the proposal when it is applied
mechanically to all RTOs and ISOs.\461\ NRECA states that any changes
in the Final Rule should not weaken mitigation, should not supersede
the PJM/MMU Settlement Agreement, and should follow the Final Rule in
Order No. 697.\462\ CAISO notes that its internal monitor does not
administer mitigation, but does administer an Enforcement Protocol
related to late fees and the untimely submission of outage reports and
meter data,\463\ and seeks guidance as to whether these activities
would constitute ``tariff administration'' under the Final Rule.\464\
TAPS does not oppose the proposal, but thinks MMUs can function better
doing mitigation.\465\
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    \460\ EEI at 24-25, ISO New England at 19-22; Maine PUC at 7;
and New York PSC at 6-8.
    \461\ Midwest ISO at 24-26.
    \462\ Market-Based Rates For Wholesale Sales Of Electric Energy,
Capacity, And Ancillary Services By Public Utilities, Order No. 697,
FERC Stats. & Regs. ] 31,252, at P 241 (2007), order on reh'g, Order
No. 697-A, 73 FR 25,832 (May 7, 2008), FERC Stats. & Regs. ] 31,268
(2008).
    \463\ Calif. Indep. Sys. Operator Corp., 106 FERC ] 61,179, at P
154; order on reh'g, 107 FERC ] 61,118; reh'g denied, 109 FERC ]
61,089 (2004); order on reh'g, 110 FERC ] 61,333 (2005).
    \464\ CAISO at 15-16.
    \465\ TAPS at 52-53.
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    368. Potomac Economics and APPA offer compromise positions and
clarifications. APPA suggests that the MMU continue to review bids, but
refrain from participating directly in drafting proposed changes to the
mitigation rules; rather, the MMU would comment on the proposed rules
and, if necessary, become a separate intervenor in a Commission
proceeding if one were to occur.\466\
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    \466\ APPA at 84-85.
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    369. Potomac Economics observes that the aspects of mitigation that
the Commission appears to find objectionable are those that are applied
prospectively to participant offers and thus affect market outcomes
(such as altering the prices of offers or altering the physical
parameters of offers such as ramp rates and start-up time). Potomac
Economics proposes that the Commission clarify that the RTO or ISO
should be responsible for implementing these prospective mitigation
measures, while the MMU be allowed to be responsible for implementing
retrospective measures such as calculation of after-the-fact mitigation
true-ups for billing purposes and settlement price adjustments. Potomac
Economics also suggests that MMUs continue to be responsible for the
production of inputs into the mitigation process, such as reference
levels and the identification of system constraints, which rely on the
MMUs' intimate knowledge of the market and their software capabilities.
Potomac Economics believes that this bifurcation of labor would avoid
the wasteful duplication of software, staff and expertise that would be
needed for the RTO or ISO to mirror all of the MMU's mitigation
capabilities, that it contends the MMU would have to retain in order to
satisfy its market monitoring obligations.\467\
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    \467\ Potomac Economics at 8-10.
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iii. Commission Determination
    370. The proposal in the NOPR to remove MMUs from tariff
administration, and in particular from mitigation, engendered heated
disagreement amongst the commenters. Several supported the proposal,
although the majority disagreed with removing the MMU from mitigation.
The Commission has given careful consideration to the comments, and
acknowledges that there are valid concerns on both sides.
    371. As we observed in the NOPR, and as many commenters noted as
well, there is an inherent conflict of interest in an MMU conducting
mitigation and also opining on the state of the market, the health of
which may in part reflect the results of its mitigation. We also
observed that by supporting RTOs and ISOs in tariff administration,
MMUs become subordinate to the RTO or ISO, thus weakening their
independence.
    372. Many commenters, however, raise substantial concerns over
removing MMUs from mitigation, including the following: (1) There is a
greater conflict of interest for the RTO or ISO to administer
mitigation, as it has a vested interest in keeping its market
participants happy, especially the larger players who can threaten to
leave the

RTO or ISO if they choose; (2) the MMU serves as a useful buffer
between the RTO or ISO and the market participants, performing what is
often viewed as a hostile act; (3) there is an inherent tension between
mitigation and the RTO or ISO goal of promoting new markets; (4) the
MMU is better equipped by training and market access to detect the need
for mitigation; (5) removing the MMU from mitigation would distance it
from the market insights it needs to perform its monitoring functions;
(6) if removed from tariff administration, the MMU would not have
access to the mitigation settlement process and thus could not
adequately monitor the RTO's or ISO's mitigation performance; (7) there
would be much duplication of costs, since the MMU would have to retain
most of its mitigation capabilities in order to monitor the RTO's or
ISO's conduct of mitigation; (8) there would be extensive transition
costs and software licensing concerns; and (9) there is no empirical
evidence of an existing problem with the MMUs performing mitigation.
