FERCs Recent Orders on Market Power in Wholesale Electric Markets Stephen P. Rodgers, Director, Division of Tariffs and Rates South Office of Markets, Tariffs & Rates Federal Energy Regulatory Commission

FERCs April 14 Orders on Market Power One order established new interim generation market power screens and mitigation A second order initiated a new generic rulemaking proceeding on all aspects of market-based rate (MBR) authorizations

High Level Overview SMA test replaced by two interim screens that are indicative of generation market power (MP) If applicant passes both screens, presumption of no MP, but interveners can provide evidence to disprove If applicant fails either screen, presumption of MP, but applicant can provide evidence to disprove If applicant found to have MP, it can offer mitigation or cost-based rates

Indicative Screen #1: Uncommitted Pivotal Supplier Measures applicants ability to exercise MP at time of the annual peak Screen is adept at measuring MP exercised unilaterally, in spot markets, and at peak R ecognizes applicants commitments to native load, operating reserves and long-term firm wholesale sales. Deduction for native load is based on the average of the daily native load peaks during the peak month

Indicative Screen #2: Uncommitted Market Share Measures the potential of an applicant to exercise MP in all four seasons Screen is adept at measuring if applicant is dominant, MP at both peak and off-peak, and the potential for coordinated interaction S creen recognizes applicants commitments to native load, operating reserves, long-term firm wholesale sales, and planned outages Applicant passes the screen if its market share of uncommitted capacity less than 20%

What happens if applicant passes both screens? Rebuttable presumption applicant doesnt have MP but interveners can present evidence to disprove (including historical sales data, and evidence that competing suppliers cant access the market) If no evidence to rebut the presumption, then applicant obtains/retains its MBR

What happens if applicant fails either screen? Rebuttable presumption applicant has MP... but applicant can either present evidence to disprove (including historical sales data and the Delivered Price Test), OR... applicant can propose mitigation to eliminate its ability to exercise MP. Applicant passes DPT if HHI is under 2500 If applicant found to have MP, its denied MBR in all geographical markets where it has MP

Cost-based rate mitigation If applicant is denied MBR, it must use cost-based rates – either default or an applicant proposal approved by FERC. Three types of default cost-based rates, based on length of sale: 1. Incremental plus 10% for sales of one week or less

Cost-based rate mitigation (cont) 2. Embedded cost up to rates based on cost of the unit(s) involved for sales more than one week and less than one year 3. Rates not-to-exceed embedded cost of service for sales of one year or more – and contract must be approved by FERC before transacting

Relevant Geographic Market Default markets are any control areas where applicant has generation, plus each first-tier market Applicant/interveners can provide evidence to show actual relevant market is smaller or larger than the control area Flexibility to recognize evidence of load pockets

Transmission limitations Total Transfer Capability (TTC) used under SMA is abandoned for simultaneous transmission import capability TTC unrealistic because its not possible for that amount of generation to be imported at once The simultaneous transmission import capability should also reflect limits such as stability, voltage, CBM and TRM

Historical data Historical data used because its more objective, readily available and less subject to manipulation than projections Applicant must use most recent 12 months historical data A snapshot in time approach

No RTO/ISO exemption. However,... Applicants can incorporate the mitigation theyre subject to in RTO/ISO as part of their MP analysis Applicants located in RTOs/ISOs with sufficient market structure and a single energy market may regard entire footprint of the RTO/ISO as the relevant market Those with such markets now are ISO-NE, NYISO, PJM, and CAISO

No safe harbor size exemption However... Any applicant can submit a streamlined application or simplifying assumptions, where appropriate (e.g., if you pass even without allowing competing imports, then no need to consider such imports)

Recognition of hydro and Western issues Applicants can de-rate their hydro capacity (because such plants are energy limited) Those de-rating must use a 5-year average capacity factor and a sensitivity test using the lowest capacity factor in the last 5 years Recognition that the West may have larger regional markets than typical, and applicants can present evidence to that effect – interveners can challenge.

Revocation of mitigation that had been ordered under SMA No requirement to post incremental or decremental costs No must offer requirement of uncommitted capacity No mandatory purchase requirement No requirement for independent OASIS administration But, these issues may be addressed in other proceedings

Native load protections Recognition given to utility commitments to native load and operating reserves Ensures that utilities will not be overcharged when they purchase power in wholesale markets Provides greater transparency into how utilities with MP derive rates, so state regulators can be sure retail customers are getting fare share of revenue credits from wholesale sales

Implementation process AEP, Southern Company and Entergy have 60 days to file revised market power studies FERC will issue subsequent orders on those filings A screen failure would... o create rebuttable presumption of MP, o initiate a FERC 206 investigation, and o make market-based rates subject to refund

Implementation process (cont) But... refunds would only be due if FERC ultimately found MP in a later order (i.e., after reviewing applicants DPT and/or mitigation proposal) FERC will apply these same procedures to other pending MBR filings – a later order will provide details

New generic rulemaking case on MBR (Docket No. RM04-7) Will address adequacy of FERCs current 4-part test for granting MBR: generation, transmission, barriers to entry and affiliate abuse Needed since much has changed in industry in 15 years, and there are no comprehensive codified regulations for obtaining MBR Will examine issues on vertical market power and ancillary services

New generic rulemaking case on MBR (cont) Kick-off technical conference on June 9 Staff proposed another technical conference soon on competitive solicitation processes

Summary New MP screens reflect lots of due process: rehearing requests, 3 rounds of comments, a staff policy paper and a 2-day technical conference Many procedural options ahead for applicants and interveners, with symmetrical rights and opportunities for each to make their case Balances regulatory certainty with flexibility for those seeking MBR authority More to come through the new generic rulemaking proceeding