[Federal Register: March 11, 2002 (Volume 67, Number 47)]
[Notices]               
[Page 10904-10907]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr02-71]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL01-118-000]

 
Investigation of Terms and Conditions of Public Utility Market-
Based Rate Authorizations; Notice of Staff Conference Agenda

March 1, 2002.
    As announced in the Notice of Staff Conference issued on February 
25, 2002, Commission staff will hold a conference on March 11, 2002 to 
address the comments and reply comments that were filed in this 
proceeding. The purpose of this conference is to determine whether and 
how the proposed tariff condition can be modified to address legitimate 
concerns that have been raised by commenters while, at the same time, 
protecting customers against unjust and unreasonable rates that may 
result from anticompetitive behavior or the exercise of market power. A 
key question to be considered is whether the proposed tariff condition 
can be modified to adequately protect customers on an interim basis 
until such time as the Commission adopts other measures to ensure 
competitive markets, including standard market design rules (with 
market-power mitigation rules where appropriate) and the establishment 
of RTO market monitoring units. At that time, a determination could be 
made as to whether a tariff condition will continue to be needed.
    The conference will start at 9:30 a.m. and adjourn at 1:30 p.m. It 
is scheduled to be held in the Commission meeting room at the Federal 
Energy Regulatory Commission, 888 First Street, NE, Washington, DC The 
conference is open for the public to attend.
    An agenda of the conference that includes a list of conference 
panelists is appended to this notice as Attachment A. In addition, a 
staff paper that provides an overview of the comments and identifies 
possible modifications to the tariff condition is appended to this 
notice as Attachment B. Those who wish to submit comments following the 
conference may file written comments,

[[Page 10905]]

limited to 20 pages in length, by March 22, 2002.

Filing Requirements for Paper and Electronic Filings

    Comments, papers, or other documents related to this proceeding may 
be filed in paper format or electronically. Those filing electronically 
do not need to make a paper filing.
    For paper filings, the original and 14 copies of the comments 
should be submitted to the Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE, Washington DC 20426 and 
should refer to Docket No. EL01-118-000.
    Documents filed electronically via the Internet must be prepared in 
WordPerfect, MS Word, Portable Document Format, or ASCII format. To 
file the document, access the Commission's website at www.ferc.gov, 
click on ``E-Filing'' and then follow the instructions for each screen. 
First time users will have to establish a user name and password. The 
Commission will send an automatic acknowledgment to the sender's E-mail 
address upon receipt of comments. User assistance for electronic filing 
is available at 202-208-0258 or by E-mail to efiling@ferc.fed.us. 
Comments should not be submitted to the E-mail address.
    All comments will be placed in the Commission's public files and 
will be available for inspection in the Commission's Public Reference 
Room at 888 First Street, NE, Washington DC 20426, during regular 
business hours. Additionally, all comments may be viewed, printed, or 
downloaded remotely via the Internet through FERC's Homepage using the 
RIMS link. User assistance for RIMS is available at 202-208-2222, or by 
E-mail to rimsmaster@ferc.fed.us.

Opportunities for Listening to and Viewing the Conference Offsite and 
Obtaining a Transcript

    The conference will be transcribed. Those interested in obtaining 
transcripts should contact Ace Federal Reporters at 202-347-3700.
    The Capitol Connection will broadcast the conference live via the 
Internet and by phone. To find out more about The Capitol Connection's 
Internet and phone bridge, contact David Reininger or Julia Morelli at 
703-993-3100 or go to www.capitolconnection.gmu.edu.
    Live and archived audio of the conference will also available for a 
fee via National Narrowcast Network. Live audio is available by 
telephone at 202-966-2211 and by subscription on the Internet at 
www.hearing.com. The Internet audio will be archived and available for 
listening after the event is completed. Billing is based on listening 
time.
    Anyone interested in purchasing videotapes of the conference should 
call VISCOM at 703-715-7999.
    Questions about the conference program should be directed to: Saida 
Shaalan Office of Markets, Tariffs, and Rates Federal Energy Regulatory 
Commission 888 First Street, NE Washington, DC 20426 202-208-0278 
Saida.Shaalan@ferc.fed.us

Linwood A. Watson, Jr.,
Deputy Secretary.

