FERC Filings
EPSA Comments on FERC's Post-Technical Conference on Market-Base Rates for Public Utilities
Comments
During the technical conference, several speakers expressed competing views regarding whether transmission market power (or, more accurately, vertical market power) and barriers to entry are, in fact, severely compromising access to customers in the wholesale marketplace, as well as access by customers to competitive supply sources. Paul Bonavia, President, Commercial Enterprises, Xcel Energy, representing Edison Electric Institute (EEI), asserted that there is a paucity of case law, facts or evidence to support claims of substantial discrimination through the exercise of vertical market power in the marketplace. According to Mr. Bonavia, nothing more than “vague allegations” have been made, that do not warrant “generic changes to an existing policy which is just in the process of demonstrating its own effectiveness.”
However, this assertion was belied by the testimony of Ann Kimber, Technical & Environmental Systems Engineer, Iowa Association of Municipal Utilities, representing Midwest Municipal Transmission Group and the Transmission Access Policy Study Group (TAPS). Rather than “vague allegations”, Ms. Kimber cited several specific examples to support her view that, “[u]nder the Open Access Transmission Tariff, the grid has become increasingly weak and it has foreclosed power supply choices.” In testimony reiterating that point, Mr. John Hilke of the Federal Trade Commission noted, “[The FTC] view is not that [Order No. 888] isn’t a useful thing to have had in place, but it is insufficient.” Similar conclusions were drawn by Mr. Rickly Bittle of the Arkansas Electric Cooperative Corporation and Dr. Craig Roach of Boston Pacific Company, Inc.
The absence of a plethora of complaints on file is reasonably explained by recent Commission actions strongly suggesting that inadequate documentation and a general lack of transparency associated with certain discriminatory or preferential behavior create substantial obstacles for competitive market participants. For instance, the Commission has recently issued two audit reports finding violations of agency rules on transmission service. When discussing these audit reports at the December 15, 2004 FERC Sunshine meeting, Commissioner Nora Brownell specifically noted that the violative behaviors uncovered during the Commission staff’s audit would not have necessarily been discoverable or apparent to market participants. Sue Kelly, Vice President of Regulatory Affairs for the American Public Power Association, explained at the December 7 conference that the arduous, time-consuming nature of the complaint process undermines its usefulness as a vehicle to receive recompense or comparability of service in a timely manner. Further, she explained network customers’ natural reluctance to directly challenge transmission providers, observing that “[i]t’s often simpler and safer to go along to get along than it is to pull the tiger by the tail, especially when you live in the cage of the tiger.”
In light of the above discussion point from the technical conference, and the Commission’s initiation of the instant rulemaking proceeding, it is particularly troubling to EPSA that even in market-based rate authority review cases currently before the Commission, transmission market power, barriers to entry and affiliate abuse are screens far too easily passed. This appears to be due to the lack of codification and comparable emphasis for these three prongs. As a result, entities to too easily meet vague tests set out for these prongs. Until FERC corrects this problem, simple declarations that FERC-approved OATTs are on file, and should be presumed to adequately mitigate market power, will continue to divert attention away from serious market power considerations.
This is clearly an imprecise and inadequate process, which the Commission must correct as soon as possible. The Commission’s reliance on complaint proceedings to resolve market participants’ concerns about utility transmission market power is an unacceptable approach to determining whether companies are entitled to market-based rate authority. In response to a generation market power analysis filed by Entergy Services Inc., the Commission issued an order initiating a Section 206 proceeding on transmission access concerns stemming from the company’s available flowgate capacity (AFC) and Generator Operating Limits (GOL) procedures.
Noting that it had accepted Entergy’s OATT in a 1996 order, and “[b]ased upon Entergy’s representation”, the Commission found that the company satisfied the transmission market power standard requisite for market-based rate authority. Further, while expressly recognizing that concerns had been raised concerning Entergy’s ability to exercise transmission market power, the Commission nonetheless referred that issue to a separate complaint proceeding. EPSA contends that, rather than being more “appropriately raised” in a separate complaint proceeding, cognizable claims of transmission market power went directly to the heart of Entergy’s filing for market-based rate authority. EPSA respectfully urges FERC to reexamine how it will address concerns about transmission market power, as well as barriers to entry and affiliate abuse, in future market-based rate authority and triennial review proceedings. EPSA offers several pragmatic suggestions below.
