[BETA] Fortnightly

For almost a decade now, the Federal Energy Regulatory Commission (FERC) has pursued the goal of promoting competition in bulk-power markets, focusing on access to transmission as its primary tool to achieve that end. This trend first emerged in the 1987 PacifiCorp merger case. It gained momentum with the strong message sent by the Congress in the Energy Policy Act of 1992 (EPAct). It has culminated in the FERC's proposal for across-the-board, nondiscriminatory access to transmission, as described in the March 1995 Notice of Proposed Rulemaking (NOPR) on open-access transmission services.

In the past, the FERC has consistently identified transmission market power as the key stumbling block to competitive generation markets. Thus, if we assume that the final rule will reflect the NOPR, what is left for the commission to do in regulating wholesale generation? The NOPR anticipates this issue and asks a series of threshold questions about how the FERC should regulate generation rates once the rule becomes final.

Similar questions have been asked in other contexts. Both the majority's proposed policy decision and Commissioner Knight's alternative proposal in the California "Blue Book" case recognize the need to confront generation market power. Also, at the June hearing on Senator Nickles's bill to reform PURPA (Public Utility Regulatory Policies Act), much of the discussion focused on how to ensure a competitive generation market in the event of repeal of PURPA's mandatory purchase obligation.

Market-based rates for wholesale generation are not new. The FERC began approving such rates about seven or eight years ago. This policy has led to a three-part test for approving market-based generation rates: First, does the seller possess generation market power? Second, does the seller possess transmission market power? Third, can the seller erect "other barriers to entry?"

Testing Market Power

In the vast majority of cases, the real issue has arisen under the second prong of the test. In theory, transmission owners can thwart competition by denying access and favoring their own generation. But what happens if the commission succeeds with the basic concept of the NOPR, and every jurisdictional utility in the nation files an open-access tariff? Can the commission then approve blanket market-based rates for all such sellers and their affiliates?

It's noteworthy that the FERC has never found an instance in which an

applicant-seller failed the first prong of the test. That is, the FERC has never found that a seller possessed generation market power in connection with a request for market-based rates. Does that mean the test will shrink to a single prong (em whether the seller can erect "other barriers to entry?" Or, does it mean that we need to take a closer look at the standard?

Here, it's instructive to look at the FERC's order of May 13, 1994, in Kansas City Power & Light Co., 67 FERC