While wholesale market platform is debated, other FERC initiatives move ahead

James P. Fama, Edison Electric Institute

The Federal Energy Regulatory Commis-sion’s (FERC) plans for a new wholesale power market platform (WMP) have captured the attention of the power industry for the past year. During the same time, however, a number of other, more narrowly focused FERC initiatives have progressed or have been issued:

“- interconnection rules for large and small generators;
“- standards of conduct for transmission providers and their affiliates; and
“- market power remedies.

Each of these promises to change how the power industry functions—in some ways, almost as significantly as the WMP might.

Now, with Congress likely deciding the future of the WMP as part of a larger energy bill this fall, it is a good time for electric utilities to take a closer look at these less publicized initiatives and how they might transform the country’s wholesale electricity markets in the years ahead.

Large generator interconnection “Order No. 2003”

Under a new rule issued this past July, all public utilities that own, control, or operate transmission lines will be required to offer non-discriminatory, standardized interconnection service to generators larger than 20 MW. This rule clarifies that the generator pays for facilities on its side of the point of interconnection. The rule also sets out procedures that the transmission provider and the interconnection customer must follow. Finally, the rule establishes the legal rights, milestones for the project’s completion, and a process for resolving disputes.

EEI has worked to build an industry consensus around a much-needed model for interconnection agreements and procedures. Overall, this FERC ruling represents considerable acceptance of these efforts.

Although the rule does provide greater certainty for all parties, some issues need clarification:

“- How will the IRS handle tax issues surrounding partnerships and corporations?
“- How will credits be handled for generator-installed upgrades?
“- What constitutes a direct connect vs. a network upgrade?
“- How will a variety of cost recovery issues, including who will qualify for participant funding, be addressed?

Standards of conduct

Initiated in 2001, FERC has proposed expanding the standards governing relationships between regulated transmission providers and all their energy affiliates seeking to limit transmission market power. The initiative had not moved forward while FERC has been focused on WMP, but it has been revived and FERC has indicated it will take formal action later this year.

This notice of proposed rulemaking (NOPR) would establish a single set of conduct standards for both the electric and gas industries to govern the relationships between regulated transmission providers and all of their energy affiliates—not just those engaged in marketing or sales functions. Importantly, it would broaden the definition of energy affiliate to include any entity affiliated with a transmission provider.

FERC staff has also recommended the application of an “automatic imputation” rule to shared employees. This would likely eliminate the Order No. 889 exemption that permitted the use of shared employees. This could impede communications to senior management and lead to companies having to disaggregate in order to comply.

As it is written, this NOPR goes beyond what is needed to deal with current imperfections in the system. It’s a broad proposal that requires significant clarifications to ensure coordinated planning and service.

Market power screen/supply margin assessment

In late 2001, FERC proposed a new supply margin assessment (SMA) test to determine whether a power supplier was dominant in its service area. If the supplier passed the test—no market power—then it could get market-based rates. If it didn’t pass, then it would get cost-of-service rates. FERC has proposed that all suppliers selling through FERC-approved RTOs would receive market-based rate authority.

Flaws in this proposed new market power screen would cause utilities to fail the test and lose their ability to sell at market-based rates in their service area. A large generation company operating in a non-ISO/RTO area would face similar difficulties.

Market power remedies

Related to the SMA is an initiative intended to punish sellers who exercise market power or manipulate the market. FERC’s Federal Power Act Section 206 proposal would more clearly define prohibited market behavior. If a seller engaged in such behavior, it would be stripped of any unjust profits and potentially lose its ability to engage in market-based transactions. Because there are no time limits placed on the commission, this proposal would in essence create an open-ended refund liability for the seller.

Although provisions to protect against market power are welcomed, the FERC tests to prove it are vague. The open-ended refund provision opens the door to considerable regulatory uncertainty, and with it, a potential drop in investment in new generation.

Fama is executive director, energy delivery, with Edison Electric Institute. More information about the Institute can be found online at www.eei.org.

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