FERC last week adopted two new market power screens to assess generation market power and modified measures to mitigate market power where it is found. The screens will apply to all initial market-based rate applications and triennial reviews on an interim basis.

In a separate order, FERC is seeking comments on the adequacy of its current four-prong analysis to assess whether an applicant should be granted market-based rate authority. FERC will hold a technical conference this summer to frame the issues that will comprise the rulemaking proceeding.

The interim policy will remain in place until FERC adopts a new generation market power screen, which the Commission intends to consider as part of the new market-based rate generic rulemaking it launched this week.

The action responds to rehearing request on the Commission’s supply margin assessment (SMA) order issued in November 2001. In developing a decision in the case, FERC solicited several rounds of comments on its proposal, conducted a two-day technical conference to gather information from the industry and issued a staff paper to solicit feedback on various options on the issues.

“I think this is responsive to the broad array and often competing concerns that we’ve heard,” FERC Commissioner Nora Brownell said at the Commission’s regular agenda meeting.

FERC Chairman Patrick Wood pointed out that his agency “can’t sit on the sidelines and just go ‘tut-tut'” in situations where a market is not competitive. “Many customers, many wholesale customers, out there are counting on us to do our job and do it well.” He said that Wednesday’s actions by FERC is a “fact-based, good economic policy-based” outcome resulting from a “very robust and fruitful” discussion.

FERC adopted two market power analyses instead of the one proposed in the SMA order. Both screens will be indicative, not definitive, as to whether or not there is generation market power.

The first screen will be a pivotal supplier analysis based on a control area’s annual peak demand, and the second screen will focus on a market share analysis applied on a seasonal basis. Both screens will consider native load obligations, operating reserve requirements and other commitments of the applicant.

If applicants pass both screens, it will be presumed that generation market power does not exist. However, the Commission will allow intervenors an opportunity to present evidence to rebut this presumption. When an applicant fails either screen, there will be a presumption that generation market power exists and the application would have the opportunity to supplement their market power study to show otherwise.

Both screens allow the applicant a deduction for its native load commitments from the generation that is counted in the screen. In fact, both screens allow this same deduction for competing sellers.

Under the pivotal supplier screen, the applicant can deduct a proxy for native load obligations that is equal to the average of the daily native load peaks during the month in which the annual peak day occurs. This means that if an applicant’s annual peak day occurs in August, it can deduct for its native load commitments an amount of generation that is equal to the average of the 31 daily native load peaks for each day of August. Competing sellers get the same treatment for their native load obligations.

Under the market share screen, which measures the applicant’s market share in each of the four seasons, the deduction allowed for native load obligations is equal to the minimum peak demand day in a given season. This means that for the summer season (June-August) the Commission would look at the applicant’s lowest native load peak on any day during the summer season and would deduct that amount as the native load obligation. The reasoning behind using the lowest peak day is that it reflects the fact that the remainder of the applicant’s generation was uncommitted and thus available to sell into wholesale markets at some point during the summer. Again, competing sellers get the same treatment, so there is symmetry between an applicant and its competitors in this regard.

FERC also elaborated on how the market power tests differ from the SMA. In general, FERC said the new tests are more accurate in measuring the generation that is available to compete in wholesale markets by allowing for recognition of native load commitments, long-term firm non-requirements sales, operating reserve commitments and planned outages.

The Commission also said that the new tests are more accurate in measuring the transmission limitations of the system and thus more accurate in measuring the amount of competing generation that can realistically get into an applicant’s market. The new tests measure these transmission limitations using simultaneous import capability, which FERC noted is more accurate than total transfer capability (TTC), which is what was used under the SMA screen that is being replaced.

Since there are now two screens and each of the new screens has its own proficiency in measuring different things, FERC said it can much more accurately measure different types of market power — i.e. unilateral exercise or through coordinated interaction. Also, the Commission can measure market power in different products (spot sales or in the long-term markets) and over differing time periods (peak and off-peak, including over all four seasons).

FERC said the new approach is also better because it gives more process to both applicants and intervenors to make their respective cases. Specifically, applicants get a second bite at the apple with the chance to file a more robust market power study — the delivered price test — if they fail the initial screens, while intervenors can file historic sales data or transmission information to show that applicants were really more dominant/pivotal than was shown in the screens. The new version also gives applicants more flexibility in fashioning either mitigation to eliminate their market power or to develop the rates they will use in lieu of market-based rates.

With respect to mitigation policy, FERC will allow applicants to propose their own case-specific mitigation plans. Examples of mitigation plans could include cost-based rates or other mitigation that eliminates an applicant’s ability to exercise market power.

Also, default mitigation is being adopted in the event that the application chooses not to develop a plan. FERC said that applicants that have presumption of market power “will have their rates prospectively made subject to refund, pending a definitive finding of market power provided that the applicant chooses to submit additional of the lack of market power.” The Commission also said that if the applicant does not pass the generation market power screens, or forgoes the screens entirely, such default rates will be applicable unless the Commission approves different mitigation for the applicant based on case-specific circumstances.

FERC also said that an applicant’s market-based rate authority would be revoked in geographic areas where market power was found, subjecting the applicant to cost-based rates.

The default cost-based rates adopted are as follows: (i) Sales of power of one week or less are priced at the applicant’s incremental cost plus a 10% adder; (ii) Sales of power of more than one week, but less than one year, are priced at an embedded cost “up to” rate reflecting the costs of the unit providing service; and (iii) Sales of power for more than one year are priced on an embedded cost-of-service basis, with each contract filed with the Commission for review.

Wednesday’s rehearing order does not make any decision in connection with the triennial market-based rate review filings of American Electric Power (AEP), Entergy and Southern Co. These companies were the subject of the original SMA order in November 2001. The order said that AEP, Entergy and Southern have 90 days from the date of the order to file generation dominance analyses on the two indicative screens.

As for FERC’s seeking comments on the adequacy of its four-prong analysis, a technical conference has been scheduled for June 9 at FERC headquarters to outline the issues that will comprise the rulemaking proceeding. The four prongs are: generation market power, transmission market power, barriers to entry and affiliated company issues.

The technical conference will include a discussion of how all four parts of the current test interrelate, as well as other factors the Commission should consider in granting market-based rate authorizations.

FERC noted that although no timetable has been announced on how long this rulemaking will take, rulemakings of this magnitude typically take at least a year to get to a final rule, and may take up to 18 months.

Meanwhile, FERC staff also recommended that the Commission hold a separate technical conference in the near future to address affiliate abuse concerns in the context of competitive solicitations of generation and power.

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