Attachment A

Agenda--Conference on Investigation of Terms and Conditions of Public 
Utility Market-Based Rate Authorizations

[Docket No. EL01-118-000]

I. Opening Remarks--9:30 a.m.-10 a.m.

     David Hunger, Economist, Office of Markets, Tariffs and 
Rates, Division of Rates and Tariffs, West
     Jerome Pederson, Energy Industry Analyst, Office of 
Markets, Tariffs and Rates, Division of Issue Identification and 
Resolution Management
     Joyce Kim, Staff Attorney, Office of General Counsel

I. Panel Discussion--10 a.m.-11:30 a.m.

     Steven Cadwallader, Connecticut Department of Public 
Utilities Control
     Julie Simon, Vice President of Policy, Electric Power 
Supply Association
     Scott M. Harvey, Director with LECG, LLC
     John C. Hilke, Economist and Electricity Project 
Coordinator, Bureau of Economics, Federal Trade Commission
     Mark M. Jacobs, Goldman Sachs and Company
     Gerald Norlander, Director, Public Utility Law Project, 
National Association of State Utility Consumer Advocates
     Robert O'Neil, Counsel for National Rural Electric 
Cooperative Association

Break 11:30 a.m.-11:45 a.m.

III. Open Discussion (Open to any interested participant)--11:45 a.m.-
1:30 p.m.

Attachment B

Staff Paper--Conference on Investigation of Terms and Conditions of 
Public Utility Market-Based Rate Authorizations

[Docket No. EL01-118-000]

I. Commission's Proposal in November 20, 2001 Order

    In the November 20 Order in this proceeding,\1\ the Commission 
noted that it has become increasingly concerned about the potential 
that public utilities with market-based rate authorization might, 
under certain circumstances, exercise market power or engage in 
anticompetitive behavior that could result in unjust or 
unreasonableness rates. The Commission proposed to take steps now to 
minimize the potential for any such market power abuse or 
anticompetitive behavior to protect customers against possible 
unjust and unreasonable rates. In particular, the Commission 
proposed to revise all existing market-based rate tariffs and 
authorizations to include the following provision: ``As a condition 
of obtaining and retaining market-based rate authority, the seller 
is prohibited from engaging in anticompetitive behavior or the 
exercise of market power. The seller's market-based rate authority 
is subject to refunds or other remedies as may be appropriate to 
address any anticompetitive behavior or exercise of market power.''
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    \1\ 97 FERC para. 61,220 (2001).
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    The Commission stated that anticompetitive behavior or exercises 
of market power include behavior that raises the market price 
through physical or economic withholding of supplies. The November 
20 Order explains that ``physical withholding'' occurs ``when a 
supplier fails to offer its output to the market during periods when 
the market price exceeds the supplier's full incremental costs,'' 
and ``economic withholding'' occurs ``when a supplier offers output 
to the market at a price that is above both its full incremental 
costs and the market price (and thus, the output is not sold).''
    The Commission solicited initial and reply comments on its 
proposal. More than 90 comments (initial and reply) were received. 
Some commenters argue that the Commission's proposed tariff 
condition is overly broad or vague and will create uncertainty in 
the marketplace. Others argue that the condition does not go far 
enough. An overview of the comments and a list of possible 
modifications to the tariff condition is provided below.
    The purpose of this conference is to determine whether and how 
the proposed tariff condition could be modified to address 
legitimate concerns that have been raised by the commenters while, 
at the same time, satisfying the Commission's concern that customers 
be protected against unjust and unreasonable rates that may result 
from anticompetitive behavior or the exercise of market power. A key 
question to be considered is whether the proposed tariff condition 
can be modified to adequately protect customers on an interim basis 
until such time as the Commission adopts other measures to ensure 
competitive markets, including standard market design rules (with 
market-power mitigation rules where appropriate) and the 
establishment of RTO market monitoring units. At that time, a 
determination could be made as to whether a tariff condition will 
continue to be needed.

