FERC Revises Market-Based Rate Procedures

Deck: 

Order 816 indicates the commission is scrutinizing the underlying calculations of market power analyses.

Fortnightly Magazine - March 2016

On October 16, 2015, the Federal Energy Regulatory Commission issued Order No. 816,1 refining the policies and procedures relating to the wholesale sales of energy, capacity, and ancillary services at market-based rates (generally, "MBR" authority). Much of the Order simply clarifies and codifies existing practice or provides guidance on areas that were previously vague, but the Order sets forth a number of new provisions that will affect the filing entities.

Background

In 2007, the commission issued Order No. 697 which codified the procedures that suppliers must follow when applying to obtain and retain authorization to sell at market-based rates.2 Order No. 697 and related orders indicate that suppliers must periodically submit (1) "indicative" horizontal market power screens, (2) an appendix listing the filing entity, all of its energy affiliates and their associated energy assets, and (3) land acquisition reports, among other requirements. Furthermore, should a filer fail the horizontal market power screens, it may submit additional evidence, including an analysis called the Delivered Price Test, or DPT, to show that it does not hold horizontal market power.

Order No. 816

Order No. 816, including all its appendices, is over 250 pages long. The order resulted from a public comment proceeding of almost one and one-half years.3 Its provisions govern substantially all of the over 2,500 entities that now hold or are seeking MBR authority, as well as those entities that apply for MBR authority going forward. 

As discussed above, much of the Order clarifies existing practice or provides guidance on areas that were previously vague. For example, under the existing procedures, in measuring their capacity for the market power screens filers could "derate" the capacity of hydroelectric and wind-powered generators (so called "energy-limited" generators) to reflect historical achieved output levels over a five-year period, rather than maximum capacity. Order No. 816 provides additional guidance on how to treat energy-limited facilities that have not been online for long enough to have five years of historical output. Furthermore, it adds solar thermal facilities to the list of energy-limited generators.4

There are several provisions that will have a greater impact on filers. First, the commission has revised the requirements for including long-term firm purchases in market power analyses and asset appendices. Under the prior procedures, such purchases were only to be included to the extent they conveyed "control" of the underlying generating facility to the buyer. In Order No. 816, the commission requires that all long-term firm purchases that have associated long-term transmission reservations, including purchases that do not convey "control" and even energy-only purchases not tied to a specific generator, be included. This revision could have a significant impact on the market power analyses of certain franchised utilities and their affiliated MBR entities. Such MBR entities may have a material amount of contracted energy or capacity that will now be included when measuring their market presence.

This revision could have significant impact on market power analyses of certain franchised utilities and affiliated MBR entities. –Eric Korman

Order No. 816 permits an MBR entity to exclude from its statistical market power screen calculations any capacity that is fully committed for long-term firm sale to unaffiliated purchasers. However, the commission will not permit an MBR entity to exclude from screen calculations affiliated uncommitted capacity in adjacent markets. It is unclear whether the result reached by Order No. 816 in this respect reflects any substantial change in existing commission practices. 

Order No. 816 permits MBR applicants and holders to disregard behind-the-meter generation from some, but not all, MBR reporting requirements. However, commentary in Order No. 816 makes clear that the commission's proposed treatment of behind-the-meter generation is limited to generation that is not at all used for wholesale sales and that cannot and does not reach the grid. And behind-the-meter generation must still be included in transmission providers' periodic reports to the commission. Order No. 816 similarly permits MBR applicants and holders to delete from their enterprise-wide asset appendices some Qualifying Facility generators that exhibit small sizes, or that sell their electrical output exclusively under the Public Utility Regulatory Policies Act of 1978; this results in these Qualifying Facilities no longer being included in an MBR affiliate's statistical market power screen studies. 

