A Manipulated Market Is No Market

After the movie-themed market manipulation schemes, ‘Death Star’ and ‘Get Shorty,’ from the California energy crisis entered the lore decades ago, we were assured that the master market designers would plug the holes in their RTOs so that bad actors could not, once again, defraud the public.

Unfortunately, market manipulation is back in the news, this time in MISO. FERC’s Office of Enforcement (OE) alleges Dynegy manipulated the MISO capacity market to harm Illinois consumers to the tune of $428 million dollars.  Though heavily redacted in the details of Dynegy’s conduct during the 2015/2016 MISO capacity auction, the punchline from the Remand Report from FERC’s Office of Enforcement (OE) is “Dynegy knowingly engaged in manipulative behavior to set the Zone 4 price in the 2015/16 Auction.” As Utility Dive notes in describing the capacity prices for Zone 4, it “cleared at $150/MW-day. Capacity cleared at $3.29/MW-day to $3.48/MW-day in MISO’s eight other zones.”

Dynegy (now part of Vistra) certainly deserves its day in court.  As we’ve recently seen in MISO with the 2022 capacity auction, prices can jump dramatically.  It could be that the 2015/2016 Zone 4 capacity auction price spike can be explained as a signal of real capacity shortfalls, as opposed to Dynegy’s manipulation. 

But, a few thoughts on the Remand Report.

First, the old chestnut that “justice delayed is justice denied” is operative here.  It is six years after the alleged fraudulent conduct, and FERC OE is just now getting to the allegation of misconduct stage of the case.  Dynegy’s defense of the charge promises to add years more to the process.  To put this in perspective, consider that sorting out  compensation for the market manipulation from the California energy crisis, such as it was, took well over a decade to start flowing back to customers who were harmed.

Second, the manipulability  of the RTO/ISOs is a recurring theme.  The complexity, opacity, delay in enforcement, low chance of getting caught, and enormous gains available from manipulation of these markets creates a dilemma for market designers and regulators.  To be sure, any regulatory system will have its problems, but the current RTO/ISO system seems particularly susceptible to manipulation by the very nature of the institution.

This all leads to a conclusion that is particularly unsettling.  Either:

a.     FERC’s Office of Enforcement is wrong, and Dynegy’s actions were legitimate, or

b.     Dynegy, a major player in the merchant generation business, truly did set out to manipulate the MISO market, or

c.     The market rules are so complex, that not even sophisticated parties like Dynegy and FERC OE have a solid grasp of what does and does not constitute illegal market manipulation.

Any way you slice it, the coming legal battle over the alleged market manipulation is a bad look for the nation’s organized wholesale markets.