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Perspective

Some want a tighter grip on generators, but FERC should steer clear.
Fortnightly Magazine - October 1 2001

competitors, increase the cost of capital for the power industry, and reduce consumer benefits in the long run.

And if the alternative to MBRs should call for some form of regulation, then remember that regulation itself produces its own set of inefficiencies and unintended consequences. (That is why the electric power industry is being restructured in the first place.) In short, the FERC should carefully consider both the costs and the benefits of any departure from the status quo.

Perhaps the FERC should wait until RTOs have taken shape and boundaries are settled before implementing any new analysis. RTOs could define (or redefine) the scope of the relevant markets for generators. In the meantime, whatever interim mitigation measures remain in place will be a sufficient safeguard against the exercise of market power.

In fact, the commission might very well choose to assign to the RTOs the responsibility for presenting the market power analysis. And in the case of a for-profit RTO, the RTO's independent market monitors could assume that responsibility. (After all, under Order No. 2000, RTOs already will be responsible for market monitoring.) Under this scenario, as under current MBR rules, the RTO would be required to update its analysis after three years, or some other suitable interval.

In the end, getting market structure right is the key to workably competitive generation markets. That, together with all of the new generation that is coming on line within the next couple of years, should greatly diminish the opportunities for generators to exercise unchecked market power. Once the requisite market structure is in place, the commission can shift to addressing localized market power and other discrete issues where fine tuned market power diagnostics and a big stick are truly needed.

  1. , 78 FERC ¶61,309 (1997); see also ., 62 FERC ¶61,016 (1993),, 58 FERC ¶61,234 (1992).
  2. , 96 FERC ¶61,050 (2001) (Massey, dissenting) (order dismissing rehearing).
  3. The hub-and-spoke method, as FERC has applied it over some 10 years now, examines market shares for total and uncommitted generating capacity, both within the applicant's service area and in first-tier interconnected markets-i.e., those markets directly interconnected with the applicant.
    As part of its request that the FERC adopt a more sophisticated market power screen, the One of its staunch opponents, the Illinois Commerce Commission, defined the hub-and-spoke analysis as follows:method in a recent brief filed with the FERC arguing for its demise. As stated there, the method requires an applicant to compares its own controlled generating capacity to the sum of (a) the generating capacity controlled by itself, (b) any alternative generating capacity in the service area and (c) all generating capacity in the first-tier utilities. As stated there, FERC then "examines the relative size of the sellers as a measure of the ability of a utility to dominate electricity supply in a geographic market or to raise prices by withholding capacity." .
  4. , Inside FERC, July 16, 2001, at 1.
  5. , 96 FERC ¶61,050 (2001) (Massey, dissenting) (order dismissing rehearing):
    "The Commission must move immediately to develop a more sophisticated approach to market analysis. The