1 FERC Presentation at NARUC Forum on Resource Procurement Chairman Pat Wood III Federal Energy Regulatory Commission May 16, 2005

2 FERC’s Responsibility Under Section 203 of the FPA Section 203: FERC has authority over the sale, lease or disposition of public utility facilities subject to FERC jurisdiction, and shall approve the same if it finds that they are “consistent with the public interest.”

3 FERC’s Responsibility Under Section 203 of the FPA—Con’t In reviewing filings under Section 203, FERC for many years has considered the effect on competition, rates and regulation.

4 FERC’s Responsibility Under the Federal Power Act--205 Section 205(a): “All rates and charges made... or received by any public utility for... the sale of electric energy... shall be just and reasonable.” Section 205(b): No public utility can grant any undue preference or advantage to any person with regard to any FERC-jurisdictional sale, nor can it maintain any unreasonable difference in rates, charges, service, facilities or in any other respect.

5 A Key FERC Policy in Implementing the FPA To establish competitive wholesale electric markets for the benefit of wholesale and thereby retail customers.

6 Market-based rates under 205 Courts have held that FERC may rely on market forces, i.e., competition, to ensure that market-based rates (MBR) are just and reasonable, and thus FERC only allows MBR when applicant can show that it has no market power or that it’s been mitigated.

7 Market-based rates—con’t FERC may consider all factors relevant to the justness and reasonableness of rates before granting MBR authority.

8 Key FERC Orders Under 205 Edgar (1991): Three examples of how to show lack of affiliate abuse: (1) head-to-head competition; (2) price evidence of what non- affiliates pay; and (3) benchmark price evidence (e.g., an index). Detroit Edison (1997): Three conditions: (1) utility can’t sell to an affiliate at lower rate than non-affiliate; (2) any affiliate discounts must be offered to similarly–situated non-affiliates; and (3) simultaneous public posting for any affiliate transaction.

9 More Key Orders Under 205 Allegheny (2004): Four non-mandatory guidelines for reviewing RFPs: transparency; product definition; evaluation criteria; and oversight by an independent 3rd party. “The underlying principle when evaluating an RFP... is that no affiliate should receive undue preference during any stage of the RFP.”

10 More Key Orders Under 205 Conectiv Energy (2004) FERC set case for hearing since affiliate was selected under RFP that didn’t meet Allegheny Guideline for independent 3 rd party oversight E.g., with no 3 rd party oversight, applicant could have eliminated non- affiliate bidders based on credit

11 More Key Orders Under 205 Mountainview/SoCalEd (2004): All affiliate long-term Power Purchase Agreements, whether market- or cost- based, must meet the Edgar standard.

12 Recent Key FERC Orders Under Section 203 Cinergy (2003) FERC approved application to transfer two Cinergy merchant generators to affiliate. But FERC had competitive concerns because the ability of merchant to be acquired by franchised utility affiliate gives that merchant a “safety net” not available to others

13 More Key Orders Under 203 Ameren Energy/Union Electric (2003) After a hearing, FERC approved Ameren request to acquire two merchant generators Applied the Edgar standard, and the Allegheny RFP guidelines, to affiliate plant acquisitions. Objective is “to ensure that the conduct of competitive solicitations involving affiliates does not harm competitive markets by favoring those affiliates and foreclosing opportunities to competition.”

14 More Key Orders Under 203 Oklahoma Gas & Electric (2004): IOU acquisition of a generator and step-up transformer needed for native load could harm competition; case settled, with IOU offering mitigation, e.g., transmission upgrades, redispatch to help competitor

15 Complaints to FERC of affiliate abuse that can cost customers $ Non-public sharing of info between affiliates that causes lower-cost competitors to lose out in RFP Non-affiliate generators not selected in RFP because they didn’t know what product to bid on or how to structure bid Non-affiliate loses in RFP because of discriminatory credit conditions imposed by IOU

16 Complaints to FERC of affiliate abuse that can cost customers $ -- con’t Unregulated merchant generator sells power at excessive price to franchised IOU affiliate – captive wholesale and retail customers foot the bill IOU sets up RFP evaluation to include non- price factors (like tx access) that preference affiliate bidders Merchant generator has access to real-time balancing and back-up power from IOU affiliate

17 Complaints to FERC of affiliate abuse that can cost customers $ -- con’t IOU buys distressed affiliate merchant rather than buying cheaper non-affiliate power – captive customers pay more and competition harmed by “safety net” IOU sells power from its cheapest ratepayer- financed generation to marketer affiliate – captive customers are left paying for power from remaining higher-cost generation

18 The extent of state review over affiliate transactions “There is considerable variation among the states regarding the type of regulatory oversight over affiliate transactions.”– Wisconsin Commissioner Robert Garvin at FERC tech conf of 1/28 There are also differences among the states re: the scope of authority over affiliate transactions

19 Conclusion FERC has a responsibility to protect wholesale customers and competition and to ensure market behavior that is not unduly discriminatory. FERC has a national perspective and responsibility that is as valid as an individual state’s perspective and responsibility.

20 Conclusion—con’t FERC recognizes states’ responsibility for, and jurisdiction over, resource adequacy and resource portfolio decisions States have various means of achieving resource adequacy, some that don’t involve FERC jurisdiction (e.g., self-build) and some that do (e.g., wholesale sales to affiliates)

21 Conclusion—con’t FERC and the states need to work cooperatively to exercise their overlapping responsibilities in a complementary fashion. Win-Win solutions should be the goal!

22 Conclusion-con’t One possible solution is for FERC and the states to work together to develop a standardized process (e.g., for RFPs) which FERC would grant deference to if relied on by an applicant.