United States: New Year, New Market-Based Rates Regulatory Regime

Last Updated: February 3 2016
Article by Doron F. Ezickson, Thomas Reid Millar and Michael Selig

Most Read Contributor in United States, September 2017

The new year has brought U.S. electricity markets participants an overhauled regulatory regime for market-based rates under section 205 of the Federal Power Act.  The Federal Energy Regulatory Commission ("FERC" or "Commission") has adopted the Final Rule on Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities ("Order 816").1  According to its preamble, Order 816 is "another step in the Commission's efforts to modify, clarify and streamline certain aspects of its market-based rate ("MBR") program."  It reflects the FERC's sharpened focus on market participants' accumulation of horizontal market power and potential affiliate abuses as it continues to refine its data collection and analysis capabilities, as also emphasized in the FERC's 2015 Enforcement Report.2

Order 816 amends the contours of reportable information for MBR sellers and subjects such sellers to greater scrutiny both during the initial market power screening process and on an ongoing basis.  It also expands the scope of information the FERC collects with respect to affiliate relationships.  As we explain in greater detail below, the changes that Order 816 brings may subject a broader swath of market participants to the need to rebut a finding of market power.  While increased regulatory costs for such market participants are possible, Order 816 includes a number of regulatory changes geared towards streamlining the FERC's MBR regime.

Market participants ought to familiarize themselves with the details of Order 816 because it significantly alters the obligations associated with seeking and maintaining MBR authority.  We summarize the most significant of these changes below.

I.          Background on MBR Regulatory Regime

Firms applying to sell electric energy, capacity or ancillary services in the wholesale market at market-based rates are required to demonstrate that they lack the ability to exercise market power in their "control area."  The Commission screens for both horizontal and vertical market power.  Horizontal market power is the ability of an applicant to affect market prices or competition within a single market, as defined by the FERC's horizontal market power guidelines under sections 203 and 205 of the Federal Power Act.3  Vertical market power is the ability of an applicant to exercise market power in one market by virtue of having market power in another related market.4  The FERC detects horizontal market power using two indicative screens:  (1) the uncommitted market share screen, and (2) the uncommitted pivotal supplier screen.  A seller who fails either screen is presumed to have the ability to exercise market power; but the seller can rebut this presumption through a Delivered Price Test ("DPT") analysis.  Other parties may intervene and present alternative evidence to support or rebut the results of the indicative screens.5

II.         Expanded Contract and Affiliate Reporting Obligations

Consistent with the FERC's increasing appetite for data about its market participants,6 Order 816 requires that MBR sellers "report in their indicative screens" more detailed information than now required.  For example, to demonstrate a lack of vertical market power under the current rules, a seller must provide:  (i) a description of its ownership or control of (or affiliation with an entity that owns or controls) intrastate natural gas transportation, storage or distribution facilities; (ii) sites for generation capacity development; and (iii) physical coal supply sources and ownership of or control over who may access transportation of coal supplies (collectively, inputs to electric power production).7  As of January 28, Order 816 broadens these disclosures by requiring a seller to include in "its indicative screens and asset appendix all of its long-term firm purchases of capacity and/or energy that have associated long-term firm transmission reservation regardless of whether the market-based rate seller has control over the generation capacity supplying the purchased power."8

Under Order 816, a seller who is filing an initial application for MBR authority, an updated market power analysis, or a notice of change in status that reports new affiliations must also include a corporate organizational chart.9  The Commission clarified that filers should indicate all affiliates, as defined under section 35.36(a)(9) of the Commission's MBR regulations.10

While a potentially complicated task, market participants should heed the Commission's advice and take care to identify all affiliates who must be disclosed.  Identifying all appropriate affiliates can be challenging for companies with complex ownership structures.  For example, the Commission explained that "[a]pplicants should not assume that upstream owners are not affiliates of the applicant without looking further up the ownership chain."11  In certain scenarios, such upstream owners will need to be identified as affiliates and listed in the organizational chart.

