FERC recently proposed to streamline its market power rules so that generators in markets operated by Regional Transmission Organizations and Independent System Operators would no longer need to demonstrate a lack of horizontal market power in order to charge flexible market-based rates.  Instead, FERC will rely on the existing market monitoring and mitigation measures approved for those markets to guard against exercises of market power.

This proposal will significantly simplify the regular market power filings required of generating resources in RTO/ISO markets.  FERC estimates that, after the proposal is in effect, the total estimated annual reduction in cost burden to respondents will be $2,226,388, or $42,406 per respondent

Background

To sell electricity in wholesale markets at flexible market-based rates instead of cost-based rates, a generation resource owner must demonstrate to FERC that its resources cannot be used to exercise market power.  A demonstration must be made in the initial application and again every three years with respect to horizontal market power, i.e., the ability to raise prices through control of generation resources, and vertical market power, i.e., control over inputs to electricity, transmission and other entry barriers.

With respect to horizontal market power, FERC has adopted two data-driven “indicative screens”: the wholesale market share screen and the pivotal supplier screen.[1]  Passing both screens creates a rebuttable presumption that the seller lacks horizontal market power in the relevant markets.  If either of the screens is failed, the seller may offer other evidence to show it is unable to exercise market power, or propose mitigation measures such as price caps.

FERC’s proposal

Under a recent Notice of Proposed Rulemaking, FERC would revise its rules to relieve sellers from the requirement to submit the indicative screens for sales in markets operated by RTOs or ISOs.  These markets have FERC-approved market monitoring and mitigation provisions designed to protect against the exercise of seller market power and have been found by FERC to ensure just and reasonable rates.  RTO/ISO market power mitigation is based on real-time data, triggered in response to specific resource offers or system characteristics, and tailored to the market rules of each RTO/ISO.  With these monitoring and mitigation measures already in place, FERC finds that the submission of the indicative screens yields little practical benefit when compared to the associated burden on industry.

Importantly, FERC’s proposal applies only to sales in markets that are operated by an RTO or ISO.  Four of the RTOs/ISOs — PJM, New York, New England and Midcontinent —  operate markets for energy, ancillary services and capacity and thus FERC’s proposal applies to sales of all of these products in those markets.  The proposal applies in a different way in the  California ISO (CAISO) and the Southwest  Power Pool (SPP).  CAISO and SPP do not now operate centralized capacity markets and thus do not have tariff-based mitigation in place for capacity sales.  Accordingly, FERC’s proposal does not apply to sellers of capacity in CAISO and SPP; those sellers must still submit the indicative screens.  But sellers of solely energy or ancillary services in CAISO and SPP may rely on the tariff-based mitigation provisions in place for those markets and need not submit the indicative screens.

FERC’s proposal does not affect the other aspects of its monitoring programs.  Sellers in the markets affected by the NOPR must still address vertical market power in their initial applications for market-based rates and in updates to that analysis every three years.  In addition, all sellers must still file quarterly reports of sales and prices, and report to FERC any pertinent changes in ownership, affiliation and control of resources soon after such changes occur.

Comments on the NOPR are due 45 days after publication in the Federal Register.  Note that during the partial government shutdown, the Federal Register is only publishing documents directly related to the performance of governmental functions necessary to address imminent threats to the safety of human life or protection of property.

 

 

[1] The wholesale market share screen measures whether a seller has a dominant position based on its share of uncommitted generation capacity in the relevant market in each season.  The pivotal supplier screen measures the seller’s ability to exercise market power unilaterally based on uncommitted capacity at the time of the annual peak demand.

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Photo of Bud Earley Bud Earley

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers…

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers, a natural gas pipelines and hydroelectric facility licenses, and LNG export authorizations.

Working with Covington teams, Mr. Earley has provided expert advice and analysis to investment firms, utilities, independent power producers, project developers, customers, marketers and U.S. and international energy companies,

Prior to joining Covington, Mr. Earley served for over 30 years in various staff positions at the Federal Energy Regulatory Commission (FERC). While at the FERC, Mr. Earley was instrumental in developing and applying policies regarding the transition of the electric utility industry to competition, including policies regarding independent power producers, transmission access, standard generator interconnection procedures, organized electricity markets, mergers and market-based rates.