Market Monitoring & Enforcement

Foreword

Foreword

This professional reference is one of a series Energy Compliance, Inc. publishes for registered entities and the people who run their compliance programs.

I’ve spent more than thirty years on every side of the bulk electric system. I’ve operated control centers as a Reliability Coordinator, Transmission Operator, and Power System Operator. I’ve audited grid facilities and signed off on findings as a senior compliance auditor. I’ve worked enforcement matters from inside the regulator’s process. For the last several years I’ve advised registered entities directly through the firm I founded.

The entities that do reliability well share a common habit. They take the standards seriously without confusing them with reliability itself. They know that a NERC Reliability Standard is a floor, not a ceiling. They know that compliance is something an auditor evaluates, but reliability is something a system either delivers or doesn’t. They prepare for audits by building programs that survive real questions, not binders that look thick.

That’s the perspective these references try to share. Each one focuses on a single topic. A standard family, an operational function, a regulatory framework, or an emerging industry challenge. Each one walks through how the topic actually works.

These references are written for the compliance manager who wants to understand the system, not just memorize requirements. For the legal counsel who has to brief a board honestly. For the senior operator who’s been told that compliance and reliability are the same thing and suspects they aren’t. And for the new compliance hire who got handed a binder and told good luck.

These references aren’t marketing material disguised as content. They’re the result of three decades of doing this work and watching it succeed and fail. I’ve written them in the same voice I use in a control room or in front of a Regional Entity audit team. Direct, evidence-grounded, honest about what the standards do and do not require.

Energy Compliance exists because most of the consulting offered to registered entities today is structured for billable hours rather than for outcomes. Every engagement is led by one senior practitioner. We don’t bring five people to a meeting that needs one. We automate the work that should be automated. We apply senior judgment to the work that requires it. If that approach matches what you’re looking for in a compliance partner, the back of this reference has our contact information.

If not, the reference still belongs to you. Take what’s useful. Apply it well. And remember the only test that ultimately matters: when the system needs to perform, does it?

Rob Smith, Founder, Energy Compliance, Inc.

EC-WP-404 Market Monitoring, Oversight, and Enforcement

Chapter 1

Institutional Foundations of Market Monitoring

The purpose of enforcement mechanisms is to deal with misbehaviour in markets that compromise market integrity or violates a set of rules agreed to by market participants. Enforcement mechanisms are not meant to guide or improve market performance, but to ensure that all market participants comply with agreed rules in order to preserve competition and system reliability, and to enforce a balance between deterrence, proportionality and market confidence.

Market Monitoring, Regulation and Enforcement in Organized Wholesale Electricity Markets brings together authoritative views from respected sources in the electricity industry on issues related to governance, regulation and enforcement of organized wholesale electricity markets. The focus is on the functions of market monitoring, regulation and enforcement as institutions or structural components of these markets. The publication emphasizes institutional design, governance arrangements, regulatory authority and their interaction with market performance and reliability effects. Rather than providing procedural details, the publication offers a perspective based on prevailing regulatory and reliability practices, and therefore offers a new analytical perspective to the subject matter.

Monitoring markets in organized wholesale electric markets stems from the market design institutions put in place to mitigate the adverse effects of competitive markets on reliability and compliance with regulatory requirements. These institutions acknowledge that market outcomes cannot be adequately analyzed independent of the BES or the regulatory framework governing the market. Monitoring markets as a institution was developed in response to the changing design of organized markets over time, learning from the problems encountered in the early versions of these designs.

An Independent Market Monitor (IMM) is a body appointed by means of tariffs approved by the Federal Energy Regulatory Commission. These tariffs impose specific obligations upon the bodies they appoint including: an obligation of independence; an obligation to approach their duties with the proper level of analytical rigour and professional care; and an obligation of candour. In general, IMM’s are not involved with the operation of the market and are not involved in the regulatory enforcement of market rules. Rather, their activities are designed to determine whether the results they observe occurring in the market are in accordance with the rules the Commission has approved for that market; to determine whether the actions of the participants in the market are driven by appropriate economic considerations; and to determine whether the characteristics of the market design as defined by the rules produce results that are consistent with what would be expected of a competitive market given the circumstances prevailing in that market at the time.

The independence of market monitoring functions is a core institutional design feature. Market monitors must be segregated from market activity and other normal system operations to eliminate the risk of operational conflict of interest that could compromise their objectivity. They must also be perceived as such by others. Independent does not mean isolated. In order to carry out their analytical work, market monitors must have ready access to a wealth of transaction level operating data, as well as market input and system performance information typically located within the walls of Regional Transmission Organizations and Independent System Operators.

Market monitoring organizations operate within a governance framework that includes both Federal regulatory authority and reliability governance institutions. While monitors apply rules related to tariffs and market behavior to the actual behavior of market participants, the standards and operating practices

related to the reliability of the grid are established and enforced through the institutions of the North American Electric Reliability Corporation (NERC). As a result the monitors’ determinations have an implicit relationship to reliability regardless of whether reliability standards are specifically referenced.

The institutional design of market monitoring reflects the premise that market outcomes can be affected by the actions of market participants and the broader characteristics of the market system. In the absence of system knowledge, changes in prices and in the resulting dispatch schedule may be the result of market participant behavior, or may be the result of limitations within the system, such as constraints, resource inadequacy and operating practices. Rather than attempting to evaluate the propriety of individual market outcomes, a monitoring strategy necessarily requires a more contextual evaluation of the functioning of the market system, differentiating between effects arising from potential market participant misbehaviour and those that arise from valid system constraints and conditions.

These institutions set the parameters of the market monitoring mechanism that acts as a guarantee for the integrity of the market. They determine the limits of responsibility, the flow of information and the scope of assessment for the entities that operate in the market: suppliers, distributors, transmission system operators and retailers, as well as for regulatory bodies and other market governance entities.

End-of-Chapter Summary

This chapter analyzed the institutions that support market monitoring in the context of organized wholesale electric markets. It investigated the role of the Independent Market Monitor, the importance of structural independence, and the interplay of surveillance over the market, system operation and reliability governance. These institutions set the rules of the game under which the market activities of generators are observed and controlled.

Chapter 2

Scope and Limits of Market Monitoring Authority

The scope of market monitoring activity within organized wholesale electric markets is intentionally limited in order to preserve the requisite degree of separation between monitoring and other market activities. Monitoring cannot be allowed to become involved in the on-going operation of the market, to impose specific market rules or requirements, or to engage in discretionary determination of market events that are subject to rules. An understanding of the scope of market monitoring activities is important to assessing both the effectiveness and the limitations of such activities. See our Glossary of Terms Independent Market Monitors are appointed and act solely within the authority granted by tariffs and market rules approved by the Federal Energy Regulatory Commission. Their scope of review is limited to those provisions of the tariffs and market rules that address the bidding process, market participation, mitigation measures, and information to be reported. In conducting their reviews, Independent Market Monitors examine, on a retrospective basis, whether market activity has occurred in a manner consistent with the applicable tariffs and market rules. Such reviews do not involve the exercise of commission discretion or the imposition of regulatory norms as to what constitutes proper or prudent behavior in the wholesale power market. The distinction between monitoring and enforcement activities is central to the role of a market monitor. A market monitor does not have enforcement powers nor decide on penalties for violations. Rather than being empowered to police a market, a monitor records possible problems where it has sufficient information to make an analysis, records its findings and reports to the relevant regulatory authority. The purposes of the separation are to protect due process and to ensure that any enforcement action is carried out by means of a formal regulatory process rather than as part of the day-to-day activities of the market. Our Market Monitoring responsibility is somewhat constrained by operational considerations. Regional Transmission Organizations and Independent System Operators are solely responsible for operational activities such as real-time operations and planning, including determining which generation and transmission resources are committed, identifying congestion, performing reliability restoration services, etc. While the Market Monitor can

determine the potential market effects of these operational actions, it does not have the ability to direct or override these actions – even when the operational actions affect the market outcome in a material way. Reliability monitoring is not part of market monitoring. While market monitors may note events

that may impact reliability in their market monitoring activities as background or context for market activity, they are not responsible for ensuring that generation or transmission operations comply with NERC Reliability Standards or for reviewing generation and transmission operating procedures to determine if they meet reliability standards. Similarly, such responsibilities rest with registered entities, reliability coordinators and other mechanisms established by the FERC and NERC to ensure reliability. Providing clear lines of responsibility is important in order to avoid confusion about who is responsible for what. The boundaries dividing authorities within the framework of economic supervision do not represent weaknesses, but are rather a constituent part of governance principle characterized by clarity of responsibilities, autonomy of analysis and discipline of institutions. By providing a framework in which price supervision activities can serve the purposes of market stability without encroaching on the competences or activities of other market authorities, these boundaries allow for the full effectiveness of economic supervision of markets.

End-of-Chapter Summary

Chapter 8 discussed the bounds of market monitoring authority and, accordingly, the interplay between the separate activities of market monitoring, market operation, and enforcement. We then turn to tariff based authority, the absence of an enforcement role and the boundaries that are deliberately defined to prevent possible abuses and to protect the respective roles and responsibilities of market monitoring entities in organized wholesale electric markets.

Chapter 3

Analytical Methods and Market Surveillance

Market monitoring uses analytical techniques for the detection of patterns, anomalies or changes in market activity which could diverge from the rules and market design currently authorized, or could contradict one or more of the principles of competition. These are not inflexible models or algorithms, but are rather tools for analyzing, in an organized and relevant manner, large quantities of market and operational data which are appropriate to the institutional and system framework in which they are applied. In other words, the aim of market surveillance is to allow potential breaches of the rules of the market under surveillance to be checked out in more detail, and not to enable definitive conclusions to be drawn on their own. Surveillance encompasses both forward-looking and backward-looking analysis. Real-time and near real-time surveillance monitors events occurring in real time and/or near real time on a grid or market-based system and may involve monitoring developing events which could potentially affect market performance such as aberrant bids, apparent price distortion and congestion prices that are significantly different from historical or expected levels given the current state of the system. Retrospective surveillance involves an examination of market performance over a longer term to monitor trends, structural effects and recurring phenomena. The analytical process is inherently situational. Market outcomes are shaped by a broad array of events, including transmission outages, resource availability, weather-related demand shifts and operational measures taken to preserve grid reliability. Our market monitoring efforts focus on drawing comparisons, analyzing scenarios and ensuring market relationships are consistent rather than referencing absolute metrics. Before concluding that there is a market issue, we consider system conditions and relevant market rules. Data integration is an important part of market surveillance activities. Market monitors require access to a wide range of detailed bid data, dispatch instructions, locational marginal price (LMP) components, transmission constraint data and operational logs. By integrating economic and operational data it becomes possible to more effectively and robustly differentiate between market manipulative effects and legitimate market responses resulting from valid transmission constraints or reliability actions. Much like our market

monitoring activities, our analytical methods must also satisfy requirements of transparency and defensibility. Findings of our market monitoring analyses must be verifiable, data-based and compliant with the officially endorsed Market Rules. Our analysis must be presented in a manner which can be referenced in any potential proceeding or rulemaking. Ensuring methodological rigour in our analysis

helps to ensure that the findings from market monitoring activities are credible and effective in their role in the price regulation framework. Market surveillance is not there to attempt to smooth out volatility or to curb the conduct of efficient market-making strategies. Rather, its role consists in providing an assessment of whether market developments correspond to the structural assumptions and competition rules incorporated into market design. In this respect, market surveillance is carried out based on a backward-looking approach rather than on an a priori assessment of market developments, using reasoning that is as sound as possible and on the strength of as credible institutions as possible.

End-of-Chapter Summary

In Chapter 2 the methods that are used during market monitoring and surveillance have been examined in more detail in the context of the evaluation framework, datalinkage and applying rigour. The methods and processes that monitors use in order to monitor developments in a market and in order to identify issues and potential issues, are explained. The process by which monitors judge whether developments may be anomalous and therefore may warrant investigation or action is explained, while also making clear the distinction between normal price movements and price movements which require consideration.

Chapter 4

Oversight Relationships and Governance Structures

Market monitoring is a function that operates in a layer of governance that involves a number of shared responsibilities, defined boundaries and levels of interdependence among institutions. Governance mechanisms define how monitoring findings are handled when they are reviewed, referred to higher levels or acted upon. The governance structure is a very important factor in the legitimacy and accountability of the organized wholesale electric market. Independent Market Monitors (IMMs) report through paths established in tariffs approved by the Federal Energy Regulatory Commission (FERC). These paths generally include: (1) routine public quarterly reports on market conditions; (2) confidential reports of possible violations of the tariff, based on information supplied by market participants or discovered in the course of monitoring market activity; and (3) technical assistance requested by regulatory bodies. These provisions provide an appropriate level of disclosure and privacy concerning potential improprieties. Market monitoring reports are primarily for the purpose of Federal regulatory approval, interpretation and enforcement of market rules. The FERC will consider such reports in conjunction with its statutory responsibilities to assure just and reasonable rates and to prevent undue discrimination and market manipulation. Market monitors are not substitutes for regulatory authority, but are an analytical tool to assist regulatory judgement. Market monitoring with respect to Regional Transmission Organizations and Independent System Operators is a relatively rare occurrence. As they have a more regulatory type of governance, they are primarily responsible for the operation of the markets and the security of the transmission network. They also play a facilitating role for market monitoring by providing the necessary data and coordinating their procedures with the market monitoring carried out by other market participants or with the ACER’s Network Monitor. This particular governance framework calls for discipline to avoid any risk of operational bias on the part of market monitoring carried out by other market participants or the ACER’s Network Monitor in the event of an arbitration referral. Governance arrangements

should also be considered with respect to relations with reliability oversight entities. As mentioned earlier, market monitoring and reliability oversight activities are generally undertaken independently. However, there are numerous points at which data used for one purpose may be shared or cascading effects on both systems are experienced. This raises the issue of how governance arrangements for respect and effective collaboration with reliability oversight entities are ensured, especially in the event

of concerns arising from possible noncompliance with a reliability standard and that need to be addressed within the context of the NERC process for Failing Grid Conditions or other market activity that should be the subject of market oversight and potential regulatory sanctions. Market oversight governance is highly dependent on the definition of roles and procedures for escalation. It is essential that the analysis of market monitoring findings in the regulatory process is done in a way that maintains analytical independence, respects the autonomy of regulatory bodies, and upholds market integrity.

End-of-Chapter Summary

This chapter examined the governance and oversight relationships that affect the relationships involved in market monitoring in organized wholesale electric markets. It focused on the reporting mechanisms, regulatory bodies and their relationships with market operators, market monitors and oversight bodies.

Chapter 5

Enforcement Frameworks and Regulatory Authority

Complaints and Enforcement in respect of organized wholesale electric markets deal with behavior that may be outside of the rules or otherwise contrary to the market rules or may otherwise be contrary to the market rules. Enforcement as a formal regulatory activity is necessarily a distinct process from market monitoring which as noted is an evaluative function. The separation between monitoring/ enforcement functions is a critical aspect of organizational market governance and reflects the rule of law and the importance of due process and the administration of justice through appropriate regulatory institutions. Under current FERC regulations, the Federal Energy Regulatory Commission retains exclusive authority to bring enforcement actions against market participants it determines are violating rules of FERC’s wholesale market jurisdiction. Such enforcement actions may involve allegations of market manipulation, tariff violations, and the imposition of Commission remedies and civil penalties. These actions are based upon the Commission’s exercise of the authority and discretion provided under FERC’s statutes, regulations and policies and are based upon more than just simply a determination that the market activity at issue has been characterized by so-called “abuse of discretion” as determined by the Commission under the standards of proof and other evidence-based factors that look beyond just the purely analytical, or market efficiency, aspects of the activity at issue. Market monitoring functions relate to the enforcement process in two ways: 1. They can be used to identify potential problems that can be the subject of analytical documentation for consideration by the Commission in its enforcement proceedings. Referrals based on Independent Market Monitor analyses do not constitute conclusions that a violation has occurred. Rather, they are documentation that the Commission can use in its enforcement process. This preserves the analytical independence of the market monitors while ensuring that the Commission has sufficient documentation to pursue enforcement actions. Enforcement measures are designed to be proportionate and adaptable to the particular circumstances. In determining the appropriate regulatory response

to a particular incident, account will be taken of a range of matters, including: the nature of the conduct and the extent to which it may involve anti-competitive or exclusive conduct; the role or purpose of the conduct, including whether the conduct has been purposefully engaged in or is simply a manifestation of commercial judgement; the impact of the conduct on the functioning of markets and any associated implications for the reliability of the market; and any subsequent compliance action, penalty or

repayment that should be imposed, having regard to the seriousness of the conduct and any repeat offending. Enforcement is not intended to be a mechanism for managing market activity but rather to protect and preserve compliance with the rules. Enforcement authority also relates to market rule evolution. Results of enforcement actions can be carried over to future revisions of tariffs or interpretations in order to support adaptive governance of the organized market. Such relationship among enforcement authority, enforcement actions and market rules and their mutual impacts are structured in a way that avoids overlap between institutional functions. Credibility and consistency of enforcement frameworks determine their real impact. Predictability of enforcement action to market participants not only redresses abuse of discretion, but in addition provides a confidence boosting level of regulatory certainty. Predictable action to enforce compliance with regulation, adjudicated in an orderly manner and through established procedures, should operate to reinforce, rather than undermine, confidence in the market.

End-of-Chapter Summary

Enforcement Rules and Regulatory Authority in Organized Wholesale Markets This Chapter focuses on the enforcement rules and the regulatory authority found in organized wholesale electric markets. It provides a careful description of the distinction between enforcement and market monitoring as well as between federal and statelevel regulatory authority. Enforcement rules provide a formal and often proportional way of ensuring market integrity.