III.        Changes that Could Lead to More Screen Failures and Greater Regulatory Costs

Order 816 broadens the indicative horizontal market power screens by increasing the amount of capacity applicable to the screens.  First, the screens will consider more of a seller's capacity.  Sellers must now include their long-term firm capacity and/or energy purchases, irrespective of the seller's operational control of the generation capacity that supplies the electric energy.  Second, the screens will expand the relevant geographic market for Independent Power Producers ("IPPs").  The relevant geographic market of IPPs that are located in generation-only balancing authority areas will now include the balancing authority area of each transmission provider directly interconnected to the IPP's generation-only balancing authority area.  Third, sellers will be required to include solar photovoltaic and solar thermal technologies as energy-limited generation resources in their horizontal market power screen submissions.12  Sellers must use nameplate capacity ratings for such facilities instead of a five-year historical average.13

Each of these changes to the indicative screens may result in more sellers failing the initial screens, resulting in higher costs to obtain and maintain MBR authority.  More capacity to account for and a wider applicable geographic market mean a greater possibility of failing a screen.  Failing the initial screen would require a seller to incur the additional cost of performing a DPT analysis and presenting it to the Commission in order to rebut the presumption of market power.  A DPT analysis requires sellers to identify potential suppliers (based upon market prices, input costs and transmission availability) and calculate each supplier's available economic capacity ("AEC") for each season or load period.14  Additional DPT proceedings would also provide interveners with additional opportunities to oppose granting MBR authority – to a potential competitor, for example.

In addition, power marketers without generation assets must now include all affiliated generation capacity for each region in which they sell for purposes of determining their seller category in that region.15  It is possible that the inclusion of such affiliates could result in an increased regulatory burden if the power marketer's status shifts from "Category 1" to "Category 2."  Category 1 sellers generally are not required to automatically submit updated market power analyses (commonly referred to as "Triennials"), while Category 2 sellers must do so.

IV.        Modifications to the Change in Status Reporting Framework and other FERC Efforts to "Streamline" the MBR Regulatory Regime

In an effort to counterbalance the regulatory expansions summarized above, the FERC also took steps to ease regulatory burdens. 

Order 816 modifies, and limits, the events that trigger the requirement to file a notice of change in status with the Commission. As a condition of obtaining and retaining market-based rate authority, under Rule 35.42, a seller must report to the Commission any change in status that "reflects a departure from the characteristics the Commission relied upon in granting the market-based rate authority.16  As applicable to the changes in Order 816, under the current rule, a "change in status" includes any change in ownership or control of generation capacity that results in a net increase of 100 megawatts.  It also includes, without the 100 megawatt limit, any new affiliation with an entity that was not disclosed in the seller's MBR application that "owns or controls generation facilities or inputs to electric power production," "owns, operates or controls transmission facilities," or "has a franchised service area."17  Change in status reports must generally be filed within 30 days of the change, but under the current rules, MBR sellers must also make quarterly change in status reports reporting the acquisition of control over sites for new generation capacity development where the seller has demonstrated site control in the interconnection process and the potential number of megawatts that are reasonably commercially feasible is 100 megawatts or more.18

Order 816 alters this change of status reporting framework in two ways.  First, the order establishes a 100 megawatts threshold for reporting new affiliations in change of status filings.19  MBR sellers with new affiliations will now be required to file a notice of change in status when they affiliate with an entity whose generation assets result in a cumulative net increase of 100 megawatts of capacity in a relevant geographic market.  The FERC will determine this threshold in "exactly the same manner" as it determines the 100 megawatts threshold for other notices of change in status.20

Second, Order 816 provides additional clarification to MBR sellers.  Order 697-A requires MBR sellers to report a change in status when they acquire 100 megawatts or more in the geographic market relevant to the horizontal market power screening.21  In Order 816, the Commission clarifies that the 100 megawatts reporting threshold is not limited solely to the geographic market relevant to the previous market power screening22   MBR sellers must report a change in status when they acquire generation that would result in a cumulative net increase of 100 megawatts or more in any relevant geographic market, including those not previously subject to market power scrutiny.23  However, sellers need not consider new generation in authority areas that are directly interconnected to the seller's balancing authority area, otherwise known as "first-tier balancing authority area markets."24  The FERC notes that MBR sellers may use nameplate or seasonal capacity ratings to calculate the threshold for "most generation" and either nameplate or a five-year average capacity factor for "energy-limited generation."25

Third, Order 816 eliminates the quarterly land acquisition reports required by Rule 35.42(d) as well as the requirement that sellers provide information on sites for generation capacity development in their MBR applications and triennial updated market power analyses.26  This change eliminates the requirement to report "(1) the number of sites acquired; (2) the relevant geographic market in which the sites are located; and (3) the maximum potential number of megawatts that are reasonably commercially feasible on the sites reported."27

