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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.

Fortnightly Magazine - July 2005
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commitments to produce electric power. For an analysis of wholesale markets, it is irrelevant that a utility’s generation is necessary to serve the total load in an area when the utility already has committed to supply a substantial share of the retail loads. Quite simply, the SMA totally was indefensible in court, and FERC never issued an order where it presumed that a utility had market power because the utility failed the SMA screen. Instead, FERC accepted filings that passed the SMA screen and waited more than two years to issue its April 14, 2004, order describing its new interim screens.

The PSA avoids the flaw of the SMA by subtracting a native load proxy from the applicant’s capacity and by comparing uncommitted capacity to the wholesale-load proxy. Instead of being a screen in which most vertically integrated investor-owned utilities fail, most applicants pass the screen. The reason is that most utilities are not necessary to serve the wholesale loads (other than the applicant’s) in a control area. Either other generation sources within the control area, imports, or a combination are sufficient to meet the wholesale demand available for competition.

Two other changes constitute improvements over the SMA. One is the exemption for generation installed after the transmission open-access rules were adopted on July 9, 1996. The essence of market power is restricting production to obtain higher market prices on the remaining production. Installing new capacity that will recover its costs only if it operates is the antithesis of market power. It is a pro-competitive activity that reduces prices and makes buyers better off. Hence, it is reasonable, even desirable, to give new generation a pass on the market-power screens. The practical import is that most owners of such generation make a simple filing that states when the generation was built and shows that the applicant does not have transmission market power, cannot erect barriers to entry, and adheres to the commission’s codes of conduct.

Another improvement is the requirement that a generation owner in a regional transmission organization (RTO) must file the assessment. Under the SMA, utilities in RTOs with commission-approved market power monitoring and mitigation did not need to submit an SMA. This was curious because the SMA was not applied in RTO markets where many suppliers do not have retail-load obligations and are more likely to have market power, and it was applied in traditional markets where suppliers had retail load obligations that mitigate wholesale market power. But now all utilities with generation installed before July 9, 1996, must file a market-power study.

Moreover, FERC has shown that it actually may consider the import of such filings. In one recent case, FERC limited market-rate authority to sales into the organized RTO markets and did not allow bilateral sales at market-based rates. 5  FERC appears to have abandoned its prior reasoning that if short-term markets are competitive, then longer-term markets also must be competitive. 6  But since that underlying reasoning is correct, perhaps FERC now is hedging its bets that its market monitoring and mitigation programs actually are