Chapter 6

Boundary Tension Between Market Outcomes and Reliability Obligations

Market monitoring and enforcement mechanisms are more often challenged by gray area situations where market outcomes and reliability actions overlap and create tension at the boundaries between the two. Such ambiguities arise at the margins where economic market signals and reliability operating responses are close to, but potentially violated by, normal market outcomes. Enforcement does not resolve the underlying ambiguity. Integrated markets were designed to reflect reliability constraints through price, through commitment and through transmission network models. But there has always been a gap between what was designed to be reflected and what could be anticipated by the design. And so, day after day, after day, reliability conditions are discovered that were not contemplated in the design of the market products. Weather storms and fuel supply disruptions, generation unit performance degradation, and emerging transmission constraints are but a few of the numerous events that must be addressed by the operating staff of an ISO/RTO market, after the initial effects of the market-based tools have been acted upon. In other words, market tools will often produce prices that are different from those that would occur if the ISO/RTO could afford to let the market operate unimpeded, affecting such things as demand response, shifts in the locations of price-induced demand reduction, and the resulting movements of the flow-based price locations, and affecting all manner of expectations, implicit and explicit, that are inherent in the market rules as they are practiced by suppliers and buyers. Reliability challenges that arise under these conditions are quite different from those that can be readily characterized from a monitoring perspective as presenting behavioral assessment challenges. The observed market distortion may be the result of an operator’s strategy as opposed to the behavior of market participants; and vice versa, the behavior of the market participants that does not diverge from the rules of the market could still be contributing to increased reliability challenges. Therefore, market monitoring must take into account the underlying impact of reliability needs that may not always be associated with the market’s economic outcome. This is boundary tension at its most institutional and most mundane. Reliability responsibilities are mandated by rules set forth by NERC and carried out by Reliability Coordinators, Transmission Operators, and Balancing Authorities. Market oversight responsibilities are mandated by federal regulation and enforced by tariff authority. The central

challenge is one of identifying when actions that are mandated by reliability concerns result in price and dispatch outcomes that fall outside of the boundaries of the market design or, instead, show that the normal functioning of the market needs to be modified in order to assure reliable service. Ensuring fairness in markets during times of low supply is a delicate balance. Enforcement in such situations is highly sensitive. Market monitoring authorities face the complex task of determining what constitutes abusive market practices by taking advantage of reliability conditions for financial gain as opposed to normal market practices where consumers and generators react in a rational manner to constraints in the system. If enforcement is too heavy it can discourage legitimate participation during periods of low supply whereas if it is not sufficiently carried out it can cause abusive practices to become entrenched as the norm in these situations, a time when reliability risk is at its highest. Market conditions that make enforcement of commodity pool rules more complex highlight several important aspects of the structure of organized markets. These include the dynamic and open nature of such markets, the complex interaction of physical market forces, the allocation of responsibility, and the exercise of official discretion. Enforcement in the difficult cases thus involves the exercise of informed judgment, more than mere adherence to a rigid body of rules.

End-of-Chapter Summary

This chapter has examined those scenarios where the market clearing outcome and the reliability obligations are intertwined creating complexities for market monitoring and enforcement. It has highlighted the need for a high degree of contextual judgment in assessing the nature of the actions and resulting outcomes that occur under reliability driven system conditions.

Chapter 7

Information Asymmetry and Oversight Risk

Market monitoring theories assume as a matter of course that information asymmetry is a natural part of organized wholesale electric markets. A marketplace with numerous participants will always have some buyers and sellers who have varying levels of operational knowledge, knowledge about specific resources, and situational awareness (especially during times of system stress). Monitoring and enforcement activity therefore must take into account these inherent asymmetries, bearing in mind that unequal access to information does not necessarily mean that unequal access to information will be used for improper market conduct. As markets continue to grapple with the difficulties of designing market design rules to deal with information asymmetry, there is an increasing recognition that information asymmetry is a characteristic of the system. That is, it exists because of the structure of the power system and the operation of the generators. Asset owners and operators generally have information that is readily available on the performance of a particular unit, the likelihood of forced outages, the availability of fuel, the physical limitations of individual units, and other factors that are not captured in the data feeds available in a market-based system. Information such as the nature of transmission constraints that may affect movements of real and reactive power from one area to another, the specifics of remedial action schemes and other operating practices that support grid reliability, the circumstances under which reliability operators may direct generators to change operating conditions, and other knowledge are all held uniquely by particular groups of market participants and are largely independent of proximity to the affected equipment or region. In other words, information asymmetry is a practical characteristic of power systems and markets and one that is very difficult to manage away through design of market rules. For market monitors dealing with the asymmetric information problem is not so much the fact that there is information asymmetry, but dealing with the opportunity to exploit it. The oversight analysis has to draw a line between the action based on knowledge of operations necessary to run the business and those actions that exploit gaps in the information available to others to achieve unjustified gains. The line is often not easily defined. What appears in retrospect to have been an

economically irrational transaction may have been a rationally made decision based on the information available to the transactor at the time, and the transactor may not have known that it was operating in an information gap that would be later identified as irrational by others. Our recent Energy Policy

publication examines the issue of oversight risk that arises when informational disparities between firms coincide with structural market leverage. Authors Jason Chao, Charles Ro suppress and Michael Barker argue that firms that have supplies or reserves located far from network central points, have fuels that are little substitutable to natural gas or hold reserved capacity during periods of scarcity, can influence either spot prices or the direction of grid resources without breaching the spirit of their contracts. In such instances, market monitoring requires a highly intrusive reconstruction of firm decisions, whereas conventional market monitoring approaches are based upon the less invasive inference of firms’ actions from information concerning their commercial outcomes. This is particularly relevant in situations where the enforcement sensitivity is higher. In such cases, when assessing the impact of rules on the market, regulators will have to verify whether the rules of the market had already dealt with potential imbalances arising from the asymmetry, and if the observed behaviour is a consequence of such imbalances, or rather an abuse. Considering structural asymmetry as an enforcement issue instead of a regulatory one can easily lead to behavioural problems being attributed to the market participants rather than to design flaws of the market structure, which can erode the confidence in both the enforcement and the market as a whole. Why Market Surveillance Fails: The inevitability of insider trading and other forms of market abuse is the fact that some market participants will always have an advantage of information over others. Unfortunately, ensuring market integrity means that the challenge of preventing insider trading is not about eliminating the asymmetric information from the market, but about preventing the exploitation of such advantage while coming to terms with its inevitable presence. Market surveillance activities should also recognize the need to exercise moderation in the extent of analysis and data required, in order to match the limitations of real-time market information and system capacity.

End-of-Chapter Summary

Chapter 4 dealt with information asymmetry as a risk factor for the structural failures that can occur in organized wholesale electric markets. The problem of information asymmetry implies that in a market transaction, one or several of the parties involved in the transaction have more knowledge and information at their disposal. This chapter noted that this problem is also a problem for the purpose of controlling and policing the wholesale electric market, since the unequal distribution of information is difficult to assess except retroactively and in a general or qualitative sense rather than prospectively and quantitatively in a strictly evaluable manner.

Chapter 8

Market Design Feedback and Regulatory Adaptation

While the purpose of monitoring and enforcement market design activity is to prevent improper conduct and protect the markets’ integrity, the real outputs of the activity are market signals and a view of how market design behaves during real time trading. It is through the accumulation of trading patterns over time that the Commission is able to determine how to modify Market Rules, including tariffs, mitigation measures and monitoring requirements. These adjustments, because they are based on trivial actions that occur in commodity trading markets on a daily basis, are neither formalized nor widely recognized for what they are – an ongoing process of market design adjustment and refinement to implement the principles of competitive organized wholesale electric markets. The Market Monitoring Team often finds that compliance with grid rules is not necessarily the same as fulfilling market needs. This can be for various reasons. Non-compliance may not always amount to bad intent. Rather, it can be the consequence of shortcomings in grid or market design that Market Monitoring can bring to the attention of SPP, ISO and the stakeholders. The process of regulatory adaptation is multi-faceted and occurs through both formal and informal mechanisms. FERC proceedings, ongoing stakeholder activities within RTOs/ISOs and market rule change proposals resulting from the periodic review all serve as avenues for translating monitoring findings into market realignments. The market monitors contribute their analysis and perspectives during these activities but do not determine the resulting outcomes of the process. Nor, once contemplated, are proposed design changes automatically implemented. Approval from the regulatory body and additional stakeholder agreements are necessary. This adaptive cycle illustrates the dynamic between stability and responsiveness. Frequent regulatory changes can reduce market confidence by increasing uncertainty; while infrequent regulatory changes can lock in inefficiencies and “oversight blind spots.” The purpose of market monitoring is to collect sufficient information to support regulatory change, while at the same time avoiding over-reaction to transitory events or individual occurrences.

The enforcement outcomes are fed back to further evolve the market design. Complainments received during the enforcement process can indicate that aspects of the rates language, enforcement levels, and/or mitigation levels and triggers require further clarification. The dynamics of these market design elements further mature in time and with further interaction. The Market Design Feedback (MDF) relates to the dynamic nature of organized markets. Enforcement and monitoring does not simply relate

to compliance of behaviors but rather on the interactions between assumptions and the physical properties of the system. The regulation must follow closely with intelligent monitoring in order to respond to the dynamics of changing system conditions, fuel mixes and changing reliability issues.

End-of-Chapter Summary

The 10th chapter analyzed how market monitoring and enforcement interact in the market design feedback and regulatory adjustment process and the importance of oversight to address potential design limitations while pursuing incremental regulatory adjustments on a sound base of analysis rather than through regulatory orders.

Chapter 9

Credibility, Confidence, and Market Legitimacy

Creditability is the hallmark of an effective market monitor, regulatory body or enforcement agency. Reliability prices, processes and markets rely on the confidence of stakeholders that transactions are based on fair rules and their enforcement on a non discriminatorily basis. Without creditability, stakeholders become defensive, investment signals become distorted and markets become disconnected from Reliability Obligations. The credibility of the regulatory framework is determined more by the consistency and fairness of regulatory actions than by the number of enforcement actions carried out. Market participants assess the legitimacy of market regulation on the basis of regulatory actions and their analysis, consistency and correspondence with market objectives. Inconsistent or obscure regulatory actions may lead to market uncertainty that cannot be hedged out and may result in risk averse or non-economic market behaviour. Market surveillance contributes to maintaining market confidence in a relatively hidden but nonetheless fundamental way. Market surveillance analyses and conclusions as interpreted by the public are an important reference point for market players, regulators and other parties. Provided they are characterised by a high degree of economic analysis and restraint in terms of interpretation, these conclusions should provide proof that market surveillance authorities are actively involved, have the necessary technical skills and react promptly to changes occurring within the financial system, without automatically imputing intentional irregularities every time facts develop in a different direction from what was expected. Enforcement credibility, too, depends on the principle of proportionality and adherence to institutions. If enforcement is excessively punitive to what is at best uncertain or debatable behaviour, participation in crucial periods of system stress when huge quantities of resources must be brought into play to provide reliability may be deterrred. Conversely, failure to enforce even obvious cases of violation can lead to strategic behavior by price-sensitive customers who seek to exploit what they believe to be the relative lack of enforceability of the market rules. The appropriate balance between the two must be

derived from an analysis of motivational, effect and rules aspects. In fact, market legitimacy depends on a whole range of visibility and separation of functions within the system of supervision, which ensures that a clear separation of functions is visible to all market participants. In case of unclear functions, even if such ambiguity arises from considerations of efficiency or urgency, the legitimacy of supervision institutions and their ability to exercise genuine accountability will be undermined. Understanding

Market Monitoring as an Institutional Challenge This insight highlights that monitoring the market is not simply a technical task. Market monitoring is an institutional challenge that imposes on governments three types of constraints: constraint of governance, in relation to the principles of governance that need to be respected (principle of discipline and rule of law); constraint of prudence, in relation to the regulation of market conduct (principle of moderation); and constraint of transparency, in relation to the principles of information (principle of disclosure). In all those cases, the purpose of market monitoring and enforcement is not to eliminate risks and disputes, but to establish a framework that is stable and credible for dealing with them.

End-of-Chapter Summary

This chapter examined the relationship between credibility and confidence and the market legitimacy of an organized wholesale electric market as seen through the lens of market monitoring and enforcement activities.

Chapter 10

Structural Limits of Oversight in Complex Market Systems

Market monitoring and enforcement is often considered to be a precision tool in which every transaction and every second counts. Market oversight institutions are held to a standard that may be beyond what is humanly and technologically possible to achieve. Wholesale electricity markets are inherently complex systems. They are dynamic, unpredictable and composed of many diverse components. The underlying systems and resources are changing over time. The enforcement institutions have to navigate through multiple regulatory layers. Market oversight is a part of a very complex system, and there are inherent structural limitations on what can be accomplished by market monitoring and enforcement. These limitations may be impossible to fully mitigate by any amount of data processing or analysis. As an example, there is the limit imposed by the abstraction of the rules. In fact, the tariffs that translate the physical behavior of the system into an economic variable imply that a more perfect, complete and accurate representation of reality is translated into a summary of a smaller number. In other words, the node prices, the algorithms for committing the resources and the measures to mitigate phenomena such as reactive surges imply an approximation of the state of the system, that is not capable of capturing the nuances of the operating regime. The market monitoring accordingly analyses the behaviours through the lens of an abstraction of the system, that cannot take into account the dynamics of the instant-by instant functioning. So, when it comes to producing a judgment on the occurrence of market misconduct, this will necessarily always be approximate. Another constraint is temporal mismatch. A great deal of market activity occurs in real time in the marketplace, and the oversight analysis process that looks back weeks, months or even years after the fact is a significant mismatch. By the time regulatory staff are able to look at patterns of behavior and activity and decide what action to take, if indeed anything is done at all, the underlying conditions that prompted that activity are often long gone. While oversight can be a powerful tool for providing notice and deterrent over time, its impact is inherently too late to act as an effective control in real time. Instead oversight and enforcement tends to be more of a rear view mirror phenomenon. Jurisdiction is another factor that impedes effective oversight. Wholesale markets are regulated, governed by regional markets and overseen by grid reliability and other entities. None of these entities regulate or monitor all aspects of the wholesale market or grid behavior fully. The FERC oversees tariff compliance and behavior on the wholesale market trading platforms, the FERC or regional regulatory commissions enforce market rules, and others such as the regional reliability organizations oversee grid behavior. As a result, jurisdictional gaps and seams in

the regulatory framework will necessarily exist, and can complicate attempts to impose enforcement on behavior that affects multiple regulatory systems. The effectiveness of monitoring is further constrained by the availability of data. Market monitors have access to a broad swath of information. However, judgments made on a purely operational basis, as well as asset-specific constraints or other considerations that are determined in real time and thus are not captured in any form of after-the-fact record may not be observable. This necessarily makes it speculative to try to infer motive or to evaluate the potential implications of counterfactual behavior, reinforcing the need for restraint and care in drawing conclusions and for rigorous regard for evidence. Market abuse regulators need to be aware of the inherent structural limits of their market monitoring and enforcement powers. These structural limitations do not diminish the importance of regulation, but they do define the achievable boundaries of the regulatory activity. Market abuse regulation is not a guarantee of that markets will be free from impropriety or that wrongdoers will be caught, but rather it is a means of setting and enforcing a perimeter of permitted behaviour and providing market participants with comfort in relation to the rules that apply. Accepting constraints is a hallmark of institutional maturity. Meaningful oversight navigates complexity rather than refuting it, and it relies on principles of consistency, transparency, and proportionate reasoning as substitutes for unfettered command over detail.

End-of-Chapter Summary

This chapter analyzed the structural limitations that arise in market monitoring and enforcement in complex market systems. Constraints arise from abstraction, timing, delimitation of market areas, and data availability and this requires a more disciplined and realistic approach to governance expectations.

Chapter 11

Enforcement Signaling and Behavioral Response

Enforcement activity in organized wholesale electric markets is a matter of more than mere consequence for the individual cases brought under FPA § 206. Rather than the immediate consequences to the enforcement target, the enforcement action is in part a signaling event. Through its action, the enforcing body sends to other market participants a number of possible messages concerning its enforcement priorities, its interpretations of particular provisions of the FPA, and the particular circumstances that will and will not violate the FPA’s market rules. Those messages do not cause participants to behave in particular ways through explicit communication of rules or prohibitions; instead they affect the nature of the risks to which participants fear incurring the enforcement agency’s ire, and the sense of the regulatory institution’s tolerance for particular activities and departures from normative behavior. Offenders form opinions about compliance enforcing authorities on the basis of their overall enforcement experience over time rather than individual incidents. Elements of compliance enforcing authority behaviour which affect enforcement experience include when compliance enforcement actions are taken, the type of compliance related conduct targeted and the reasons given for compliance enforcement orders. However, the more clear and rule-based the enforcement rationale, the less likely enforcement experience is to affect compliance strategy in the direction of caution and the more likely it will be achieved in a nonretrogressive manner. While the behavioral response to enforcement actions may seem to be uniform at first glance, individuals with different asset profiles, risk profiles and operational complexity are likely to react in distinct ways to the enforcement signal. For example, one category of participant may change its approach to bidding or increase its level of internal compliance measures in an attempt to lower its assessed risk exposure. Another category of participants may reassess their participation in the electricity or gas market more broadly, with particular attention to those periods when regulatory enforcement is less certain, and ambient levels of surveillance are lowest. The heterogeneity of the response to enforcement actions indicates that enforcement alone cannot be seen as an “on the spot fine” that directly impacts the underlying actions of market participants; rather, it transforms the incentives and circumstances under which those actions are taken. The signaling impact of enforcement is heavily influenced by volatility in prices over time. While scarcity, severe weather and reliability restoration initiatives are always present in the FRR, the increased visibility of enforcement actions, and the heightened vigilance of market participants, to the enforcement actions are most pronounced during periods of high volatility. In this scenario, enforcement signals can not only affect

market prices and quantity, but also impact the availability of resources needed to respond to emergencies, and can therefore affect reliability outcomes. The behavior causal effects of enforcement decisions should also be taken into account by the regulatory authorities. In particular, enforcement actions that appear to be erratic, backward-looking or otherwise poorly keyed to specific circumstances can have spill-over effects on other forms of behavior. By contrast, enforcement actions that are clearly and rationally explained should serve to reinforce the public’s perception of regulatory enforcement as being consistent, fair-minded and rules-based rather than arbitrary or reactive. The communication between buyers and sellers in markets is an aspect of competition law enforcement that is sometimes overlooked. Enforcement is not only a punitive activity, but also a communicative one. It is governed not only by legislation and evidence, but also by the rules of communication, which make it possible for economic agents to know what is permitted and what is not in a market context that is constantly changing and becoming increasingly complex.

End-of-Chapter Summary

Enforcement as a Signal Chapter Five examined the role of enforcement as a signal in an organized wholesale electric market. Enforcement and its effect on the behavior, beliefs and confidence of market participants was examined, with an emphasis on the need for both clarity and judgment.

Chapter 12

Limits of Predictability and the Role of Regulatory Judgment

Market monitoring and enforcement typically are evaluated by their degree of predictability by market participants wishing to know beforehand how behavior will be treated and how market rules will be applied under particular sets of market circumstances. While predictability is an important aspect of fair and credible enforcement of market rules, it is often misplaced as the definitive criterion for monitoring and enforcement activities in an organized wholesale electric market. Such markets have inherently uncertain market structures and conditions for which complete forecasting is not possible, and judgment by regulatory officials must play a critical role. Market rules are designed for known contingencies and normal behaviour. The unforeseen is outside that design. The complexity of modern resource portfolios, the incidence of extreme weather events and the integration of a wide range of emerging technologies means that the operating regime of that market is increasingly likely to be outside of the design parameters of the price regulation contained within the market rule. Market monitoring can highlight where the potential for market abuse is more likely because the prevailing circumstances are no longer within the scope of the market rules. However, it is rarely an automatic ‘on/off’ switch and will always require some element of discretion and judgment in order to reflect the complexity of the particular circumstances. Regulatory judgment occurs within boundaries. Within those boundaries enforcement is governed by statute, Commission precedent and evidence. However, enforcement decisions have to deal with changing and often wholly unforeseen circumstances of real life. Enforcement thus has a substantial, though not necessarily deterministic, element of discretion. It therefore has to deal with questions of intent, of what could be foreseen and the materiality of the effect of an action. All of these are complex in situations where the circumstances do not fall within a clear regulatory rule. The use of discretion introduces a degree of uncertainty. Members will be unsure how a clearinghouse or exchange will react to the use of new strategies or to the emergence of unforeseen circumstances, because historical experience may be lacking.

