Order No. 697 & Progeny

Commission's New Market-Based Rate Reforms Prevent Exercise of Market Power

Order No. 697: Market-Based Rates For Wholesale Sales Of Electric Energy, Capacity And Ancillary Services By Public Utilities 

June 21, 2007

Docket No. RM04-7-000

The Federal Energy Regulatory Commission today finalized a series of fundamental reforms to its market-based rate program that will strengthen competitive markets and protect consumers by reinforcing regulations for just and reasonable wholesale electric power sales.

The reforms are intended to protect consumers from an electric power seller’s exercise of market power.

“This new rule reflects the Commission’s fundamental responsibilities to strengthen wholesale power markets and protect consumers from exploitation in those markets,” Chairman Joseph T. Kelliher said. “These reforms reform and codify our existing standards to help protect customers and provide greater certainty to sellers seeking market-based rate authority.

The new rule has five major elements:

• It collapses the Commission’s four-prong analysis for determining whether a wholesale seller of electric energy, capacity or ancillary services qualifies for market-based rate authority into a two-part test covering horizontal (generation) and vertical (transmission and other barriers to market entry) market power. Restrictions on affiliate abuse will be codified in regulations and must be satisfied as a condition of obtaining and retaining market-based rate authority.
• It eliminates what is known as the section 35.27 exemption for all generation built after July 9, 1996. The Commission was concerned that retaining the exemption could allow a seller to gain a dominant position in the market without being subject to any generation market power analysis. All sellers seeking market-based rate authority, or filing updated market power analyses, on or after the effective date of the rule must provide a horizontal market power analysis for the generation they own or control, including generation built after July 1996.
• It allows a seller to use the entire RTO/ISO geographic footprint as the default relevant geographic market if the RTO/ISO has sufficient market structure and a single energy market. But if the Commission determines there is a submarket within an RTO/ISO, the submarket becomes the default relevant geographic market.
• For sellers that do not demonstrate a lack of market power, it provides that the Commission will determine appropriate mitigation on a case-specific basis, including whether a “must offer” requirement is necessary to mitigate market power.
• Finally, it allows mitigated sellers to make market-based rate sales “to the border” if that seller commits that the power will leave home and not ricochet through an affiliate. The rule imposes a record retention requirement on mitigated sellers making such sales and required tariff language to allow for such sales.

The final rule divides market-based rate sellers into two categories for purposes of filing regularly scheduled updated market power analyses. Generally, Category 1 is for wholesale power marketers and power producers that own or control 500 MW or less of generation in aggregate per region, do not own other than minimal transmission facilities, and are not affiliated with any franchised utility in the region. They are exempt from filing updated market power analyses. Category 2 is for all other power sellers. They must continue filing their triennial studies under a new regional approach that separates the country into six geographic regions. Companies in two regions would file their studies with the Commission in any given year. Both Category 1 and 2 sellers must continue to file change in status reports.

The final rule does not adopt a proposal for a standardized market-based rate tariff, or require all sellers in a corporate family to be under the same tariff. Instead, the final rule outlines specific provisions that all sellers must have in their tariffs.

• Order No. 697-A 

FERC Affirms, Clarifies New Market-Based Rate Policy

April 17, 2008

Docket No. RM04-7-001

The Federal Energy Regulatory Commission (FERC) today largely affirmed its findings in the market-based rate final rule it enacted last year to strengthen competitive markets and protect consumers by reinforcing regulations for just and reasonable wholesale electric power sales.

The final rule, Order No. 697, was issued in June 2007 and clarified in December 2007. Today’s order, which takes effect 30 days after publication in the Federal Register, affirms several basic determinations made in the rule, including the horizontal and vertical market power analysis, the use of a balancing authority area or the regional transmission organization/independent system operator market as the default relevant geographic market, a regional approach for triennial market power studies that separates the country into six geographic regions, and codification of restrictions on affiliate abuse in the regulations.

Also in today’s order, FERC clarifies some important points concerning the horizontal market power analysis, noting that while it affirms its continued use of historical data and a “snapshot in time” approach, it also will consider case-specific sensitivity studies that present clear, compelling evidence that certain changes in a market should be considered as part of the market power analysis.

Finally, to encourage long-term contracts and at the same time protect customers against market power, today’s order also notes that the Commission will allow mitigated sellers to demonstrate on a case-by-case basis that they do not have market power with respect to long-term contracts.

“The Commission takes seriously its fundamental responsibilities to strengthen wholesale power markets and protect consumers from exploitation in those markets," Chairman Joseph T. Kelliher said. “Order No. 697 provides the fundamental market reforms that will do just that.”

FERC stressed that under this new policy all mitigated sellers have the burden of making case-specific arguments for being able to make long-term sales at market-based rates. An applicant must file with FERC under section 205 of the Federal Power Act a case-specific request for contract-specific market-based rates by demonstrating that it does not have market power with respect to the specific long-term contract being filed.

Elsewhere in today’s order, FERC granted a rehearing on the adoption of two-way information sharing restriction by finding, among other things, that a one-way information sharing restriction adequately protects captive customers. FERC also provided clarifications regarding other aspects of Order No. 697, including addressing questions that have arisen concerning the implementation process adopted in Order No. 697.

• Order No. 697-B 

The Federal Energy Regulatory Commission affirms its basic determinations in Order No. 697-A, granting rehearing and clarification regarding certain revisions to its regulations and to the standards for obtaining and retaining market-based rate authority for sales of energy, capacity and ancillary services to ensure that such sales are just and reasonable.

• Order No. 697-C 

FERC Strengthens Reporting for New Generation Site Acquisition

April 17, 2008

Docket No. RM04-7-001

The Federal Energy Regulatory Commission (FERC) today clarifies its Market Based Rates rule with new reporting requirements on the acquisition of sites for new generation capacity development.

The new requirements address wind developers’ concerns regarding the burden of the existing requirements as well as provide FERC with the information necessary to evaluate a seller’s ability to erect barriers to market entry while preserving commercially sensitive information about the future development of sites for power generating plants.

Under the rule, a seller must file a report for those sites where site control has been demonstrated in the interconnection process.

In addition, the order establishes a reporting requirement for land that has been held for three years to allow FERC to evaluate a seller’s ability to erect barriers to entry to the development of generation projects.

The order also denies requests for rehearing of the tariff provision governing mitigated sales at the metered boundary.

Today’s order denies rehearing and clarifies certain standards for utilities and companies seeking market-based rates for sales of energy, capacity, and ancillary services. The Order No. 697 rulemaking orders strengthen competitive markets and protect consumers from an electric power seller’s exercise of market power between the mitigated and non-mitigated areas.

• Order No. 697-D 

The Federal Energy Regulatory Commission is granting in part and denying in part the requests for rehearing and clarification of its determinations in Order No. 697-C, which granted rehearing and clarification of certain revisions to Commission regulations and to the standards for obtaining and retaining market-based rate authority for sales of energy, capacity and ancillary services to ensure that such sales are just and reasonable.

• Order on Rehearing and Clarification