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Failing the Market-Power Test:
How FERC's ruling could affect wholesale power markets.
The July ruling from the Federal Energy Regulatory Commission (FERC) on market-based rates, enacting two new market tests utilities must pass if they want to enter into wholesale power transactions at market rates, caught the attention of industry players. Those two tests-the pivotal-supplier test and the wholesale market-share test-stirred much debate and triggered several hearings and open forums. FERC generally stuck to its guns, adding a few minor provisions and a clause that allow companies that fail the market tests either to make their case in front of FERC or pass the delivered-price test. However, large investor-owned utilities (IOUs) that are outside of independent system operators (ISOs) and that don't belong to a control area with other members of similar size may as well book a ticket to Washington, D.C., if they want to sell power at market rates, because our analysis, developed here at Energy Velocity, shows that FERC is going to have a busy year.
The Pivotal-Supplier Test
The pivotal-supplier test is designed to ensure that no single company's capacity is essential to meet wholesale load. The test is simple: If the applicant's uncommitted capacity is greater than the market's net uncommitted capacity, the company fails the test. Table 1 contains a detailed description of the pivotal-supplier test. Net uncommitted capacity is the sum of all participants' uncommitted capacity less the market wholesale load. If the applicant's uncommitted capacity is greater than the market net uncommitted capacity then it is assumed that at some point the applicant will be in a position to control the market price, and the applicant fails the test.
Energy Velocity applied this test under two different conditions. The first did not include the control area's interconnected capacity; the second did. In the first analysis, only 11 of 136 companies failed the test. All those that failed were in control areas with peaks under 6,000 MW and had not experienced significant investment from independent power producers in the past few years. The second analysis included interconnected capacity, and no companies failed. This is partly a result of the recent overbuild and partly because most control areas are fairly well connected to their neighboring control areas.
Wholesale Market-Share Analysis
The wholesale market-share test is designed to measure an applicant's market power. Once again, the test is simple: If the applicant's uncommitted capacity is greater than or equal to 20 percent of the total market uncommitted capacity, the applicant fails. Figure 2 contains a detailed description of the wholesale market-share test. The base definition for supply in this test is the same as in the pivotal-supplier test, except that capacity is reduced to account for planned outages and low water years for hydro units. Planned outages need to be considered, because for this test, FERC defines native load as the minimum load in any season.
We also applied this test twice. The first analysis did not include the control area interconnected capacity; the second included first-tier interconnections. In the first run, only 69 out