[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Notices]
[Pages 75229-75233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E3-00652]


-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission


Notice of Technical Conference on Supply Margin Assessment Screen 
and Alternatives

December 19, 2003.
    Conference on Supply Margin Assessment (Docket No. PL02-8-000); AEP 
Power Marketing, Inc., AEP Service Corporation, CSW Power Marketing, 
Inc., CSW Energy Services, Inc., and Central and South West Services, 
Inc. (Docket Nos. ER96-2495-016, ER97-4143-004, ER97-1238-011, ER98-
2075-010, and ER98-542-006 (Not consolidated)); Entergy Services, Inc. 
(Docket No. ER91-569-018); Southern Company Energy Marketing L.P. 
(Docket No. ER97-4166-010).
    1. Take notice that a technical conference will be held on January 
13 and 14, 2004, from 9:30 a.m. to 4 p.m. in the Commission Meeting 
Room at the Federal Energy Regulatory Commission, 888 First Street, 
NW., Washington, DC. As discussed below, the goal of the technical 
conference is to discuss modifications or alternatives to the Supply 
Margin Assessment (SMA) interim generation market power screen and 
related mitigation measures announced in AEP Power Marketing, Inc., et 
al., 97 FERC ] 61,219 at 61,969 (2001), reh'g pending (SMA Order). One 
or more of the Commissioners may participate in the conference. 
Additional details about the conference and a conference agenda will be 
provided in a subsequent notice.
    2. In the SMA Order, the Commission announced a new market power 
screen for generation, the SMA, to be applied to market-based rate 
applications on an interim basis pending a generic review of new 
methods for analyzing market power and established mitigation measures 
applicable to entities that fail the SMA screen.\1\ In a Notice 
Delaying Effective Date of Mitigation and Announcing Technical 
Conference, issued on December 20, 2001, the Commission deferred the 
date by which the companies in the above-captioned proceedings or any 
other public utilities failing the SMA screen must implement the 
mitigation for spot market energy sales set forth in the SMA Order, and 
announced its intention to hold a technical conference open to all 
interested persons, not only parties to the dockets captioned in the 
SMA Order.
---------------------------------------------------------------------------

    \1\ SMA Order, 97 FERC ] 61,219 at 61,967.
---------------------------------------------------------------------------

    3. On August 23, 2002, the Commission issued a notice establishing 
Docket No. PL02-8-000, Conference on Supply Margin Assessment, to 
provide an opportunity for all interested persons to comment. In 
preparation for the technical conference, the Commission invited all 
interested persons to submit written comments regarding the SMA screen 
and related mitigation measures. Those comments were filed on October 
22, 2002.
    4. In an effort to address concerns raised by commenters regarding 
the SMA screen and the price mitigation measures contained in the SMA 
Order, the Commission asked staff to prepare a staff paper identifying 
possible modifications or alternatives to both the SMA screen and price 
mitigation measures (such staff paper is set forth in the Attachment to 
this notice) and to hold a technical conference on these issues. In 
preparation for the technical conference, the Commission invites all 
interested persons to submit written comments on the staff paper no 
later than January 6, 2004. All comments should include an executive 
summary; the summary shall not exceed five pages. To conserve time and 
avoid unnecessary expense, persons with common interests or views are 
encouraged to submit joint comments.
    5. Persons interested in participating in the technical conference 
should be prepared to discuss the proposals in the staff paper. In 
addition, we encourage interested persons to propose alternative 
approaches and demonstrate why any such alternatives are improvements 
to the SMA screen/mitigation measures and the proposals contained in 
the staff paper. Those proposing alternative approaches, either in 
their comments or at the conference, should address how their proposal 
meets data accessibility issues as well as the timing constraints the 
Commission faces in having to act upon many market-based rate filings 
within a 60-day statutory period. Finally, persons interested in 
participating in the technical conference should indicate what 
principles the Commission should apply in modifying