II. Overview of Comments

    The November 20 Order proposed a tariff condition prohibiting 
anticompetitive behavior or the exercise of market power. The 
November 20 Order highlighted two ways to exercise market power: 
physical and economic withholding of output. The November 20 Order 
stated that withholding supplies can also occur when a seller is 
able to erect barriers to entry that limit or prevent

[[Page 10906]]

others from offering supplies to the market or that raise the costs 
of other suppliers. Examples would include denying, delaying, or 
requiring unreasonable terms, conditions, or rates for natural gas 
service to a potential electric competitor in bulk power markets. 
Some commenters argue that the proposed definition of both economic 
and physical withholding is vague and overly broad. These commenters 
generally argue that because the definitions do not consider certain 
physical, institutional and regulatory constraints, suppliers will 
be subject to penalties and/or refunds in many cases where they were 
simply making reasonable business decisions, not exercising market 
power.

A. Economic Withholding

    The November 20 Order defined economic withholding as occurring 
when a supplier offers output to the market at a price that is above 
both its full incremental costs and the market price (and thus, the 
output is not sold).
    Some commenters claimed these problems with identifying economic 
withholding:
     Pay-as-bid markets: Much of the market activity takes 
place in bilateral markets where the supplier is paid its bid. In 
those markets, competitive suppliers base their bids on the 
perceived value of their product, not merely the marginal cost of 
production.
     Energy-limited units: For units that are constrained by 
the number of hours they can run, such as hydroelectric facilities 
or plants facing emissions limitations, the opportunity cost of 
running in a given hour is the foregone profit in another hour. 
Commenters argue that suppliers must bid in excess of running costs 
in order to account for the opportunity costs. Under the Order's 
definition of economic withholding, such bids would be considered to 
be engaging in economic withholding and subject to refund.
     Start-up and minimum load costs: For units with start-
up costs, it may not be profitable for the plant to provide energy 
for only a few hours when the market price exceeds its incremental 
costs. If the revenue during a given time period is not large enough 
to offset the startup costs as well as the variable running costs, 
then it would not be profitable for a plant to run for that period. 
The generator may submit bids in excess of marginal cost in order to 
recover its startup costs.

B. Physical Withholding

    The November 20 Order defined physical withholding as occurring 
when a supplier fails to offer its output to the market during 
periods when the market price exceeds the supplier's full 
incremental costs.
    Some commenters claimed these problems with identifying physical 
withholding:
     In the cases of energy limited units, outage risk and 
operating risks, if the suppliers cannot bid sufficiently high to 
avoid running all of their capacity (potentially engaging in 
economical withholding) they will be forced to simply hold back some 
or all of their output, even when the market price is greater than 
their full incremental costs.
     A plant operator needs to be able to decide what is the 
best time to take a plant out of service or run it at less than full 
capacity for reliability purposes. If the operator faces the risk of 
having the unit's revenues subject to refund or having its market-
based rate authority revoked, it may be forced to operate the plant 
in a way that reduces its reliability.

C. Market Price

    The November 20 Order stated that anticompetitive behavior or 
exercises of market power include behavior that raises the market 
price through physical or economic withholding of supplies.
    Some commenters claimed these problems with identifying market 
price:
     Suppliers can sell into many different markets.
     Markets are differentiated across time (e.g., forward 
vs. spot) and product (e.g., energy vs. reserves).

D. Economic Consequences

    Some commenters contend that entry of new electricity generating 
facilities, and the value of existing plants, may be reduced because 
of the risk of refunds imposed as a result of the proposed tariff 
condition. Potential suppliers may be less interested in building 
new facilities and those that are interested may not be able to 
obtain financing or would have to borrow at higher interest rates 
(due to the increased uncertainty), thus deterring entry.

