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Frontlines

Did FERC's market power ruling go too far?
Fortnightly Magazine - August 2004

Frontlines

Did FERC's market power ruling go too far?

Will utility executives and proponents of electric competition mark July 8, 2004, as a dark day? That was the day the Federal Energy Regulatory Commission (FERC) said it would make no changes to the extremely contentious "interim" screen-the one it adopted back in April to measure market power in electric generation.

I say "dark" because the market-based sales now put at risk are the financial lifeblood of some utilities, especially those of the multi-billion-dollar, vertically integrated variety. Those that fail FERC's market-power test will be forced to sell their excess generation at cost-based rates-a "death penalty," according to some utility CEOs.

And to make matters worse, some advocating open markets still question whether the new test will improve competition in wholesale power transactions.

FERC's new market-power test, the critics say, offers no real incentive for utilities to join a regional transmission organization (RTO). That's because RTO membership no longer provides a safe harbor-an exemption from having to pass the market-power screen.

But FERC has said that even if utilities fail the new screens they can point to membership in an RTO (or ISO) as evidence that their market power has been mitigated. And Jon Ecker, president of Energy Velocity, agrees at least in principle when he says, "The protections provided in structured markets such as RTOs generally result in markets where prices are transparent and attempts to exercise market power are mitigated."

Yet many proponents of free trade had long called for FERC to limit its use of the "death penalty" in a way that would persuade utilities to join regional energy markets and thus fall in line with the commission's own lobbying efforts on behalf of RTOs.

So as things now stand, there is considerable disagreement over whether FERC has done itself any good-or, for that matter, whether it has made anyone happy. The critics say that FERC's ruling failed to heed any of the suggestions by any of the major factions: the utilities, public power, the merchant generators, or even the state public utility commissions.

FERC Chairman Pat Wood III, in a press statement, asserted, "Market-based rate authority is not a right. … Today's order balances the competing views of a broad spectrum of commenters."

But many commenters disagree. They cite several key faults in FERC's final market-power screen, all involving the native-load obligation owed by vertically integrated utilities. They say FERC's screen:

1) Deducts too little in general for native load, and thus overstates uncommitted capacity available for market;

2) Wrongly relies on an average of native load in the "pivotal supplier analysis," which again tends to understate such obligations;

3) Offers a false hope for utilities that fail the screen, since virtually all traditional utilities with native load are doomed to fail the Delivered Price Test, which FERC has set up as a secondary safe harbor. A cursory read of the final order shows how these arguments are but a few of many that FERC rejected. Some utility executives say FERC did give utilities the greatest concession of all-the

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