FTC Staff Comments on Reforms to Promote Competition with New England Public Utilities

The Federal Trade Commission staff suggested that the Federal Energy Regulatory Commission (FERC) consider structural remedies in order to increase the likelihood of effective competition in the electric power industry in New England. If FERC finds evidence of a market power problem due to concentration of ownership of electricity generation assets in New England, it may be useful to consider divestiture or other structural remedies rather than to rely exclusively on market monitoring mechanisms and behavioral remedies, the comment suggested.

The staff comment made public today was submitted by the FTC’s Bureau of Economics in response to FERC’s notice of filing for consideration of a market power mitigation proposal submitted by New England Power Pool (NEPOOL) in conjunction with its application for authority to implement market-based rates. NEPOOL proposes that the transmission grid operator, ISO New England, monitor generators’ bids and power offerings. Under the NEPOOL proposal, if a market power problem is detected, only behavioral remedies would be available. The FTC staff believes that there are substantial potential difficulties in identifying and documenting the exercise of market power in the electricity industry and in preventing it through behavioral rules. According to the staff, “[A]s FERC considers this and similar proposals ... it may wish to consider carefully the use of structural remedies instead of or in addition to behavioral solutions.”

The comment refers to a previous FTC staff comment regarding FERC’s proposals for ensuring open access to electricity transmission grids. In the prior comment, FTC staff discussed two basic difficulties with taking a solely behavioral approach to market power in the electric industry. One was the difficulty in detecting the exercise of market power. The current comment states, "We believe that much the same problem is likely to exist in detecting the exercise of horizontal generation market power. ... Subtle bidding and generation availability decisions can have marked effects in raising prices and reducing output, and ... could be very difficult to determine and document [as] anticompetitive."

The second concern noted in the previous comment was that a solely behavioral approach to transmission access issues would leave in place any existing incentive to exercise market power. Similarly, according to the current staff comment, if market power is present in power generation, the incentives for its exercise would remain under a behavioral approach to monitoring and mitigation. Thus, staff concluded, restructuring may be a preferable remedy for market power.

The FTC staff suggested that in considering NEPOOL's proposal, if FERC finds evidence of generation market power, "it may wish to consider making appropriate structural relief a predicate for granting the authority sought ... ." If FERC does not make a finding of current generation market power, the staff suggest that FERC may wish to condition the initial grant of authority to NEPOOL in ways that would allow FERC to review the market-monitoring experience after a certain period. That would enable FERC to require any necessary structural remedies before renewing the initial authority, the staff said.

The staff comments take no position as to whether market power is present in the generation market or markets at issue and express no views about the likely magnitude of any costs that may ensue upon approval of NEPOOL’s application for market-based rates.

These comments represent the views of the staff of the FTC's Bureau of Economics and not necessarily the views of the FTC or any individual Commissioner.

Copies of the comment are available from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326- 3128; TTY 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov (no period)

(FTC Matter No: V980002)