FERC has streamlined its rules so that generators in the organized markets operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) no longer need to demonstrate a lack of horizontal market power in order to charge flexible market-based rates. Instead, FERC will rely on existing market monitoring and mitigation measures in place in those markets to guard against exercises of market power. This rule will be of interest to power generators; it will significantly simplify the market power filings required of generating resources in RTO/ISO markets.
The new rule was proposed earlier this year, as described in a post on this blog. FERC adopted the rule as proposed but made a few minor clarifications.
To sell electricity in wholesale markets at flexible market-based rates instead of cost-based rates, a generation owner must demonstrate to FERC that its resources cannot be used to exercise 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. The new rule applies only to horizontal market power demonstrations.
FERC’s existing policy employs two data-driven “indicative screens” to measure horizontal market power. Passing both screens creates a rebuttable presumption that the seller lacks horizontal market power in the relevant markets. Failing either screen creates a rebuttable presumption that the seller has horizontal market power, in which case the seller may offer evidence to show it is unable to exercise market power or propose mitigation measures such as price caps.
The new rule
FERC’s new Final Rule relieves sellers from the requirement to submit the indicative screens with respect to sales in markets operated by RTOs or ISOs. These markets already have in place FERC-approved market monitoring and mitigation provisions designed to protect against the exercise of seller market power. These provisions are 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.
Four RTOs/ISOs — PJM, New York, New England and Midcontinent — operate markets for capacity in addition to energy and ancillary services. The new rule applies to sales of all of those products in these four RTOs/ISOs, including sales made under bilateral contracts. However, the California ISO (CAISO) and the Southwest Power Pool (SPP) do not operate centralized capacity markets and thus do not have tariff-based mitigation in place for capacity sales. Accordingly, sellers of capacity in CAISO and SPP must still submit the indicative screens with respect to capacity; they may rely, however, on the tariff-based mitigation in place for sales of energy and ancillary services.
A wholesale electricity seller generally must submit the indicative screens in its initial application for market-based rate authority, in an updated showing required every three years required for some sellers, and whenever there is a significant change in circumstances. For the covered sellers, the new rule eliminates the need to prepare screens for all three filings. According to FERC staff, the new rule would eliminate the need to file indicative screens in more than half of the 593 three-year updates submitted in the last three years.
FERC’s new rule does not affect the other aspects of its market monitoring programs. Sellers in RTO/ISO markets must still provide detailed information on their generation portfolios, address vertical market power in their initial applications and updates, file quarterly reports of sales and prices, and report to FERC any significant changes in circumstances such as pertinent changes in ownership, affiliation and control of resources.
The rule is effective 60 days after publication in the Federal Register.
 A 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. A pivotal supplier screen measures a seller’s ability to exercise market power unilaterally based on uncommitted capacity at the time of the annual peak demand.