POWER November 2014 - 22

Reevaluating the Wholesale
Market Power Analysis
Caileen Gamache
T
he Federal Energy Regulatory Commission (FERC) serves as
the gatekeeper to wholesale power markets in interstate commerce.
The process to obtain and retain authority to sell into
these markets at market-based rates (MBR) can be onerous. Any
failure to fully comply with FERC's regulations could result in participation
restrictions and civil penalties of up to $1 million per day,
per violation. Recently, and with a stated purpose of streamlining
the process, FERC issued a Notice of Proposed Rulemaking (NOPR)
proposing to significantly revise the requirements for sellers seeking
to obtain and maintain MBR authority. Several industry participants
filed responsive comments. Although FERC is not required to act on a
NOPR, the substantial industry reaction foreshadows changes ahead
in several key areas that will likely, on balance, reduce the compliance
burden associated with MBR authority.
Eliminating Market Power Indicative Screens in ISOs/
RTOs
To acquire and retain MBR authority, a seller must demonstrate
that it cannot exercise horizontal market power to impair competitive
markets. The analysis involves preparation of two indicative
market power screens: (1) a pivotal supplier analysis
to evaluate the potential of a seller to dominate a geographic
market based on uncommitted capacity during periods of annual
peak demand; and (2) a market share analysis, which measures
whether the seller has a dominant position in the market in any
of the four seasons based on its uncommitted capacity compared
to that of the entire market. If a seller passes both screens, then
there is a rebuttable presumption that it lacks market power. If
it fails one or both screens, it may present evidence to disprove
the results or explain how its ability to exercise market power will
be mitigated by other circumstances. Notably, FERC has found
that an entity may rely upon applicable market power mitigation
procedures of a Regional Transmission Organization (RTO) or
Independent System Operator (ISO) to demonstrate satisfactory
mitigation of market power concerns.
The recent NOPR proposes to eliminate the burden of preparing
and filing the market power screens when a seller affirmatively
states that it relies on RTO/ISO mitigation procedures
as evidence that it cannot exercise market power. This change
could significantly reduce compliance costs. The majority of commenters
encourage FERC to adopt the proposal, and some even
asked FERC to consider extending the exemption to sellers in
non-RTO/ISO markets that have implemented sufficient market
power mitigation measures. A few notable industry trade groups
and even one ISO Independent Market Monitor, however, disagree
with FERC that relying upon an ISO/RTO's mitigation measures is
adequate to protect against market power concerns. Given the
strong support for this proposal, but influential dissent, FERC will
likely conduct further analysis of the market mitigation measures
of each RTO/ISO and may end up applying a hybrid version of its
original proposal.
22
Capacity Counting
The NOPR includes several instructions for counting generation
capacity. Capacity size is significant because it can affect
the results of the indicative screens and can trigger
reporting obligations-including an obligation to conduct
and file a new market power analysis. Entities often have
elaborate internal processes for tracking capacity changes
that may require modification. Many of the comments oppose
these revisions, alleging they will overstate existing
capacity in a market and will increase compliance burdens.
The proposals include:
■ Requiring entities to report the full capacity of affiliated generation
assets, regardless of whether the facility is owned or
controlled by multiple entities.
■ Directing filers to calculate the capacity of similar resources in
the same manner in a single filing (for example, if the seasonal
rating is used for a thermal unit, it must also be used for all of
the entity's other thermal units).
■ Directing entities to account for the capacity of behind-themeter
generation and qualifying facilities under 20 MW (both
of which are generally exempt from FERC's market-based rate
requirements).
■ Reversing current policy by directing sellers to account for
long-term firm power purchases even if the purchase does not
confer control of the capacity.
Streamlining Ongoing Compliance Obligations
The NOPR proposes to eliminate reporting requirements attendant
to a seller's acquisition of land for new generation
capacity development. The requirement, which was originally
adopted to track whether land acquisition could be used as a
barrier to entry into energy markets, has caused significant
industry confusion. The NOPR reports that the compliance
burden to sellers and FERC staff has heavily outweighed any
accrued benefits.
Another popular proposal is the revision of existing regulations
that require a seller to file a detailed report whenever it
becomes affiliated with a new entity that owns or controls generation.
The revised requirement would only require a report if
the affiliation results in cumulative net increase of 100 MW or
more in the relevant markets.
FERC will likely adopt these streamlining proposals in light
of industry's positive response and FERC's interest in preserving
its own resources. FERC also retains considerable " backstop "
authority to request additional information at any time
in the event there is a concern that a seller is impairing proper
market functions. ■
-Caileen Gamache (caileengamache@dwt.com) is counsel in
the energy practice group at Davis Wright Tremaine LLP, based in
the firm's Washington, D.C., office.
www.powermag.com
POWER | November 2014
http://www.powermag.com
POWER November 2014

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