SOUTH EAST EUROPE REGIONAL ELECTRICITY
MARKET MONITORING PILOT PROJECT

I. Background

The Treaty Establishing the Energy Community went into effect July 1, 2006. Under the Treaty the contracting parties (Albania, Bosnia and Hercegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania, Serbia, and UNMIK) agree to work together to create electricity and gas markets that are integrated with the EU Internal energy markets. The Treaty requires the contracting parties to adopt EU energy, competition and environmental acquis communautaire. The Treaty creates an Energy Community Regulatory Board, which recently met in Athens and will advise on market development issues.

There is substantial interest in market monitoring and transparency issues in the European Union and among the members of the Energy Community. The European Commission (EC) Electricity Directive addresses monitoring as does the DG TREN Note (January 14, 2004) on The Role of Regulatory Authorities. The recent EC Energy Sector Inquiry-Preliminary Findings identified issues related to monitoring including the lack of adequate data availability and transparency. In the Energy Community process two initiatives have addressed the monitoring issue. The regulatory benchmarking undertaken by The Council of European Energy Regulators South East Europe Working Group (CEER SEE WG) identifies the existing monitoring capabilities in the regulatory bodies most of which were established in the last 3 years. In addition, the CEER-NARUC (U.S. National Association of Regulatory Utility Commissioners) Workshop on Monitoring of Competitive Electricity Markets held in Athens, October 4-5, 2005, established the technical foundation and rationale for market monitoring. The EC Mini-Forum on October 6-7, 2005, concluded that a monitoring program proposal would be developed by the U.S. Agency for International Development (USAID) and put forward at the June 2006 Athens Forum.

The importance of data transparency and availability for achieving a competitive electricity market has also been addressed recently by the European Regulators Group for Electricity and Gas (ERGEG), the Electricity Transmission System Operators (ETSO), Eurelectric and the European Federation of Energy Traders (EFET). All reflect the need for transparent and available data with illustrative examples of what is needed. The monitoring function will require access to and collection of many of the same data.

The design and pilot testing of the regional competitive electricity market monitoring will provide experience and lessons learned for decisions to be made on longer term arrangements for the opening of the market in 2008.

II. Purpose/Objective

The purpose this pilot project is to develop an approach to market monitoring and to test its implementation so that decisions can be made with respect to the institutionalization of market monitoring in the Energy Community. This approach will develop performance indices and screens that identify anticompetitive market conduct, market flaws and market power.

The objectives are to:

1. design data collection and analytical elements for market monitoring;
2. conduct a pilot test of data collection and market analysis; and
3. draw lessons from the this experience and make recommendations on the implementation of a market monitoring function before the Energy Community market for non-residential customers opens in 2008.

III. Approach

Global experience indicates the importance of having in place a monitoring capability at the time of market opening. The illustrative schedule below proposes that the design and pilot testing take place in a timeframe that provides experience, lessons learned and recommendations for long-term monitoring before the 2008 market opening.

1. The approach is to create a virtual monitoring of the electricity market activity with limited on the ground activity; no new institution is proposed as part of the pilot work.
2. The focus of the work will be on: (a) short-term identification of anticompetitive behavior; (b) market design problems; and (c) market power and structure.
3. The scope of the monitoring will focus on cross-border trade and not national transactions which are the responsibility of the national regulators. National data will, however, be needed.
4. A consortium of U.S. and European expertise will be contracted to implement the monitoring design and pilot test. These implementers will coordinate with TSOs, national regulators and the Energy Community Regulatory Board (ECRB), which has established a working group on cross-border electricity. The Energy Community Treaty provides that the ECRB “shall
   
   
   1. advise the Ministerial Council or the Permanent High Level Group on the details of statutory, technical and regulatory rules;
   2. issue Recommendations on cross-border disputes involving two or more Regulators, upon request of any of them;
   3. take Measures, if so empowered by the Ministerial Council;
   4. adopt Procedural Acts”. Treaty Establishing the Energy Community, Title V., Chapter 3, Article 58.

   5. The design will, to the extent appropriate, make relevant data available in as rapid a manner on a website to allow market participants and others to contribute to the monitoring process. Initial design and data collection will focus on selected key data and not be comprehensive or burdensome. Data collection will be consistent, where possible, with existing standards or practices.

   6. The TSO data will be an important part of the activity. The market monitoring effort will be carried out collaboratively with the TSOs and others as appropriate such as ETSO, UCTE, etc.
   

IV. Expertise for Monitoring and Analysis

A combination of U.S. and European expertise will be obtained to implement the work. The purpose of drawing upon U.S. experience is that the availability of data in the U.S. has resulted in considerable market monitoring experience and studies assessing electricity markets.

Potomac Economics: The U.S. expertise will be provided by Potomac Economics. They are a leader in the field of monitoring and competitive assessment of wholesale electricity markets. They serve as the independent Market Monitor for the Midwest Independent System Operator (ISO) and Independent Market Advisor for the New York ISO and ISO New England. They are responsible for designing and implementing Market Monitoring Plans to identify anti-competitive behavior, market flaws and market power. Dr. Robert Sinclair will serve as Potomac Economics’ lead on the pilot project.

Cambridge University, Faculty of Economics: Professor David Newbery and other faculty members have done extensive research and analysis on European electricity issues and markets including the work “A Review of the Monitoring of Market Power.”

Corvinus University, Regional Center for Energy Policy Research (REKK): Dr. Peter Kaderjak and staff have carried out analytical work on electricity market issues and have familiarity and experience with the South East Europe energy issues.

National Association of Regulatory Utility Commissioners (NARUC): The U.S. NARUC will, with USAID financial support, obtain the services of the three organizations and provide related support and expertise from the U.S. or European regulatory organizations as needed.

The expertise of the three organizations will work in a collaborative manner. The lead in the monitoring design and pilot test will be Potomac Economics with a focus on the short-term monitoring of the operation of the market and potential anti-competitive behavior. Both Cambridge University and the REKK will have lead responsibility for analytical work on issues of market design and market power.

The three organizations will establish working arrangements with stakeholder organizations such as the CEER SEE WG, SETSO TF, ETSO, UCTE, Energy Community Secretariat and others.