[[Page 75230]]

the SMA, such as what the generation dominance screen should measure, 
how rigorous the screen should be (e.g., should it examine annual peak 
or monthly peak), how to factor in internal or external transmission 
constraints, and whether to look at installed capacity or uncommitted 
capacity.
    6. As noted above, the SMA screen and related mitigation measures 
were designed as an interim measure for analyzing generation market 
power pending a generic review of new methods for analyzing markets and 
market power. The Commission has stated that it intends to launch a 
generic rulemaking proceeding to address other aspects of its market-
based rate program.\2\ The purpose of the technical conference will be 
to pursue what changes, if any, should be made to the SMA screen and to 
the mitigation measures applicable to entities failing the screen so 
that the interim screen for generation market power can be finalized 
and implemented (with mitigation measures where appropriate). Thus, the 
upcoming conference will be limited to a discussion of the alternative 
interim screens and mitigation measures.
---------------------------------------------------------------------------

    \2\ SMA Order, 97 FERC ] 61,219 at 61,967.
---------------------------------------------------------------------------

    7. Transcripts of the conference will be immediately available from 
Ace Reporting Company (202-347-3700 or 1-800-336-6646), for a fee. They 
will be available for the public on the Commission's e-Library two 
weeks after the conference. Additionally, Capitol Connection offers the 
opportunity for remote listening of the conference for a fee. Persons 
interested in this service should contact David Reininger or Julia 
Morelli at the Capitol Connection (703-993-3100) as soon as possible or 
visit the Capitol Connection Web site at http://www.capitolconnection.gmu.edu and click on ``FERC.''
    8. For more information about the conference, please contact Kermit 
Banks at 202-502-8217 or [email protected].

Filing Requirements for Paper and Electronic Filings

    9. Comments, papers, or other documents related to this proceeding 
may be filed in paper format or electronically. However, the Commission 
strongly encourages electronic filings. Those filing electronically do 
not need to make a paper filing.
    10. For paper filings, the original and 14 copies of the comments 
should be submitted to the Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426 and 
should refer to the above-referenced Docket Nos.
    11. Documents filed electronically via the Internet must be 
prepared in MS Word, Portable Document Format, or ASCII format. To file 
the document, access the Commission's Web site at www.ferc.gov, click 
on ``E-Filing'' and then follow the instructions for each screen. First 
time users will have to establish a user name and password. The 
Commission will send an automatic acknowledgement to the sender's e-
mail address upon receipt of comments. User assistance for electronic 
filing is available at 202-502-8258 or by e-mail to [email protected]. 
Comments should not be submitted to the e-mail address.
    12. All written comments will be placed in the Commission's public 
files and will be available for inspection at the Commission's Public 
Reference Room, 888 First Street, NE., Washington, DC 20426, during 
regular business hours.

Magalie R. Salas,
Secretary.

Attachment--Staff Paper Technical Conference on Supply Margin 
Assessment Screen and Alternatives

    This paper sets forth Staff options for the Supply Margin 
Assessment (SMA) or alternative interim generation market power 
screen in electricity markets, and the appropriate mitigation to 
impose on those that fail the adopted screen. This paper is intended 
to serve as a focus for discussion at an upcoming technical 
conference that will be held on these matters. Staff stresses that 
the focus of this paper, and of the upcoming technical conference, 
is the appropriate interim generation market power screen, which is 
only one prong of the Commission's four-part test in reviewing 
applications for market-based rates, which examines: (1) Generation 
(horizontal) market power; (2) transmission (vertical) market power; 
(3) other barriers to entry; and (4) affiliate abuse. As the 
Commission has previously stated, it intends to initiate a generic 
rulemaking proceeding on potential new analytical methods for 
assessing markets and market power.\3\ Thus, the Commission would be 
positioned to address all aspects of its market-based rate program 
as part of the generic rulemaking proceeding, while the focus of 
this paper and technical conference is on just one aspect of that 
market-based rate program.
---------------------------------------------------------------------------

    \3\ See AEP Power Marketing, Inc., et al., 97 FERC ] 61,219 at 
61,967 (2001) (SMA Order).
---------------------------------------------------------------------------

