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Commission policies need to recognize customer obligations and state commission decisions.
Fortnightly Magazine - July 2004


Commission policies need to recognize customer obligations and state commission decisions.

Even the best of intentions can create unintended consequences. The Federal Energy Regulatory Commission (FERC) has acted aggressively and appropriately during the past few years to stimulate competitive wholesale electricity markets.

Now the commission is beginning a comprehensive reassessment of its four-part analysis to determine whether applicants for market-based rate authority have market power-the ability to profitably raise prices in these competitive markets.

As FERC examines its policies to address the potential for the exercise of market power, it must recognize the potential impact the policies could have, as a side effect, on the ability of electric utilities and state public utility commissions to serve their regulated customers. FERC's actions here could take away many of the options both groups need to make the best decisions to provide their customers with a reliable and affordable supply of electricity.

Conflicts Arise

This past April the commission substantially revised its interim generation market power test for market-based rate applications. FERC also announced that in June it would begin holding hearings and technical conferences to examine the generation market power issue and three other aspects of the market power question-limiting transmission access, building barriers to entering a market, and the potential for creating preferential deals with affiliates.

This comprehensive look at market power comes as conditions in the wholesale electricity market have produced an abundance of low-priced power plants for sale. State regulators have authorized utilities to pursue some of these assets as the best-cost option to serve their customers. These actions have included:

  • Authorizing utilities to purchase financially distressed merchant generation plants to serve their regulated customers;
  • Enabling energy companies with utilities to reclassify power plants from merchant to regulated load serving;
  • Allowing utilities to enter into power purchase agreements with affiliated generation units; and
  • In open retail states, setting up state-approved competitive procurement practices.

FERC, however, out of its desire to stimulate wholesale competition, has placed a number of these resource procurement actions under scrutiny. For example, FERC is now conducting a technical conference that could lead to FERC oversight of state competitive procurement.

In some cases, the commission has even overruled a procurement action-and with it a decision of the regulating state public utility commission-on the basis of the action's potential for enhancing the market power position of the applicant. For example, in mid-December FERC reviewed a proposal by Oklahoma Gas and Electric (OG&E) to purchase a local merchant power plant and set it for a rehearing. The Oklahoma Corporation Commission, the state regulatory agency, had approved a plan for OG&E to add not less than 400 MW of new generation capacity to meet the growing needs of its retail customers. OG&E made the decision to buy the plant based on its analysis that it would save money for its retail customers compared with building or contracting for the needed power. In late April, the Oklahoma Corporation Commission issued an order acknowledging that OG&E's customers are indeed receiving savings as contemplated in the company's 2002 rate settlement agreement. In that