On the other hand, replacing discretion with a more determinate set of rules could introduce a different set of risks, including the possibility that what was thought to be aberrational is actually normal, and that the market design has gaps that have not yet been observed. Market monitoring is one of the tools designed to act as a constraint in this complex governance context. By ensuring the continuity of analysis, a homogeneous analytical framework and rules of reasoning that are clear to all can serve as a

reference point for the discretion of regulatory authorities, limiting the scope for subjective enforcement decisions. In the long term, it can provide a basis for harmonization of expectations, even if it is impossible to guarantee complete legal certainty. The fact that regulatory judgment is required shows that all market economies have complex systems with rules – they are not simple automata. Effective regulation is not about abolishing the exercise of discretion; rather, it is about ensuring that discretion is exercised in a disciplined and transparent way, and with full regard to its consequences for the functioning of the market economy and for economic stability.

End-of-Chapter Summary

This chapter explores the boundaries of predictability in market monitoring and enforcement and the role of regulatory judgement in dealing with unusual events and complexity. It emphasizes the need for disciplined discretion in order to sustain credible and effective market regulation.

Chapter 13

Transparency, Confidentiality, and Oversight Credibility

The principles of transparency are widely accepted as underpinning effective market regulation. However, the balance between transparency and confidentiality in the context of organized wholesale electric markets is a fraught one. The disclosure of certain information necessary for the purposes of market monitoring and enforcement can potentially damage businesses and compromise grid stability. The credibility of market regulation institutions also depends on their ability to provide explanations and justifications of regulatory actions and findings in a form that is intelligible, rationable and verifiable by interested parties and stakeholders in a way that disclosure of underlying sensitive information can at times be impossible. Such ambiguity is also apparent in Market monitoring outputs. Public market performance reports always represent a summary of the analysts’ conclusions, omitting sensitive information such as individual bids, methodologies and internal system details. The purpose is to verify that the market behaves in the expected way, rather than to provide information that could be potentially misused to replicate or take advantage of the observed trends. In this context, transparency refers to the transparency of reasoning rather than to the disclosure of underlying data. Confidentiality can also be a factor in how enforcement actions are carried out. Many investigative tools, as well as certain types of internal and operational information, are often confidential in nature and consist of materials that could be embarrassing to their owners if they were to be disclosed in full without adequate judicial protections (such as promises of secrecy and assurances that disclosure is necessary to prevent ongoing violations or to preserve national security) or commercial harm were to result. As a result, while a regulatory order may suggest a finding and provide a brief explanation of the Commission’s reasoning, the absence of detail or any context that would allow outsiders to reach a confident judgment as to the Commission’s ultimate legal conclusions and to figure out the implications of the action for future cases can be infuriating. Disclosure levels can create an oversight risk of partial visibility. Information disclosed may not fully explain the conclusions

drawn by regulators and market participants, potentially undermining the legitimacy of any supervision or enforcement action even if it is technically sound. On the other hand, disclosure that is more detailed can undermine the efficiency of the regulatory process by: (i) providing information that could undermine market participants’ incentives to disclose potential weaknesses; (ii) revealing information that could compromise market stability; and (iii) undermining the effectiveness of investigations by

causing potential co-operation to breakdown. It is the job of oversight bodies to ensure that the balance is maintained through matters of procedure and consistency of argumentation. Legitimacy is guaranteed when one has a clear methodological framework, when the same arguments are used for several analogous cases, and when one explains the basis of conclusions drawn from the evidence. The principle of transparency means neither full disclosure nor complete secrecy, but rather an explanation of why decisions are taken in conformity with current norms and with what impartiality. All this is made more complicated by the reliability dimension. There are many operations for which disclosure of sensitive information would risk exacerbating the security and reliability challenges facing the market. Hence the need to link Market Monitoring and oversight to the wider reliability of the system and to exercise restraint when seeking to increase transparency. Even when there is a case for openness, caution may be needed to avoid jeopardising the very arrangements or infrastructure in question. Market oversight is never fully transparent. Its transparency is context-dependent, negotiated and limited by a range of competing institutional imperatives. Regulators’ credibility in their market oversight role can only be sustained by exercising careful discretion in respect of these competing considerations, rather than than by seeking to meet unrealistic requirements for openness.

End-of-Chapter Summary

It then covered the issues surrounding information disclosure that FSR, FSRU and EMRT encounter on a daily basis in their efforts to balance disclosure and protection of market sensitive information while upholding their crediblity and analytical skills for the benefit of the market and reliability.

Chapter 14

Oversight Resilience During System Stress Events

System stress events are generally the most critical and challenging scenario for market monitoring, regulation and enforcement activities. Weather events, widespread power outages, fuel supply disruptions, and cascading transmission constraints can dramatically reduce the amount of time available for regulation, enforcement and market management activities while at the same time engaging all of the key regulatory considerations under each model. Effective regulation will require appropriate responses to these events, regardless of regulatory approach, and must ensure the delivery of appropriate analytic insights and regulatory actions in a timely manner without jeopardizing regulatory autonomy or efficacy. After market events occur during periods of stress, it often becomes clear that the resulting market outcomes bear little resemblance to the outcomes that would have occurred during normal hours given the expectations formed at that time regarding market outcomes. Scarcity prices and emergency commitment and operational decisions resulting from operator directives can result in prices and generation and transmission schedules that seem far removed from market participants normal expectations given the underlying physical circumstances. It is therefore necessary to derive participant behavior as well as the market circumstances surrounding that behavior for successful market monitoring, given that there often is a significant time lapse between the occurrence of the event and the time at which all relevant information that participants had during the stress event has been fully understood in conjunction with all other contemporaneous information which could have been changing rapidly in the stressed period. Financial market oversight resilience requires discipline from various sides. The pressure to react to politically sensitive or market-sensitive circumstances arising from public, political or shareholder reactions can undermine the necessary distinction between analysis and judgment. Market monitoring regulators may be tempted to draw conclusions which are driven by the market outcome of events they are monitoring; regulators facing political pressure over events affecting significant financial market infrastructure may be tempted to rush to judgment before having ascertained the facts of the particular incident. The discipline required to preserve the credibility of financial market oversight activities in the aftermath of such critical events is as much about restraint as about timely reaction. It is important to remember that these are peak demand periods and reliability is very important. Decisions made to protect reliability may not always align with the economic operations of the power market, and market outcomes that are not in line with economic principles may be the result. Regulators should be mindful of the potential for “relief” to be provided for one set of

circumstances only to introduce “ills” that have unintended consequences for the broader market, and therefore should be cautious not to overstate the impact of commodity trader behavior, lest they create lasting perception of market failure that endures even after crisis has been averted. The post-event analysis in this case was for accountability and learning purposes. The former requires examining whether the market rules were applied in the manner prescribed and whether behaviour fell within tolerable limits. The latter involves drawing lessons for future reference, and conclusions based on post facto analysis are most valid if they are based on a more detailed reconstruction of events rather than on what should have happened according to officially prescribed rules and standards. Overseeing market risk exposure in times of stress is a defining feature of an institution’s level of market development. We view this and other attributes as characteristics of an effective market monitoring and enforcement framework: A) They acknowledge a degree of uncertainty, while capturing the relevant facts and circumstances at the time of discretion. They adhere to methodological principles that were established prior to the dispute over controversial market outcomes arising during stressed market conditions. The oversight of market risk exposure during stressful periods is an especially important test of market institutional development. It speaks directly to the level of market maturity, and has a direct bearing on how market monitoring and enforcement are perceived by market participants, particularly in periods of greatest scrutiny.

End-of-Chapter Summary

This chapter examined how market monitoring and enforcement responded to the system stress events identified in the report. It highlighted the need for contextual analysis, institutional restraint and post event learning to preserve oversight credibility in those moments when markets and reliability are under most pressure.

Chapter 15

Long-Term Market Integrity and Institutional Memory

Market monitoring and enforcement are the enforcement mechanisms and regulations that apply over time horizons that are far greater than that of individual events, individuals or regulatory actions. This means that an important factor is institutional memory, that is, the capacity of regulatory agencies to store, analyze and apply information and knowledge over long periods of time in order to provide a dynamic perspective to markets that are constantly changing and thus to guarantee long-term market sustainability. Institutions provide the context for storing and utilizing the memory linked to repeated behavior. Thus, the significance of such behavior can change. That which was innocuous behavior in isolation may be seen as something different when considered in light of past occurrences. Market monitors draw upon their knowledge of past instances of behavior, enforcement actions and structural changes in rules when trying to determine if a new development is really different from what has occurred before. Such an understanding allows for a more comprehensive analysis and is a guard against overreaction and inconsistency. Regulatory continuity is important as well. The credibility of enforcement agencies depends on consistency in the administration of the law in similar circumstances over time, regardless of fluctuations in the market. Even as the law may change, abrupt and inexplicable shifts in enforcement practices will undermine compliance and create unnecessary regulatory risk that can affect firm behavior. Institutional memory serves to provide a source of continuity in enforcement agency decisionmaking that links each specific enforcement action to general principles of the law rather than to the particular conditions that may be present at the time of enforcement. Staff rotations, reorganisation and more complex markets all serve to erode institutional memory, and regulatory agencies need to build on records, methods and procedures to ensure continuity. The latter enables regulatory agencies to ensure stability and manage the huge amounts of variability that arise from the constant flow of new entrants, products and market dynamics. It also has an impact on the long-term stability of the market. The results of the oversight should be processed in such a way that they contribute to the governance of the market. The lessons learned from monitoring and enforcement should enter into the design of the market in a sustainable way, without becoming a mere “rule book” that market participants must navigate or turning into an ad-hoc reaction to specific events in the market. Thus, the institutional learning should contribute to a market that is more stable and therefore more resilient, while also maintaining price stability. Long term market integrity is not an issue of perfect regulation at one point in time, but rather one of sustainable regulatory competence over time. The

regulations and enforcement practices that provide continuity, context and regulatory stability are those that will secure long term market credibility as reliability challenges, changing energy mixes and policy requirements develop.

End-of-Chapter Summary

Institutional memory for long term market integrity The third chapter examines the role of institutional memory in ensuring long-term market integrity. It examines the continuity mechanisms and the historical perspective and discipline of learning that enable market monitoring and governance to be sustained over the long-term.

Chapter 16

Oversight Effectiveness and the Limits of Measurement

Market monitoring, regulation and enforcement is often considered through the lens of observable impact. Yet many of the most significant consequences of regulation and enforcement are either very difficult to measure, or do not lend themselves to being measured, as the intangible elements of market integrity, stability and behavior cannot be captured through metrics. Attempting to measure the impact of regulation and enforcement can simplify an imprecise and dynamic set of relationships in market structures. Looking at enforcement in terms of observable indicators such as the frequency of inspections, level of fines or public attention to investigations does not necessarily tell us much. Low enforcement does not necessarily mean that enforcement is inadequate to deter adverse conduct. It may also reflect the fact that rules or standards are too vague or that enforcement officials are not able or capable of detecting non-compliance. Likewise, the fact that enforcement activities are carried out frequently does not necessarily mean that enforcement is strong or credible. Many structural weaknesses can remain unaddressed. Monitoring activities tend to prevent undesirable outcomes and therefore are largely preventive. As long as monitoring is seen as credible by potential offenders, their actions will be influenced before they can cause damage. The preventive nature of monitoring activities is rarely reflected in monitoring data. Nevertheless, monitoring is making a difference in the behaviour of companies and individuals involved in procurements. The absence of detected misconduct in no way implies that the surveillance was unnecessary. Measurement is complicated by a variety of system factors. For example, many of the effects of oversight are masked by weather, fuel market, transmission and resource conditions. Even if possible to estimate, it is difficult to separate the effects of oversight from these system factors. So meters in oversight organizations are more a matter of ensuring consistency and conformity in measurement and compliance practices rather than producing accurate measures of performance. In the regulatory field the accountability dimension is also qualitative as well as quantitative. The credibility of oversight

activities is evaluated on the basis of the rationality of the arguments used, the stability of the control frameworks adopted, and the correspondence between declared regulatory goals and the conduct of regulatory affairs. These criteria serve to enhance public confidence irrespective of whether the regulatory interventions are disputed or imperfect. Measuring the limitations of oversight does not diminish its relevance. Monitoring and enforcement are not performance indicators but rather tools that

ensure the proper functioning of markets. These tools are not there to achieve perfect results, but rather to define the rules of the game, penalize obvious abuses and maintain the confidence of the public and of operators. Their impact is not measurable by means of indicators, but by the stability of the governance of the markets over time.

End-of-Chapter Summary

The chapter focused on the challenges of measuring the effectiveness of oversight in organized wholesale electric markets. It discussed the use of quantitative indicators and their limitations as well as the preventative, contextual and qualitative aspects of market monitoring and enforcement that are essential for ensuring the long-term integrity of the market.

Chapter 17

Oversight in the Context of Market Evolution

The organized wholesale electric markets are dynamic systems and their dynamics do not remain constant over time. The dynamics change with the evolution of technologies of the resources, with changes in load and policy objectives, and with changes in reliability risk exposures. Market monitoring and enforcement under these dynamic systems have to deal with a changing set of rules that were formulated for a system configuration that existed at some point in the past. This temporal mismatch between the system dynamics and the enforcement processes increases complexity and reduces effectiveness of the enforcement processes. Evolution of the market leads to new forms of demand and interaction, which do not always fit into the assumed framework for oversight. Also, changes in demand and supply patterns, degree of dispatchability and system inertia can lead to different market clearing and violation handling mechanisms. These changes have to be understood by market oversight authorities to ensure that changes in demand and supply behavior are reflecting legitimate developments in the system, rather than attempts to exploit loophopes that may no longer be in line with the underlying physical system. The determination of these changes is not always straightforward and typically requires several price periods for conclusions to be drawn. Monitoring frameworks are generally set in relation to an assessment of current market structure. Over time the base case will change, thresholds and monitoring will need to be adjusted and trends and activity that were considered noteworthy will increasingly become the norm and vice versa. What should not happen is a retroactive adjustment of expectations built into the monitoring framework. Compliance is always difficult during periods of change. retroactively imposing compliance rules on an unprecedented set of facts and circumstances raises significant issues of predictability and justice. A regulatory body needs to balance the needs of the regulated to regulate unforeseen circumstances ahead of market infrastructure modernizing to regulatory changes. Exercising compliance powers in such a manner can amount to a penalty or fine, which is clearly unjustifiable in a period where huge amounts of compliance activity will necessarily be purely adaptive. Institutional coordination becomes increasingly important as markets evolve. Market

monitors, system operators, and regulators must share situational awareness regarding emerging system characteristics without blurring role boundaries. Oversight credibility is strengthened when institutions acknowledge transition explicitly rather than treating evolving behavior as deviation from static norms.

The evolution of markets means that the rules for market conduct oversight must be disciplined yet dynamic. Monitoring and enforcement must be within the bounds of the rules as they were prescribed, but there must also be an understanding of how these rules are played out in a changing marketplace. Market integrity requires a combination of wisdom informed by history, a keen awareness of the market’s current state and an appreciation of how the regulatory environment may evolve over time and influence the conduct of market participants.

End-of-Chapter Summary

Chapter 7 - Market Monitoring and Enforcement This chapter examines how firms and regulators monitor and enforce contracts in an ongoing dynamic market. The chapter focuses on the difficulties of implementing a static regulatory framework to a dynamic market structure, and the role of adaptive, yet rule-bound, discretion.

Chapter 18

Interdependence Between Oversight Institutions

Monitoring, supervision and enforcement are not independent tools. Each system’s efficiency depends on interdependence between institutions that although preserve specific competences in the regulatory system, face system’s interdependence due to horizontal links based on sharing of information, coordination of procedural activities and acknowledgement of others’ competence. Independent Market Monitors are dependent on the system operator for access to relevant operational and market information. Unless they have this information, in combination with an understanding of the operational decisions that have been made, they risk drawing incorrect conclusions concerning market activity and the relative importance of the observed activity. Conversely, the System Operator must also consider that the activities being monitored by an Independent Market Monitor could represent market events that, although within the parameters of the Tariff, could also have a material impact on operational risk. Utility Commission Staff and regulatory body staff that oversee the wholesale electric market use the combined data from both market monitors and the system operator in building up a body of evidence. The analyst brings a market or economic perspective in addition to an understanding of the market behavior. The system operator and planners provide operational data and insights related to the physical operations of the grid and the technical justification for decisions based on the grid’s capacity and reliability. Enforcement decisions should reflect a recognition that the analysis of a particular market outcome is more than purely economic. Rather it is important to consider the physical constraints of the high voltage transmission and distribution system which provide the foundation upon which market decisions are made and which provide the justification for the operational decisions that were based on the potential for congestion or other reliability problems. This interdependence gives rise to coordination risk. The potential for divergence in the mandates, timing or focus of their activities creates an opportunity for misalignment. Market monitoring may identify developments which are economically anomalous but operationally inevitable. Actions are taken in the interests of reliability which may have only limited implications for the market and are typically only identified in off-line analysis. The challenge is to reconcile these divergent views of events in a way that does not privilege one perspective over another. Although these relationships are formally governed by reporting mechanisms, non-disclosure agreements, and grievance procedures, they are also subject to a set of informal norms. The ability of formal institutions to enforce boundaries while recognizing the legitimacy of external dependencies is key to the success of oversight. Conversely, failures of oversight governance often involve the denial of

formal interdependencies and the informal recognition of informal linkages. Oversight cannot function as a monolithic structure because market integrity cannot be policed by a single entity. Rather market integrity is a systemic outcome of a complex system of individual and collective actions carried out by independent bodies (including self-regulatory bodies), carried out on the basis of multiple forms of information. Thus each monitoring entity and each operational entity needs to be alert to the implications of their actions and analyses on the workings of the overall system of supervision, and regulatory agencies must similarly be attentive to the implications of their policy actions and enforcement actions on other aspects of the system of market supervision.

End-of-Chapter Summary

This chapter focused on interdependencies among market monitors, system operators, and regulatory authorities. It examined how the effectiveness of oversight activities depends on the sharing of information and trust among these actors and what this implies for their respective roles in organized wholesale electric markets.