    In the SMA Order, the Commission announced a new generation 
market power screen, the Supply Margin Assessment (SMA), to be 
applied to market-based rate applications on an interim basis 
pending a generic rulemaking proceeding. Since the markets were 
evolving, the Commission felt its test for generation market power 
should also evolve. The SMA screen was to be applied to all sales 
other than those in independent system operator (ISO) or regional 
transmission organization (RTO) markets with Commission-approved 
market monitoring and mitigation.
    In a Notice Delaying Effective Date of Mitigation and Announcing 
Technical Conference, issued on December 20, 2001, the Commission 
deferred the date by which the companies in the above-captioned 
proceedings or any other public utilities failing the SMA screen 
must implement the mitigation for spot market energy sales set forth 
in the SMA Order, and announced its intention to hold a technical 
conference open to all interested persons, not only parties to the 
dockets captioned in the SMA Order.
    On August 23, 2002, the Commission issued a notice establishing 
Docket No. PL02-8-000, Conference on Supply Margin Assessment, to 
provide an opportunity for all interested persons to comment. In 
preparation for the technical conference, the Commission invited all 
interested persons to submit written comments regarding the SMA 
screen and related mitigation measures. Those comments were filed on 
October 22, 2002. Concerns expressed in the comments regarding the 
SMA screen included the conditions and factors that impact available 
supply when implementing the SMA screen ( e.g., the generation 
capacity of an applicant that is used to meet native load, pre-
existing wholesale contractual obligations, and operating reserves). 
Commenters also expressed concern about the mitigation measures and 
their implementation, such as spot market energy sales mitigation. 
They objected to the split-the-savings requirement and argued that 
requiring the posting of incremental/decremental cost information 
would be ineffective and harmful to the competitive market.
    In an effort to address concerns raised by commenters regarding 
the SMA screen and the price mitigation measures contained in the 
SMA Order, and to provide a framework for the technical conference, 
the Commission asked Staff to prepare a paper identifying possible 
modifications or alternatives to both the SMA screen and price 
mitigation measures.
    The purpose of this paper is to outline Staff's current thinking 
on potential interim generation market power screens and methods for 
mitigation. While Staff is not recommending one screen over another 
or a mitigation method over any other, Staff is seeking comments and 
welcomes suggestions from commenters and technical conference 
participants.
    Persons interested in participating in the technical conference 
should be prepared to discuss the proposals in this staff paper, and 
to propose alternative approaches and why any such alternatives are 
improvements to the SMA screen/mitigation measures and the proposals 
contained herein.

I. SMA Screen and Mitigation

SMA Screen

    The SMA screen as adopted by the Commission in the SMA Order 
assesses whether an applicant has generation market power. In 
determining the geographic market, the SMA considers transmission 
constraints into the applicant's respective control area(s).

[[Page 75231]]

In determining the size that triggers generation market power 
concerns, the SMA establishes a threshold based on whether an 
applicant is pivotal in the market, i.e., whether at least some of 
the applicant's capacity must be used to meet the market's peak 
demand. An applicant will be pivotal if its capacity exceeds the 
market's surplus of capacity above peak demand--that is, the 
market's supply margin. Thus, an applicant will fail the SMA screen 
if the amount of its capacity exceeds the market's supply margin.
    In applying the SMA screen, the control area market where the 
applicant is located is first considered. Next, the markets directly 
interconnected to the applicant's control area market are 
considered. An applicant will pass the screen if it or its 
affiliates own or control an amount of generation located in a 
control area which is less than the supply margin (generation in 
excess of load) in the control area. The margin will include the 
amount of generation that can be imported into the control area 
limited by the total transfer capability (TTC) of the transmission 
system (i.e., the lesser of uncommitted generation capacity or 
TTC).\4\ Under the Commission's current policy, market-based rate 
applicants are allowed to sell at market-based rates into any 
control area where they pass the screen.
---------------------------------------------------------------------------

