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FERC’s Market-Power Test: First, Do No Harm

Why a new market-power screen—accounting for the relationship between customers and suppliers in the wholesale marketplace—is a necessity.

Fortnightly Magazine - April 2005

the wholesale market.

Since August, 41 electric utilities have filed for MBR authorization. While approximately 9 percent of those utilities operating outside of regional transmission organizations (RTOs) have failed the pivotal-supplier screen, approximately 75 percent have failed the market-share screen. This disparity in failure rates between the screens suggests there is a false positive problem associated with the market-share screen, particularly when the additional actual market analyses that a number of the "failing" utilities submitted appears to demonstrate that they do not possess market power within their control areas.

Contestable Load Analysis Screen

Given the limitations in the market-share screen, as well as the ongoing need to more accurately assess who has market power, FERC should adopt a third screen, what Edison Electric Institute (EEI) calls a contestable load-analysis screen.

The contestable load analysis looks at the relationship between those wholesale customers actually seeking competitive supply alternatives (contestable loads) and the competitive generation resources that are available to serve them. The contestable load analysis also includes a demonstration that takes into account the ability of transmission to provide access by contestable loads to competitive suppliers. These two principles are the conceptual basis for EEI's contestable load-analysis proposal.

In preparing the contestable load analysis, an applicant would:

  • Identify the relevant market and products, e.g., on-peak, off-peak, short-term, long-term, etc. that would be used in the analysis;
  • File the analysis based on historical market information, although if the applicant's asset position or market conditions are expected to change significantly in the future, the applicant also can file a forward-looking analysis;
  • Identify all contestable loads, with the opportunity to develop the specific method for identifying those loads,  e.g., relying upon an analysis of RFPs or an analysis of the power supply portfolios of the wholesale customers;
  • Identify both the potential competitive suppliers in the market, and the total uncommitted wholesale capacity that would have been available to compete for the contestable loads;
  • Determine what portion of that total uncommitted wholesale capacity could have been imported into the relevant market during the historical period; and
  • Demonstrate that transmission constraints did not limit access by the contestable loads to competitive generation resources.

The next two steps would establish the criteria for the applicant to pass the contestable load analysis:

  • If the total competitive generation resources were at least twice the total contestable load, the applicant would be deemed to have passed the analysis for the specified product and seasons; and
  • The applicant would have to provide a demonstration that the competitive generation resources were not unduly concentrated amongst the competitive suppliers.

FERC should use the contestable load analysis at the time the applicants make their initial filing for MBR authorization. If FERC determines that the analysis demonstrates an absence of market power, a rebuttable presumption would then be established that the applicant does not possess market power, and a Section 206 proceeding would not be needed. For those applicants that already have filed for MBR authority and have failed, FERC should allow them to re-file using this additional analysis.

The contestable load analysis looks at