Fourth, Order 816 further modifies the market power screening process by eliminating the indicative screen requirement for sellers whose generation capacity in the relevant geographic market is fully committed under firm sales arrangements with a non-affiliated buyer lasting at least one year.28  Order 816 notes that sellers may explain that their generational capacity is fully committed in their filings to satisfy the FERC's market-based rate requirements regarding horizontal market power.29  It also clarifies that a change in status filing is required when a long-term firm sales agreement expires resulting in a net increase in 100 megawatts.30  Furthermore, if a contract's expiration date is unknown when a seller files their MBR application, the seller must inform the FERC of the expiration date within 30 days of it becoming known through an informational filing in the MBR docket.31

In sum, the FERC continues to refine its abilities to collect and analyze data to further its enforcement goals through Order 816.  MBR sellers and participants in these markets should be familiar with the new regulatory regime to avoid falling short of compliance.

The text of Order 816, which took effect on January 28, 2016, is available on the FERC's website at:  http://www.ferc.gov/whats-new/comm-meet/2015/101515/E-1.pdf


1. See Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity, and Ancillary Services by Public Utilities, 153 FERC ¶ 61,065 (Oct. 16, 2015) (to be codified at 18 C.F.R. pt. 35) (hereinafter "Order 816"), available at http://www.ferc.gov/whats-new/comm-meet/2015/101515/E-1.pdf (effective Jan. 28, 2016).

2. Cadwalader summarized the 2015 FERC Enforcement Report in a previous Clients & Friends Memo available here.

3. See Jonathan A. Lesser & Leonardo R. Giacchino, Fundamentals of Energy Regulation 307-09 (2d. ed. 2013); Analysis of Horizontal Mkt. Power under the Fed. Power Act, 138 FERC ¶ 61,109 (2012).

4. See id. at 307-312.

5. 18 C.F.R. § 35.37(c)(2).

6. Cadwalader commented on the FERC's increasing appetitite for data in "FERC Seeks to Impose New 'Connected Entity' Reporting Requirements," where we addressed the FERC's new "connected entity" reporting requirement, available here.

7. Order No. 697-A, FERC Stats. & Regs. ¶ 31,268 at P 176. 

8. Order 816 at P 16.

9. Order 816 at P 21.

10. Section 35.36(a)(9) defines affiliate to mean:  "(i) Any person that directly or indirectly owns, controls, or holds with power to vote, 10 percent or more of the outstanding voting securities of the specified company; (ii) Any company 10 percent or more of whose outstanding voting securities are owned, controlled, or held with power to vote, directly or indirectly, by the specified company; (iii) Any person or class of persons that the Commission determines, after appropriate notice and opportunity for hearing, to stand in such relation to the specified company that there is liable to be an absence of arm's-length bargaining in transactions between them as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the person be treated as an affiliate; and (iv) Any person that is under common control with the specified company." 

11. Id. at P 334.

12. Id. at P 100.

13. Id.

14. See, e.g., Public Service Company of New Mexico, FERC ¶61,060 (Oct. 15, 2015) ("...the DPT analysis identifies potential suppliers based on market prices, input costs, and transmission availability, and calculates each supplier's economic capacity (EC) and AEC for each season/load period.  The results of the DPT can be used for pivotal supplier, market share and market concentration analyses.  Under the DPT analysis, applicants must also calculate market concentration using the Hirschman-Herfindahl Index (HHI).  An HHI of less than 2,500 in the relevant market for all seasons/load periods, in combination with a demonstration that the applicants are not pivotal and do not possess more than a 20 percent market share in any of the seasons/load periods, would constitute a showing of a lack of horizontal market power, absent compelling contrary evidence from interveners.")

15. Id. at P 315-20.

16. 18 C.F.R. § 35.42.

17. Id.

18. Id. at § 35.42(d)

19. Order 816 at P 251.

20. Id.

21. Id. at 213.

22. Id. at P 228.

23. Id.

24. Id. at P 230-31; 45.

25. Id. at P 232.

26. Id. at P 207.

27. Id. at P 208.

28. Id. at P 13.

29. Id. at P 39.

30. Id.

31. Id. at P 44.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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