FERC Adopts Interim Wholesale Market Power Screen and New Market-Based Rate Condition
December 2001
In an effort to improve its ability to assess and mitigate wholesale market power throughout the United States, the Federal Energy Regulatory Commission (FERC) recently issued two orders that change, or propose to change, the rules governing its review of generation market power and wholesale electricity sales at market-based rates.
The first order announced a new, interim generation market power screen and mitigation policy (the Market Screen Order). Pursuant to this policy, FERC will use a Supply Margin Assessment (SMA) screen in any market without a FERC-approved market monitoring and mitigation plan to review generation market power and market-based rate applications. The Market Screen Order also addressed the posting of certain transmission and interconnection information to assist the siting of a new generation.
The SMA screen measures an applicant’s market power by determining whether a market is dependent on the applicant for at least a portion of its peak power needs, thereby making the applicant "pivotal." The SMA considers out-of-market power supply and transmission constraints regarding the control area.
FERC replaces its 20 percent generation market share standard and hub-and-spoke methodology with the pivotal applicant SMA standard. An applicant that fails the SMA for a particular market is subject to a price-mitigated, must-offer requirement for its excess spot market capacity.
The excess spot market power is priced using a split-the-savings formula, which is a cost-based ratemaking model that calculates price based on an average of a seller’s incremental cost of producing additional energy and a buyer’s decremental costs of not producing additional energy. An applicant that fails the SMA for a particular market must publicly post the incremental costs for energy offered for spot and day-ahead market sales.
Using the SMA, the FERC found that three sellers affiliated with utilities have market power in their respective control areas, finding that each entity’s installed capacity was a factor greater than the supply margin within the control area.
In an important, related order, the FERC is investigating whether market-based rate tariffs and authorizations include terms and conditions that ensure the rates are just and reasonable (the Market-Based Rate Order). While FERC emphasized that it has not found that any particular market participant has exercised market power, FERC proposes to impose the following condition on all existing and new market-based rate authorizations:
As a condition of obtaining and retaining market-based rate authority, the seller is prohibited from engaging in anticompetitive behavior or the exercise of market power. The seller’s market-based rate authority is subject to refunds or other remedies as may be appropriate to address any anticompetitive behavior or exercise of market power.
The refund effective date for this condition will be January 26, 2002.
While the FERC did not impose a ceiling or cost-based rate on long-term transactions, an applicant must offer and post on its web site a portfolio of longer-term products and prices available to entities within the applicant’s control area. The FERC stated that it may impose further mitigation if someone raises a legitimate concern that the applicant is exercising market power over longer-term products.