    \4\ As the Commission explained in the SMA Order, the total 
amount of TTC is used as only a point of reference to establish the 
maximum amount of uncommitted generation supply, even though this 
amount of generation could not be simultaneously imported into an 
applicant's control area. The Commission stated in the SMA Order 
that intervenors will be allowed to present arguments on a case-by-
case basis that another factor limiting import capability is 
appropriate, if warranted by the facts.
---------------------------------------------------------------------------

    All sales, including bilateral sales, into an ISO or RTO with 
Commission-approved market monitoring and mitigation (PJM, ISO-NE, 
NYISO, and CAISO) are currently exempt from the SMA and, instead, 
are governed by the specific thresholds and mitigation provisions 
approved for the particular markets. At the technical conference, 
Staff invites comments on whether this exemption should be 
continued.

Mitigation for Those Failing the SMA Screen

    In the SMA Order, the Commission stated that the primary tools 
for exercising generation market power are physical and economic 
withholding. To prevent physical withholding, the Commission 
required that an applicant who fails the SMA screen offer 
uncommitted capacity (i.e., generation in excess of each hourly 
projected peak load and minimum required operating reserves) for 
spot market sales in the relevant market. To prevent economic 
withholding, this uncommitted capacity would be priced using a 
split-the-savings formula.\5\ The Commission required that an 
applicant implement split-the-savings pricing for spot market sales 
and purchases.\6\
---------------------------------------------------------------------------

    \5\ A seller's incremental cost (the out-of-pocket cost of 
producing an additional MW) is compared with a buyer's decremental 
cost (the cost of not producing the last MW). The average of the 
incremental and decremental costs is the split-savings price. The 
details of how split-the-savings pricing was to be implemented are 
described in the SMA Order. See 97 FERC at 61,971-73.
    \6\ For purposes of this paper, spot market sales are intended 
to include only hourly transactions.
---------------------------------------------------------------------------

    The Commission reasoned that applying mitigation to spot market 
transactions will also result in mitigation of generation market 
power in longer term (forward) markets by creating a kind of 
competitive ``standard offer'' service for customers. If sellers 
attempt to charge excessive, non-competitive prices in forward 
markets, customers can avoid them by waiting to purchase in the 
real-time market. This puts market pressure on sellers to offer 
competitive prices in the forward markets. And when sellers offer 
competitive forward prices, many buyers will prefer to purchase in 
the forward markets in order to gain price certainty. Staff invites 
comments on the reasonableness of this assumption at the conference.
    In the SMA Order, the Commission also imposed additional 
mitigation on applicants failing the screen. The Commission 
established mitigation for the size of a pivotal supplier (the 
Commission required that when a transmission provider performs a 
study pursuant to a request for interconnection, an unaffiliated 
entity may request that the output of its proposed project be 
modeled for study purposes to serve load within the control area in 
which it is located, without having to formally designate a 
particular load or without having to be selected as a designated 
network resource at the time of interconnection). In addition, to 
address concerns regarding residual transmission market power, the 
Commission required that the parties to the SMA Order employ an 
independent third party to operate and administer their OASIS sites. 
(See 97 FERC at 61,973).

II. Possible Revisions to the SMA Screen

    Many commenters were critical of the SMA screen. In particular, 
some commenters claimed that the SMA screen overstates the amount of 
an applicant's capacity that is available to the wholesale market by 
including capacity committed to serve native load and pre-existing 
contract obligations as well as operating reserves set aside to meet 
regional reliability requirements. Other commenters raised concerns 
on the use of TTCs to determine import capability, since they 
claimed that TTCs may overstate transmission availability, thereby 
overstating the size of the geographic market to the benefit of 
market-based rate applicants. Some commenters objected that the SMA 
passes/fails applicants by using a bright-line standard which is 
overly narrow because it evaluates one hour's supply and demand, 
thereby neglecting to recognize non-peak generation market power or 
the lack thereof.
    In response to these comments, Staff has identified for purposes 
of discussion at the technical conference two general methodologies 
for assessing generation market power that would constitute 
modifications to the interim SMA screen as announced in the SMA 
Order: Pivotal Supplier and Market Share.\7\ Among the improvements 
Staff recommends are that the interim screen should recognize 
planned generation outages when calculating capacity under the 
pivotal supplier and market share models discussed below. In 
addition, Staff recommends that State and Regional Reliability 
Council operating requirements for reliability (i.e., operating 
reserves) should be used when calculating capacity in both the 
pivotal supply and market share screens discussed below.
---------------------------------------------------------------------------