    373. We find many of the objections raised by commenters
meritorious. However, we remain concerned that the unfettered conduct
of mitigation by MMUs makes them subordinate to the RTOs and ISOs and
raises conflict of interest concerns. Therefore, we adopt a compromise
approach, one that strikes the appropriate balance between allowing
modified participation by the MMUs in mitigation, while protecting
against the conflict of interest and subordination inherent in their
unfettered participation.
    374. As the first element of this approach, we direct that in the
event an RTO or ISO employs a hybrid MMU structure, it may authorize
its internal MMU to conduct mitigation. An internal MMU is a part of
the RTO or ISO, and allowing it to conduct mitigation adequately
separates it from the monitoring duties of the external market monitor
and places mitigation within the RTO or ISO itself. However, this
solution only works if the external market monitor is charged with the
responsibility of reviewing the quality and appropriateness of the
mitigation conducted by the internal market monitor. We therefore
require that in the event an RTO or ISO with a hybrid MMU structure
permits its internal market monitor to conduct mitigation, it must
assign its external market monitor the responsibility, and give it
adequate tools, to monitor the quality and appropriateness of that
mitigation.
    375. As the second element of our approach, we find useful Potomac
Economics' distinction between prospective and retrospective
mitigation. It is only prospective mitigation that affects the
operation of the market, and therefore it is only prospective
mitigation that creates a potential conflict of interest for an MMU.
Therefore, we direct that RTOs and ISOs may allow their MMUs,
regardless of whether it uses a hybrid structure, to conduct
retrospective mitigation. For these purposes, we consider prospective
mitigation to include only mitigation that can affect market outcomes
on a forward-going basis, such as altering the prices of offers or
altering the physical parameters of offers (e.g., ramp rates and start-
up times) at or before the time they are considered in a market
solution. All other mitigation would be considered retrospective. We
also determine that the MMU may provide the inputs required by the RTO
or ISO to conduct prospective mitigation, including determining
reference levels, identifying system constraints, cost calculations and
the like. This will enable the RTO or ISO to utilize the considerable
expertise and software capabilities developed by their MMUs, and reduce
wasteful duplication.
    376. As noted by Potomac Economics and by PJM in its supplemental
comments, a number of our orders specifically lodge elements of
mitigation and administration within the MMUs. Many of these may
properly be considered retroactive mitigation, and the RTOs' or ISOs'
tariffs would not need to be adjusted to remove these responsibilities
from the MMU's purview. Should there be any question of categorization,
whether for existing or proposed tariff provisions, the RTO or ISO may
seek guidance from the Commission in its compliance filing.
    377. We also direct that purely administrative matters, such as
those identified by CAISO (enforcement of late fees and the untimely
submission of outage reports and meter data), should be conducted by
the RTO or ISO, rather than the MMU. Such activities are remote from
the core duties that this Final Rule assigns to the market monitoring
function.
    378. We also direct that the tariffs of RTOs and ISOs clearly state
which functions are to be performed by MMUs, and which by the RTO or
ISO. This separation of functions will serve to eliminate RTO or ISO
influence over the MMUs, and remove the concern that MMU assistance in
mitigation makes it subordinate to the RTO or ISO.
    379. Finally, we direct the RTOs and ISOs to review their
mitigation tariff provisions with a view to making them as non-
discretionary as possible, whether performed by the MMU or by the RTO
or ISO, and to reflect any needed changes in their compliance filings.
This will go a long way toward removing the ability of either entity to
act in a discriminatory manner, and will facilitate the monitoring and
review of mitigation activities.
e. Ethics
i. Commission Proposal
    380. In the NOPR, the Commission proposed that development of
particular ethics standards to be applied to MMUs should be left in the
first instance to the discretion of the RTOs and ISOs. However, the
Commission noted that these standards should include certain minimum
requirements, as follows: (1) Employees shall have no material
affiliation (to be defined by the RTO or ISO) with any market
participant or affiliate; (2) employees shall not serve as an officer,
employee, or partner of a market participant; (3) 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); (4) employees shall not engage in any market
transactions other than the performance of their duties under the
tariff; (5) 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; (6) 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 (7) employees must advise their
supervisor (or, in the case of the MMU manager, 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.\468\
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    \468\ The Commission noted that some external MMUs may currently
have business associations that 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
Commission proposed that the RTO or ISO should propose a suitable
transition plan in its compliance filing. NOPR, FERC Stats. & Regs.
] 32 ,628 at n.200.
