Perspective

FERC's Market-Power Test:

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

The philosophy of "first, do no harm" has served the medical profession well for more than 2,000 years. Today, it may be equally good advice for the Federal Energy Regulatory Commission (FERC) as it seeks to create fair and accurate screens to determine who does and does not have market power.

One of the two interim screens FERC is using to evaluate applications for market-based rate (MBR) authority may create a large number of false positives-power suppliers judged to have market power when in reality they do not. To remedy this, FERC should add a new market-power screen based upon an analysis of the actual relationship between customers and suppliers in the wholesale marketplace.

Interim Screens

Last April, FERC began using two screens to indicate which MBR applicants would require more detailed scrutiny to see if they have market power. These indicative screens are intended as interim measures until the commission decides on its final screens, the date of which has not been announced.

The first screen, the pivotal-supplier screen, looks at whether a supplier is pivotal to the market. Will supplies (including imports) from other entities be sufficient to meet wholesale demand in the market? The second screen, the market-share screen, calculates an applicant's share of uncommitted generation capacity in the wholesale market. If the applicant's share exceeds 20 percent, the applicant fails the screen.

Failing one or both of the screens creates a rebuttable presumption of market power. The commission then initiates a Section 206 hearing, where applicants can provide evidence that they do not posses market power. For those who cannot, they then either can accept the commission's default cost-based rates, or they can propose a mitigation plan that would address the commission's market-power concerns.

Given the number of applications for MBR authority, the commission needs to implement an indicative screening process to identify those applications that will require more detailed scrutiny. As with any indicative screen, however, both the pivotal-supplier and the market-share screens have traded simplicity in preparation for analytical accuracy and a limit on how much data applicants are required to present. For the market-share screen in particular, these tradeoffs have introduced a serious problem with false positives.

As an example of one such tradeoff, the market-share screen does not take into account the relative level of total market demand and supply. An MBR applicant could fail this screen with a market share of 50 percent (5,000 MW/10,000 MW), but still not have market power if the total wholesale market demand is only 2,000 MW.

Similarly, in calculating an applicant's wholesale capacity market share, the market-share screen excludes much of the capacity the applicant needs to meet its native-load obligations. Unfortunately, the methodology adopted by FERC seriously understates the capacity required to serve native loads and consequently overstates an applicant's capacity available to compete in the wholesale market.

Since August, 41 electric utilities have filed for MBR authorization. While approximately 9 percent of