    \7\ Although several alternative screens were proposed by 
commenters (which are summarized below), Staff is not focusing on 
them at this time because of the intensive data requirements 
associated with these screens that would make them burdensome and 
costly for many applicants, and would be administratively difficult 
for Staff to review and perform in the 60-day statutory time period.
---------------------------------------------------------------------------

    Staff continues to propose the use of TTCs in applying the 
interim SMA screen. However, Staff seeks comment on viable 
alternatives (i.e., flexibility to consider historical firm 
transactions, losses, and transmission reserve margins affecting 
available transfer capability). In particular, Staff seeks comment 
on how much transmission capacity should be included in the analysis 
where transmission providers (whose control over transmission has 
not been transferred to an RTO or ISO) calculate the capacity and 
also participate in generation markets. There are also transmission 
and other operating constraints inside the control area being 
evaluated, such that some generators are not able to run to their 
maximum rated capacity. What percent of these generators' capacity 
should be included as participating in the market?
    Also, to address the commenters' concerns as to the SMA's over 
reliance on system peak data, options discussed below propose to 
measure generation market power on a monthly basis. However, Staff 
solicits the input of technical conference participants as to how 
the Commission can obtain the data to make such monthly measurements 
practicable. Migrating to a monthly measurement using the proposed 
models will require collecting applicant and relevant control area 
supply and demand monthly information. Monthly data for the supply 
and the demand for control areas and applicants cannot presently be 
gathered from a single source. Although supply data could be 
obtained from the FERC Form No. 714, private or industry data 
services, and OASIS information, and demand data obtained from the 
FERC Form No. 714 and FERC Form No. 1, Staff would appreciate 
suggestions as to what current reporting requirements exist that 
include necessary data and what reporting requirements may need to 
be expanded to collect the data, if a monthly measurement is 
ultimately adopted.
    In addition, some commenters contended that the SMA Order was 
flawed because it lacked clarity and explanation when defining the 
data that would be used. In response, Staff has developed 
definitions for the data used in the interim generation market power 
screens discussed below. These definitions are set forth in Appendix 
A and Staff seeks comment on the clarity and accuracy of these 
definitions.

[[Page 75232]]

Possible Alternatives to SMA Screen

A. Pivotal Supply Screen--Capacity Surplus Index (CSI)

    The CSI is a Pivotal Supplier screen that is a modified version 
of, and an alternative to, the SMA. Much like the SMA, the CSI 
continues the use of a pivotal supplier concept. However, unlike the 
SMA, rather than considering the applicant's capacity in relation to 
the supply margin, the CSI eliminates the applicant's capacity from 
the analysis entirely and only focuses on whether there is 
sufficient competing supply in the market to meet peak load.
    An important refinement of the CSI over the SMA is that under 
the SMA, the applicant is assumed to have market power in all months 
if its installed capacity is higher than the supply margin (which is 
calculated based on the system's peak day). Rather than calculating 
the supply margin based on the system's peak day, the CSI 
incorporates monthly data and determines whether the applicant is a 
pivotal supplier on a monthly basis. With respect to the applicant's 
control area, the CSI calculation first computes the Control Area 
Competing Supply (all non-applicant installed capacity, minus 
planned outages in the control area, plus imports that are the 
lesser of Uncommitted Capacity or TTC). The Control Area Competitive 
Supply is then compared to the Control Area Peak Demand (which 
includes operating reserves). If the Competitive Supply exceeds the 
Control Area Demand, then the applicant passes the CSI screen. In 
other words, if there is sufficient competing supply to meet peak 
load, the applicant passes the CSI; otherwise, it fails. A similar 
analysis is computed for markets directly interconnected to the 
applicant's control area market.
    Under the CSI, an applicant may be found to be a pivotal 
supplier in one or more months and found not to be pivotal in other 
months. The CSI would only impose price mitigation on the applicant 
in the season(s) in which it was found to be a pivotal supplier.\8\ 
For example, if an applicant is found to be a pivotal supplier 
(having the ability to exercise generation market power) during the 
months of July and August but not during the remaining months of the 
year, the CSI would impose price mitigation on the applicant only 
during the summer period (June through August).
---------------------------------------------------------------------------