Chapter 19

Oversight Fatigue and the Risk of Normalization

As wholesale markets grow and evolve, regulatory bodies run the risk of normalizing what were previously considered abnormal circumstances. The systems that regulate markets rely on identifying unusual events or deviations from the norm. Over time, however, regulatory bodies may become less vigilant due to repeated exposure to periods of high tension, the need for repeated interventions, or the fact that the market is operating under structural constraints that are deemed acceptable. Oversight fatigue is not a matter of complacency or lack of vigilance, but rather a form of market desensitization. It has become common to discuss normalization in relation to frequent occurrence of certain system conditions. After awhile, the analytical mind starts to think of high demand periods or periods of scarcity pricing or having to operate in off-peak markets as normal rather than abnormal. After a few occurrences of these conditions what originally triggered our concerns become normalized and tend to go unnoticed unless continuously monitored. Normalization of system conditions should be a motivation for increased vigilance to the fact that chronic problems have not been resolved due to limitations in system design or infrastructure. Oversight fatigue, combined with the huge volume of analysis that market monitors and regulators are required to conduct on an on-going basis – using such materials as reports and event analyses – means that many things that would otherwise merit detailed consideration are either given little or no attention at all because regulators and monitors have to make choices and triage market developments on a daily basis. The process of on-going monitoring and market oversight is an extremely demanding intellectual and organizational endeavor, and it is inevitably the most serious and obvious threats to market stability that are focused on while smaller and less dramatic trends may receive less attention as a result. Normalization of Enforcement Behavior by Repeat Offenders In this case the normalization of enforcement behavior presents another related challenge. The same conduct was repeated and neither thwarted nor meaningfully punished on multiple occasions despite the fact that it violated formal government regulations. Through repeated enforcement failure, the relevant population came to recognize and accept the same violation as not being of much concern

by virtue of it being unprohibited (not enforced) even if it remained prohibited in theory. Populations can come to behave in conformity with changed enforcement priorities without a formal regulatory change to behavior as officials may respond to behavior in a manner different than what is written into formal code. As oversight agencies endure the same sets of enforcement challenges time and again, they must

ensure that their behavior sends credible and balanced signals in order to prevent complacency on the part of those being supervised or over exuberance by agents trying to correct what they deem egregious transgressions. Maintaining appropriate oversight balance in these repeat enforcement situations is therefore an important but also increasingly difficult challenge for reform efforts. The reliability-driven normalization of the emergency measures presents yet another layer of challenges. As stressing the system becomes more the norm, interventions that have material impacts on the market may no longer be viewed as extraordinary. Regulators will need to closely monitor the consequences of what are now viewed as routine actions, given that what began as emergency measures are increasingly operating in a manner more akin to standard operating procedures. Getting ahead of oversight fatigue is a matter of institutional self-awareness. We need to look occasionally and in reflect on our assumptions, recognize when our baseline for what is normal has changed, and be willing to undo familiar patterns of behaviour. While markets are dynamic and regulators must be alert to novel developments, the primary goal of a monitoring and enforcement system is not to respond to something that feels different from the last occasion on which action was required. Rather it is to be always looking at something.

End-of-Chapter Summary

The chapter focused on the phenomena of oversight fatigue and normalisation in organized wholesale electric power markets. This chapter aims to provide insights into the potential impacts of having to deal on a continuous basis with periods of high pressure on the system and with repetitive patterns of occurrence, and highlight the ongoing monitoring that is needed to ensure the proper functioning of the market.

Chapter 20

Oversight as a Constraint on Market Power Perception

Market monitoring and enforcement is often viewed as the phase of the FTTC process that focuses on detecting and punishing misconduct in wholesale electricity markets. This interpretation is understandable, but it is not the whole story. Market monitoring and enforcement can also be important to the exercise of market power and the social norms that govern it. The enforcement component of monitoring can act as an additional factor that market participants take into account when determining whether their actions are viewed as competitive behavior or as an abuse of market power. Even if enforcement action is not taken, the component of monitoring that involves enforcement can have a perceptible impact on market participants’ understanding of the limits of what is acceptable economic and business activity in a wholesale electricity market. Market power in organized markets is not determined by the level of ownership concentration or structural indicators alone. Rather, market power is situational and determined by a range of factors including resource characteristics, constraints of the transmission system and system conditions. Market monitoring will reflect this situational perspective of market power viewing market power as a short-term and contingent phenomenon rather than as a permanent and intentional one. A market monitoring mechanism is a preventative measure that sends a signal that an analysis of a situational advantage that is not neglected. Resources are not used in constrained conditions or during periods of high demand because it is known that their use will be monitored, even if it is in line with tariff conditions. This article and the associated paper were both made possible by generous support from the Robert B. and Ethel Ray Rosenfield Foundation. See Joseph P. McMahon, Some Thoughts on What Constitutes Abuse of Market Position in the Antitrust Relatement Era, 92 ANTITRUST L.J. 83 (2015) (discussing possible alternatives to an abuse of market position standard). See also discussion infra Part V. See Daniel F. Akerson et al., Understanding Market Power, Competition Policy Inst., at 2 (Finding No. 1, Nov. 17, 2015) ("The enforcement agency’s role in policing the boundaries of permissible

activity helps to inform firms as to what behavior is expected and what crosses the line of acceptable action.“). In the antitrust context, defining and policing the boundary between”legitimate" competition and “abuse of situational leverage” falls squarely within the enforcement agency’s competence. As noted in Part III, enforcement agency actions defining the permissible boundaries of firms’ conduct, and thereby articulating the circumstances under which context, purpose, and effect are measured, have the

potential to educate firms about the circumstances in which concern for market power is appropriate even though there is no clear standard for determining when firms are engaging in that kind of conduct. These actions arguably affect the behavior of other firms beyond the particular transactions or conduct at issue. Perception matters because market confidence is based on the perception that outcomes are the result of competition and not of monopolistic or abusive practices. Oversight which is not seen as being actively engaged or too lenient risks to transform from time to time accidental benefit of situation to routine abuse and thereby to undermine the confidence of all market players. Conversely, oversight that is perceived as overbearing will be an obstacle to the very activity it seeks to regulate in those areas where market developments are most strained. Oversight therefore imposes a complex constraint on competition. It does not a priori suppress the market power that is inherent in any constrained system but constrains its exercise and its acceptability. By ensuring the vigilance of market monitoring and the respect of competition rules, it establishes a border of legitimacy between acceptable and inacceptable forms of exercise of this power and therefore ensures the integrity of the market.

End-of-Chapter Summary

This chapter examined the impact of market monitoring and enforcement on the perception and exercise of market power. As suggested in the previous chapter, oversight may be more about constraining situational advantage by using enforcement and sanctions as a disciplinary device and a focal point for suppliers and buyers than about adhering to an automatic prescription of structural market power.

Chapter 21

Oversight Accountability and Institutional Self-Assessment

Market monitoring and enforcement rules are scrutinized too. Governance bodies and enforcement agencies act under delegated authority with considerable discretion and a high degree of opacity, both attributes that imply a degree of responsibility for internal self-assessment and reporting. Ultimately, the smooth functioning of organized wholesale electricity markets is just as much about how market participant behavior is monitored and governed as it is about how the activities of those who monitor and enforce those rules are themselves monitored and governed. Accountability in the institutional sense is not really punitive. Market monitors, regulators and system operators look in from time to time to confirm that their accountability goals are being met, to confirm that their methods of analysis are still appropriate and to confirm that institutional frameworks are still aligned with market and reliability conditions. Typically this is an intra-institutional and low-profile process – sometimes an ongoing process rather than a discrete event – but it is one of the significant influences on how any institutional process of accountability evolves over time. Risk Appetite & Oversight: Self-Assessment – Metrics are elusive in this regard as well as in relation to market efficiency. It is not possible to effectively measure or reduce oversight risk to a few key performance indicators or threshold compliance levels. Rather, as is the case with market efficiency, indicators will be more qualitative in nature, such as consistency of risk analysis, stakeholders’ confidence, and resilience of market participation during turbulent periods, and will therefore require a formal, internal process of reflection, rather than an operational adjustment to events as they unfold. External oversight mechanisms can at best provide limited accountability. Such aspects include, for example, federal regulatory proceedings related to the evaluation of an external audit, judicial review procedures, or public consultation processes through which decisions related to oversight reviews might be called into question or interpreted. These procedures generally address specific events or decisions rather than the overall performance of oversight bodies. They are thus no substitute for internal learning by these bodies

as to whether their procedures remain relevant and adequate for carrying out their mandates effectively. Accountability also relates to the realization of potential consequences of oversight choices and judgments. Choices concerning enforcement, focal points and disclosure can create outcomes in the market that send enduring messages about how that market is to be organized. These consequences need to be considered by institutions before they make choices, and institutions need to reflect on

potential market consequences of choices where there has been a formal rationalization of action. This will sometimes involve acknowledging risky market consequences in the absence of perceived threats to systemic stability. Accountability is a cultural phenomenon. The frameworks that we have that emphasize scrutiny, intellectual independence, and caution will be the ones that will endure and have the credibility to shape the cultural attitudes of others in relation to oversight. Accountability, as a byproduct of culture, cannot be achieved by insisting that market oversight institutions are infallible; it is a matter of creating the ability to think and adapt to circumstances that are inherently highly volatile.

End-of-Chapter Summary

Chapter 4 looks inside market monitoring and enforcement institutions to explore the accountability of individuals who work there. Relatively little is known about this, so the chapter primarily offers possibilities for further investigation rather than drawing definitive conclusions. The analysis focuses on internal accountability mechanisms such as self-evaluation, technical review, and work-place culture to examine the conditions under which market monitoring and enforcement can be carried out credibly in the context of organized wholesale electricity markets.

Chapter 22

Market Oversight and the Preservation of Regulatory Boundaries

The compliance promotion and enforcement mechanisms are situated in a governance framework that heavily depends on the accuracy of the market segment boundaries between the market analysis, rulemaking and adjudication activities. If enforcement agencies overstep their competences, whatever the reason behind it (increase efficiency, etc.), this can undermine the integrity of the market governance framework. Independent Market Monitors determine compliance with tariffs and Market Rules based on actions and outcomes. They do not determine or interpret the terms of tariffs and Market Rules. An analytical posture that amounts to more than constructive guidance for Market Participants can be considered to be de facto rulemaking because it omits procedural safeguards required for formal regulation changes. Administrative law regulators also face a balancing act, between compliance and administrative discretion. When administrative actions are required to enforce compliance with regulatory requirements the Commissioner must make interpretive decisions. However, the regulator must always refer to the wording of the licenced regulations and what was intended by the regulator when the licence was granted. Any administrative discretion allowed within the enforcement of existing licenced regulations should not be confused with the regulatory-making process for new proposed amendments to regulatory texts, to avoid any perception of bias in the regulatory system. So called system operators are also subject to boundaries. Decisions taken to preserve reliability in the operating framework can have a major impact on the market, but do not constitute a basis for adjusting or governing market mechanisms and the expectations of market regulation. In the event that individual operating practices have to serve instead of market design or regulatory solutions, the rules of accountability become blurred and regulatory clarity is lost. Boundaries are most vulnerable during high pressure or times of change. There may be an understandable temptation to merge functions in the face of tight deadlines, political pressure or severe system crisis. Nevertheless it is precisely in these situations that adherence to organizational boundaries is critical. The potential short term gains to crossing boundaries can come at great cost to longer term management of the institution. Each market institution must exercise self-discipline in addition to being subject to discipline from others. In practice, the functions of monitoring, enforcement, operations and regulation are often conflated. Maintaining a distinction between them serves to protect due process, the rule of law, market stability and the public’s faith in the orderly application of rules and principles.

End-of-Chapter Summary

This chapter discusses the importance of maintaining regulatory and institutional boundaries within market monitoring and enforcement regimes and the role that discipline and restraint play in the legitimacy, transparency and accountability of organized wholesale electric markets.

Chapter 23

The Role of Precedent in Market Oversight

Precedent is a complicating factor in the FRR market monitoring and enforcement regime. Large swathes of the organized wholesale electric power market requires consistency to support price stability and transactions reliability; yet individual enforcement decisions are determined by fact patterns that will differ from one another based on various factors of the energy market including the operational conditions of the grid at the time of any alleged violation; the nature of alleged misconduct by market participants; and enforcement agency bureaucratic and regulatory considerations. While precedent can be highly relevant in these enforcement decisions, it is only one factor and does not function as a cookie cutter determinative decision-making tool. A regulatory precedent is a reference point that antitrust authorities and courts use to enforce and apply competition rules to similar conduct over time. Enforcement orders, Commission findings and decisions, as well as the underlying reasoning, set a precedent which market players and enforcement agencies can then rely on in assessing similar conduct. In this way, precedents clarify the intent, the effect and the circumstances of the activity at issue and guide the assessment of other activities that present similar issues, even where the factual circumstances differ. Precedent is a market monitoring tool that monitors other market segments indirectly. Our analytical framework is the product of our accumulated experience and past surveillance outcomes, and we continually update the scope of our focus and the criteria for surveillance discipline. Nevertheless, the analysis must not be merely inferential, that is to say that it should not be limited to verifying the consistency of developments with what happened in the past, because: - In the case of a large number of market developments, trends, etc. that do not conform to known precedents. In such cases it is essential to realise that nonconformity does not necessarily mean that the development in question is irrelevant to the objectives of market development. Another limitation inherent in a history based system is that precedent evolves over time. As new data and information becomes available (changes in resources, operating practices, etc.), risk evaluations and decisions made years ago may no longer accurately reflect the present day. Therefore, it is incumbent upon regulatory bodies to assess when precedent

still holds for the present and when it does not. If regulatory bodies fail to adapt or think of precedent as ‘etched in stone’, they risk becoming mired in outdated and potentially obsolete analyses and conclusions. Agency determinations whether to rely upon precedent to enforce prior decisions must also

carefully calibrate concerns of consistency and fairness. Relying on the findings of prior decisions in similar circumstances when they have been updated or otherwise modified to account for changing circumstances risks creating retroactive rules on complaint after the point at which the conduct was engaged in. Deviating without explanation from prior decisions, meanwhile, risks stultifying predictability and fostering suspicion of arbitrary action. Careful agency enforcement therefore should take care to explain how it incorporates precedent into its decisionmaking, and to explain why enforcement decisions falling outside of established precedent are proper, without being required to hold that prior precedent required the particular enforcement action ultimately chosen by the agency. Precedent will be effective if viewed as a directional guide as opposed to a restrictive rule. Precedent serves as a disciplinary frame work for market oversight within a broader institutional context that evolves over time. It affords the SDA sufficient latitude to address unique situations in the market while ensuring that market integrity is maintained on an ongoing basis. Above all, precedent helps to promote stability through continuity in the face of changing circumstances.

End-of-Chapter Summary

This chapter analyzed the role of precedent in market monitoring and enforcement. It generally highlighted the importance of precedent in shaping analysis and assuring consistent regulation while always leaving room for the need to adjust to new developments in markets and the operating system of the energy sector.

Chapter 24

Oversight Judgment Under Uncertainty

A hallmark of organized wholesale electric markets is that virtually all participants operate under conditions of significant uncertainty. Load and resource performance, transmission and fuel supply constraints all present uncertainties that cannot be fully resolved prior to the time that market participation decisions are made. Consequence is that market monitoring and enforcement activities focus on conduct and outcomes that occurred when the participants had only partial information and an evolving picture of the operating conditions of the market. The timely exercising of oversight judgment in uncertain times calls for caution as well as a high level of vigilance. This means that when evaluating whether behaviour has been permissible (given the circumstances at the time it was exercised) the market supervisor must take account of the facts that were known at the time rather than those that with hindsight have become apparent. It is easy in hindsight to see what was the correct course of action, especially in the case of unfortunate market developments, and this temporal bias can easily become distorted to the extent that it leads to overly-negative judgements about how events unfolded. In addition to moral and ethical issues, another set of concerns revolve about uncertainty and how to determine intent. Many of the decisions made by officials were based on probabilistic thinking rather than on certainties. Actions that would later be deemed to be of an aggressive nature were made in response to perceived situations and in an attempt to minimize risk and exposure, while other actions that seem to be neutral in hindsight may have been undertaken in an attempt to achieve strategic gains while managing risks and uncertainties. Understanding the environment in which decisions were made requires considerable care, caution and attention to detail. It is easy to infer intent and motives after the fact, but doing so in hindsight can easily become misleading and misleading to the real circumstances. Uncertainty and Rule Structure Regulating Market Participation by Providing Clarity about What Is Permitted and Prohibited By further exploring the constraints on regulatory judgment, we shed light on the impact of rule structure. Current market rules often leave uncertain what actions are permitted or prohibited by providing only general guidelines regarding permissible and prohibited actions in market participation under various circumstances. Without deciding what actions are optimal in each of the situations that may arise, these rules leave considerable room for interpretation by the regulatory authority when it has to make enforcement decisions. In particular, the authority must make a highly complex judgment regarding whether an actor has exceeded the boundaries of permissible action by taking advantage of gaps and ambiguities in the rules in order to artificially influence the outcome of the

transaction. Such judgments are not amenable to clearcut, mechanical standards and are inherently fact dependent. Even as we live with high levels of uncertainty, we should remember the need for humility in our analysis. We should remember that over sight credibility is not about our ability to say we can see into the future. Rather, it’s about our ability to recognize where we do not have solid evidence to make a choice and our ability to justify the choice we make. A more candid recognition of uncertainty and the methods by which choices are made despite uncertainty, will lead to more confident decision making than an attempt to create a false impression of certainness where none exists. Uncertainty is not an oversight failure – it is a structural condition. Market monitoring and enforcement frameworks that take account of this are more likely to be credible and stand the test of significant surprise. Oversight under conditions of uncertainty will require the exercise of sound discretion, rigorous analytical techniques and an understanding of the distinction between prudent risk-taking and illegal conduct.

End-of-Chapter Summary

It seems to have been left out of the table of contents. This chapter may have been left out of the TOC or it may not be fully integrated with the rest of the material. We notice that this chapter discusses the exercise of discretion under uncertainty in the context of market monitoring and enforcement. Reconstructing the decision context, avoiding the influence of hindsight bias, and maintaining the credibility of enforcement efforts are core issues.

