FERC’s Recent Orders on Market Power in Wholesale Electric Markets
Stephen P. Rodgers, Director, Division of Tariffs and Rates SouthOffice of Markets, Tariffs & RatesFederal Energy Regulatory Commission
FERC’s April 14 Orders on Market Power
One order established new interim generation market power screens and mitigation
A second order initiated a new generic rulemaking proceeding on all aspects of market-based rate (MBR) authorizations
High Level Overview SMA test replaced by two interim screens
that are indicative of generation market power (MP)
If applicant passes both screens, presumption of no MP, but interveners can provide evidence to disprove
If applicant fails either screen, presumption of MP, but applicant can provide evidence to disprove If applicant found to have MP, it can offer mitigation or cost-based rates
Indicative Screen #1: Uncommitted Pivotal Supplier Measures applicant’s ability to exercise MP
at time of the annual peak Screen is adept at measuring MP exercised
unilaterally, in spot markets, and at peak Recognizes applicant’s commitments to
native load, operating reserves and long-term firm wholesale sales.
Deduction for native load is based on the average of the daily native load peaks during the peak month
Indicative Screen #2: Uncommitted Market Share Measures the potential of an applicant to
exercise MP in all four seasons Screen is adept at measuring if applicant is
dominant, MP at both peak and off-peak, and the potential for coordinated interaction
Screen recognizes applicant’s commitments to native load, operating reserves, long-term firm wholesale sales, and planned outages
Applicant passes the screen if its market share of uncommitted capacity less than 20%
What happens if applicant passes both screens?
Rebuttable presumption applicant doesn’t have MP . . .
. . . but interveners can present evidence to disprove (including historical sales data, and evidence that competing suppliers can’t access the market)
If no evidence to rebut the presumption, then applicant obtains/retains its MBR
What happens if applicant fails either screen?
Rebuttable presumption applicant has MP . . . but applicant can either present
evidence to disprove (including historical sales data and the Delivered Price Test), OR
. . . applicant can propose mitigation to eliminate its ability to exercise MP.
Applicant passes DPT if HHI is under 2500 If applicant found to have MP, its denied
MBR in all geographical markets where it has MP
Cost-based rate mitigation
If applicant is denied MBR, it must use cost-based rates – either default or an applicant proposal approved by FERC. Three types of default cost-based rates, based on length of sale:
1. Incremental plus 10% for sales of one week or less
Cost-based rate mitigation (con’t)
2. Embedded cost “up to” rates based on cost of the unit(s) involved for sales more than one week and less than one year
3. Rates not-to-exceed embedded cost of service for sales of one year or more – and contract must be approved by FERC before transacting
Relevant Geographic Market
Default markets are any control areas where applicant has generation, plus each first-tier market
Applicant/interveners can provide evidence to show actual relevant market is smaller or larger than the control area
Flexibility to recognize evidence of load pockets
Transmission limitations
Total Transfer Capability (TTC) used under SMA is abandoned for simultaneous transmission import capability
TTC unrealistic because its not possible for that amount of generation to be imported at once
The simultaneous transmission import capability should also reflect limits such as stability, voltage, CBM and TRM
Historical data
Historical data used because its more objective, readily available and less subject to manipulation than projections
Applicant must use most recent 12 months’ historical data
A “snapshot in time” approach
No RTO/ISO exemption. However, . . .
Applicants can incorporate the mitigation they’re subject to in RTO/ISO as part of their MP analysis
Applicants located in RTOs/ISOs with sufficient market structure and a single energy market may regard entire footprint of the RTO/ISO as the relevant market
Those with such markets now are ISO-NE, NYISO, PJM, and CAISO
No “safe harbor” size exemption
However . . . Any applicant can submit a
streamlined application or simplifying assumptions, where appropriate (e.g., if you pass even without allowing competing imports, then no need to consider such imports)
Recognition of hydro and Western issues
Applicants can de-rate their hydro capacity (because such plants are energy limited)
Those de-rating must use a 5-year average capacity factor and a sensitivity test using the lowest capacity factor in the last 5 years
Recognition that the West may have larger regional markets than typical, and applicants can present evidence to that effect – interveners can challenge.
Revocation of mitigation that had been ordered under SMA
No requirement to post incremental or decremental costs
No “must offer” requirement of uncommitted capacity
No mandatory purchase requirement No requirement for independent OASIS
administration But, these issues may be addressed in other
proceedings
Native load protections
Recognition given to utility commitments to native load and operating reserves
Ensures that utilities will not be overcharged when they purchase power in wholesale markets
Provides greater transparency into how utilities with MP derive rates, so state regulators can be sure retail customers are getting fare share of revenue credits from wholesale sales
Implementation process
AEP, Southern Company and Entergy have 60 days to file revised market power studies
FERC will issue subsequent orders on those filings
A screen failure would . . . o create rebuttable presumption of MP, o initiate a FERC 206 investigation, and o make market-based rates subject to
refund
Implementation process (con’t)
But . . . refunds would only be due if FERC ultimately found MP in a later order (i.e., after reviewing applicant’s DPT and/or mitigation proposal)
FERC will apply these same procedures to other pending MBR filings – a later order will provide details
New generic rulemaking case on MBR (Docket No. RM04-7)
Will address adequacy of FERC’s current 4-part test for granting MBR: generation, transmission, barriers to entry and affiliate abuse
Needed since much has changed in industry in 15 years, and there are no comprehensive codified regulations for obtaining MBR
Will examine issues on vertical market power and ancillary services
New generic rulemaking case on MBR (con’t)
Kick-off technical conference on June 9
Staff proposed another technical conference soon on competitive solicitation processes
Summary
New MP screens reflect lots of due process: rehearing requests, 3 rounds of comments, a staff policy paper and a 2-day technical conference
Many procedural options ahead for applicants and interveners, with symmetrical rights and opportunities for each to make their case
Balances regulatory certainty with flexibility for those seeking MBR authority
More to come through the new generic rulemaking proceeding