The 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.
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-the-meter 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 “back-stop” 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 ([email protected]) is counsel in the energy practice group at Davis Wright Tremaine LLP, based in the firm’s Washington, D.C., office.