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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

trivial share of imports and was credited with only 5 to 10 MW of them. But this method ignores the fact that California could transfer to Sierra Pacific only 92 MW of its 51,000 MW of generation capacity, while Idaho Power’s control area could export 475 MW of its 2,200 MW of generation. Whereas Idaho Power had only about 3 percent of the first-tier uncommitted capacity, its control area could export about 33 percent of Sierra Pacific’s simultaneous import capability. If the actual ability to export to Sierra Pacific were used instead of assuming that all first-tier capacity had equal ability to reach Sierra Pacific, Idaho Power likely would fail a 20 percent screen in the Sierra Pacific control area.

Moreover, the WMSA cannot screen for market-power problems for which it purports to screen. One of the alleged purposes of the WMSA is that it “may indicate the presence of the ability to facilitate coordinated interaction with other sellers.” 10  But the WMSA is incapable of providing a screen for the likelihood of coordinated interaction ( i.e., interdependent actions of a few sellers to raise prices above competitive levels), because the WMSA only looks at one seller. A seller that fails the screen with a 20 percent share and faces 16 equal-sized sellers as competitors is very unlikely to be involved in coordinated interaction, whereas a seller that passes the screen with a 19 percent share and has only one competitor with an 81 percent share may be likely to be involved in coordinated interaction. If FERC desires a screen for the likelihood of coordinated interaction, it needs to consider information about the number and sizes of competitors.

When interested parties raise objections to the WMSA, FERC responds that the PSA and WMSA represent a “balanced” approach to screening. The July 8 order on rehearing uses the word “balance” nine times to describe or defend its approach. But an approach that routinely identifies a likelihood of market power where none exists and fails to identify market power that does exist is not balanced; it is arbitrary and capricious. Like the SMA, the WMSA is indefensible on both theoretical and empirical grounds. It needs to be replaced.

The Ugly

Some facets of complying with the PSA and WMSA have less to do with the substance of finding or not finding market power, and more to do with filing requirements. For example, FERC has been pedantic about using nameplate capacity for the PSA and WMSA. Nameplate capacity is the design capacity for a generation unit that is typically recorded when the generation is installed, and it is seldom changed. Utilities also report summer capacities and winter capacities, reflecting the actual ability to generate electricity during the summer and winter seasons. These capacities are much more likely to be updated as capacities change over time as a unit ages or is upgraded.

FERC-accepted filings using alternative capacity measures in a number of cases. 11  The commission addressed the issue of alternative measures in Dayton Power & Light . Dayton used summer capacity