Publications

On May 19, 2006, the Federal Energy Regulatory Commission ("FERC" or the "Commission") issued a notice of proposed rulemaking ("NOPR") reforming the four-pronged analysis for determining whether a wholesale seller of electric energy, capacity or ancillary services is qualified to make sales at market-based rates, among other things.[1]  A brief summary of the major provisions the NOPR proposes to revise follows:

Horizontal Analysis 

In its April 14, 2004 order, the Commission adopted on an interim basis two screens for determining whether a seller has market power in a generation market -- an uncommitted pivotal supplier analysis and an uncommitted market share analysis.  Sellers which do not pass the two screens would be rebuttably presumed to have market power, but would be allowed to present additional evidence in support of their cases in the form of a delivered price test ("DPT").  As a follow-up effort for those revisions, the current NOPR proposes to:

• Adopt in most respects and codify the interim standards for granting market-based rates;
• Repeal the current exemption from market power analysis for generation constructed since January 1, 1996;
• Allow sellers to present evidence that the relevant geographic market is different from that relied upon by the Commission;
• Change the native load proxy for the market share screens from the minimum peak day in the season to the average peak rate load, averaged across all days in the season; and
• Allow applicants for market-based rate authority the option of using seasonal capacity instead of nameplate capacity in their analysis.

Vertical Market Power

In analyzing transmission market power, the Commission proposes to continue the policy under which an open-access transmission tariff ("OATT") is deemed to mitigate a seller’s transmission market power.  However, the NOPR would make a violation of the OATT cause to revoke a seller’s market-based rate authority in addition to any other applicable remedies.  The NOPR explains that if FERC revokes a transmission provider’s market-based rate ("MBR") authority within a particular market because of an OATT violation, each affiliate of the transmission provider with MBR authority will have that MBR authority revoked in that market as well.

In addition, the NOPR proposes eliminating the other barrier to entry prong of the four-pronged test, and instead including it as part of the vertical market power analysis.  The NOPR continues to require the submission of a description of affiliate ownership or control of inputs to electric power production (e.g. fuel supplies within the relevant control area; ownership or control of gas storage or intrastate transportation and distribution of inputs to electric power production; and control of sites for new capacity development in the relevant market).  The NOPR proposes not to consider FERC-regulated interstate pipelines.  The NOPR also requires the seller to make an affirmative statement that it has not erected barriers to entry to the relevant market and it cannot do so.

Affiliate Abuse

In continuation of its efforts to prevent abuse of market power in sales by and to affiliates, the NOPR proposes to:

• Discontinue analyzing affiliate abuse as a separate prong of the market power analysis, and instead codify an explicit requirement that any seller with MBR authority must comply with affiliate sales restriction provisions;
• Require that the NOPR’s affiliate sales abuse provisions be satisfied on an ongoing basis as a condition of obtaining and retaining MBR authority;
• Require that power sales between a franchised public utility and any of its non-regulated power sales affiliates be pre-approved by the Commission;
• Codify code of conduct restrictions to help protect against cross-subsidization by captive customers of non-regulated power sales affiliates; and
• Treat energy and asset managers acting on behalf of a franchised utility or affiliates as the franchised utility or affiliates, respectively, for the purpose of complying with the affiliate power sales prohibition and the code of conduct requirements.

Market-Based Rate Implementation, Tariff, and Notice of Change in Status

The NOPR would streamline the MBR program by modifying requirements for which sellers must file the triennial market power review currently required of all sellers.  In addition, the NOPR proposes adopting a generic corporate family tariff, and seeks comments on notice of change in status requirements.  Specifically, the NOPR proposes to:

• Establish two categories of sellers for market power analysis.  Category 1 sellers would consist of power marketers and producers that own or control 500 megawatts of generating capacity or less in the aggregate, and are not affiliated with any public utility with a franchised service territory.  Category 2 sellers would include all other sellers.  Under the NOPR, Category 1 sellers would no longer be required to file regular triennial reviews.  The Commission would rely on change in status reports and ongoing enforcement monitoring to determine whether these sellers have developed market power.  Category 2 sellers would still be required to file regular triennial reviews;
• Analyze all MBR sellers in the same region concurrently in order to ensure consistency in data used to evaluate Category 2 sellers;
• Adopt an MBR tariff of general applicability for all MBR sellers in a corporate family; and
• Order that an entity (such as an asset manager or other such entity) that controls generation from which jurisdictional power sales are made is required to have a rate on file with the Commission in order not to violate Section 205 of the Federal Power Act.
• In addition, the NOPR seeks comments on, among other things, whether it should make certain generic findings, or create certain generic presumptions, regarding indicia of control.

Mitigation, Waivers, and Ancillary Services Sales

The NOPR indicates that FERC may impose default cost-based mitigation on sellers with market power, and seeks comments on such mitigation.  Specifically, the NOPR seeks comments on the rate methodology for designing cost-based mitigation; discounting; protecting customers in mitigated markets; and sales by mitigated sellers that "sink" in unmitigated markets.

With respect to waivers, the NOPR seeks comments on whether FERC should continue to grant waivers of financial accounting requirements and a blanket authorization to assume liabilities and issue securities.  Also, in the case of loss of MBR authorization, the NOPR proposes that waivers will remain in effect for an additional 60 days. 

In addition, FERC proposes retaining its policy on ancillary services sales at MBR outside certain organized markets (CAISO, ISO-NE, PJM, and NYISO), and seeks comments on whether FERC should revise its current approach.

Comments on this NOPR must be submitted 60 days after publication in the Federal Register, by August 7; reply comments are due 30 days thereafter, by September 6.  If you have any questions regarding the contents of this update, please contact Katherine Zeitlin at (202) 887-1546.