Chapter 25

Oversight as an Element of Market Stability

These functions have a broad, latent and incremental impact on market stability in Organized Wholesale Markets (OWMs) that is difficult to be directly observed and quantified. Market stability in this context is not about non-volatility and the suppression of price fluctuations. Rather, stable markets are those that can absorb fluctuations and occasional price spikes while adjusting to changing market conditions and remaining consistent with market governance rules in a manner that sustains participants’ trust and prevents market failure. Oversight functions as a stability-promoting factor that reinforces the expectation of rule stability. Investments, participation in the derivatives market and risk-reduction measures are all made on the assumption that market structures will be stable over time. Stabilitypromoting monitoring and enforcement mechanisms therefore deter market participants from exploiting regulatory loopholes or one-off market conditions. Another factor contributing to stability is the way in which failure is dealt with by supervisory processes. As we have already seen, disruptions, product failures and enforcement cases are inevitably involved when weaknesses revealed by accidents cannot be adequately addressed in real time. What contributes to stability is that oversight deals with them as opportunities for learning – and hence as acceptable events that do not challenge the legitimacy of the system, so that market participants are not unduly troubled by the need to take measures to deal with them and financial stability is not otherwise undermined. One of the most prominent features of regulation and market governance in transition is the connection between the two and stability. As a small number of system parameters change over time, the market may enter periods of high price volatility, dynamic behaviour or emergent coupling between regulatory and reliability variables. Effective regulation must take into account the transition state in order to regulate departure from nominal operational conditions as a normal process rather than as an instance of misbehaviour. Stability is not an obstacle to change, but the regulatory framework in which change takes place. The enforcement strategy is an important factor. There is often a temptation to over-react to immediate outbreaks of violence, knowing that calm is likely to be restored soon. However, over-reaction during a wave of unrest will always serve to encourage retrenchment or aggressive behavior and so should be avoided. On the other hand, failing to act against outrageous behavior has its own negative consequences, as citizens begin to lose faith that authorities will take appropriate steps in the face of increasingly disruptive behavior. In this way, enforcement must be both proportional and composed in order to secure the dividends derived from a well-designed and articulated monitoring strategy that has clearly identified intended

focus areas for attention. In addition to design, the stability of the market cannot be achieved solely by means of regulation. Oversight institutions, by rigorously making use of their control and monitoring functions, co-create the stabilizing effect of this regulation. The effect of the oversight on the stability of the market is difficult to quantify. The loss in case of a breakdown in governance confidence and the resulting conditional or strategic nature of participation, speaks for itself.

End-of-Chapter Summary

This chapter analyzes the impact of market monitoring and enforcement activities on market stability. It highlights the somewhat indirect, cumulative and therefore difficult to measure influence of such enforcement on the resilience of rules, on their introduction, and therefore on the maintenance of confidence in a volatile or changing market.

Chapter 26

The Practical Limits of Deterrence in Market Oversight

The goal of deterrence is frequently cited as a main goal of market monitoring and enforcement, but there is little systematic analysis of the limits of deterrence in the context of enforcement of social protection policies. Enforcement agencies intend to deter infractions by making the rewards for lawful behaviour greater than those for unlawful conduct. However, enforcement does not always achieve the same impact on the same group of actors, under the same conditions and at the same time. The extent and efficacy of deterrence is significantly influenced by many factors that are often beyond the control of enforcement agencies. The effectiveness of deterrence can be influenced by the perception of the risk of oversight by the various actors. Large players may consider the risk of enforcement as a relatively modest price to pay, while small players may consider the same risk as catastrophic. This does not necessarily result in the behaviour that is desired by the oversight authority. While compliance monitoring can help to raise awareness of issues that warrant attention, it does not ensure that deterrence has an equal impact on all participants. Temporal distance makes deterrence more ineffective as well. Enforcement activities may be carried out only many years after a firm commits an improper act. Complex work may be required to re-create data or make a comprehensive analysis of circumstances. All of these can introduce time between an actor’s conduct and an enforcement body’s assessment of appropriate sanctions for the behavior. Even if enforcement body’s actions are carried out relatively promptly within its own information horizon after being informed of particular behaviors, such behaviors are often carried out a considerable period after the original improper action took place. These long time spans make the impact of firms’ behavior small as firms can act for a considerable number of periods before an enforcement body can impose more than trivial sanctions under the simplest deterrence rules in sequential models of behavior, rules in which the fine levied upon discovery of bad behavior, but before imposition of sanction, does not include any penalties that carry over from prior periods and in which each firm makes behavior choices for each period

separately. The relevance of the reputation an enforcement agency has developed as an agency for imposing sanctions makes any such deterrence effect based on agencies carrying over consequences from previous behavior in subsequent enforcement actions more a function of the agency’s accumulated reputation rather than the contemporary effect of individual penalties and fines on firms that have to decide whether or not to participate in markets enforced by sanctions imposed by such an agency.

Ambiguity is a major constraint on deterrence. Where rules are sufficiently discretionary or open to particular interpretation, parties may justifably have different views on the probability of the Commission enforcing penalties in specific circumstances. Oversight cannot adequately respond to this ambiguity by threatening severe penalties after behavior has occurred. Deterrence through the use of the fog of uncertainty is necessarily a distorting as well as a disciplining force. This monitoring has a deterring effect, albeit in an indirect way. By making officials aware that their conduct is being tracked and assessed in the context of an overall review it can inhibit improper conduct in the face of imprecise expectations about the consequences of non-compliance. This form of “observational deterrence” may be described as professional and reputational in nature rather than punitive. It seems to me that deterrence and oversight are necessarily linked to the recognition of the limits of deterrence. Market monitoring and sanctions cannot on their own avoid strategic behaviour or enforce the rules by the threat of punishment. Their role is to put in place enforceable reference points, norms and rules that clearly define unacceptable behaviour and are used to police that behaviour once the limits of deterrence have been recognised.

End-of-Chapter Summary

The chapter examines the bounds of deterrence within the context of market monitoring and enforcement. The analysis examines how parameters such as participant heterogeneity, entry timing, ambiguity and perception all influence the actual deterrent effect that is realized by antitrust enforcement, noting that monitoring plays a critical role in shaping legal boundaries as matters of enforcement rather than attempting to use penalties to shape behaviour.

Chapter 27

Oversight Legitimacy in Politicized Environments

Market monitoring and enforcement operate within markets that are not entirely immune to political interference. High prices, shortages, power outages or other emergency events almost always trigger political as well as media and public commentary. Ensuring the legitimacy of the market monitoring and enforcement regime requires successfully navigating the inevitable pressure to offer explanations or excuses for observed events while striving to maintain an objective market monitor posture. Politics is always about outcomes, not about process. A spike in gas prices, an emergency price freeze, or a public outcry over supposed shortages can all generate politically embarrassing questions that demand instant answers. For market monitors and regulators, the challenge is to ensure that they answer those questions in a way that reflects the rules of the market and the institutional balance of power at play, rather than being drawn into a never-ending cycle of complaint and counter-complaint that ends up playing politics with the principle of the law and the search for fairness. If they do not, then those same politics will shift the terms of reference for the very rules that are supposed to ensure fairness, sustainability and efficiency in markets, and in the process undermine the very principle of due process. In order to protect legitimacy, market regulators need to constantly explain the boundaries between design, between conduct rules and between system circumstances. They need to explain how price formation occurs in a scarcity period and that in such period, when all the rules that were authorized in advance have been respected, certain conducts may not have been prohibited, yet may not be authorized. Above all, they need to know and explain in what respects they exercise their regulatory powers. This is an explanatory task that is likely to be highly difficult but that is crucial to ensuring that public debate stays within the framework of institutional facts, and that regulator’s credibility is preserved through turbulences. In politicised environments enforcement posture can be a highly sensitive issue. High-profile enforcement actions can create enormous pressure to act in individual cases even when there may be doubts as to whether

there is enough evidence, or the application of the law to the specific circumstances is clear-cut. This pressure can come from multiple sources including elected officials, media outlets, non-governmental organisations or other stakeholders. Oversight bodies should not equate citizen discontent with illegality. Enforcement actions that are determined by political considerations at a given time are unlikely to enhance enforcement in the long run, even if they may provide temporary relief in a specific case.

Market monitoring contributes to the legitimacy of market regulation through the continuity of analysis on the political cycle. Regularly applying the set of analytical tools sends a clear signal to all stakeholders that monitoring activities are guided by rules and procedures and are not adjusted to specific circumstances. Such stability contributes to market regulation being seen as the result of institutionalised processes, rather than ad-hoc reactions to short-term political developments. Regulation cannot prevent politics from interfering with markets – not least of all in the case of key infrastructure such as networks, power lines and other energy networks. More generally, politicization is not an exception for regulators, but a normal part of the regulatory business. Thus, regulatory frameworks need to be designed in such a way that they can deal with such pressure in a way that preserves their credibility. Regulating markets efficiently is a matter of ensuring that politics does not obstruct sound economic judgment – not that politics is kept away from regulators, but that regulators’ judgements are not undermined by the very process of being held to account.

End-of-Chapter Summary

This chapter dealt with oversight legitimacy in a politicised context. It explored how market surveillance and enforcement activities can be maintained in a context where there is a high degree of political and societal influence, and consequently can threaten the legitimacy of such activities. To that end, it is important to rely on procedural scrutiny, clear delimitation of the competent authorities’ responsibilities and uniform assessment criteria.

Chapter 28

Oversight Consistency Across Market Regions

When operational aspects are accounted for, the organized wholesale electric markets that currently exist in the United States are subject to the same federal regulations, but differ by region in terms of market rules, resource portfolio, and grid configuration. As markets operate within this varied landscape, Market Monitoring and Enforcement must balance regulatory heterogeneity to ensure sufficient homogeneity to sustain market participants’ trust that similar actions will be treated comparably. Regional variation does not arise from oversight failure, but rather from legitimate differences between generation and transmission system characteristics and market designs. Differences in transmission systems, load patterns, degree of exposure to fuel markets and operating practices can influence the nature of markets and risks. When evaluating operational conduct therefore, oversight must always take into account the regional context in question and should not impose rigid and dogmatic criteria that fail to take account of meaningful differences in system characteristics. In this segment of the commodity markets enforcement activities are not necessarily about consistency. Rather than being a matter of enforcement practice the term “consistency” is used in the context of the application of enforcement tools and the regulation principles to refer to shared perceptions or underlying criteria, such as the context-based approach, the principle of proportionality, or market conduct analysis. Enforcement practices may then be adjusted to take into account local specifics in a given country, region or market, in order to ensure that the principle of fairness is not called into question because of what may amount to an enforced, and hence inappropriate, uniformity of results. The Multiple Markets Challenge In today’s financial markets, dealers, or other market participants, can be active in many regions. A firm trading in more than one organised market may find that the level of focus or the degree of detail of the enforcement activities differ between those markets, which may cause some uncertainty about how their conduct will be viewed by regulatory authorities. Market regulation Coordination, information sharing, and the application of Commission decisions establishing principles which are applicable across the single market, while allowing for different implementations at local level, can be useful means to mitigate this concern. It is especially important to achieve consistency in enforcement. Perception of inconsistent enforcement in different regions can erode public trust, even where differences in enforcement appear to be justified by the specific facts and circumstances of each case or by specific provisions of the law. Credibility as an effective oversight agency requires that it can explain to the public in a principled fashion why the same conduct is punished in one place but not in another, and to do so in

a way that minimizes the appearance of arbitrary discretion. Consistency across regional markets is a matter of institutional discipline. Compliance monitoring programmes need to be more than wary of the ‘equal treatment’ mantra. As fairness is not necessarily served by blind uniformity, informed enforcement must preserve a degree of consistency while being sufficiently sensitive to diversity. So what is required is the enforcement of compliance monitoring and market governance in ways that reference common governance principles underlying evaluations of individual market sector activities while making room for the diversity of local market conditions.

End-of-Chapter Summary

The 7th chapter dealt with the consistency of oversight among the regional markets. It discussed the differences between the conceptual and procedural aspects of consistency and highlighted the evaluation criteria and principles that can be used as a benchmark for fair oversight despite the legitimate differences between the regions.

Chapter 29

The Relationship Between Oversight and Market Participation

Market monitoring and enforcement not only affect market conduct but also the choice to participate in markets and under what conditions. Decisions to enter or not and under what terms are influenced by perceptions of market opportunities, risks and credibility of market governance. Through influencing the predictability of enforcement and the perceived impartiality of market institutions, oversight frameworks exert their impacts on these participation decisions in subtle ways. When providing capital, resources or operational capacity, investors take into account the oversight environment of the sector in which they are investing. Markets with clear regulatory frameworks and robust oversight are generally more stable and can sustain large investor bases even in times of high volatility. Conversely, uncertainty and inconsistent regulation may act as a significant deterrent to investing, particularly during periods of high stress to the system when strong demand for services is required to maintain stability. Oversight may affect market participants in different ways. Larger and more diversified market participants or those with greater experience in overseen markets may prove more robust to higher levels of uncertainty, while smaller or newer participants may view comparable conditions as more burdensome. Discretionary elements in market monitoring and enforcement can further exacerbate disparities in the effects of oversight and restrict participation in ways that affect competition and market stability. This balance between oversight and participation is particularly visible in times of scarcity. Participants have to balance the monetary potential deriving from trading on stressed energy markets against the regulatory risk they expose themselves to in case of misconduct complaints reported to regulatory bodies. Poorly designed oversight measures that do not provide sufficient clarity on how individual context and intentions are considered can lead to unintended consequences: they can reduce the availability of resources in exact moments when energy reliability is at risk. These effects are not necessarily the result of a deliberate choice. Rather they are operational consequences that may not be immediately apparent. Market monitoring facilitates more confident participation by delimiting the scope of permissible and prohibited behaviour in such a way that it does not amount to the prescription of specific actions. The rules and criteria that will be used for analyses may be made public, even if it is not possible to predict with certainty what the consequences will be for those involved. This enables participants to make decisions about the extent of their participation, and over time establishes a stable and flexible group of participants rather than a rigid and defensive one. While the oversight of a market does not directly influence the level of participation in that market, it does influence the parameters of

the participation decision that market players must take. Effective oversight frameworks therefore play a key role in ensuring the integrity of markets with high levels of participation and diversity. Such markets are typically characterized by both high competition and diversity of business activities.

End-of-Chapter Summary

This chapter investigated how market monitoring and enforcement affect participation in the market. In particular, it examined the relationship between market participation and oversight in a more indirect way by looking at its effect on buyer and seller confidence, participation choices and the competitive and reliability implications of seller participation under different forms of oversight.

Chapter 30

Oversight Maturity and the Balance Between Stability and Change

Market monitoring and enforcement mechanisms in organized wholesale electric markets are constantly balancing competing needs in order to preserve market stability while enabling change. Enforcement agencies must provide enough stability and predictability to ensure market participant confidence in order to deter unacceptable behavior, while at the same time being adaptable enough to reflect changes in generation and transmission systems, in market rules and design, and in the ever present risks to reliability. Agencies’ level of market maturity is reflected in how effectively this balance is struck over time. The stability of regulatory oversight means that there is regulatory consistency in respect of individual regulatory criteria, clarity of regulatory authorities’ functions and restraint in enforcement. Stable oversight is marked by the formation of fairly stable expectations regarding regulatory assessment of economic conduct whatever the fluctuating circumstances of economic operations. It does not mean that the rules are static, but rather that they are rigorously implemented and clearly and transparently applied. As time unfolds, market developments may not remain within the original anticipated parameters and conditions embedded in regulations. Shifts in fuel compositions, operating modes, and patterns of system stress are not uncommon and have the potential to reveal latent vulnerabilities or mismatches that had not been fully considered at the time of initial rule-making. Oversight bodies may be seen as advanced in their capabilities if they respond to such developments by recognizing the circumstances for what they are and directing ensuing adjustments through established procedures rather than through mere regulatory reinterpretation. No area of the regulatory system is more fraught with tension between preservation of the status quo and change than when agencies seek to address systemic problems by taking enforcement or monitoring action in individual cases. Trying to enforce rules and monitor conduct to address underlying systemic problems is not always an effective or even advisable way to address those problems, and the pressure to react quickly to emerging problems can exacerbate the temptation to enforce compliance with whatever regulatory definition can be most argueably stretched to cover the particular circumstances of a case. A high quality of regulation is associated with an ability to resists this temptation and preserve the functional differentiation between adjudicative determinations of particular actions and the rulemaking process that defines the governing regulations and the bounds of permissible behavior. The balance between operational responsibility and institutional learning is a critical factor. Oversight arrangements which draw on relevant institutional experience while avoiding rigid adherence to past practices are designed to be flexible. This calls for

analytical ability, a culture of self-reflection, recording and continuity of staff and institutional changes. In its basic sense, the maturity of oversight implies awareness of boundaries. The ability to monitor markets and enforce compliance in the market economy does not guarantee that the market will always produce optimal results or that all disputes will be resolved in a satisfactory manner. The main task of monitoring and enforcement in a market economy is to establish an efficient governance framework that ensures stability and legitimacy of the market. Efficient oversight balances stability and dynamism in such a way that markets remain not only stable but also credible, stable and adaptable.

End-of-Chapter Summary

This chapter analyzed the concept of oversight maturity as a balance between stability and change. It highlighted how consistent analytical principles, disciplined restraint, and structured adaptation support long-term market integrity in the face of organizational change in the organized wholesale electric markets.

Chapter 31

Oversight Failure Modes and Institutional Risk

Risk Management Many market monitoring and enforcement frameworks are put in place to mitigate specific risks. However, they are not failsafe and can fail in various ways. Oversight failure modes are often more institutional than technical in nature. They tend to arise from issues related to incentives, role confusion, and the deterioration of analytical discipline, and are important to be aware of in order to ensure that oversight is maintained on an ongoing basis. Mandate overstretch is another potential source of regulatory failure. The mandate of regulatory monitoring bodies and enforcement agencies is defined by specific norms, standards, procedures or legislation that establish the parameters of their discretion. These monitoring and enforcement bodies overstretch their mandate when they refer to market designs not written into any legislation or formal regulation in their findings or enforcement practices. The motivations for this are understandable, insofar as there are clearly many aspects that are not properly taken into account in market designs. The evaluation function is being exceeded by the regulatory function, however, when these organisations make binding rule suggestions based on a market design not established in legislation and regulation. In the short term, the impact of such suggestions or enforcement practices may appear to be suitable for the purpose intended. They are, however, inacceptable in the long term for several reasons. First, there is always a risk of criticism and resistance from various stakeholders, and enforcement practices may therefore be challenged before the courts. Secondly, their acceptance would threaten the credibility of regulatory monitoring bodies and enforcement agencies. Another example of “failure mode” is institutional passivity. Regulatory bodies may fail to take prompt action in response to a pattern of complaints about potential abuses (e.g. excessive forward pricing for particular customers, or discriminatory price differentials). The regulators may figure that taking disciplinary action would be excessive for the particular conduct at issue, or that the market dynamics underlying the conduct would not be unduly disturbed by a warning or a fine. In any case, an institutional culture that fails to react forcefully to a recurring problem may amount to a tolerance of that problem as it develops – a tolerance that is increased by the inherent difficulty or politics of

the problem, and further increased by the fact that attempted regulatory action would require substantial changes in production or operations in order to address the underlying problems that are triggering reports of market abuse to the Commission. In this way, the institutional failure mode of

passivity can foster abuses that do not individually seem to warrant Commission enforcement action, through the process of gradually eroding the pricing discipline of the market over time. Analytical degradation is a less overt risk. Assumptions may be inadvertently reused, outdated baseline or analytical approaches may be relied upon, or previous analyses may be applied too uncritically to the current situation. This can lead to a monitoring system losing the ability to “detect” changes in the system being monitored. Analytical degradation is often a subtle, hard to self-detect process. It tends to occur over time and is often obscured from view because the output of a monitoring system continues to look normal and consistent, and therefore seemingly correct, even though it is actually inaccurate. Coordination failure is also a source of institutional risk. Poor alignment between the roles of market monitors, system operators and regulators can lead to fragmented and opaque responses to incidents, which obscure accountability. Even where each institution plays its part, lacking awareness of the activities of others can ensure that gaps in oversight remain even as individual institutions are hard at work. Recognizing the potential for failure to occur in these areas does not mean that failures will occur. It simply highlights that a price for noncompliance must be paid and that oversight will have to address both endogenous and exogenous factors influencing both institutional and trader behavior. A market monitoring and enforcement system that recognizes its own vulnerability and is made more vigilant and proactive in its enforcement activities as a result can often deter unacceptable trading and preclude losses from arising as a result of a breach in market integrity before any significant damage is done.

