Student Report: Inside the FERC Bootcamp

On May 10th and 11th, twenty members of the Dartmouth student community participated in a two-day workshop featuring Jay Matson ‘91 and Nancy Bowler ‘82 from the Federal Energy Regulatory Commission (FERC) and Matthew Mahalik from Argonne National Laboratory. The intensive “bootcamp” experience – co sponsored by the Irving Institute for Energy and Society and by the Nelson A. Rockefeller Center for Public Policy and Social Sciences– provided participants with an overview of electricity markets and FERC’s role regulating them.  Participants had the opportunity to put their new insights to use via an interactive simulation. Workshop participants (like myself!) particularly valued the chance to learn from peers during the simulation as we worked to develop successful energy market bidding strategies.

Matson and Bowler, each currently serving as a Branch Chief in FERC’s Office of Enforcement, started by discussing FERC’s mission and the mechanisms that underpin the energy market in the United States. FERC regulates and monitors the transmission and wholesale sales of electricity and natural gas, and investigates potential rule violations. Producers of energy bid into energy markets each day by making hourly offers based on the quantity of energy they are willing to produce and the price at which they are willing to sell it. The process may sound straightforward – but it is far from it! The quantity and price an energy producer bids depends on the weather, the predicted energy load, costs of various production facilities, and more. Additionally, it is impossible to predict what other energy producers are bidding and whether or not your facility will actually be dispatched.

The market is extremely complex, and regulators are on a constant lookout for instances where market players attempt to manipulate the market to maximize their profits. Entities may try to collude to drive up the locational marginal price, or offer to sell power at an extremely low price for one hour only to raise their price exorbitantly the next hour. In one scheme, energy system operators tried to take advantage of the fact that system operators are paid for the power they produce while they are in the process of “ramping down,” or shutting down, a process which often takes hours. Generation facilities could bid a very low price for the 24th hour of a day to ensure their facility is dispatched and then bid a very high price for the 1st and 2nd hours of the next day. The local energy system operator is then required to pay the producer their new inflated price while their facilities ramp down. This strategy, called “Midnight Ramping,” was employed by JP Morgan Ventures Energy Corporation and resulted in $410 million in penalties.

After the intense briefing on the functioning of energy markets and armed with a new appreciation for the challenges facing federal regulators, participants were eager to put their knowledge to use and reach a new level of understanding of the market by partaking in the simulation led by Matt Mahalik from Argonne National Laboratory. In preparation for the simulation, student participants –whose majors included Environmental Studies, Economics, Government, Mathematics, Engineering, History, and more– were divided into teams of 2 or 3. Each team was given three generation plants (coal, natural gas, and combined cycle) and were asked to place daily bids into the electricity market for how much power they wished to sell, from which plant, and at what price. The simulation ran for five rounds, each round simulating a day in which a participant bid into the market.  After each round, Matt would “run” the market to determine for each team which of their facilities were dispatched during which hours, the quantity of energy demanded by each of their facilities, the amount they were paid for that energy, and their net profit or loss.

One of the most valuable aspects of the simulation was the opportunity to collaborate on the bidding strategy with peers. For example, my team had to make important adjustments to our bidding strategy in order to avoid running the natural gas facility if we were asked to provide under 15,000 MWH since this was the threshold at which the costs of running our facility exceeded our profits. Collaborating with my intelligent and motivated peers in trying to improve our strategy and attempting to predict the strategy of others was a unique and enriching process. I agreed with Shawdi Mehrvarzan ‘22, a summer 2019 FERC intern, when she reflected that: “my experience of the auction process really expanded throughout this simulation.”

At the end of the exercise, the whole group reconvened to discuss the lessons we learned from the simulation. Some individuals spoke about the challenge of balancing risk and reward: bidding in at an extremely high price often resulted in a refused bid, yet if other facilities happened to experience a facility shutdown that day, this technique could be extremely rewarding. Others responded that this sort of risky behaviour and aggressive bidding could in fact benefit all participants. The system operator must pay each utility the highest price per megawatt purchased during a certain hour. As a result, if the system operator was forced to buy the expensive energy for an hour due to a lack of supply, some groups greatly benefitted by free-riding off the aggressive bidding strategy of other groups. Participants also seemed to gain insight into how energy producers may be tempted to manipulate the market. As Julia Snodgrass ‘21 observed, “I now understand the incentive to cheat and the desire to collude!”

The bootcamp was a rigorous yet highly rewarding experience for the diverse group of students. Though we spent over ten hours immersing ourselves in FERC and the energy market, at the end of the bootcamp many participants stayed behind to delve even deeper into the subject matter with Jay, Nancy, Matt, and their peers. Not only did this bootcamp give participants a basic understanding of the energy market: it ignited a curiosity in participants to learn even more about the regulation of energy in the United States.