E. Penalty for Prohibited Behavior

    In its November 20 Order, the Commission stated:
    Should public utility market participants engage in prohibited 
behavior, their rates will be subject to increased scrutiny by the 
Commission, and to potential refunds or such other remedies as may 
be appropriate. This could result in further conditions or 
restrictions on their market-based rate authority, including, for 
example, prospective revocation of the market-based rate authority 
of the seller or any of its affiliates, or conditions precluding the 
seller from selling at market-based rates to its affiliates.
    1. Comments generally in support:
     The refund condition should be broad enough to allow 
for refunds from all sellers who profit from anticompetitive 
behavior regardless of whether a particular seller was engaged in 
the anticompetitive behavior.
     Reasonable penalties or other sanctions in individual 
cases in which a supplier has exercised market-power may be 
warranted.
    2. Comments generally in opposition:
     The November 20 Order does not explain or provide 
examples of how a seller with market-based rate authority can be in 
a position to abuse market power.
     The Commission should rely on existing monitoring plans 
and deal with alleged abuses on a case-by-case review.
     As written, the November 20 Order could penalize those 
who have not committed anticompetitive acts.
    3. Modifications proposed by commenters:
     The refund condition should apply only to spot market 
sales; to wholesale sellers possessing market power; or to 
generation affiliated with vertically-integrated transmission and 
distribution assets.
     There should be various exemptions such as: Market 
dysfunction unrelated to seller misconduct; entities which are too 
small to exercise market power effectively; forward markets 
including bilateral sales outside the spot market; power marketers 
that do not own physical assets; transactions into a market with 
Commission-approved market monitoring and mitigation measures.
     Some commenters propose that a specific time limit for 
claiming refunds be instituted while others argue that such a time 
limit will reward violaters who successfully conceal their 
anticompetitive behavior.

F. Procedural Issues

    Due to concerns regarding the impact of the refund condition, 
commenters make the following recommendations:
    1. Administrative concerns:
     Clarify and specify the requirements for filing a 
pleading seeking to trigger a refund investigation and the burden of 
proof in such proceedings; adopt a streamlined-resolution process or 
expedited complaint-review process.
    2. Due process concerns:
     Clarify that sellers will be given the opportunity to 
respond to charges and explain the basis for their actions (e.g., a 
trial-type hearing).
    3. Concerns regarding regulatory risk and transaction finality:
     Investigate on a case-by-case basis and provide the 
requisite notice.
     Establish a reasonable period of time for filing a 
complaint, or commencing an investigation, and a reasonable 
retroactive refund period.
     To avoid the reduction of the market value of non-rate-
base generating stations, such as merchant power plants, establish 
bright-line procedures for facilities' transfers which will preserve 
their market-based rate authorizations.

III. Possible Modifications to Tariff Condition

A. Modifications to Definitions

    Based on comments regarding the definitions of economic 
withholding and physical withholding, should we modify the proposed 
definitions? If so, how?
     Should the term ``full incremental cost'' be clarified 
(e.g., to include opportunity cost)?
     Should the use of the term ``market price'' be 
clarified, e.g., as to time (forward vs. spot), product (energy vs. 
reserves) and geographic market?
     Should environmental, operational and reliability 
factors be taken into account for purposes of determining whether 
physical withholding has occurred? If so, how?

B. Limit Applicability to Certain Markets/Market Participants

     Should we exempt sales in markets that are fully 
competitive with effective market monitoring; exempt all suppliers 
in an approved RTO market with Commission-approved bid caps?
     Should we exempt power supply agreements of a specified 
duration or agreements where parties explicitly waive refund 
obligations; exempt all bilateral

[[Page 10907]]

contracts; create safe harbors (rebuttable presumption of legality) 
for certain transactions, such as, those with markups at a certain 
level above marginal cost?
     Should we limit the condition to the specific market(s) 
in which a seller has market-power, and tailor mitigation rules to 
those firms given their particular circumstances, while exempting 
from the rules those generators that are unable or unlikely to 
exercise market power, such as net buyers, and small, single-plant 
suppliers?
     Should we set an impact threshold for alleged 
violations?

C. Procedure Modifications/Applicability Based on Timing

     Should we limit the window of refund potential so that 
transactions would not be subject to refund unless specifically 
challenged within a particular timeframe; set a sunset date for the 
refund condition?
     Should we clarify the type of opportunity that sellers 
will be given to respond to allegations and explain the basis for 
their actions (e.g., a trial-type hearing)?

D. Other Suggestions

     Should we impose temporary price caps along with 
reserve capacity requirements until a competitive market structure 
emerges?
     Should we tailor mitigation measures to be applied to a 
particular exercise of market power, class of participant, and 
sector?

[FR Doc. 02-5693 Filed 3-8-02; 8:45 am]
BILLING CODE 6717-01-P