End-of-Chapter Summary

This chapter examined a variety of common oversight failure modes including overreach, passivity, analytical degradation, and coordination failure. The chapter also stressed the need for high levels of institutional self-awareness in order to mitigate oversight risk and protect market stability.

Chapter 32

The Enduring Role of Judgment in Market Oversight

Complaining about excessive discretion in market monitoring is misconceived. There is a great deal of formal regulation of markets, surveillance mechanisms and enforcement measures. In complex organized wholesale electric markets there will inevitably be institution-based human discretion for determining how to operate the formal system. Effective market surveillance is not a matter of eliminating discretion but rather exercising it in a constrained, visible and accountable way. Judgment in this regard should be exercised where rules need to be applied in circumstances that are not clearly provided for or where there are uncertainties. Conduct that falls within the letter of applicable tariff provisions could for example be inconsistent with Market Operations, Reliability or Pricing objectives, or historical circumstances. Conversely, conduct that may prima facie be considered questionable, could be considered justified in circumstances of the time such as system conditions, or availability of information. The role of oversight institutions in such situations will be to exercise judgment in their consideration of relevant circumstances, while at all times avoiding the exercise of individual discretion as opposed to the proper application of established criteria. Judgment is shaped by institutional culture. It will be applied more consistently and effectively in institutions that value technical analysis, diverse points of view, and transparency of methodology. In those that emphasize speed, consensus and outcome, judgment is more likely to be exercised capriciously or in the dark. And the inequities between the two will become more visible over time, as the patterns of oversight behavior become more apparent and less credible. Judgment is also limited by procedure. Documentation requirements, peer review, escalation procedures and regulatory review can all serve to rein in discretion and mitigate the potential for individual prejudice. They do not eliminate the use of judgment but ensure that it is exercised within a more collaborative and auditable context. Judgment is a lasting fact of life in the market regulatory system. Because no matter what rules are imposed, and no matter what models are constructed, no regulator has ever been able to draft a complete set of instructions for accountants to follow in every market regulatory situation that may arise, or to eliminate even a single uncertainty from the mass of data that must be

reviewed. An oversight system that recognizes the reality of judgment, as opposed to hiding it, is more transparent, more flexible and more legitimate. The ability of market monitoring and enforcement frameworks to achieve their objectives has less to do with providing a guarantee of outcomes and more

to do with ensuring that, once a decision has been made, the underlying reasoning is prudent, consistent and constrained by well-defined institutional parameters. Anything less would be a weakness of the regulatory process, rather than one of its characteristics.

End-of-Chapter Summary

Chapter five discussed the persistent role of discretion in monitoring and enforcing market rules. We highlighted the importance of disciplined discretion, as well as organizational norms and procedures for credible market monitoring in complex and dynamic organized wholesale electric markets.

Chapter 33

Market Oversight as a Governance Function

Market monitoring, regulation and enforcement are often considered as a series of technical, administrative measures. In fact, as a governance functions they have a lasting impact on the integrity of wholesale power markets. These markets exist only by virtue of the regulatory license that confers authority, and the delegated operations that underpin their daily activities. These actions of oversight help to reconfirm that legitimacy of the operations of these markets. In governance terms, oversight is more concerned with the dynamics of market systems and institutions rather than the individual outcomes of specific activities. This means assessing whether the underlying assumptions in a market system approach are still valid (for example, whether the market system has continued to work in the way it was designed); whether governments and other regulators are behaving within expected parameters; and whether institutions are able to carry out their functions effectively as market systems and economies change. In this view, oversight is a regulatory role that acts to safeguard the stability of a market system, rather than to correct any particular event or imbalance. To perform the function of governance, one needs to look beyond the present moment. Market watchers and authorities need to put present events into a broader historical perspective, keeping in mind that the responses to immediate disruptions form part of the larger institutionbuilding process, the underlying rules of the game that make up the collective legitimacy of a market’s institutional framework. An oversight decision, enforcement action or public statement, whether particular to a disruption or not, either reinforces or undermines the legitimacy of a market’s institutional framework and so impacts its viability. The essence of successful governance is long-term rather than short-term. The governance-oriented oversight approach is also an exercise in restraint. Not every adverse event is a scandal and not every market crisis is resolved by means of law enforcement or regulatory interpretation. The legitimacy of the regulatory process requires the acceptance of constraints on the power of the regulatory authority and the steering of systemic issues towards adequate forms of market regulation such as structural reforms or regulatory policy. Oversight that does more than support good governance undermines the transparency and determinacy that is needed for effective regulation. The interaction between markets and reliability frameworks is another dimension of the governance function of oversight. There is always some interaction between market activity and the physical system’s reliability obligations. Reliability performance must also be part of any effective governance of the system. These interactions require ongoing vigilance to ensure that market functions align appropriately with reliability performance

obligations and that governance of the system is consistent. Market monitoring, enforcement and regulation ultimately provide the underpinning for the efficiency and structure of a multi-product organized wholesale market in order to reconcile the governance of market based economic transactions and bilateral contractual reliability arrangements. The success of the various market management tools is not measured by the absence of debates or unforeseen events, but rather by providing a stable, orderly and lawful means of dealing with changes as they arise.

End-of-Chapter Summary

Market Monitoring and Enforcement as Governance in the Context of the organized Wholesale Electric Market This chapter has looked at the activities of market monitoring and enforcement as examples of governance in an organized wholesale electric market. As we have seen, these activities were important for sustaining legitimacy, role clarity and long term trust for all the actors in the market. Rather than trying to correct the outcome of individual transactions or instances, these activities worked to ensure that the overall framework of the market was stable and secure.

Chapter 34

The Cumulative Nature of Oversight Influence

The impact of market monitoring and enforcement is not always easy to see in the actions that make up the work of market monitoring and enforcement activities. In general, the impact of the work is not from a particular decision, a particular report or enforcement action. Rather, it is a result of applying market analysis principles to monitor developments in the market on an ongoing basis, of explaining the rules of the market in a consistent manner and of ensuring that enforcement practices within the Commission are disciplined. The cumulative effect of these activities has a more lasting impact on the behavior of participants in the market than any individual enforcement action. Market participants are gradually socialized into the expectations that others have regarding the nature of oversight, and so learn to form views of what is and what is not likely to be of interest to regulators on the basis of increasingly indistinct and highly contextual signals that are inherently implicit and are communicated through process rather than statement, in the form of routines and rules that affect their assessments of risk, their characterizations of action, and their management of ambiguity. Regulation by Notification acts to maintain the continuity of market analyses that enable participants to make educated guesses as to how their conduct will be judged, even when the impact of that conduct upon regulatory scrutiny is itself highly contingent. Another factor is the cumulative effect at the institutional level. A regulatory authority’s actions will acquire a certain legitimacy based on the consistency of its conduct, on the moderation of its demands, and on the reasoning it presents. The impact of audits carried out in one year can be different in another. The sanctions imposed on one company may not have the same effects on another. The public and users’ attitudes during a calm period can differ from those during a crisis or a scandal. An oversight institution gradually builds its legitimacy. This can be worn away over time, like sand eroded by the waves, through the repetition of inconsistent or excessive actions. The cumulative nature of oversight means that it is virtually impossible to attribute any specific impact on markets to specific actions of regulators or supervisors. When things are going right and markets are stable and secure confidence is high, it is in practice very difficult to separate the impact of oversight and regulation

from other, more enduring, design features of markets and financial systems. When things are going wrong and confidence falls, it is easy to blame regulation and supervision for the fall in confidence, even though the underlying drivers may be much more long term and related to broader economic or financial market developments. All of these factors combine to emphasize the need for both patience

and perspective when considering the impact of oversight on markets and wider economic developments. The cumulative nature of the dynamic also suggests that continuity over time and between different individuals exercising oversight influence is important. Changing the method of analysis from one period to the next or from one individual to another can undermine the overall impact of oversight influence. While there is obviously no requirement that the method of analysis remain static over time or be the same for different individuals, recognizing the potential impacts of any changes on the market can make an important difference. Market monitoring and enforcement exert a greater influence on market conduct through their presence than through individual enforcement measures. The combined effect of their presence determines the framework for the scope of competition and permanently reinforces the rules of the market through repetitive conduct, consistency and rules of conduct.

End-of-Chapter Summary

This chapter focused on the cumulative effect of market monitoring and enforcement in the context of competition policy. It argued that the principles of oversight are meant to influence market conduct not only on an immediate basis but also over time in terms of the credibility of enforcement bodies and the broader integrity of markets.

Chapter 35

Market Oversight and the Management of Institutional Trust

Institutional trust is an implicit condition of organized wholesale electric markets. Rules, monitoring mechanisms and enforcement authority all rely on the assumption that institutions act in an efficient, uniform and bounded fashion. Such trust is not passive – it must be fostered through deliberate actions, good analytical practices and adherence to norms of governance. Public trust in regulatory bodies is built over time through affirmative evidence that similar types of conduct are treated uniformly, new issues are addressed thoughtfully and conclusions are supported by credible evidence, rather than expediency. The trust that is built by Market monitoring is maintained through consistent analysis across changing market circumstances. The enforcement process reinforces the trust built in regulatory action that is considered proportionate and clear, rather than ad hoc and reactive. Boundary management is a key challenge for institutional trust. Governance should refrain from any encroachment into the domains of other actors; otherwise, trust will be threatened. The fiduciary board overstepping its mandate and meddling with operational details, design choices, or political decisions can undermine trust in several ways. While the motivations of the fiduciary board might be benign and aimed at improving the system, the effects may appear as lack of predictability rather than of responsiveness. What is critical for maintaining trust is that the board can refrain from intervention, even when pressed by interested parties, which is a clear signal of trust in the governance framework. Administering trust requires recognition of the boundaries and limits of trust. Oversight institutions increase trust by dealing openly with issues of uncertainty, spatial boundaries, and limits of evidence. Unrealistic control or predictive pretences regularly lead to disappointment when proved ineffectual against the complexity of real systems and cannot therefore sustain trust as they do not honour or embody a realistic version of trust. Market oversight is conducted in a trust that can be eroded over time and rebuilt only slowly. One‐off enforcement actions, particular announcements and particularly the way regulators react to shocks to the financial system all have an

impact on the more general perception of the trustworthiness of individual institutions. As trust is seen as a variable rather than fixed asset, regulators are likely to create conditions that promote stability of participation in markets and ongoing legitimacy in the eyes of customers.

End-of-Chapter Summary

Our oversight influences the development of the market not only through the exercise of authority, but also through the degree of confidence it inspires. Continuous analysis, judicious use of instruments and respect for the boundaries of our mandate all contribute to market participants’ confidence that the market functioned in a previsible and fair manner, despite possible turbulent and disputed developments.

Chapter 36

Oversight Continuity Across Personnel and Organizational Change

Market monitoring and enforcement frameworks are designed and implemented by institutions, but administered by individuals. Over time, personnel changes, restructuring and leadership priorities can all intervene, and affect public perception and the application of enforcement measures. Ensuring continuity in these circumstances is often overlooked, but fundamental to good market governance. The continuity of oversight does not necessarily depend on the expertise of individuals. Rather, it is a matter of procedures. The methods of analysis, the forms used for record keeping, the review mechanisms, and the procedures for reporting incidents are what provide continuity. Provided that these procedures are institutionally stabilized, the exercise of oversight can be carried out in the same manner whether one person or another occupies an important position in the organization. The absence of stable procedures can result in an oversight approach that changes with the arrival or departure of staff members or changes in management, which can lead to considerable uncertainty for the actors in the market. Organizational change can also affect the emphasis of oversight. For example, efficiency or management driven changes could have the effect of changing the reporting lines, budget or scope of analysis of an oversight unit. Similarly, changes in practices that affect monitoring or enforcement could be perceived as affecting the vigilance or strictness of an oversight unit or as changing the level of disclosure that is expected from an organization undergoing change. In these cases, oversight institutions must be vigilant to the potential effects of organizational change on the signals sent to the public by an organization and its regulators, even if the formal rules and arrangements for accountability have not changed. Continuity is very important for institutional memory. A significant loss of experienced staff can lead to loss of historical perspective which, when combined with the natural human tendency to consider first-time events as unusual rather than recognizing them as repeat instances of familiar behavior, can complicate distinguishing between truly innovative behavior versus the repetition of previously identified acts. Adequate documentation and knowledge transfer between periods of change can help preserve the analytical perspective. Auditors, contractors and grantees are acutely sensitive to such changes. An unintended shift in audit approach could affect the behavior of auditees, who may change their actions or be more wary of taking on new work because they are unsure of how the auditors will react. Continuity in audit procedures sends a signal to auditees that the audits are guided by established audit procedures and less by the preferences of the individual auditor. Our oversight programmes that focus on continuity mechanisms help to ensure long term credibility. Rather than solely relying on the

expertise of individual individuals our processes embed judgement so that institutions are able to maintain stability and ensure that markets can confident cope with any changes that arise from significant changes to the organisation.

End-of-Chapter Summary

Continuity of oversight is crucial to the sustainability of the market monitoring and enforcement efforts. While the presence of individuals and institutions is critical to the initial phases of these activities, their continuity is not essential. Rather, it is the methodology, documentation and process of knowledge exchange that need to be maintained over time to ensure that the efforts have a lasting impact, and that credibility is retained among the stakeholders, even as personnel and institutions change.

Chapter 37

Oversight Signal Clarity and Market Interpretation

Market monitoring and enforcement typically communicate with market participants through the use of indirect market signals, rather than direct intervention. Market monitoring and enforcement use a wide range of direct and indirect signals in market monitoring reports, through enforcement actions, public announcements and other institutional practices. The relevance and clarity of these signals for market participants can significantly affect their behavior, regardless of the specific wording of the relevant regulatory provisions. That agents are able to see through noise in signals that change over time requires coherence, not necessarily strict regularity. Agents will typically infer the implications of a rule or objective based on observed similarities and differences between individual events, the formulation of explanations given for disciplinary actions or the absence thereof, and the perceived characterization of ambiguity or uncertainty. If the signal provided by such events is coherent agents may be able to understand sufficiently well the implications of the rules and goals agents are asked to follow or conform to in apparently anomalous or complex situations. If the signal is otherwise noisy or presented episodically then agents may well be left to guess much of what is required or prohibited in seemingly similar events. In such a setting it is likely that their behavior will be correspondingly more diffuse or imprecise. Analysis / Market risk management Ambiguity in market conduct messages can be a major risk in times of stress. In sensitive periods such as during high-profile investigations, when market participants are under pressure to complete transactions within tight timelines and where regulatory attention is intense, any oversight posture that is perceived as other than neutral can have severe consequences. Any rapid market response to analysis or enforcement actions that appears to be not procedural or focused solely on the specific outcome of the action at hand can send clear signals to market participants that market conduct expectations are evolving and in a way that is not necessarily consistent with any formal change to market conduct rules. This can act as a deterrent to participation and/or encourage risk averse trading practices that can be very detrimental to market efficiency. It is not necessary to simplify things. In principle, oversight signals can manage complexity and uncertainty, while conveying constancy. We believe that specifying the criteria for contextual judgment, decision-maker intent and system states contributes to interpretive stability, while allowing for a range of specific conclusions conditioned on the context. Actors will tend to accept outcomes they do not like more readily if the reasoning process is clear and in line with their prior experience. Signal discipline breaks down not only between authorities and market participants but also between supervisory bodies. When

market watchers, the grid operator and regulatory authorities all give differing accounts of the same developments, they create a fog of confusion that obscures the law of the market. It is not necessarily a question of agreeing on the analysis but rather of presenting it in a way that is consistent from one authority to another. Market oversight works best with signals that are faint rather than bright. Rather than demonstrating power, the aim is to create an environment where market participants can read the rulations that, over time, will condemn misconduct. Faint, reliable signals confirm that oversight is grounded in principle, stable over time, and consistent with regulatory rules, rather than the latest market developments.

End-of-Chapter Summary

Market behavior is determined not by the formal authority underlying the regulatory signals but by how these signals are interpreted by market actors. With strategically aligned and therefore appropriate, coherent, consistent and context-dependent design, actors are able to adapt their behavior to the regulatory intentions underlying the regulatory signals, even in the presence of highly complex and dynamic system situations.

Chapter 38

Oversight Credibility and the Management of Expectations

Our ability to influence events externally comes not so much from formal authority as from careful management of the expectations we create. In market models, the principle underlying an organized wholesale market is that market rules, monitoring procedures and penalties will all function in a predictable and equitable manner on a continuing basis even during those periods of system stress when drastic regulatory actions may appear unreasonable. Failures in meeting these expectations undermine market credibility irrespective of whether the facts and actions involved are technically in order. Expectation gaps arise under stressful or turbulent circumstances. Various stakeholders, including market participants, policy makers, and the wider public have various and, often, unrealistic expectations regarding the role of regulators and supervisors, often expecting regulatory agencies to take action to prevent particular outcomes from occurring, even when those outcomes are presently included within established and acceptped regulatory frameworks. The potential for expectation gaps in relation to market monitoring and enforcement arises, because stakeholders are likely to have an exaggerated view of the regulatory system’s ability to police and regulate market behaviour to an extent that is not within the regulatory system’s current capacity or design parameters, and there is an imperative to make these limits clearer to all concerned. Market monitors provide analytical frames that support expectation management. By distinguishing between compliant outcomes arising from well-designed market structures and those that are simply the result of design limitations, their reports help to manage expectations within the bounds of what is institutionally possible versus what might be considered a more fair or stable market outcome. By framing oversight in terms of rules rather than outcomes, they reinforce the formal nature of the markets they oversee. Enforcement expectations are often the most contentious to navigate. High profile enforcement actions may create the perception that similar enforcement actions should be taken in similar circumstances, notwithstanding the possibility of substantial variations in the underlying circumstances. It

is thus important for oversight bodies to make clear that their views as to enforcement are premised on a thorough understanding of the relevant context, the intended or possible impact of any enforcement action, and the quality of the evidence supporting such enforcement action, so that such actions are not unfairly caricatured by reference to individual enforcement actions that may not be representative. In addition to being outward-facing, expectations must also be managed internally by oversight institutions

in order to appropriately calibrate their own expectations of the role and potential impact of oversight monitoring and enforcement activity. Managing overly optimistic or pessimistic internal expectations of oversight capability can help avoid overly defensive or reactive agency postures versus oversight actors on the one hand and bureaucratic malaise or excessive complacency on the other. Increasing awareness of the potential for such dynamics helps manage expectations on all sides. Regular oversight ensures that expectations are matched to real-world governance practices. Through consistent reinforcement of limits of authority and rules governing market monitoring and law enforcement activities, governance frameworks that provide stability and promote confidence are maintained, despite potential disputes over impact. Stability is not guaranteed by having expectations met, but by ensuring that expectations are appropriate to the real-world governance arrangements in place.

