Energy Law

FERC Mostly Affirms Market-Based Rate Program

By Tracy Davis

On April 21, FERC issued an order generally affirming its market-based rate program, promulgated last June in Order No. 697.  FERC left many of its prior determinations in place, including much of the analysis sellers must provide in order to receive or maintain authority to sell electric energy, capacity, and/or ancillary services at market-based rates. 

In particular, FERC affirmed its decision to combine its prior four-pronged analysis into an evaluation of horizontal and vertical market power.  FERC will continue its approach of using "indicative" screens to determine both a seller's wholesale market share and whether the seller is a "pivotal" supplier within the relevant geographic market.  If a seller fails to pass either of these screens, FERC will presume the seller has market power within that market and require the seller to either (a) refute that it has market power or (b) adopt mitigated (i.e., cost-based) rates for that market.  FERC also affirmed its decision to remove questions about the relationship between market-based rate sellers and their affiliated franchised public utilities from the market-based rate review program, and instead to codify those requirements in FERC's regulations as ongoing obligations that sellers must continue to meet.

FERC did offer certain clarifications or revise certain of its prior determinations on rehearing.  One of FERC's major changes was to allow a seller that has been presumed to have market power in the short-term to continue to show that it does not have market power, and thus may continue to charge market-based rates, with respect to its long-term contracts.  To do so, a seller is required to show that the buyer has other viable alternatives to purchasing power under the contract.  Additionally, with respect to FERC's affiliate restrictions, FERC granted rehearing on its adoption of a prohibition on two-way information sharing between market-based rate sellers and affiliated franchised public utilities with captive customers, determining instead that to adopt a one-way prohibition, i.e., the utility may not provide information to the market-based rate seller.  A few FERC's other notable clarifications included:

? FERC clarified that sellers may make use of ISO/RTO mitigation and/or market monitoring in order to show they do not possess market power and that such mitigation and monitoring will be presumed to be sufficient to address market power concerns, although other parties may present evidence otherwise. 

? FERC made certain clarifying changes with respect to the horizontal market power analysis, which examines whether a seller has generation market power in generation.  In particular, FERC clarified the data that it will rely upon in this analysis.  FERC generally affirmed its decision to rely solely on historical data to determine whether a seller has market power.  However, FERC conceded that it will consider, on a case-by-case basis, "clear and compelling evidence" that certain changes in relevant geographic markets should be taken into account.  Additionally, FERC also provided several clarifications to the transmission import studies that sellers must provide to account for uncommitted generation capacity in their relevant markets.

? FERC clarified that sellers are not required to report on firm transmission rights or congestion contracts (collectively, FTRs) as part of their analyses of their vertical market power, which examines whether a seller has market power with respect to transmission or can erect other barriers to entry.

? FERC codified definitions of "affiliate" and "captive customers" in its regulations, and clarified that the affiliate restrictions in its regulations generally supersede prior "codes of conduct."

Full post as published by Energy Legal Blog on May 02, 2008 (boomark / email).