Some want a tighter grip on generators, but FERC should steer clear.
Some want a tighter grip on generators, but FERC should steer clear.
Fortnightly Magazine - October 1 2001

Some want a tighter grip on generators, but FERC should steer clear.

The turmoil surrounding the California electricity crisis has prompted calls for the Federal Energy Regulatory Commission (FERC) to reexamine its approach to analyzing market power and granting market-based rate authority to wholesale generators. 1

In a series of dissenting opinions, 2 Commissioner William Massey has waged a campaign against what he calls the agency's "outdated and unreliable" hub-and-spoke analysis 3 for assessing market power.

It is now clear that this issue will become part of the regulatory agenda for the newly reconstituted Commission, because Massey's new colleagues, Chairman Pat Wood, III and Commissioner Nora Mead Brownell, also have expressed interest in this initiative. 4 Yet this debate should not occur in isolation from the commission's global initiatives to promote open-access transmission and competitive markets for wholesale power.

The Larger Agenda

Commissioner Massey would have FERC place the issue at the top of its agenda. 5 But does it merit that level of priority?

In short, the emergency is over. With its mitigation orders, the commission has already acted politically and substantively to address the crisis-real or perceived-in wholesale electric power markets.

Even if we concede that hub-and-spoke has failed, the commission has now imposed temporary market mitigation measures in the regional markets that are most completely restructured and where, not coincidentally, there exists the greatest concern about power producers exercising market power. 6 Also, we can expect to see a significant amount of generating capacity come on line within the next several years in virtually all of these markets. 7 That should make it more difficult for power producers to extract scarcity rents for that last megawatt.

Instead of immediately building a better mousetrap for screening market power, I suggest that FERC should put market structure atop the agenda. After all, that's one of the principal lessons of the California debacle.

For reasons now known all too well, the California market structure was fatally flawed. That, plus a lack of investment in new generating capacity, caused power prices to skyrocket. Get the market structure right and there will be less of a need for examining whether individual generators possess market power.

Some Want the Merger Screen

The commission's July 11th Sunshine meeting featured a lively discussion of possible alternatives to the hub-and-spoke analysis. In particular, in his comments and in dissenting opinion from in the commission's Sierra Pacific order, Commissioner Massey offered some ideas for revamping the test for market-based rates (MBR). Here are some of the issues that arise in connection with these ideas.

It was recognized that almost any alternative to the hub-and-spoke test (with the possible exception of blanket MBR authority that FERC has granted for natural gas wholesales) will be more complex and resource intensive. That raises practical considerations, since the commission in the past has authorized MBRs some 900 times using the hub-and-spoke test. Even accepting a considerable overlap in terms of multiple authorizations for affiliated entities within the same geographic market, a case-by-case approach would eat up a lot of time and money.