End-of-Chapter Summary

Consistency with stakeholders’ expectations is crucial for any oversight body but may not always be achievable. Oversight bodies will generally enjoy greater credibility for their activities if their powers and responsibilities are made abundantly clear to all relevant parties, together with the criteria that will be employed for evaluating their performance. Consistency with these expectations may not always be possible, especially in situations in which market outcomes do not correspond with stakeholders’ understanding of what is appropriate or desirable.

Chapter 39

Oversight Boundaries in an Era of Expanding Market Complexity

Market monitoring in complex wholesale markets The landscape of organized wholesale markets has become more complex, as greater diversity of resources, greater uncertainty in operations and greater interregional interdependence all contribute to pressure on institutions’ existing regulatory boundaries. While market monitoring and enforcement continue to be necessary tools to help ensure fair rules of the game are in place and complied with, they cannot be used as a substitute for market design, operation or policy decisions. Increased complexity introduces a new factor in assessing the boundaries of conduct that needs to be supervised. Rules established in a context of relative homogeneity are no longer applicable, as complex systems involve very diverse types and characteristics of resources whose performance and reactions may vary significantly. New constraints and unforeseen consequences in the handling of transmission constraints, which also constitute an element of greater complexity, make it more difficult to maintain hypotheses and analytical frameworks that are commonly accepted and have proven their worth. The purpose of supervisory authorities is to assess the extent to which conduct observable in the market is in line with established rules of conduct while refraining from introducing new elements by expanding the scope of said rules. Boundary pressure is often most intense where complexity creates ambiguity. Some actions may not be obviously prohibited or permitted given current policies. There may be pressure to monitor or enforce the issue on an ad hoc basis because the consequences of non-compliance are either dramatic or politically embarrassing. However, enforcing through discretion rather than rule can be a loss for the regulatory system. Managing complexity with respect to barriers means having to balance a whole series of requirements. Not every irregularity or dysfunction in market activity is worth reporting and not every design constraint can be policed. Above all, market monitoring is useful in situations where complexity reveals fundamental incompatibilities in the market design. In such cases, rather than providing a regulatory response or developing a regulatory plan to address

the impact of complexity, the issue is simply accepted as a constraint that can be accommodated within the regulatory framework. Complexity in the internal workings of oversight institutions has also been identified as a possible factor. In part this is due to the increased use of new analytical tools, data integration techniques and the need for greater coordination, all of which have accompanied the wider scope of activities in the markets they oversee. The result can be over-explained and overly-regulated

entities that are no longer bounded by their core mission of oversight and are instead driven by a desire to achieve a level of full coverage or control. In this context, maintaining integrity of oversight boundaries in the face of increased market complexity is not a matter of abstinence, but a matter of governance. Ensuring that there is clarity as to the respective roles that can be fulfilled in the market, and providing appropriate frameworks in order for those roles to be developed in a manner that is in line with the functioning of the market, ensures that the market can grow and develop in an appropriate manner, while at the same time, ensuring that monitoring and enforcement activities remain credible, stable and predictable and therefore exercise their function in accordance with their purpose.

End-of-Chapter Summary

In an increasingly fragmented market it is becoming increasingly difficult to maintain the integrity of oversight boundaries. Ensuring effective market monitoring and enforcement in this context therefore requires that there is no expansion of the scope of regulatory interpretation and that regulatory boundaries between ex ante supervision, ex post regulation and market design are maintained, not least in view of the increasing complexity of interdependencies between individual components of the market infrastructure.

Chapter 40

Oversight Credibility in the Presence of Structural Constraints

Structural barriers are endemic to organized wholesale electric markets. Transmission constraints, resource location, fuel dependency, and geography impose significant market effects that cannot be readily altered through rule design or enforcement actions. Enforcement and market monitoring actions must be effective in the presence of these structural barriers without being perceived as having the ability to change their effects. Infringing on the credibility of oversight is imposing structural constraints which may result in manifestly unfair or unequal economic consequences or less efficient provision of services, leading to congestion, price spikes or price volatility and giving rise to doubts as to whether the pricing mechanisms are fair or whether the behaviour of the parties involved is unreasonable. The consequences resulting from structural constraints should be explained by supervision authorities so that they are not regarded as an indication of lack of governance. Market monitoring is crucial for documenting how structural constraints affect market activity and consequently influence economic market outcomes. Our analysis can confirm that prices and market results of combined auctions are in line with the constructions that are mandated for constrained situations, thereby validating the underlying of what may be seen as unfavorable market outcomes. The need for this validation is particularly significant in situations where many market participants perceive structural barriers to be persistent over time and become a focus of contentious market discussion. Enforcement posture must remain calibrated to this reality. Treating constraint-driven outcomes as enforcement problems risks mischaracterizing the nature of the issue and undermining confidence in oversight fairness. Conversely, failure to act when participants exploit constraints beyond intended market constructs erodes trust. Oversight credibility depends on maintaining this distinction with discipline and evidentiary rigor. Institutional design imposes constraints on management of expectations. Citizens and stakeholders often assume that regulatory agencies can remedy problems that have arisen from decisions taken in other parts of the system, and which are therefore beyond regulatory control. Increasing the credibility of sanctions, improving accountability, and spreading best practices serve to redefine the legitimate scope of audit and control, thereby addressing expectations on who should do what and when. Organizations cannot work credibly on the basis of structural restrictions if they are to maintain institution-building as a central aim. Monitoring systems that accept the limits of their capacity to change or enforce compliance are more likely to retain the trust of governments and local communities. Instead of comparing the reality of microfinance institutions to an ideal, market-based monitoring and enforcement

measures start from the current state of affairs rather than striving for particular outcomes, and in so doing, can strengthen the governance of the sector as underlying restrictions remain unaddressed.

End-of-Chapter Summary

Market outcomes can be shaped by structural factors which cannot be fully influenced by regulation. Monitoring and enforcement in a market have to be credible to differentiate the constrained outcome from potential cases of market abuse and to reassure market participants that an unpopular outcome is structural, not regulatory.

Chapter 41

Oversight Interaction with Planning and Long-Term System Decisions

Market monitoring and enforcement processes currently focus on individual market transactions in a predefined market structure. In parallel, planning processes set the framework for the system conditions that will prevail at the time of those transactions, including transmission projects to address future grid needs, measures to ensure energy security during periods of peak demand and long-term reliability planning. As these processes can dictate the conditions under which markets are cleared and, hence, may distinguish between conduct or inherent system issues, potentially impacting the relevance of the persistent concerns highlighted through market monitoring activities, further investigation in this area is warranted. Market monitoring activities frequently reveal price behavior that cannot be explained within the context of the market mechanisms. Such effects may be a signal of underlying planning issues. Examples may include frequent cases of congestion on specific lines due to inadequate transmission and/or generation development, wide price differentials due to poor interconnection planning, and excessive use of emergency generators due to an inappropriate generation portfolio. Although these types of findings may be verified through detailed market analysis, the scope of regulatory functions often does not encompass direct intervention in planning. Relationships between oversight and planning are therefore typically both oblique and important. The findings of market monitoring often affect the more general knowledge within an institution of where planning assumptions or other hypotheses are likely to be seriously at variance with market reality. This information may then be used as a background for discussions within planning bodies. It is important to maintain a clear separation of oversight and planning in order to preserve administrative clarity. In this context, enforcement is highly sensitive. In limited planning situations, seemingly inappropriate behaviour may be perfectly justified in the circumstances. Overbooking that occurs at an individual level because it is anticipated that the planning authority will not be able to refuse boarding at the ticket counter should not be dealt with as a case of planned overbooking. The threat of disciplinary action to individuals could cause unfair prejudice but could also have a stigmatising effect on the oversight body that seeks to enforce it. It could also be highly counterproductive if it were interpreted at the planning level as evidence of inherent demand limitations, rather than of individual misconduct. Expectations about long-term system decisions that may influence how expectations of oversight are set, and thus how current and future behavior is conditioned. In many markets, current behavior is conditioned by anticipated transmission projects, regulatory signals and future market design. Oversight rules that take into account the evolution of

expectations regarding the longer term can be more effective in distinguishing between a commercial strategy and a potential abuse, at least in the transition period. A review of oversight and planning confirms the broader governance lessons identified above: that market monitoring and enforcement helps to support the current market architecture but does not provide a substitute for investments in the longer term evolution of the systems. Oversight that works to preserve this separation and to turn market analysis and other insights into operational knowledge applicable to all stakeholders and aspects of the market is essential to delivering the full benefits of better market design and operation.

End-of-Chapter Summary

Market regulation through information and not through control or mandate. The link between regulation and planning occurs via means of analysis and not command. Regulation and enforcement clarify the roles and ensure that the short term motivations of individual operators do not detract from the longer term planning decisions that are in the public interest. Essentially regulation and enforcement is meant to show how market constraints impact on the behavior of the operators in the market and without substituting regulation for planning decisions.

Chapter 42

Oversight Credibility in an Interconnected Market Landscape

Interregional coordination and market interdependence are central to today’s wholesale electricity market dynamics. Power and energy are physically moved and relied on from far beyond the individual market boundaries and enforcement horizons. Managing reliability risks resulting from extended geographic affects the outcomes of enforcement choices made at one location more than ever. The challenge in the compliance and monitoring space is to address the new interconnections without loss of focus at the individual regional level. Interconnection complicates the oversight analysis of a number of market monitoring issues due to the fact that the effect of the underlying cause may not be concentrated in a single region. This can result in a regional outcome being caused by events or conditions that occur in another region. For example, FMPR issues that cause a regional price to differ from the FMPR in another region, transmission constraints that prevent a region from benefiting from high prices in another region, resource outages in a region that impact pricing in another region, or FDN/ FPRR issues that cause a FPRR in one region to be used in response to a FDN in another region. In order to effectively analyze these types of issues, FERC market monitors must adopt a more systems-oriented view in which potential local market abuse is masked by network effects. Authority, however, is bounded by region. Actions to enforce tariffs and commodity agreements are taken only within particular market jurisdictions, even if the underlying facts that justify intervention appear to exist in more than one market. An appropriate analytical framework will be required to avoid confusion in determining the correct jurisdiction or jurisdictional level at which facts should be established and authority assigned. Greater interconnectedness between institutions means that coordination will become more important. To avoid fragmentation in the evaluation process and ensure that learning from one market does not collapse others, information, methodologies and an understanding of regional events are likely to need to be shared between institutions. By making institutions’ interdependencies more explicit and clearly recognising that achieving credibility across

markets reduces the risk of adverse surprises in other markets, oversight credibility may also be enhanced. Market participants acting across multiple markets are well aware of this. Disparities in regulatory responses across different markets and jurisdictions can affect how market participants behave, price risk and choose which markets to participate in. Inconsistent regulatory enforcement is more about maintaining regulatory credibility and integrity than about trying to achieve uniform

outcomes, such as same quantitative penalties or same levels of market intervention. Achieving regulatory consistency in this context means applying the principles of the rules in a way that takes into account the dynamics of cross-market activity, while also being sensitive to regulatory differences between markets and between jurisdictions. Market connections do not make regulation less necessary, but rather more complicated. Effective monitoring and enforcement requires both a broader systemic view of the market, while at the same time maintaining the transparency and clarity of individual regulatory authority mandates.

End-of-Chapter Summary

Interconnected markets demand oversight that takes into account cross-border factors, while respecting the role of national authority. Credibility will be enhanced by surveillance and enforcement linking market analysis to international considerations and national authority.

Chapter 43

Oversight Adaptation Without Institutional Drift

Adaptation is often celebrated as a virtue in regulatory governance of markets. But what happens if regulation simply adapts rather than enacting discipline on the unfolding dynamics of markets? Can adaptation to markets events be other than regulating, without at the same time undermining the legitimacy of the regulation itself? And, more generally, if regulation has to adapt to the evolving structure and behavior of markets, how to draw the line between proper adaptation and uncontrolled drift? How to be sensitive to the incremental and compound effects of these different regulatory attitudes? Adaptive oversight is the change in place because of new information, unexpected behavior of the system or inadequacies in the original oversight approach. In this case it would involve adjusting analytical tools, metrics, threshold values or key performance indicators while remaining consistent with regulatory frameworks and governing principles. Drift occurs when the oversight function gradually moves from the intended engineered market or policy design, operation or dispute resolution processes because of the inherent difficulties in addressing the complaints people have about the market. This risk is heightened when markets face long-running challenges. Chronic congestion, repeated emergency actions, or sustained volatility create pressure for oversight institutions to “do something,” even when formal authority is limited. Incremental interpretive expansion, informal expectation-setting, or selective enforcement emphasis can appear adaptive in the short term while quietly altering institutional boundaries over time. Even rule-based market monitoring frameworks can be subject to the type of drift observed in the tariffs. The focus of analysis can solidify into practice, becoming de facto rules embedded in practices and expectations of market participants without ever being written down as formal tariff provisions. The motivation for these types of changes can be legitimate; yet they all increase uncertainty and decrease the clarity and enforceability of rules, by moving the governance signal outside of the formally agreed rules. Preventing drift requires awareness of the boundaries at play. Oversight bodies need to regularly revisit, for instance, the objects they are overseeing, the basis for doing so, and whether the scope of the delegated mandate is still applicable. Similarly, controls to avert drift are built into internal governance such as practices of peer review and escalation. Legitimacy-preserving adaptation is often a deliberate as opposed to a responsive process. It acknowledges changes as they occur while redirecting potential sources of systemic conflict away from the centre and into more appropriate forums for debate and redress. A market monitoring and enforcement system can be

modernised in a manner that is sustainable and does not undermine governance, as long as it is possible to distinguish between evaluation and legitimacy.

End-of-Chapter Summary

The oversight bodies need to be adaptable to the changing market circumstances but should not extend their mandate. Disciplined boundary awareness is necessary to ensure that the analytical firm’s evolution does not lead to institutional drift, thereby ensuring predictability and governance integrity over time.

Chapter 44

Oversight Fatigue at the Institutional Level

Constant market monitoring and enforcement require substantial capacities. After a while, these demands lead to the development of a type of institutional fatigue that is distinct from enforcement failure or neglect. The type of institutional fatigue that we are talking about reduces the analytical powers, turns the focus into a routine, and causes the use of simplified narratives and reasoning that force any new thinking to revisit the most basic assumptions. It is common for institutional fatigue to build up gradually. Repeated exposure to the same market events, the same type of behavior from market participants and the same explanations can lead to a perception that the analysis is already complete and that everything has been said on the matter. Oversight institutions can then start to focus more on expediency than on thoroughness. Rather than re-examining the complex circumstances surrounding each significant event, they are content to refer to their previous judgements and conclusions, sometimes without even realising that they are doing so. The incentives are amplified by finite resources. Monitoring and enforcement organisations have a limited amount of time to devote to tracking market developments, tracking individual events and monitoring data streams. Intense workload pressure typically entails some level of informal and informal “triage” of less pressing issues to ensure more urgent concerns receive adequate focus. As days and weeks pass, however, the ad hoc process of deciding which items require immediate or even passing attention can create irreducible blind spots – not least when complex or politically contested problems require consideration of future impacts that will not be immediately apparent. Institutional fatigue affects judgment. When numerous similar questions arise with no clear answer, regulators and overseers often come to rely on a set of judgments that minimize uncertainty and provide a degree of stability and predictability in their decision-making. These are not necessarily bad faith judgments; they are the kinds of judgments that reflect the limitations of human and organizational capacity to deal with uncertainty. But they can erode the credibility of the regulatory system. To address potential issues of institutional fatigue is to take measures to counterbalance them. An analytical reset should be carried out on a periodic basis; internal challenges should be

raised in relation to current thinking; and previous conclusions should be revisited on purpose. In this way, the safeguards are more deeply rooted in the institution rather than being triggered in a reactive manner, in particular when confronted with external criticism or market volatility. The credibility of

market oversight is sustained only so long as regulators have the capacity to continue to ask questions over time. Governance risk arises from fatigue not from the pace of oversight, but rather from the oversight body’s diminished ability to question the validity of prevailing assumptions and models.

End-of-Chapter Summary

If oversight is too long-standing, complacency can set in and diminish analysts’ ability to scrutinize carefully. This makes it important to build into the organizational culture features that address potential decline in effectiveness caused by focus and comfort with the status quo and to revisit periodically issue priorities, methodology, and analysis tools.

Chapter 45

Oversight Discipline and the Avoidance of Reactive Governance

Enforcement and market monitoring is a considered activity; not a rush response to events. Reactive governance occurs when regulation agencies are required to change their analytical perspective or enforcement strategy in response to shortterm events, pressure from interested parties, or individual incidents. While some degree of responsiveness to current events is necessary, reactive regulation is inherently dynamic and creates uncertainty through volatile changes in expectations without corresponding changes in rules or regulatory authority. The fallacy of reactive regulation typically occurs after a major market event in the grid is highly visible. Spot price spikes, emergency generators are turned on, or there is an unexpected power outage, and suddenly market stakeholders have hundreds of questions for regulatory bodies. In these moments regulatory bodies are under tremendous pressure to prove their “Authority”. Regulators should be wary of bowing to this pressure and making assessments that are conforming in order to allay political pressure, rather than on a consistent set of principles. Market monitoring is considered to be disciplined if it can clearly separate the event and rule aspects of extreme market occurrences. In particular, it must not consider every extreme market outcome as evidence of market failure or irregularities. Instead, market monitoring should work its way back, step by step, to determine whether the outcome is due to inherent properties of the market system or to specific, substantial deviations from the rules. Without such discipline, law enforcement on an ad hoc basis can lead to a deterioration in market standards and to unintended effects and increased uncertainty, which can last for a long time. Preventing over-reaction as a form of prudent governance also calls for a temporal perspective. Regulatory authorities cannot simply react to each adverse outcome on a case-by-case basis, evaluating only the degree of damage inflicted. Market regulation, as we have seen, must account for the fact that market processes are subject to fluctuations and events that are sometimes disturbing or politically sensitive. If regulatory authorities were to act solely based on the principle of avoiding adverse outcomes,

this would undermine the regulatory principle of certainty, which is indispensable to market activity. Overhang regulation is a discipline that is supported by regulatory bodies acting to maintain rules. The regulatory framework of overhang rules often includes a review process, a lower materiality standard for quantitative overhangs and an analytical function differentiated from a regulatory enforcement function to mitigate adverse real-time market effects and to avoid sending strong regulatory signals that are

based on transitory market conditions, a concern that is heightened in periods of high stress when cumulative pressure to act can be eroded by considerations of short-term restraint. If governments do not exhibit discipline in relation to oversight, it does not mean that they have been lacking in intention in relation to governance stability. The market functions best when there is wise and proportionate oversight, thus the ability to absorb periodic outbreaks of market volatility. By not reacting in a hasty or ad-hoc manner to events on the market, governments can ensure that market monitoring and enforcement are effective in giving assurance to market participants that rules and norms have been complied with, regardless of events that have transpired in the market.

