Perspective
FERC's Market-Power Test:
First, Do No Harm
Why a new market-power screen-accounting for
the relationship between customers and suppliers
in the wholesale marketplace-is a necessity.
April 2005
By Louis R. Jahn
The philosophy of "first, do no harm" has served the medical profession well for more than 2,000 years. Today, it may be equally good advice for the Federal Energy Regulatory Commission (FERC) as it seeks to create fair and accurate screens to determine who does and does not have market power.
One of the two interim screens FERC is using to evaluate applications for market-based rate (MBR) authority may create a large number of false positives-power suppliers judged to have market power when in reality they do not. To remedy this, FERC should add a new market-power screen based upon an analysis of the actual relationship between customers and suppliers in the wholesale marketplace.
Interim Screens
Last April, FERC began using two screens to indicate which MBR applicants would require more detailed scrutiny to see if they have market power. These indicative screens are intended as interim measures until the commission decides on its final screens, the date of which has not been announced.
The first screen, the pivotal-supplier screen, looks at whether a supplier is pivotal to the market. Will supplies (including imports) from other entities be sufficient to meet wholesale demand in the market? The second screen, the market-share screen, calculates an applicant's share of uncommitted generation capacity in the wholesale market. If the applicant's share exceeds 20 percent, the applicant fails the screen.
Failing one or both of the screens creates a rebuttable presumption of market power. The commission then initiates a Section 206 hearing, where applicants can provide evidence that they do not posses market power.
For those who cannot, they then either can accept the commission's default cost-based rates, or they can propose a mitigation plan that would address the commission's market-power concerns.
Given the number of applications for MBR authority, the commission needs
to implement an indicative screening process to identify those applications that will require more detailed scrutiny. As with any indicative screen, however, both the pivotal-supplier and the market-share screens have traded simplicity in preparation for analytical accuracy and a limit on how much data applicants are required to present. For the market-share screen in particular, these tradeoffs have introduced a serious problem with false positives.
As an example of one such tradeoff, the market-share screen does not take into account the relative level of total market demand and supply. An MBR applicant could fail this screen with
a market share of 50 percent (5,000 MW/10,000 MW), but still not have market power if the total wholesale market demand is only 2,000 MW.
Similarly, in calculating an applicant's wholesale capacity market share, the market-share screen excludes much of the capacity the applicant needs to meet its native-load obligations. Unfortunately, the methodology adopted by FERC seriously understates the capacity required to serve native loads and consequently overstates an applicant's capacity available to compete in the wholesale market.
Since August, 41 electric utilities have filed for MBR authorization. While approximately 9 percent of those utilities operating outside of regional transmission organizations (RTOs) have failed the pivotal-supplier screen, approximately 75 percent have failed the market-share screen. This disparity in failure rates between the screens suggests there is a false positive problem associated with the market-share screen, particularly when the additional actual market analyses that a number of the "failing" utilities submitted appears to demonstrate that they do not possess market power within their control areas.
Contestable Load
Analysis Screen
Given the limitations in the market- share screen, as well as the ongoing need to more accurately assess who has
market power, FERC should adopt a third screen, what Edison Electric
Institute (EEI) calls a contestable load-analysis screen.
The contestable load analysis looks at the relationship between those wholesale customers actually seeking competitive supply alternatives (contestable loads) and the competitive generation resources that are available to serve them. The contestable load analysis also includes a demonstration that takes into account the ability of transmission to provide access by contestable loads to competitive suppliers. These two principles are the conceptual basis for EEI's contestable load-analysis proposal.
In preparing the contestable load analysis, an applicant would:
Identify the relevant market and products, e.g., on-peak, off-peak, short-term, long-term, etc. that would be used in the analysis;
File the analysis based on historical market information, although if the applicant's asset position or market conditions are expected to change significantly in the future, the applicant also can file a forward-looking analysis;
Identify all contestable loads, with the opportunity to develop the specific method for identifying those loads, e.g., relying upon an analysis of RFPs or an analysis of the power supply portfolios of the wholesale customers;
Identify both the potential competitive suppliers in the market, and the total uncommitted wholesale capacity that would have been available to compete for the contestable loads;
Determine what portion of that total uncommitted wholesale capacity could have been imported into the relevant market during the historical period; and
Demonstrate that transmission constraints did not limit access by the contestable loads to competitive generation resources.
The next two steps would establish the criteria for the applicant to pass the contestable load analysis:
If the total competitive generation resources were at least twice the total contestable load, the applicant would be deemed to have passed the analysis for the specified product and seasons; and
The applicant would have to provide a demonstration that the competitive generation resources were not unduly concentrated amongst the competitive suppliers.
FERC should use the contestable load analysis at the time the applicants make their initial filing for MBR authorization. If FERC determines that the analysis demonstrates an absence of market power, a rebuttable presumption would then be established that the applicant does not possess market power, and a Section 206 proceeding would not be needed. For those applicants that already have filed for MBR authority and have failed, FERC
should allow them to re-file using
this additional analysis.
The contestable load analysis looks at the relationship between contestable loads and those competitive generation resources in the market place to serve them. Consequently, it evaluates an applicant on the basis of the actual state of competition in a given market. By using this screen, the commission will gain a much more accurate assessment of whether an applicant really does or does not possess market power.
The result will be a wholesale market place where power plants are used more efficiently, where valuable signals are sent when new plants are needed, and where the consumer, the economy, and the environment all benefit from more efficient use of power.
EEI supports FERC's objective of developing competitive wholesale markets. We firmly believe that the development of such markets will lead to the lowest possible energy costs for customers. We also strongly support the commission's effort to prevent the abuse of market power in those markets.
But instead of helping competition, the commission's new screening process could end up harming it, by preventing the majority of utilities outside of RTOs from competing in the deregulated wholesale marketplace. The result will be markets with fewer supply options and less liquid energy prices.
Unfortunately, the early results
of FERC's screening for market
power indicate that this already may
be happening.
Louis R. Jahn is director, Wholesale Market Policy, at the Edison Electric Institute. He can be reached at Ljahn@eei.org.
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