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Experience with deregulated electricity markets has shown that the assumption that markets will naturally produce competitive results is not justified. The existing independent system operators (ISOs) and emerging regional transmission organizations (RTOs) all have developed or are developing systems and procedures to accomplish the monitoring task in their markets. This paper provides an overview of the key elements necessary for effective design and implementation of market monitoring systems. Market monitoring must be concerned primarily with ensuring efficient market performance by identifying market inefficiencies, the potential for market abuses, and market power problems. In this paper, we define market power and identify factors that allow the exercise of market power in electricity markets. We also propose market efficiency objectives that should be used to design market rules that discourage gaming. We then identify the issues relevant to designing and implementing an effective market monitoring function.
Date of Publication: May 2003