More than five years ago one of us had a conversation with a FERC commissioner who was deeply involved in revising the Commission’s policies on electricity market power. The Commission was starting to realize that its method of checking whether a generator was entitled to deregulated pricing — market-based rates (MBRs) in Commission vernacular — was too simplistic. The Commission had already changed its method of analyzing market power in electric utility mergers to a much more sophisticated approach. We suggested that consistency between the tests for market power in the two settings might make sense. The Commissioner — who shall remain nameless — replied that using the more complex merger analysis for MBRs was totally unacceptable to the industry. What a difference five years makes. On April 14, 2004, the FERC issued a new interim approach to analyzing market power for MBRs.
The approach contains a hierarchy of analyses and screens, including the delivered price test (DPT) — the same test used for mergers. The MBR analytical framework is arguably more challenging than the merger DPT, and it is certainly more variegated. It is unquestionably a massive improvement over the original test, and holds the promise of a somewhat coherent — if complex — framework for analyzing market power in the bulk power sector.
The new framework replaces an interim test issued in 2001 called the Supply Margin Assessment (SMA). The SMA test was heavily criticized as being too restrictive — traditional utilities were nearly guaranteed to fail in their own control areas — and for its automatic mitigation. Many commenters found that the SMA was unsuited to its task, creating little or no improvement in the prevention of market power. Others noted that it examined only unilateral market power by large sellers, ignoring the remaining market structure.