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ii. Comments
    381. All commenters addressing the subject agree that ethical
standards should be imposed on MMU

employees.\469\ All but one of these commenters agree that the
standards should appear in a tariff provision, thus making the MMU
subject to an enforcement action. However, FirstEnergy, stating that it
is opposed to collecting from RTO or ISO members any penalties assessed
to an RTO or ISO, prefers that the MMU adopt ethics standards
internally and implement them by managing and disciplining its
employees.\470\ APPA and Ohio PUC suggest adding a provision to the
standards covering post-employment activities.\471\ Midwest ISO states
its market monitor performs independent work for other entities under
Commission-approved monitoring plans, and requests clarification that
the minimum guidelines the Commission proposes would not prohibit other
employees of the MMU's firm from performing independent monitoring for
other entities. Potomac Economics, the Midwest ISO's MMU, requests the
same clarification, noting that the work is not done on behalf of the
company.\472\ NRECA asserts that ethics standards should include civil
penalties.\473\
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    \469\ Ameren; APPA; CAISO; California PUC; DC Energy; EEI;
FirstEnergy; Industrial Consumers; ISO New England; Midwest ISO;
North Carolina Electric Membership; NRECA; Ohio PUC; PG&E PJM Power
Providers; Potomac Economics; Reliant; SPP; and TAPS.
    \470\ FirstEnergy at 15-16.
    \471\ APPA at 86; Ohio PUC at 25-26.
    \472\ Midwest ISO at 26-27; Potomac Economics at 13.
    \473\ NRECA at 53-54.
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    382. Potomac Economics proposes that the Commission should include
the phrase ``other than the RTO or ISO'' after the first clause in
proposed minimum requirement (5), as omission of the phrase would
prohibit compensation of MMU employees for any expert witness testimony
or other commercial services on behalf of the Commission-approved RTO
or ISO, thus preventing the MMU from performing many of the required
market monitoring functions.\474\
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    \474\ Potomac Economics at 11-13.
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iii. Commission Determination
    383. There was widespread agreement among the commenters that
ethics standards should be imposed, and the importance of such
standards calls for their inclusion in the RTO's or ISO's tariff,
subject to enforcement by the Commission. (The manner of such potential
enforcement, including whether civil penalties might be imposed and the
avenue by which any such penalties might be collected, is beyond the
scope of this Final Rule.\475\) Therefore, we direct that each RTO and
ISO include in its tariff the minimum ethics standards set forth in the
NOPR, with certain modifications as set forth below.
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    \475\ See Revised Policy Statement on Enforcement, 123 FERC ]
61,156 (2008) (discussing the factors to be considered in
determining what, if any, remedies are to be imposed in the case of
violations of Commission rules and regulations).
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    384. We note that the requirements we impose are minimums, and an
RTO or ISO is free to propose more stringent ones. Therefore, the
appropriate place to request additional requirements, such as the
suggested extension of the standards to post-employment activities,
would be in stakeholder meetings, or before the Commission when the RTO
or ISO makes its tariff compliance filing.
    385. Midwest ISO and Potomac Economics request clarification that
the ethics standards do not prohibit employees of the MMU from
performing monitoring for entities other than RTOs or ISOs. We clarify
that if the employing entity is not a market participant in the
particular RTO or ISO for whom the MMU already performs market
monitoring, such engagement is permissible. However, if the employing
entity is a market participant in the RTO or ISO for whom the MMU
already performs market monitoring, the proposed work would entail the
same conflict of interest as would any other consulting services. We
are cognizant of the fact that if an MMU currently has such engagements
in place, it will take a certain amount of time to unwind the
association or make other suitable arrangements. We direct the RTO or
ISO to apprise the Commission of such engagements in its compliance
filing, and to propose a transition plan for dealing with them in a
manner consistent with the aims expressed in this Final Rule, as the
Commission proposed in the NOPR.\476\
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    \476\ NOPR, FERC Stats. & Regs. ] 32,628 at P 200.
---------------------------------------------------------------------------

    386. We agree with Potomac Economics that the NOPR's regulatory
text inappropriately omitted the phrase ``other than the RTO or ISO''
after the first clause of proposed minimum ethical requirement (E).
(The phrase was included in the body of the NOPR itself). We direct
that the RTO and ISO tariffs should include the omitted phrase, and we
correct the regulatory text in this Final Rule.
    387. We also note that both the body of the NOPR and the regulatory
text refer to ``employees,'' whereas the intent of the provision
encompasses both the MMU itself as well as its employees. We therefore
direct the RTOs and ISOs to specify that their MMU ethics standards
apply to the MMU itself as well as to its employees.
f. Tariff Provisions
i. Commission Proposal
    388. The Commission proposed in the NOPR that RTOs and ISOs be
required to include in their tariffs, and centralize in one section,
all of their MMU provisions. We noted that including all MMU provisions
in the tariff will ensure they are made subject to the compliance