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Industry News

FERC Orders Market Power Investigations

LCG, December 16, 2004--The Federal Energy Regulatory Commission (FERC) issued orders yesterday for sixteen companies that had submitted market-based rate filings, which include tests of the potential for a company to exercise market power with respect to generation. Seven utilities failed one or more of the new market power tests, and the failure will institute Section 206 proceedings under the Federal Power Act, with the rebuttal presumption that the utilities have market power.

The utilities that failed the market power tests are: Duke Power, Southern Company, Entergy, Alliant Energy, American Electric Power, Kansas City Light and Power, and Public Service of New Mexico. In addition, Pinnacle West Energy and Puget Sound Energy were found not to have submitted the necessary information and will receive further scrutiny. At risk is the ability of each utility to sell wholesale electricity at market-based rates, rather than at the incremental cost of generation.

The FERC spent considerable time evaluating and revising its methods for analyzing market power. In July, the FERC issued its Order on Rehearing that confirmed and clarified the new tests to assess market power. In the Order on Rehearing, the FERC stated, "Market-based rate authority is not a right. The Commission may grant such authority under the FPA only to applicants who demonstrably lack market power." Utilities must file new market analyses at least every three years to preserve the right to sell power at market-based rates.

The two new screening tests analyze a market participant's total amount of uncommitted capacity available for wholesale sales in a market. The first screen is the pivotal supplier analysis, which examines a participant's generation market power during the peak hour of the year, and is based on a control areas annual peak demand. The hours leading up to that point are the most likely time that a participant will be a pivotal supplier.

The second screen is the wholesale market share analysis that examines the market share of a participant in all seasons. Both screens consider native load obligations, operating reserve requirements and other commitments of the participant. If the participant passes both indicative screens, it is presumed that generation market power does not exist. If the participant fails either screen, it is presumed that the generation market power exists.

Each utility that failed a market power test now has 60 days to either (1) file an additional analysis (the Delivered Price Test); (2) file a mitigation proposal developed for its specific circumstances, or (3) inform the FERC that it will adopt the default cost-base rates or propose other cost-base rates, together with supporting information. The FERC may also order a utility to refund overcharges.

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