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Carrots haven't worked. FERC needs to get tough on backing its SMD vision.
Fortnightly Magazine - February 15 2003

occasions, have dispatched less efficient plants before its own gas-fired turbines.

Meanwhile, some vertically integrated utilities like Avista, Idaho Power, Duke Power, and FPL have remained untouched in their states by the restructuring movement. Yet, all four companies have wholesale energy divisions and merchant operations, which operate in many unregulated wholesale markets throughout the country.

The issue of reciprocity has been discussed time after time with no real results. Also, reciprocity as some may remember was introduced in one of the many proposed national energy bills to eliminate the patchwork quilt of regulated and unregulated states, but it never gained any ground in Congress.

Most say it is patently unfair and uncompetitive for some utilities to be able to compete and take market share from other utilities in competitive states while their vertically integrated utility is being protected at home from competition by their state PUC. In fact, even in Europe, the European Union recently began proceedings against protectionist laws in Spain and Italy that were designed primarily to keep France's EDF from acquiring assets in those countries. Italy and Spain had reasoned that since France hadn't reciprocated by allowing acquisition of French assets, EDF shouldn't be allowed to buy Italian and Spanish assets, according to Feb. 1 issue.

Naturally, everyone thought the standard market design would solve the reciprocity issue in the U.S. But with pushback from some state PUCs and those states' representatives in Congress on SMD, FERC must play a stronger hand.

Some say FERC should just repeal market-based rate authority for those companies who operate in regulated states. That would be consistent with state PUC arguments against SMD. After all, such companies do pose a market power problem under the new market power screen. If regulated utilities and their state PUCs are so enthusiastic about the virtues of cost-based rates, shouldn't FERC accommodate these views by providing a more consistent rate-of-return framework across all market segments?

It's hardly surprising that state regulators in the South have chosen to oppose SMD, while accepting the idea of market-based rates at the wholesale level. That way, they get to have their cake and eat it too. Regional players are shielded from imports, but remain free to export power and reap the benefits of an opened wholesale market.

FERC should demand reciprocity, not hypocrisy.

FERC's Market Screen: The Industry's Great Equalizer?

FERC last year quietly adopted its Supply Margin Assessment (SMA) or market power screen, which exempts those joining ISOs or RTOs, but puts other power suppliers under a microscope.

"To prevent economic withholding, we will require that an applicant who fails the SMA screen offer uncommitted capacity for spot sales in the relevant market. The uncommitted capacity will be priced under a form of cost-based rates," according to FERC.

Bill Hieronymus, on behalf of Exelon last year, said that, "SMA's test … will result in denial of market rate authority in the failed market without further inquiry, and the SMA would deny market rate authority to nearly all IOUs in their home territories [vertically integrated utilities]." That's quite a big stick.