MBR entities have typically been required to file Notices of Change in Status with the commission when, among other events, the entities become affiliated with any new generating facility and/or when the MBR entities become affiliated with any 100 MW or more of generating capacity. For the purposes of some MBR reporting requirements, the geographic location of the new generation affiliates have typically not been considered relevant by the commission. For example an MBR generator in New York's new affiliation with 101 MW of generation in California would trigger Notice of Change in Status filing requirements. The commission has proposed to narrow this requirement to only the relevant geographic area: an MBR entity need not consider its and its affiliates new generation, including generation from long-term purchase agreements, in adjacent, or "first-tier" market areas, in determining whether it has reached the 100 MW threshold. 

Furthermore, the commission has extensively revised the format and information that is to be included in asset appendices, market power screens, and Simultaneous Import Limit studies.5

A commitment by an MBR seller to agree to mitigation could be substantial for generators, for which “mitigation” could effectively amount to price caps. The commission did not adopt this. –Mark Williams

The commission has also removed the requirement to file quarterly land acquisition reports, reducing the burden on filers. While the commission has required MBR applicants and holders of MBR authority to report control over sites for generation development (in initial MBR applications and triennial reauthorization filings, and in quarterly special reports), there is no record of any MBR holder or applicant ever being deprived of MBR authority solely by virtue of site affiliation, and it is uncertain what purpose the previous site-disclosure requirement served. 

One major proposed change to the procedures was not adopted in the final rule. In the Notice of Proposed Rulemaking issued in June 2014, the commission pr oposed removing the requirement for MBR entities located in a Regional Transmission Operator (RTO) or Independent System Operator (ISO) to submit market power analyses, in exchange for the MBR entities' commitments to adhere to ISO/RTO market monitoring and mitigation. Under the proposal, "RTO sellers would not have to submit indicative screens as part of their horizontal market power analyses if they rely on commission-approved monitoring and mitigation to prevent the exercise of market power."6

While effectively all MBR sellers that participate in organized ISO/RTO markets are subject to ongoing market monitoring by the applicable ISO/RTO and its market monitoring unit, not all MBR sellers are subject to the "mitigation" by an ISO or RTO of that seller's wholesale electricity pricing. A commitment by an MBR seller to agree to mitigation could be substantial for generators, for which "mitigation" could effectively amount to price caps. However, in Order No. 816, the commission did not adopt this proposal. 

Order No. 816 adopts a number of mechanical modifications to MBR filings that may take existing MBR entities some time to digest and implement. Asset appendices need no longer report some - but not all - Qualifying Facility affiliations and market power screens may exclude some - but not all - Qualifying Facility capacity. The calculation of generator capacity has changed, particularly for some intermittent generators (some of which may be Qualifying Facilities and, therefore, might be excludable from some calculations in any event). Detailed organizational charts referencing all 10 percent and greater direct and indirect owners and energy affiliates all must be supplied in essentially all MBR filings, but this requirement has been temporarily stayed.7

Conclusion

The recent changes made by the commission will require filers to adjust their methodologies for the market power screens, DPTs, and SIL studies, but most of the changes are straightforward. The detailed recommendations and clarifications in Order No. 816 indicate that the commission is scrutinizing the underlying calculations of market power analyses. In order to reduce the likelihood of a follow-up request by commission staff, filers should be sure that all assumptions in the analyses are well-founded and explained, and that the workpapers provided with the filing are organized and clear.

Order No. 816 became effective in January 2016. Utilities, attorneys, and economists, including the authors, will be watching closely to see how the new policies are actually implemented by the commission.

Endnotes:

1. Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 816, 153 FERC ¶ 61,065 (2015).

2. Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 697, 119 FERC ¶ 61,295 (2007).

3. FERC issued the underlying Notice of Proposed Rulemaking on June 19, 2014.

4. While solar photovoltaic facilities are also energy-limited, the Commission notes that "[g]iven the generation profile of solar photovoltaic facilities (i.e., output is highest during peak hours), we believe that use of nameplate ratings is reasonable for the purposes of the horizontal market power analysis." (Order No. 816 at ¶ 102).

5. The Simultaneous Import Limit, or SIL, is an input to both the market power screens and the DPT.

6. Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, 147 FERC ¶ 61,232 (2014), ¶ 36.

7. Order Partially Extending Compliance Effective Date, 153 FERC ¶ 61,337 (2015).