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April 15, 2004
NEM's Summer and Fall Executive Committee Meetings

NEM welcomes ideas for the location of its Summer Executive Committee Meeting. Constellation NewEnergy has offered the use of its Chicago location again. The Summer Meeting is critical as it is the venue where the new Executive Committee leadership and regional and state policy chairs are selected and voted upon and the Associations's advocacy goals and activities for the remainder of 2004 will be evaluated and decided upon. NEM's current leadership roster is hotlinked here for your review.

NEM is also exploring the possibility of hosting a Utility-Marketer Summit to discuss the most important transitional rate design issues and the utilities exit from the merchant function this fall. Nate Owen, President of ESG, has offered to host the fall meeting. Other member companies that wish to sponsor the fall meeting should contact headquarters.

FERC Initiates Rulemaking on Market Based Rates for Public Utilities

FERC has initiated a rulemaking proceeding to examine the adequacy of its current four prong market-based rate authority analysis and determine whether and how the analysis should be modified to better ensure just and reasonable rates. The four prongs of the market-based rate analysis examine whether an applicant: 1) has generation market power; 2) has transmission market power; 3) can erect barriers to entry; and 4) raises concerns about affiliate abuse and/or reciprocal dealing.

As part of the rulemaking the Commission will address: 1) the adequacy of existing four prong test; 2) whether factors considered under the four prongs should be revised; 3) whether the interim generation market power screens (see analysis below) should be adopted in the long-term; 4) whether a different approach to affiliate transactions be used: 5) whether new regulations should be promulgated specifically for electric market-based rate filings. The rulemaking will include market-based rate authorizations associated with ancillary services.

The Commission will hold a series of technical conferences in this proceeding with the first to be convened on June 9, 2004. The purpose of the June conference will be to frame the rulemaking issues. The full text of the Notice Initiating Rulemaking Proceeding is available on the NEM Website.

FERC Adopts Interim Generation Market Power Screens

The Commission has replaced the Supply Margin Assessment generation market power test and adopted two "indicative screens" to assess generation market power. The new screens are only adopted on an interim basis pending the market based rate authority rulemaking discussed above.

The two screens include an uncommitted pivotal supplier analysis to evaluate the potential of an applicant (including its affiliates) to exercise market power based on the control area market’s annual peak demand as well as an uncommitted market share analysis that will seasonally evaluate the market share of the uncommitted capacity of an applicant and its affiliates. A supplier with less than a twenty percent market share in the relevant market for all seasons will satisfy the market share analysis. A supplier with a twenty percent or greater market share will be subject to a rebuttable presumption of market power.

The relevant geographic markets under the screens will be the control area market where the applicant is physically located and the markets directly interconnected to the applicant’s control area market. The pivotal supplier analysis and the market share analysis will both consider utilities’ obligations to serve native load. Specifically, the pivotal supplier analysis will use the average of the daily native load peaks during the month in which the annual peak demand day occurs as a proxy for native load obligation. The market share analysis will use the native load obligation on the minimum peak demand day for a given season. All applicants for market-based rate authority must submit the generation market power analyses even if an applicant owns or controls generation within an ISO/RTO.

If an applicant passes both screens, there will be a rebuttable presumption that the applicant does not possess market power in generation. If an applicant fails either screen, it will create a rebuttable presumption that market power exists in generation. The applicant can present evidence to rebut the presumption by: 1) proposing a more robust market power study (the Delivered Price Test); 2) filing a mitigation proposal tailored to its particular circumstances that would eliminate the ability to exercise market power; and/or (3) informing the Commission that it will adopt "default cost-based rates" or other cost-based rates. An applicant can choose to forego submitting a generation market power analysis, accept a presumption of market power and go directly to mitigation by proposing case-specific mitigation that would eliminate the ability to exercise market power, or agreeing to "default rates."

An applicant's market-based rate authority will be revoked in geographic areas in which market power is found, and the applicant will be subject to cost-based default rates or other cost-based rates. Default rates will be calculated as follows: "1) sales of power of one week or less must be priced at the applicant’s incremental cost plus a 10 percent adder; 2) sales of power of more than one week but less than one year must be priced at an embedded cost “up to” rate reflecting the costs of the unit or units expected to provide the service; and 3) new contracts for sales of power for more than one year must be priced at a rate not to exceed embedded cost of service and the contract must be filed with the Commission for review." Those found to have generation market power will also be required to post optimum generation sites on OASIS.

The full text of the Interim Generation Market Power Analysis Order is available on the NEM Website.

Commission Clarifies Standards of Conduct

The Commisson issued an Order clarifying its standards of conduct applicable to gas and electric transactions. FERC upheld the "no conduit" provisions that permit shared employees to receive certain information if they do not actively share the information with a marketing or energy affiliate. FERC clarified that a transmission provider can share information necessary to maintain the operations of the transmission system with its energy affiliates. FERC also clarified that corporate governance information can be shared with permissibly-shared employees, such as officers or directors, between the transmission provider and the energy affiliate, provided that the employees do not act as a conduit for sharing information. The Commission refined the definition of an energy affiliate "engaged in" transmission transactions to mean an, "affiliate that holds or requests transmission capacity on a transmission provider as a shipper or customer or buys or sells transmission capacity in the secondary capacity market." An energy affiliate "involved in" transmission transactions means "an entity that is acting as agent, asset manager, broker or in some fashion, managing, controlling or aggregating capacity on behalf of transmission customers or shippers." The implementation date has been extended to September 1, 2004. The full text of the Press Release on FERC's Standards of Conduct is available on the NEM Website. The Order will be posted when made available electronically.

Commission Policy Statement on Grid Reliability

FERC adopted a Policy Statement on Grid Reliability. By the terms of the Policy Statement the Commission will: 1) consider reliability implications of its decisions; 2) not permit ISOs/RTOs to begin operations until reliability capabilities are functional; 3) appoint a staff task force to report on potential funding mechanisms for NERC and regional reliability councils to permit their independence from the utilities they monitor; and 4) direct staff to prepare a memorandum of understanding defining NERC's working relationship with FERC. The full text of the Commission's Press Release on the Policy Statement is available on the NEM Website. The Policy Statement will be posted when made available electronically.

New York
Commission Approves Phase 7 of ConEd Electric Choice Program

The Commission has approved Phase 7 of ConEd's electric choice program, for the period of May 1, 2004, through April 30, 2005. By the terms of the program, ConEd will provide backout credits of two mills per kWh for non-demand billed and one mil per kWh for demand billed retail access customers. The Commission also decided that ConEd is not required to file annual retail access "phase" filings. With respect to cost recovery, the Commission denied ConEd's request for advanced approval for the recovery of costs associated with the backout credits. The Commission reasoned that, "it is incumbent upon the company to reduce the cost of its operations when customers migrate to retail access and no longer utilize various utility resources, such as customer service." The full text of the ConEd Phase 7 Order is available on the NEM Website.

NEM Intervention in AEP Rate Stabilization Plan Proceeding

NEM has intervened in AEP's rate stabilization plan proceeding. In NEM's filing it objected to AEP's plan because: 1) the plan failed to include a competitive bid-out provision; 2) the proposed standard service offer rates are not market based; and 3) the plan included a minimum stay provision for customers returning to utility service. NEM also urged that the residential class incentive should be increased beyond 25% and made applicable to all residential customers of Columbus Southern. The full text of NEM's Intervention is available on the NEM Website.

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