FERC Filings
EPSA's Post-Technical Conference Comments on Market-Based Rates for Public Utilities
Comments
A. Generation Market Power
The two generation market power indicative screens – the pivotal supplier test and the market share analysis – have been the subject of two technical conferences and several rounds of written comments before FERC. In EPSA’s opinion, it is time to move beyond the battle over crafting the perfect screens. First, it’s likely no such perfect screens exist; stakeholders and the Commission have gone through several iterations to get to today’s screens and yet complaints exist. Second, in the end, the screens are only indicative measures. Failure of one or both of the screens does not brandish an entity with market power, but merely raises a flag that further analysis is necessary in order to assess an entity’s ability to exercise market power. In fact, the screens can be viewed inversely -- as a mechanism to allow those entities that clearly have no market power or market power potential to bypass in-depth analysis by the Commission or market participants, saving time and resources where there is no concern about market power. While the “next step” of analysis in the market power test is resource-intensive, that is appropriate in order to protect consumers, market participants and competitive markets. The current state of wholesale electricity markets requires, then, that the indicative screens not be an aperture letting everything pass, but rather a sieve that catches potential problems for further examination.
As it is time to accept the indicative generation market screens and move on, so it is time to put the battle over calculating the native load exemption for these tests to rest. The current market power tests recognize utilities’ native load obligations, operating reserves and reliability needs. However, after the discussions of the January 27 conference, it should be clear that there is no perfect approach to measuring and accounting for native load, either for the indicative screens or the Delivered Price Test.
As several stakeholders have noted on numerous occasions, changing the calculation of native load to reflect a full deduction based on the peak period for demand does not adequately reflect that the same generation is often available for wholesale off-system sales. While a peak period reference for all the market power tests may include all load built and designated to serve native load, much of that generation supply is available – and sold – in the wholesale market at market-based rates, competing against independent generation. In fact, it is probable that a certain portion of the supply ostensibly dedicated to serve native load is sold at wholesale far more often than it is relied upon to serve those native load obligations. This causes a competitive imbalance in the wholesale marketplace when this supply, financed by ratepayers and protected under retail cost assurance, is made available on a competitive basis. This concern should not be exacerbated by further protecting such load under the market power test.
EPSA appreciates that utilities own generation supply that has been developed to meet their state-regulated native load obligations. However, this load is also being sold into competitive wholesale markets through market-based rate transactions. As there is no way to perfectly account for native load as actually served by an entity, the Commission has invoked a range of calculations for the indicative generation market power screens and the Delivered Price Test that serve to account rationally for native load exemption calculations. If these calculations remain intolerable to market-based rate applicants and all peak period supply earmarked for native load is to be excluded from the market power screens, that same supply should also be excluded from market-based rate wholesale sales. Such generation supply not utilized to serve native load obligations may be sold into the wholesale market at cost-based rates, but cannot rely on market-based rate treatment for these off-system sales if it has been specifically excluded from an entity’s market power assessment.
B. Transmission (or Vertical) Market Power
The potential for dominant transmission owners outside of RTOs to foreclose access to transmission service by other wholesale market participants and transmission-dependent utilities has been well-recognized by the Commission. The Commission has concluded that open-access transmission tariffs (OATTs) implemented under Order No. 888 were inadequate to support efficient and reliable operation of the transmission grid and promote competitive markets. 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.
This determination, however, has not been relied upon or utilized in market-based rate authority cases currently before the Commission. As recently as December 2004, the Commission allowed several market-based rate authority applicants undergoing triennial reviews to pass the transmission market power prong based solely on the existence of a FERC-approved OATT on file. This occurred in several cases, some of which are highly protested cases before the Commission based on transmission access and market power concerns.
Further, as discussed and cited at length in EPSA’s post-technical conference comments filed on January 21, 2005, numerous market participants and representatives have testified to the Commission that transmission market power is severely compromising access to customers in the wholesale marketplace, as well as access by customers to competitive supply sources. Such testimony belied the assertion, made during the December 7, 2004 technical conference by a utility representative, that a paucity of complaints or case law negates the existence of vertical market power concerns in today’s markets. Further, FERC’s reliance on the complaint process to monitor challenges to market-based rate authority is also problematic: the process is time-consuming, marred by inadequate documentation and a general lack of transparency to market participants, and disruptive to the effort to maintain positive commercial relationships.