End-of-Chapter Summary

Our ability to successfully exercise oversight consists of exercising self-control, particularly in pressured situations. Successful market monitoring and enforcement therefore require that governments exercise governance and exercise evaluation in a controlled and rule-based manner rather than as a reaction to a particular situation. The reasons for this are numerous: market monitoring and enforcement must be able to act in a highly volatile price environment in an uncompromising and effective manner while at the same time safeguarding price stability in the long term. This requires continuity, reliability and integrity in order to maintain public trust and secure the competitiveness of Norwegian industry and exports.

Chapter 46

Oversight Credibility as a Long- Horizon Asset

Credibility as an oversight asset builds up over time and deteriorates erratically. Like formal authority under law and tariff, oversight credibility is a long-term institutional asset built up from past experience and grounded in memory, continuity and self-control. This asset is what underpins the workings of market monitoring and enforcement, especially where rules are not adequate to resolve disputes. The credibility of rules can be built through process rather than promise. The cumulative effect of individual compliance decisions based on an agency’s analysis, referral of cases, and enforcement actions can shape the public’s perception of the regulatory body and its legitimacy. Anticipations of the implications of particular regulations develop over time, not just for required compliance but also for the administrative discretion that regulators exercise in less clear-cut situations. These everyday anticipations can be a strong source of compliance. The long term nature of credibility means that there is significant risk asymmetry. A single misjudged decision based on what seems a rational argument at the time, yet is badly argued or potentially inconsistent with earlier decisions, could in theory destroy years of good work in which staff have had to deal with inconvenient things to make sure appropriate controls are in place. Likewise restoring confidence in official judgements in the midst of a scandal, inflation surge or financial crisis can only come from the building of a body of facts to demonstrate in an equally uncontentious manner that even tougher control is exercised, and more consistently presented to the public. The need for caution is particularly marked for a regulatory body trying to address a genuine problem in a relatively short period of time, particularly when it has an unprecedented or highly politically charged character. • The credibility of an institution can affect its leverage. As institutions’ credibility grows, they can accomplish changes in market participants’ behavior through the power of analysis and without needing to frequently or heavily fine and punish firms. Where an institution’s credibility is low, enforcement actions tend to be more frequent and heavier-handed, and often with little tangible impact on market behavior. Institutional credibility thus increases the leverage of financial regulatory authorities. Long term credibility governance is a serious effort. Long term credibility governance

requires attention to the fact that individual decisions can have consequential impacts on narratives of past actions, that individual communications may have broad reach, and that current actions are subject to potential future scrutiny. Oversight that views the long term credibility of the institution as secondary

to meeting short term objectives during times of crisis will not be well positioned to reinstate that focus once the emergency has been brought under control. Markets can only be effectively policed and regulated if the credibility of that policing and regulation is treated as an asset that has to be constantly safeguarded. This long-term view of markets is a hallmark of durable regulation as opposed to episodic forms of control.

End-of-Chapter Summary

Oversight effectiveness is grounded in credibility built over time. When institutions protect this long horizon asset through consistency, restraint, and disciplined explanation, market monitoring and enforcement exert influence that extends beyond formal authority.

Chapter 47

Oversight Restraint and the Value of Institutional Silence

Most accounts of oversight focus on agency activity. However we argue that significant influence can occur without agency action. Focusing on organized wholesale electricity markets as our research site, we document the quiet, yet material, roles of restraint and tacitness in the oversight of wholesale prices. Examples of Commission nonaction, nonaggresion, and silence have the same marketwide effects as enforcement actions and investigative conclusions. TheCommission’s reliance on these “governance without action” mechanisms in wholesale electricity markets suggests that oversight without agency activity is possible, and that agency silence and nonaction reflect designers’ rather than overseers’ faith in regulatory institutions. The institutional silence is most visible in those moments in which the market delivers outcomes that are unacceptable but nonetheless rule compliant: e.g. too high prices; too high differentials between one and the other areas of the market; too high levels of stress, etc. In those moments society looks to regulatory bodies to react to such developments. Regulatory bodies’ initial inaction is a message of their respect to the market mechanisms, as well as an acknowledgment of market dynamics being the root cause of those problems. An institutional silence which means that not every market outcome which is deemed “problematic” should be immediately interpreted as a prudential regulatory body failure. All assessments must operate under restraint. The need to prevent premature conclusions that are based on insufficient information or unsubstantiated reasoning that can prejudice final assessment is both crucial and immediate. Pre-mature analysis or unsubstantiated guesses and hypotheses about the causes of disasters should be avoided since they can easily prejudice subsequent analysis and assessment of possible causes. Timely market monitoring also requires adequate time for verification of data, rebuilding of relevant backgrounds and for inter-agency harmonization and coherence of judgements. Operating under restraint reinforces the certainty that findings will be reliable when they are finally issued. There is risk inherent to restraint. If silence is repeatedly or predictably employed in response to the same or

similar types of conduct that raise concerns, it may be read as indicative of institutional indifference or complicity. Discipline silence requires consistent behavior and clear context. Institutions that communicate the underlying values and the periodic analysis that guide the assessment of student conduct can practice restraint without jeopardizing accountability for ensuring that oversight is exercised. Constraint is equally vital for the protection of institutional boundaries. By refraining from

prejudging policy issues that are left to management discretion, regulatory agencies can maintain a clear understanding of their mandate and direct attention to where it will be most effective. This helps prevent the scope of oversight and enforcement from expanding beyond what can be achieved with tangible benefit. In a more mature system of governance, silence is not necessarily the absence of vigilance. Rather it is a form of vigilance that speaks to the degree to which all market participants feel that the rules, processes and authority of the system are legitimate. Exercising some degree of oversight restraint can contribute to market stability, as restraint can signal to all market participants that they are trading within a well regulated market of process as opposed to one of pure market opportunity.

End-of-Chapter Summary

Withholding opinions and engaging in circumspection based on confidence in the rule of law and adherence to professional standards in fact strengthens the capacity of oversight organizations to achieve their goals. by choosing when to remain silent or when not to express views these organizations affirm their confidence in the governance and institutional frameworks they work within, thus helping to preserve stability and mitigate uncertainty in situations of political instability or turmoil.

Chapter 48

Oversight Credibility at the Intersection of Law and Economics

Market monitoring and enforcement is about navigating a complex relationship between legal authority and market design to transform sets of economic actions into a corresponding set of legal issues, all while maintaining a separation between markets and the law. To achieve oversight credibility, one must carefully navigate this complex relationship, while using a light hand. This is a delicate and inherently conflicted relationship. The fact that outcomes are economic in nature does not necessarily mean that they are regulatory. The resulting prices, congestion patterns and dispatch results are the result of a dynamic interaction between the conditions in the system and the choices made by market participants within the framework of a approved market design. It is for the regulatory bodies to decide whether these outcomes fall within the regulatory framework (i.e. they are bound by rules) or outside of it (i.e. they occur in a lawful market structure). For this purpose, economic understanding combined with legal awareness is required and not regulatory intervention on the basis of the mere nature of the outcome. A regulation is the foundation of an enforcement authority, but it does not guarantee that an economic project is optimal. A market rule is a constraint that is imposed on the behavior of individuals and companies in order to prevent them from deviating from the principles of the market, but it cannot tell them which is the best decision to make in a given situation. The credibility of a regulatory commission is based on its ability to resist the temptation to replace economic analysis with regulatory decisions, especially when markets are the object of political or media controversies. There is also a reverse risk. Markets are also legal constructs, and treating markets solely as a regulatory construct (i.e., solely as a legal construct divorced from market economics) also constitutes a category mistake. Treatments of markets that do not take account of the role of incentives, constraints, or markets as economic systems risk being simply misconceived of the activity at issue. Any efforts at oversight by regulators will need to be grounded in an economic understanding of markets, without the regulators thereby asserting regulatory control within the broader meaning of

the word “control”. The balance between market and rule is most apparent in enforcement reasoning. Inferences that record the intersections between economic activity and regulation serve to reassure enforcement agents that their work is legitimate in both market and legal terms. Inferences that lack connection to either may undermine that legitimacy. Even when enforcement officials behave formally, they may lose the legitimacy of their administration in the eyes of the agents they inspect. The

relationship between law and economics is a fact to live with, rather than a problem to be solved. Market regulation works as long as it is recognized and based on informed discretion that is aware of its limits and powers given the interdependence between the legal and economic spheres.

End-of-Chapter Summary

Achieving credibility in the area of oversight requires a careful navigation that respects the limits provided by laws and regulations while remaining sensitive to the economic context. If monitoring and control are carried out in a balanced manner, avoiding the risk of over-explaining their actions, oversight can be carried out in a manner that is truly rule-based and not focused solely on achieving specific goals.

Chapter 49

Oversight Continuity Across Crisis and Normal Operations

Most market abuses and failures come to the attention of market regulators in times of stress. However, the effectiveness and legitimacy of market regulation and supervision is built on a continuity of oversight during both calm and stressful market situations. It is imperative that there is no perception that supervisory practices change with the circumstances. Market functions at its best when buyers and sellers have full confidence that what is acceptable in normal market conditions is unaffected in times of extreme stress. In crisis situations, time pressure increases and attention to facts and details grows. In this context, actions taken in emergency situations, price increases in times of shortage and other immediate measures imposed in a state of crisis obliges the oversight bodies to act quickly. Under no circumstances should the normal assessment criteria be derogated in times of crisis. The assessment of crisis situations should be carried out under the same rules and with the same evidence-based approach as in normal monitoring and audit situations, in order not to undermine the credibility of the oversight bodies. Risk in normal times is distinctly different. Market conditions are calm, scrutiny is decreased, and reasoning is perhaps compromised or assumptions not appropriately challenged. However, there must be continuity of approach regardless of the fact that activity during normal times will often be highly uneventful. Any market phenomena that develop during normal times may later assume great significance during periods of stress, and may be overlooked unless the surveillance posture is vigilant and unchanged throughout the times between crises. The transition between normal and stressed conditions is particularly consequential. Participants observe whether oversight expectations remain stable as conditions deteriorate, or whether evaluative criteria shift implicitly. Abrupt changes in interpretive emphasis can undermine confidence, suggesting that rules are contingent rather than durable. Continuity across these transitions signals that governance is resilient rather than situational. This continuity is supported by the institutional framework. The use of standard methodology, documentation practices and the clear distinction

between monitoring and enforcement functions ensured that the response to the crisis built on the normal supervisory practice and that the evaluation of the impact of the crisis could be made in comparable conditions. continuity in oversight contributes to the institutional legitimacy of markets as rule-governed systems, not as ad-hoc institutions adapted to the present state of affairs. By applying stable rules to all periods – whether turbulence or normalcy – market supervision and regulation

demonstrate that market governance is based on a codex of formally-enforced principles and exercise of discretion, rather than on the happenstance of market circumstances.

End-of-Chapter Summary

The integrity of oversight relies on consistent application of principles in both periods of market instability and periods of normal market operations. Maintaining analytical approaches and standards for review helps to assure market participants that market regulation does not change with circumstances.

Chapter 50

Market Oversight as an Exercise in Institutional Balance

Market monitoring, oversight and enforcement is essentially a balancing act. The organized wholesale electric markets are governed by a multitude of rules, regulations and structures that have to provide a delicate balance between the promotion of competition, security of supply and the protection of consumers, all the while allowing for some degree of market evolution. Similarly, the enforcement institutions have to strike a balance between influencing market conduct and providing the underlying governance framework that is sufficiently adaptable to allow the market to develop. Institutional balance is above all reflected in the way competing goals are balanced out. Oversight must prevent governments from exploiting markets and speculation to their own advantage without discouraging economically significant investment, protection of the climate and the environment or necessary price adjustments. The rules that need to be enforced must not be seen as a replacement for the markets themselves. These competing goals are often conflicting and can only be dealt with by means of a casuistic verdict. The credibility of oversight, therefore, depends on dealing with these conflicting goals in a way that is deliberately and not simplistically adapted to the situation at hand. Balance is also an element of governance that relates to the distribution of authority and powers among the players in the system, that is among market monitors, system operators, regulators and reliability organizations. Their powers and responsibilities are somewhat different and overlapping but they must be exercised in a way that takes into account and respects the balance and complementarity among them, without becoming so preoccupied with one aspect that they are blinded to the implications of their actions on others. Poor balance of powers, which can be the result of a concentration of authority in too few hands or by not filling all necessary governance functions, can make governance less clear and more contentious. Time too must be balanced. Inspectors must address current circumstances yet also avoid allowing pressure for the present to erode what is deemed appropriate for the future. Actions and choices made in the heat of the moment contribute to a body of institutional practice that has the potential to directly and powerfully shape subsequent behavior. Balancing time means being aware of how these single choices compound to send enduring signals about the character of a particular system of governance. Market supervision is not about eliminating market tension. It is necessary to allow for some degree of market tension to ensure that markets can properly coordinate economic processes within the given constraints. Successful market supervision therefore means that market tensions can be processed within the framework of market and economic regulation in a controlled manner, rather than through arbitrary

forms of speculation or other forms of market manipulation. Seen in this light, monitoring and enforcing the market is not a “corrective” activity that is imposed from the outside of the market – but rather a component of market governance. Ensuring that competing forces are held in balance allows for orderly, credible trading in organized wholesale electric markets, even in times of great turbulence and change.

End-of-Chapter Summary

Market oversight acts as a disciplining discipline, rather than a control discipline. The competition, security and regulation are put in a dynamic of balance allowing legitimate, adaptable and institutional consistent markets.

Glossary

Glossary

BA – Balancing Authority The entity that schedules resources ahead of time, provides real-time load interchange and generation balance in a BA Area, and provides frequency support to the Interconnection.

Bulk Electric System (BES) - Except as modified by the applicable lists in the definition of BES, the following words and phrases have the meanings set forth in the following subsections. (a) Transmission Elements, transmission lines and transformers of the Bulk Electric System whether operated at 100 kV or higher voltage levels of real and reactive power, except as provided for in the applicable modification for BES listed in the definitions in this part. (b) Real Power and Reactive Power resources including those facilities operated at 100 kV or higher voltage levels except as modified by the applicable listing of definitions in this part. Provided, that, nothing in this subpart shall be construed to mean the facilities used in the local distribution of electric energy.

Bulk Electric System Reliability: The ability of the electric system to supply the aggregate electrical demand and energy requirements of the end-use customers at all times, including consideration of scheduled and reasonably expected unscheduled outages of system elements.

Congestion: Inability to deliver or receive one or more quantities of Transmission Service during a time period because the Total Transfer Capability of one or more paths (or parts thereof) is insufficient to deliver or receive such quantities of Transmission Service.

Federal Energy Regulatory Commission (FERC) - An agency of the US Department of Energy that regulates the transmission and wholesale sale of electricity in interstate commerce.

Market Participant A generator, transmission organization, load-serving utility, or marketer that participates in an organized market.

Reliability Coordinator (RC) - The Entity with primary authority and responsibility for Bulk Electric System reliability, a wide area view of the Bulk Electric System and the necessary tools, processes and procedures to prevent or mitigate SOLE or IOLE violations.

Transmission Operator (TOP) - The party responsible for the reliability of its local transmission system and that controls, or has control over, the movement of electricity through its transmission lines.

This glossary includes a subset of definitions from the NERC Glossary of Terms with permission to use for informational purposes only. It does not supersede or replace the official NERC Glossary of Terms.

About the Author

About the Author

Rob Smith is a senior electric industry professional with over thirty years of experience across every major function of the North American Bulk Electric System. His work spans reliability coordination, transmission operations, regulatory compliance, and cybersecurity reliability.

Rob has worked directly in real-time grid operations as a Reliability Coordinator, Transmission Operator, and Power System Operator within RTO/ISO and utility control center environments. He has also held senior regulatory and oversight roles, including senior compliance auditor and subject matter expert for NERC Reliability Standards. In those roles he audited grid facilities for compliance with applicable standards, evaluated the adequacy of mitigation actions, supported the development of violation notifications and settlements as part of FERC-directed enforcement actions, and participated in risk based oversight of utility mitigation activities.

Rob founded Energy Compliance, Inc. to bring senior, regulator-side compliance authority to registered entities directly, without the layered staffing, billable-hour overhead, and generalist advice typical of larger consulting firms. Every Energy Compliance engagement is led by Rob personally.

About Energy Compliance, Inc.

About Energy Compliance, Inc.

Energy Compliance, Inc. is an independent consulting and advisory firm focused exclusively on electric reliability, cybersecurity reliability, and regulatory compliance for organizations connected to the North American Bulk Electric System.

Our work supports registered entities, including Generator Owners and Operators, Transmission Owners and Operators, Reliability Coordinators, Balancing Authorities, and Distribution Providers. We work across NERC Reliability Standards, FERC orders, RTO/ISO market participation rules, Regional Entity oversight, and state regulatory frameworks.

We do this work differently than larger consulting firms. Engagements are led by a single senior practitioner with regulator-side experience. We don’t staff for billable hours. We staff for outcomes. Our deliverables are written to be operationally executable and audit-defensible, not to manufacture activity. Where automation can replace manual work, we build the automation. Where senior judgment is required, the senior is in the room.

Energy Compliance is not affiliated with, sponsored by, or endorsed by the North American Electric Reliability Corporation, the Federal Energy Regulatory Commission, or any Regional Entity.

Services Provided

Our services are written to be clearly defensible. Operationally executable in real time. Audit-defensible at compliance review. Every deliverable is structured for the auditor’s question, not the consultant’s binder.

Energy Compliance services include, but are not limited to:

• NERC reliability and compliance advisory support
• Reliability governance and program assessments
• Registration and applicability analysis
• Operational and engineering reliability alignment
• Compliance program design and improvement
• Audit and enforcement support (non-advocacy)
• Mitigation planning and Self-Report development
• Training and executive briefings on reliability frameworks
• Regulator-perspective program reviews

Each engagement is scoped to the entity’s role, function, and bulk system impact.

ENERGY COMPLIANCE PROFESSIONAL REFERENCE

Rigorous Compliance. Defensible Programs. Energy Compliance, Inc. partners with registered entities on the institutional and technical questions that define strong reliability and cybersecurity programs, from classification through audit through enforcement response.

N ERC CO MP LIANC E S ENIO R ADV ISO RY Program support, interpretation, and audit Direct engagement on complex reliability preparation. questions.

I ND USTRY ENGAGEMENT AUD IT D EFENSE Standards development and working-group Notice of Penalty response and settlement participation. posture.

CONNECT WITH US Scan to visit

E N E RGY COMPL IAN CE , IN C. · EC-WP-404 · © 2026 · AL L RIGHTS RES E RV E D