Energy Legal Blog

FERC Tweaks, Codifies Market-Based Rate Program

After prolonged deliberations on its wholesale market-based rate program, FERC issued its Final Rule on the matter June 21, 2007.  The 670-page rule will become effective sometime in late August or early September ― 60 days after its publication in the Federal Register. 

Notably, in the Final Rule:

• As proposed in last year's Notice of Proposed Rulemaking (NOPR), FERC transformed its four-prong market power analysis into a more traditional horizontal and vertical market power analysis.  The "horizontal" analysis asks whether sellers have market power in generation, while the "vertical" analysis asks whether sellers have market power in transmission or can erect other entry barriers.  FERC codified restrictions on affiliate transactions ― the former fourth prong ― and will require tariff provisions that require market-based rate sellers to abide by these regulations.
• FERC divided sellers into two categories—Category 1 sellers, who are power marketers or power producers that own or control less than 500 MW of generation in a region and are not affiliated with franchised public utilities, and Category 2 sellers, who are all other sellers.  Category 1 sellers are no longer required to file triennial market power analyses, but instead FERC will monitor their market positions through change-in-status filings and electronic quarterly reports (both of which continue to be required of all sellers).
• FERC will now review sellers' triennial market power analyses on a rotating regional basis.  To facilitate its review, FERC divided the country into six regions, and will review two regions per year according to a schedule provided in Appendix D to the Final Rule.
• FERC retained its existing indicative screens for generation market power.  The "wholesale market share screen" measures a seller's share of the relevant geographic market; the "pivotal supplier screen" determines whether a seller is pivotal in the market and unilaterally can raise prices.  If a seller fails either screen, FERC presumes market power, which the seller can either attempt to refute or acquiesce in mitigation.
• FERC rescinded the exemption for generation facilities constructed after July 9, 1996.  Generators had argued the exemption was needed to encourage construction of new generation, but FERC disagreed, finding that as time goes on, more and more generating units would be subject to the exemption, making detection of market power more difficult.
• FERC provided guidance on identifying who "controls" generation for purposes of the both generation market power analysis and the change-in-status reporting obligation.  FERC declined to adopt generic presumptions of control, but instead will stick with a fact-specific analysis.  FERC's guiding principle is that if an entity can prevent generation from reaching a market, it "controls" that generation. 
• Transmission owners (and sellers affiliated with transmission owners) can continue to show they have mitigated transmission market power by operating under an open-access transmission tariff (OATT).  Although not automatic, FERC will now consider OATT violations as grounds for revocation of the seller's market-based rate authority so long as there is a "nexus" between the tariff violation and the market-based rate authority.  FERC generally will not revoke a seller's market-based rate authority for its transmission affiliate's tariff violation. 
• The newly codified affiliate restrictions continue to prohibit power sales between a franchised public utility with captive customers and affiliated power marketers with market-based rate authority (now known as "market-regulated power sales affiliates") without prior FERC approval.  
• The Final Rule modifies and codifies the existing "code of conduct" from market-based rate tariffs.  The regulations now specifically bar utilities from using third parties to circumvent the affiliate restrictions.  In addition, FERC created a specific exception to allow utilities to share with affiliates senior officers and directors, certain legal and administrative personnel, and field and technical personnel so long as these employees do not act as "conduits" for impermissible communications. 
• A seller found to have market power in one market, requiring mitigation in that market, will be allowed to sell at market-based rates into neighboring markets so long as it commits not to sell to an affiliate and have that affiliate sell it back into the mitigated area (so-called "ricochet" transactions). 
• FERC declined suggestions that it use the cost-based rates of the WSPP Agreement to mitigate market power.  Instead FERC determined that those rates may no longer be just and reasonable and convened an investigation into the WSPP Agreement in a separate docket. 
• FERC removed restrictions and posting requirements currently imposed on third-party sales of ancillary services, in the hopes of encouraging competitive ancillary services markets.