FERC Filings
Request for Clarification Or, In the Alternative, Rehearing of EPSA and the Western Power Trading Forum re: Mountainview Power Co. LLC
Comments
Competitive Suppliers opposed the SCE application in this proceeding, stating that any PPA between a regulated utility and its affiliate must satisfy the Edgar standard, under which the Commission requires a showing that the buyer has chosen the lowest-cost supplier from among the options presented, taking into account both price and non-price terms, for approval of transactions between affiliated buyers and sellers. In recent cases involving Ameren, Cinergy, Entergy and Southern, the Commission has clearly expressed the importance of meeting these standards in every market in order to ensure that competition is not unduly harmed. This standard is critical because the long-term markets, here represented by PPA arrangements, provide the necessary price signals for development of new resources and investments in infrastructure maintenance and enhancement. More importantly, due to the Commission’s pro-competitive initiatives over the past several years, thousands of megawatts of new generation has been constructed. Consumers will not receive the benefits from the use of such generation unless that generation can compete to serve load. Hence, the competition for the procurement of long-term power supplies must be fair, accurate and transparent if procurement decisions are to be appropriate and free of affiliate bias or utility monopsony buying power.
In the Commission’s February 25 Order, the SCE PPAs are conditionally accepted, with the Commission noting that “[t]he rate presented in the PPA is a cost-based rate, which, heretofore, has not triggered the type of analysis laid out in Edgar.” However, the Order goes on to explain that, due to changes in the electricity markets since the implementation of Edgar in 1991, “[the Commission] will henceforth require that all affiliate long-term (one year or longer) power purchase agreements, whether at cost or market, be subject to the conditions set forth in Edgar.” It does not appear from this analysis that the possible harmful impact of this transaction on competition has been fully acknowledged by the Commission. By approving this transaction and adopting a prospective-only application of Edgar, the Commission is approving a regulated utility-affiliate transaction that may have a detrimental impact on competition in the California market. As EPSA stated before, it is appropriate and necessary that the Commission fully scrutinize this transaction under the Edgar standard. To differentiate between market-based and cost-based rate transactions when assessing the impact on competition is making a distinction without a difference. In all cases, when undue preferences are granted to utility affiliates, the potential for harm to competitive wholesale markets is present. As the Commission notes, application of Edgar to all future PPAs which involve a regulated utility and its affiliate will “protect wholesale power customers and guard against potential abuse of self-dealing in a market where cost-based rates may exceed market rates…”
Further, Competitive Suppliers urge the Commission to utilize this opportunity to clarify the Edgar standard itself. As noted previously, affiliate transactions (as PPAs or asset transfers) have played a key role in several prominent proceedings and litigation before the Commission over the past few years. These cases hinge on the application of the Edgar standard because the Commission has rightly recognized that the fair, accurate and transparent solicitation of supply or assets is critical to ensuring confidence among market participants and regulators that the best possible deal has been obtained for electric utility consumers and that competition has not been impeded in the relevant market area.
In Edgar, the Commission noted that it may be possible for a utility to demonstrate that it had not unduly favored its affiliate through a market test, which uses a bid or benchmark analysis to determine whether the transaction in question was one that could have resulted through arms-length negotiations between an unaffiliated buyer and seller. Specifically, the Commission presented three nonexclusive means to demonstrate absence of affiliate abuse: 1) evidence of direct head-to-head competition between the affiliated seller and competing unaffiliated suppliers in either a formal solicitation or in an informal negotiation process; 2) evidence of the prices that nonaffiliated buyers were willing to pay the affiliated seller for similar services; or 3) benchmark evidence of market value, based on both price and non-price terms and conditions, of contemporaneous sales made by nonaffiliated sellers for similar services in the relevant market.
In several cases currently before the Commission, whether or not an application has met Edgar conditions, and whether such a showing has been made, lies at the center of lengthy and costly litigation proceedings. This multitude of cases presents the risk that inconsistent standards may be set and different conclusions may be drawn by different sets of FERC trial staff and Administrative Law Judges. Hence, Competitive Suppliers recommend that the Commission explicitly clarify and describe how an Edgar showing can be made by providing key issues, definitions and information requirements that will indicate a utility’s affiliate PPA or asset transfer is the result of a fair, transparent and accurate evaluation process. This may include a description of specific RFP characteristics that will lead to Commission approval under the Edgar standard.
A guidebook on competitive power supply solicitations, published by EPSA this year (see attached), can assist the Commission in these efforts. Included therein are specific RFP milestones and characteristics that can be required to ensure a fair solicitation process takes place. For instance, the use of a collaborative process to adopt consensus-based solicitation rules upfront ensures the credibility of the RFP. Further, it is essential that an independent, third-party monitor oversee the solicitation to guarantee that all steps of the process are fair and accurate.
It may also benefit the Commission to send its own staff to monitor certain utility procurement processes in order to allow the Commission to obtain first-hand insight into the development of a competitive procurement process. Such oversight also would allow for the detection of problems earlier in the process, providing contracting parties with the opportunity to repair or change any aspects of a solicitation that may result in transactions which impede competition.
As the Commission has repeatedly and correctly stated, vigorous, robust wholesale competition is plainly in the public interest. While the Edgar standard upholds that interest by establishing a threshold standard that a utility must meet to demonstrate a lack of affiliate abuse in the procurement of competitive supply, there are demonstrated deficiencies in the demonstration that the Edgar standard has been met. Competitive Suppliers urge the Commission to clarify Edgar standard requirements, including the utilization of an independent third-party monitor to oversee the solicitation process. To the extent that the Commission does not make such clarifications, Competitive Suppliers request rehearing for the reasons stated herein.