FTC Staff Provides FERC with Comments on Proposed Rulemaking Regarding Standard Electricity Market Design

Staff of the Federal Trade Commission's Bureau of Economics and General Counsel's Office of Policy Studies on November 15, 2002, provided the Federal Energy Regulatory Commission (FERC) with comments concerning its recent notice of proposed rulemaking (NOPR) that addresses the standard market design (SMD) of wholesale electric power markets.

In its notice, Docket No. RM01-12-000, FERC has proposed remedying the remaining discrimination in the provision of interstate transmission services and ensuring just and reasonable rates for electricity sold within and among regional electric power markets. FERC states that market forces alone will not correct these deficiencies and, therefore, it should provide regulatory reforms that lead to structurally competitive markets. FERC has proposed to achieve this by reforming the regulated use of transmission services and standardizing the design of regional wholesale markets. According to the FTC staff's comments, such standardized markets are likely to provide consumers with access to lower-priced electricity, and their consistent design, along with the uniform operation of transmission assets, is likely to speed and enhance competition in wholesale electricity markets to the benefit of U.S. energy consumers.

Specifically, the staff's comments state that the lack of uniform wholesale power market designs, rules, and operations allow for undue discrimination across regions. In addition, according to the comments, since 1996 when FERC ordered public utilities to provide open access to their transmission lines, "the flaws in functional unbundling and the lack of consistent market institutions and rules across regional markets have become more apparent." Accordingly, the staff concludes, "Now is the time to remove remaining structural barriers to competition that continue to delay the benefits of competitive markets from enuring to consumers."

The comments also address the issue of market power monitoring and mitigation, including resource adequacy. In discussing FERC proposals that combine some policies that directly promote structurally competitive electric power markets and others that do not, the staff favors direct approaches "that create incentives for market participants to behave competitively." While the staff recognizes the "unusual historical circumstances" that may make implementation of direct approaches difficult and time-consuming, "We encourage FERC and the states to emphasize the direct approaches to creating structurally competitive markets including policies that reduce concentration where it is a source of market power, ease entry impediments, and facilitate price-responsive demand."

When indirect approaches, such as the use of behavioral rules and pricing constraints, are taken, the FTC staff contends, "It is essential that FERC and market monitors use sound economic analysis that encompasses the principal components of competition analysis, including market definition, structural assessment, and entry conditions." Stating that such principles are included in the Horizontal Merger Guidelines developed jointly by the FTC and the Department of Justice, the staff states, "Failure to utilize these principles is likely to lead to inaccurate assessments of market power, faulty remedies, and harm to consumers." Moreover, the comment states that the proposed behavioral rules and pricing constraints should be eliminated once markets structures contain incentives for participants to behave competitively.

Although the comment recognizes that the proposed resource adequacy requirements may be conceptually appropriate given diminished incentives to invest in new generating capacity, the comment expresses concern about the complexity of, and ability to administrate, the proposed requirements. The comment applauds the proposal to allow price-responsive demand programs to substitute for generation projects in meeting the proposed resource adequacy requirements.

Finally, the staff suggests that FERC consider four items that are closely related to elements in the NOPR: 1) efficiency and customer service in grid operations; 2) coordinated interaction as an element of market power monitoring and mitigation; 3) disclosures regarding the increased risk of blackouts affecting retail customers of firms that do not maintain resource adequacy; and 4) integration of the market power assessment and remediation techniques used by FERC in different contexts.

"Implementation of standard market design is timely and likely to promote benefits to consumers by improving the accuracy of investment and consumption signals and by reducing existing market power or its exercise," the staff comments conclude. "Further, we agree with FERC's enumeration of the major components that should be included in standard market design. In the long term, efficient investment in generation, transmission, and price-responsive demand programs are likely to be the best remedies for market power."

The Commission vote authorizing staff to file the comments with FERC was 5-0, with Commissioner Sheila F. Anthony issuing a separate statement. In the statement, Anthony highlighted several concerns regarding FERC's deregulatory efforts, particularly its NOPR regarding standard market design that staff comments address.

"As recent events have demonstrated," Anthony wrote, "deregulation of electricity markets is not the panacea some once envisioned. Not surprisingly, deregulation efforts have stagnated. . . . If strict government oversight is removed, but the market is allowed to evolve in non-competitive ways, profit-seeking generators may have both the incentive and ability to discriminate in access to transmission services, or otherwise exercise market power, to the detriment of consumers."

Citing the FTC's history of providing comments and feedback to FERC on such issues, Anthony said that "for deregulation to work, it must be accomplished in a manner that creates efficient, competitively healthy, self-sustaining market structures." If FERC intends to establish such a framework for future deregulatory efforts, she said, the agency "should proceed cautiously and deliberately." Overall, she concluded, reiterating the FTC staff's main suggestions, "FERC should focus on alleviating transmission bottlenecks in deregulated markets with high levels of concentration and entry impediments - because, as antitrust teaches us, these markets are the most susceptible to anticompetitive harm."