FERC issues new criteria for electricity market participation

New rules serve to nudge generators into RTO agreements

By Sylvie Dale
Online Editor

November 21, 2001 – To help prepare the way for nationwide participation in regional transmission organizations, FERC has established a new method by which generator market power will be measured. One commissioner’s dissenting comments have already set the stage for controversy on the new rule.

The Federal Energy Regulatory Commission on Tuesday issued a multi-faceted order changing the way generators are measured for participation in deregulated electric markets.

The order is largely a result of electricity price problems in California last year and the complaint on several companies’ behalf that the existing method of weighing generators’ market clout did not take transmission into consideration and had other problems.

Supply margin assessments will take the place of the older hub-and-spoke analysis method for all generators seeking to gain or keep market-based rate authorization. This does not include generators selling electricity into ISO or RTO systems, which will have their own FERC-approved rules.

Hub-and-spoke analysis measures the market power of a generator by totaling its market share of installed and uncommitted generation in a particular market. In order to be authorized to charge market-based rates, the generator has to show its market share is 20 percent or less in each of the markets. The assessment to a limited extent also considers whether the applicant has transmission market power, whether there are barriers to entry, and whether there is reciprocal dealing.

But after recent events, the latest FERC stance is that the hub-and-spoke analysis doesn’t provide enough protection for customers against generation market power abuse.

“The hub-and-spoke analysis worked reasonably well for almost a decade when the markets were essentially vertical monopolies trading on the margin and retail loads were only partially exposed to the market,” the agency said in its report.

“Since that time markets have changed and expanded. While we intend to undertake a generic review of markets and market power in general., we conclude that in the interim a more appropriate test should be applied to ensure that customers are protected against market power in generation.”

The supply margin assessment (SMA) screen considers transmission constraints, to more accurately determine what supply can reach buyers to compete with the company applying for market-based rate authorization.

Another major difference is that the SMA establishes a threshold based on whether at least some of the applicant’s capacity must be used to meet the market’s peak demand.

“When an applicant is pivotal, it is in a position to demand a high price above competitive levels and be assured of selling at least some of its capacity,” FERC said.

Hinting at events that happened during the California power crisis of the last few years, FERC said “the supply margin is sensitive to the potential for the applicant to successfully withhold supplies in the market in order to raise prices.”

Commissioner Linda K. Breathitt was the only FERC member to vote against the interim approach “I just don’t see the need for all of this,” she commented. “The tail is wagging the dog, all to the detriment of a sensible replacement of the hub-and-spoke method. I would jettison the interim analysis and get to work to develop a long-term solution as quickly as possible.”

Reviewing several generators, FERC determined that American Electric Power Co , Entergy Corp and the Southern Companies all exercise market power within their control area markets because their generation is needed to meet the market’s peak demand.

If the generators want to qualify for market-based rate authorization in the future, they would have to comply with efforts to mitigate their market power and that their affiliates in the market.

FERC also attempted to review Mirant, but said it did not provide enough information for the analysis and directed the company to supply additional data within 15 days of the order, or by Dec. 5.

If the interim approach stands after “compliance, rehearing and possible court review,” as Breathitt suggests may happen, the companies will have to sell off their uncommitted capacity on the spot market at cost-based rates.

Breathitt said this threat may dissuade generators from building or purchasing new generation for fear that they may have to sell off extra power too cheaply.

“I share my colleagues’ concern that the hub-and-spoke method may not adequately protect against the exercise of market power; and I believe the commission must take action to undertake an inquiry into improving our analysis,” she commented.

“However, I do not support the approach of applying the commission’s newly designed supply market assessment screen, and requiring the mitigation set forth in this order, as an ‘interim’ measure until the commission is able to complete a broader generic inquiry.”

Breathitt said FERC should have at least waited for industry comment before proceeding with a rule, and that this rule may have a chilling effect on development of additional capacity even in areas where it is sorely needed.

“I believe one effect might be to cause utilities to ‘mothball’ older ‘pivotal’ units in order to pass the screen. The new analysis could have the effect of slowing divestiture by rendering unattractive the purchase of ‘pivotal’ generation.”

All participating companies would have to maintain records related to their market-based rate status on their web sites and include certain information in their quarterly reports as well.

AEP, Entergy and Southern Companies will be required to make a new filing with the commission by Dec. 5 demonstrating that they are in compliance with all aspects of the market power mitigation under the new rules.

To read the full report, visit FERC’s web site at http://www.ferc.fed.us/.


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