FERC Market Based Ratemaking Update: FERC Market Based Ratemaking Update Energy Supply EAC Meeting December 2004


Topics: Topics MBR Filings Scorecard 31 utilities filed in August, September and November How did they fare? What are the policy implications? Potential Market Power Mitigation Measures Contestable Load Screen Alternative


FERC Market Power Screens: FERC Market Power Screens 4/14/04 MBR Order adopted two indicative screens to determine whether an applicant for MBR authorization has generation market power Pivotal Supplier Screen Are supplies from entities other than the applicant (including imports) sufficient to meet wholesale demand in the market? Market Share Screen Does the applicant have less than 20% of the uncommitted generation capacity that can be used to supply wholesale load in the market?


Who Has Filed?: Who Has Filed? August AEP, Alliant, Consumers Energy, Dayton P&L, Duke Energy, Duke Power, El Paso Electric, Entergy, Kansas City P&L, Pinnacle West, Public Service NM, Puget Sound, Southern Company September Avista, Empire District, Exelon, Exelon/Sithe, IDACORP, Northeast Utilities, Western Resources, Wisconsin Energy Corporation, WPS Resources November Edison Mission M&T, Indianapolis P&L, LG&E Energy Marketing, Madison G&E, Minnesota Power, Mirant, PPL Generating Companies, PPL Montana, TECO Group


Pending Filings: Pending Filings December Ameren, Aquila, Cleco, Delmarva, Dominion, DTE Energy, Florida Power, FPL Group February Dynegy, FirstEnergy, OG&E, Otter Tail, Pepco Holdings, Tucson Electric, Xcel Energy


Overall Results of MBR Filings: Overall Results of MBR Filings 31 utilities have filed for MBR authorization under the new screens (August – November) Non-RTO vertically integrated utilities (18 filed in control areas) Failed Pivotal Supplier Screen in 9% of control areas Failed Market Share Screen in almost 70% of control areas Probably higher since 4 utilities did not submit results for control areas Average market share for utilities failing screen well above FERC’s 20% market share threshold -- 47% RTO vertically integrated utilities (5) 100% passed both screen Market shares 1-15%


Detailed Results of MBR Filings: Detailed Results of MBR Filings 14 of 18 non-RTO utilities have failed the Market Share Screen in one or more of their control areas AEP, Duke Power, Empire District, Entergy, IP&L, KCP&L, LG&E, Madison G&E, Minnesota Power, Public Service NM, Southern, Tampa Electric, Western Resources, WPS Resources 6 of 18 non-RTO utilities have passed the Market Share Screen in one or more of their control areas AEP, Arizona Public Service, Avista, Idaho Power, Public Service NM, Puget Sound Non-RTO vertically integrated utilities failed the Market Share Screen in 15 of 22 control areas—68% failure rate


Detailed Results of MBR Filings: Detailed Results of MBR Filings 2 non-RTO vertically integrated utilities chose not to file for MBR authorization in their control area El Paso Electric, Wisconsin Energy 2 non-RTO vertically integrated utilities did not file Market Share Screen results for their control areas but argued for another market definition Alliant (MISO), Consumers (MECS) 2 non-RTO vertically integrated utilities failed Pivotal Supplier Screen in one of their control areas Public Service NM, WPS Resources


Detailed Results of MBR Filings: Detailed Results of MBR Filings All 5 RTO vertically integrated utilities passed both screens AEP, Dayton P&L, Exelon, Northeast Utilities, PPL Generating Companies Industrial intervenor groups raising issue that RTO should not be the default market used for screens ICAP issue Local market power issue Ineffectiveness of market monitoring process


Why The High Failure Rate?: Why The High Failure Rate? Simple math 20% threshold requires that competitive suppliers within the control area of a vertically integrated utility must have 4 times the uncommitted generation capacity of the incumbent utility available for wholesale market sales for the incumbent to pass this screen Would require extreme excess capacity within control area High probability that a vertically integrated utility outside of an RTO will fail the screen


Market Share Screen Flaws: Market Share Screen Flaws Fails to take into account off-peak demand and supply market conditions—the likelihood that surplus capacity will exist during off-peak periods Fails to consider the amount of supply that might economically serve the market in off-peak situations


Consequence of Failing the Screens: Consequence of Failing the Screens April Order allows Applicant to file supplemental historical analysis to counter failure of one or more of the screens Required content and structure of such supplemental analyses has not been articulated by the Commission Unclear whether Commission will automatically initiate Section 206 proceeding if Applicant fails one or more of the indicative screens If Commission initiates a Section 206 proceeding, Applicant can file a Delivered Price Test Estimation of capacity that can be economically delivered into a designated market Pivotal Supplier, Market Share and HHI Concentration tests must be prepared using DPT data


Consequence of Failing the Screens: Consequence of Failing the Screens If applicant fails Delivered Price Test and cannot otherwise demonstrate the lack of market power, can either – Accept default cost-based mitigation rates or Propose individual mitigation plan


Potential Mitigation Measures: Potential Mitigation Measures Mitigation options on the table (Section 203 background) Independent third-party monitoring of OATT Independent third party administration of OATT and transmission expansion process Interim transmission redispatch to ensure access by independent generators Mandatory expansion of transmission system Regional generation economic dispatch Financial generation divestiture Competitive bidding for load blocks of retail customers (addresses market foreclosure)


What’s The Solution? : What’s The Solution? Commission is facing a significant Section 206 problem given the high failure rate for Market Share Screen Major restructuring of the Market Share Screen will not be viewed by the Commission as a viable solution to the pending Section 206 problem Commission will continue to respond that the screens are for indicative purposes only and that the Applicant has the right to submit supplemental historical analyses that rebut the presumption of market power April Order allows Applicants to submit supplemental historical analyses to offset the failure of one or more of the indicative screens Structure not specified by Commission


What’s The Solution? : What’s The Solution? EEI is focusing on providing the Commission with a proposed supplemental analysis (with preparation guidelines and evaluation criteria) that can be submitted to offset a screen failure without triggering a Section 206 proceeding Contestable Load Screen Commission announced in November that they will hold a 2 day Technical Conference in January that will address generation market power screens and affiliate abuse issues (RM04-7)


Contestable Load Screen : Contestable Load Screen An historical analysis of the wholesale loads that were actually seeking competitive supply alternatives (contestable loads) along with an analysis of the competitive resources that were available to serve those loads Includes a demonstration that the contestable loads had access to the competitive resources — transmission access was available The relationship between the contestable loads and competitive resources provides a more accurate picture as to the competitiveness of the market.


Contestable Load Screen Options : Contestable Load Screen Options LSE Power Supply Portfolio Analysis Analysis of contestable load component of LSEs’ power supply portfolios and competitive supply alternatives available to LSEs within Applicant’s control area for an historic or prospective period Includes a demonstration of available transmission access by LSEs to competitive alternatives Screen criteria will focus on multiple of competitive supply to contestable loads RFP Analysis Analysis of results of RFPs conducted within Applicant’s control area over an historic period


Alternative Supplemental Screens: Alternative Supplemental Screens EEI will also propose that the Applicant will retain the right to propose alternative supplemental screens that the Applicant believes effectively rebuts the presumption of market power. For example: Market Share Screen Based On Historic Sales Off-Peak Pivotal Supplier Screen