FERC should try to carve out a case precedent for dealing with transmission market power in the broader context of granting market-based rate authority to power companies, Craig Roach, a principal with Boston Pacific Co., said at a technical conference at the Commission last Tuesday.

“The thing that’s needed most is that we need a case precedent,” he said. “We need a case in which this Commission takes on — at the Commission level…the issue of transmission market power, defines the burden of proof — what evidentiary proof must be provided if someone is said not to be a network resource, for example.”

In that case precedent, “we need to be clear on instances of wrongdoing,” Roach said. “What specific actions are wrong.”

The day-long conference at Commission headquarters in Washington, DC, was convened to examine issues associated with transmission vertical market power and barriers to entry in electric markets, two of the four prongs the Commission currently uses to determine whether to grant market-based rate authority [RM04-7]. The Commission will hold a two-day conference in January to examine the remaining two prongs of the overall test.

Addressing the issue of transmission market power, John Hilke, an economist at the Federal Trade Commission (FTC), noted that some public utilities haven’t joined a FERC-approved regional transmission organization (RTO) and not all approved RTOs are fully operational.

“Public utilities in these areas may have the incentive and ability to engage in transmission discrimination that favors their own generation assets,” Hilke said. “The supplier that owns transmission assets, but is not part of an approved RTO or independent system operator, may be in a position to exercise transmission market power.”

He said that vertical discrimination in transmission is a “serious concern” because transmission technology continues to exhibit major economies of scale, “but often precludes effective competition in providing alternative transmission service…”

Hilke said that FERC “should take advantage of all it has learned” about transmission service discrimination as it updates its market-based rate assessments. “One of the most important lessons is the inadequacy of behavior rules to curtail less transparent forms of transmission discrimination.”

The FTC official believes that behavior rules “are often inadequate because they leave intact the incentives to discriminate and because discrimination in transmission operations can be very difficult to detect and document due to the time sensitivity and subtlety of negotiations for transmission access.”

Electricity transmission negotiations and transactions “are inherently time sensitive because it is not practical to store electricity in large quantities with existing technology. Transmission discrimination issues are often most serious during peak demand periods…unfortunately, it is also under these tight supply conditions that market power problems are most serious and when system operator discretion is most important. Thus, tight supply conditions aggravate [the] transmission discrimination detection and documentation problem.”

The FTC recommends that FERC use membership in an approved and fully operating RTO or ISO as its initial transmission market power screen in evaluating applications for market-based rates, as well as full compliance with Orders 888 and 889, Hilke said.

Ann Kimber, who appeared at the conference on behalf of the Midwest Municipal Transmission Group and the Transmission Access Policy Study Group, said that at least in her part of the country, utility open access transmission tariffs (OATT) don’t mitigate market power.

“Under the open access transmission tariff, the grid has become increasingly weak and it’s foreclosed power supply choices,” she said. Noting that municipal utilities depend on access to the markets, Kimber said that “there has not been joint planning between the transmission owner and its network customers. There aren’t any useful rollover rights that enable access to new power supply sources. The result is that there are very few suppliers that are able to serve municipals seeking new power supply contracts.”

She said that transmission owners benefit from the currently weak transmission grid. “They have no incentive to fix the problems,” since such improvements would benefit competitors for loads, Kimber added. Despite the existence of the OATT, “transmission providers are using their control over transmission to limit access.”

From Kimber’s point of view, RTOs don’t serve as rosetta stones in easing access to the transmission grid. “Several years ago, I would have said that regional transmission organizations are the solution, but my recent up close and personal experience with MISO [Midwest Independent Transmission System Operator] convinces me that the cure is worse than the disease.”

Steve Wheeler, executive vice president for customer service and regulation at Arizona Public Service Corp. (APS), agreed with the goal of getting to a “robust, vibrant, abuse-free wholesale marketplace.”

But he took issue with the idea that “you can take the concerns expressed here today and extrapolate them into an industrywide pervasive problem that is all attributable to the alleged exercise of transmission market power and that the only solution to all of that is a fundamental dismantling of a vertically integrated structure that has served the country well.”

Wheeler detailed several significant challenges that the Southwest is facing in terms of trying to provide adequate and reliable transmission service.

“Perhaps our most significant challenge is who can and will pay for needed transmission expansion,” he said. “We have to have more transmission capability in Arizona and in the Southwest, but the ability to finance that is hampered by probably several things.” Specifically, Wheeler cited market participants “who hope that somebody else will do the job so that they don’t have to. It is also probably the result of lack of available capital or competing demands on what capital there is.”

The APS official also said that a second challenge is that “all transmission providers in our area are not required to play by the same rules. This is particularly acute in Arizona, where 50% of the transmission is owned by non-FERC jurisdictional entities and in many cases they are joint owners of the transmission, but they also may operate or control the switchyards and the trading hubs as well. So anytime you have a bifurcated regulatory scheme, you are not going to be able to fully achieve all of your objectives.”

Another hurdle facing the region in terms of bolstering the grid involves siting issues. “Although Arizona has never denied a major transmission project in terms of its siting approval, we are finding it increasingly difficult to get federal approvals necessary for transmission projects because of both the complexity and the time inherent in going through federal review process.”

That’s a “big deal” in Arizona, Wheeler noted, “because there’s only about a quarter of the land in Arizona that’s privately owned. The rest is federally owned — it may be tribal land, it may be state-owned — so we have a significant amount of non-private ownership of lands in Arizona so any time a major transmission project is proposed, you have to go through some complicated siting procedures.”

Meanwhile, FERC Commissioner Joseph Kelliher quizzed panelists on whether they think Commission Order 888 precludes the exercise of transmission market power and “if not, do you think 888 should be revised?”

FTC’s Hilke said that his agency’s view, since 1995, “is that probably it would be helpful, but it wouldn’t be sufficient.” At the same time, he would “certainly not be willing to advocate abandoning 888 and 889, but rather to understand that that was, in fact, a transitional mechanism to help the economy move towards structural reform, which is what Order 2000 represents.”

“I don’t think that the open access tariff prevents the market power abuse if the entity wants to do it,” added Ricky Biddle of the Arkansas Electric Cooperative. He said that the open access transmission tariff doesn’t provide the needed incentive to get new transmission built that would allow access to additional resources.

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