June 1 , 2002
Capacity Planning: The Good, the Bad, and the Ugly
Market-Power Tests: A review of FERC’s market-based rate (MBR) screens, from theory to application.
On April 14, 2004, the Federal Energy Regulatory Commission (FERC) adopted new “interim” market-power screens for electric utility application and maintenance of authority to sell electric power at market-based rates (MBR). 1 Since then, FERC has heard and ruled on requests for rehearing, provided a schedule for utilities to file updated market-power studies, and ruled on many applications. It is, therefore, now appropriate to examine the screens in light of FERC’s actual application.
FERC ordered two new screens: Pivotal Supplier Analysis (PSA) and Wholesale Market Share Analysis (WMSA). In the PSA, the commission examines whether the generation owned by the applicant is necessary to serve wholesale demand within a control area. The commission first calculates the total generation capacity for an area. This is the total of generation in the control area plus the potential imports. 2
From this total, the commission subtracts out a native-load obligation proxy, firm contractual commitments, and operating reserves. 3 The result gives the uncommitted capacity. Net uncommitted capacity is calculated by subtracting a wholesale load proxy from uncommitted capacity. Net uncommitted capacity is compared with the applicant’s uncommitted capacity within the area. When the applicant’s uncommitted capacity is less than net uncommitted capacity, then all wholesale demand could be served without energy from the applicant, and the applicant passes the PSA screen. When the applicant’s uncommitted capacity is greater than the net uncommitted capacity, then the applicant fails the PSA screen.
In the WMSA, the commission examines whether the generation owned by the applicant is 20 percent or more of the uncommitted capacity in each of the four seasons. The commission first calculates the total generation capacity for an area, as in the PSA. From this total, the commission subtracts out planned outages and deratings, a native-load obligation proxy, firm contractual commitments, and operating reserves.4 FERC then calculates the applicant’s share by dividing the applicant’s uncommitted capacity by the total uncommitted capacity. When the applicant’s share is less than 20 percent, the applicant passes the WMSA screen. When the applicant’s share of uncommitted capacity is 20 percent or more, then the applicant fails the WMSA screen.
FERC presumes that an applicant does not have market power when it passes both the PSA and WMSA screens. Whenever applicants have failed either of the screens, the commission has ordered a refund proceeding to decide if the applicant must sell at cost-based rates. FERC has not yet articulated what would overcome the market-power presumption.
In some respects the new screens are an improvement over FERC’s previous screen, the Supply Margin Assessment, or SMA. The SMA was similar to the PSA, but it did not account for retail-load obligations. The flaw was that it did not account for the native-load