A. Vertical Transmission Market Power
The potential for dominant transmission owners outside of RTOs and ISOs to deny access to transmission service by other wholesale participants and transmission-dependent utilities has been well-documented by the Commission. In Order No. 2000 and the Standard Market Design NOPR, the Commission concluded that the open-access transmission tariffs (OATTs) implemented under Order No. 888 were inadequate to support the efficient and reliable operation of the transmission grid and to promote competitive markets. In Order No. 2000, the Commission expressly found that “functional unbundling does not change the incentives of vertically integrated utilities to use their transmission assets to favor their own generation and, accordingly, that the pro forma tariff no longer mitigated transmission market power.”
Based on such findings, the Commission has found that merely having an Order No. 888 pro forma tariff on file is no longer adequate to mitigate transmission market power. Clearly, the interplay of generation and transmission market dominance allows some utilities to effectively foreclose competition, thus undermining the Commission's goal of promoting effective competitive wholesale markets. This foreclosure may be evidenced in any number of ways, including:
• delaying or precluding access to transmission
services;
• delaying transmission upgrades or expansions;
• refusing to provide network access to competitors;
• providing discriminatory access to information;
• preferential dispatch of utility or affiliate-
owned generation;
• providing preferential and less costly
transmission or dispatch services or
opportunities to affiliates.
Having identified and discussed the fundamental problems associated with the legacy of the vertically integrated utility paradigm, FERC, working with all industry stakeholders, needs to develop and implement meaningful solutions. During his presentation at the technical conference, John Stout, Senior Vice President of Reliant Energy, Inc., representing EPSA, outlined several key steps that should be considered as the Commission moves forward. First, transmission owners and operators must be encouraged to use best available transmission technology so that, among other things, power flows are not unfairly limited by “worst-case scenario”, overly conservative thermal line rating calculations.
Second, FERC should promote the use of best available transmission practices and encourage the use of operational solutions to problems that exaggerate transmission constraints, thereby unnecessarily limiting power flows. In this connection, Mr. Stout explained that while most transmission operators urge their planners and engineers to utilize less costly operational solutions, independent power producers are often required to finance major facility upgrades. The discriminatory impact and market access-limiting nature of this situation is obvious—and unacceptable. Third, Mr. Stout described the reliability and economic benefits that would result from requiring transmission operators to avoid curtailing transactions by simply identifying generators who could be incremented and scheduling flows to offset congestion on the grid.
Finally, independent regional structures must be established throughout the country to assist the Commission in monitoring wholesale power markets. An independent RTO/ISO is clearly the ideal vehicle. In the absence of an RTO/ISO, the Commission should appoint or approve an independent third party to: 1) operate and administer the OASIS; 2) be responsible for calculating and posting TTC and ATC; and 3) process generator interconnection and transmission requests. The Commission must ensure that all transmission uses are subject to the same open access terms and that neither transmission access nor markets are foreclosed to supply or load. Open access and comparability were the major tenets of Order 888 over eight years ago, and remain lynchpins of workable markets today, inside or outside of organized markets.
B. Barriers to Entry
Any market power analysis must be carefully designed to ensure that suppliers have access to the market. In general, the more suppliers in a market, the less likely any one entity can exercise market power. This maxim holds true in the inverse as well, as the buyer market power of some vertically integrated utilities has increased to levels that will, in fact, erect barriers to entry of both new supply and available wholesale load into the marketplace. If a utility holds a dominant purchasing position in the wholesale marketplace that allows it to exert excessive and discretionary buying power (of both supply and supply generation facilities), the exercise of market power now lies with the buyer, not the seller. This problem is exacerbated when such a purchasing utility also owns, controls or dispatches its own proprietary supply and the relevant transmission system.
At a minimum, then, the Commission should not grant market-based rate authority to a transmission provider, or its affiliate, unless that provider provides access to – and does not foreclose competitors from – both transmission and the marketplace. Accordingly, transmission providers should be required to facilitate accessible long-term markets through all-source competitive procurement processes, preferably via state-created and supervised means, with independent third party oversight.
The Commission should also focus its attention on transmission planning and expansion processes as a critical component of any barrier to entry screen. The transmission planning and expansion process can be the forum where irrevocable decisions are made about resource alternatives. These processes must be regional, independent, open and transparent; provide an opportunity for input by all market participants; and not create any unfair advantage for either transmission or generation. Robust, independent and mandatory regional planning is crucial to ensuring access between supply and load, and hence is critical to the both the assessment and mitigation of the ability to exercise market power.