As the Commission has determined and market participants have attested, it is of paramount importance that entities granted and relying on market-based rate authority from the Commission offer true, robust open access to their transmission service. This access is critical for market participation by all suppliers; denial of such access is tantamount to market foreclosure. In the absence of the Commission seriously addressing transmission market power, vertically integrated utilities can limit competitive alternatives and, when competitive alternatives no longer exist, charge wholesale customers unrestricted (and higher) prices. Hence, in order to pass the transmission market power prong, there must be demonstrable comparability of transmission and market access among all sellers. Such comparability can be demonstrated or required through any number of the following measures.
First, transmission owners and operators must 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. Third, there are 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, at one time, Order No. 888 sufficed to ensure the provision of comparable transmission service. Today, an independent RTO/ISO is clearly the ideal vehicle to ensure service comparability. 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; 3) process generator interconnection and transmission requests; and 4) generally monitor the market for transmission market power. Open access and comparability were the major tenets of Order 888 over eight years ago, and the key to allowing market-based pricing. Such transmission access is the lynchpin of workable markets today as well, and continued approval of market-based rate authority must be contingent on the current provision of comparable, open access transmission service.
C. Barriers to Entry
As has become clear over the past several months, all four analytical prongs are interconnected, each having some impact on several aspects of competitive wholesale electricity markets and spilling over into the realm of the others. This is certainly the case when addressing barriers to entry, which involves buyer market power, market foreclosure and access issues. At its core, a competitive wholesale market is one in which 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 must require that a provider granted market-based rate authority provides access to – and does not foreclose competitors from – both transmission and the marketplace. Accordingly, load serving entities that are transmission providers must, in addition to providing enhanced transmission services, 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.
D. Affiliate Abuse or Reciprocal Dealing
As addressed in the above discussion of barriers to entry, the role utilities play as buyers, often the only buyers, impacts the ability to engage in affiliate abuse and reciprocal dealing. According to David DeRamus, Principal, Bates & White,
[A]ffiliate abuse is one of the main underlying means by which market power can be exercised in wholesale markets, particularly in markets without a fully functioning RTO. Furthermore, even the potential for affiliate abuse results in self-reinforcing market power problems, since it perpetuates artificial advantages of an incumbent and establishes a barrier to entry for new competitors.
Similar to the barriers to entry prong, affiliate abuse comprises several behaviors. Affiliate abuse occurs when a market participant is able to advantage its affiliated resources through discriminatory transmission access, discriminatory information sharing, cross-subsidization within the corporate family (offering a safety net to affiliated competitive operations), shifting risk from unregulated operations to regulated affiliates (receiving cover from state-regulated retail customers) and exercising buyer power due to control over native load franchises. Such abuse may impact prices in the market, or may result in distressing assets that are soon up for sale with only one likely buyer in sight.
With so many concerns in play under the auspices of affiliate abuse or reciprocal dealing, it is inappropriate for the current affiliate abuse analytical prong to rely on a “check-box” approach – the existence of a corporate code of conduct is insufficient and does not eradicate the possibility for affiliate abuse or reciprocal dealing. It is the Commission’s responsibility to guard against the ability of utilities and their affiliates to abuse market power by setting the price, refusing to deal with competitors, engaging in affiliate transactions that unfairly exclude other suppliers or establishing discriminatory terms or conditions in their bidding programs. When conditions exist that allow for such dealings, the Commission is justified in either denying an entity market-based rate authority or accepting adequate mitigation of those conditions, such as the institution of a well-designed competitive procurement process or economic dispatch of the transmission system in a manner that allows all generation to compete to serve load.
E. Mitigation
While the revocation of market-based rate authority can result in an entity’s return to cost-based rates for its wholesale electricity products, applicants must recognize that the Commission also offers the ability for entities to propose mitigation other than cost-based rates to resolve market power concerns. Such mitigation tools can include divestiture of targeted assets; establishment of an independent market monitor as discussed above; and reliance on independently-administered competitive solicitation or auction processes. The list of available mitigation scenarios is not exhaustive, and several alternatives may satisfy the Commission and market participants that an entity cannot exercise market power. Hence, while several market participants have sounded the death knell of a return to a cost-based rate regime, there are several intermediate steps that may be taken which can circumvent the need for that default solution.