    \8\ Although the generation market screens are applied on a 
monthly basis, mitigation could be on a seasonal basis. These 
screens take a snap shot in time, therefore, the month in which 
companies pass/fail may vary (within the season). Accordingly, to 
capture the broader time period where market power may exist, 
seasonal mitigation could be adopted. See note 13.
---------------------------------------------------------------------------

B. Market Share Screens

    Discussed below are two alternatives which incorporate a market 
share approach in determining whether an applicant has the ability 
to exercise generation market power. The Limited Competing Supplier 
screen assesses both installed and uncommitted capacity. The 
Wholesale Market Share screen only assesses uncommitted capacity.
    Unlike the Pivotal Supplier concept which determines whether a 
seller's generation must run to meet peak load, Market Share Screens 
measure whether a seller has a dominant position in the market based 
on the number of megawatts of capacity owned or controlled, i.e., is 
the applicant's control of the market excessive compared to 
competitive supplies. To the extent this is true, the applicant 
would have generation market power. Under the Market Share Screens, 
an applicant may be found to be dominant in the market in one or 
more months and found not to be dominant in the market in other 
months. Just like the CSI, the Market Share Screens would only 
impose price mitigation on the applicant in the season(s) in which 
it was found to be dominant in the market.\9\
---------------------------------------------------------------------------

    \9\ See note 13.
---------------------------------------------------------------------------

    1. Limited Competing Supplier Screen. This generation market 
power screen directly considers the impact of transmission 
constraints. As proposed, the Limited Competing Supplier Screen 
examines the applicant's installed and uncommitted capacity. Under 
this screen, available transmission (measured by TTC) will be 
factored in from OASIS sites and into the analysis of the 
applicant's market share of both installed and uncommitted capacity.
    Under the installed capacity element of this screen, the 
applicant's market share is derived by dividing its installed 
capacity by the sum of the total installed capacity of all suppliers 
in that control area plus the generation that can be imported (as 
limited by TTC). Under the uncommitted capacity element of this 
screen, the applicant's market share is derived by dividing its 
uncommitted capacity \10\ by the sum of the total uncommitted 
capacity of all suppliers in that control area plus the generation 
that can be imported (as limited by TTC).
---------------------------------------------------------------------------

    \10\ Applicant's uncommitted capacity is calculated by taking 
the applicant's installed capacity (generation owned or controlled 
by applicant) less planned outages, native load, long-term sales, 
and operating reserves. The same type of calculation is used when 
determining the amount of uncommitted capacity of competitive 
supplies.
---------------------------------------------------------------------------

    If the applicant's market share is less than 20% for the month, 
applicant passes the generation market screen and would be 
authorized to sell at market-based rates. If the applicant's market 
share is greater than 35% \11\ for the month, then applicant fails 
this generation market power screen. If the applicant's market share 
is between 20% and 35%, the Commission could consider other factors 
in granting/denying market-based rate authority (e.g., transmission 
constraints). Staff seeks comments on what other factors the 
Commission should consider.
---------------------------------------------------------------------------

    \11\ A ceiling of 35% is consistent with the Department of 
Justice's safeharbor threshold, per the 1992 Horizontal Merger 
Guidelines, Section 2.211.
---------------------------------------------------------------------------

    2. Wholesale Market Share (WMS). As noted above, the Limited 
Competing Supplier Screen examines the applicant's installed and 
uncommitted capacity. Many commenters were critical of using 
committed generation in determining market power. They contended 
that it is not possible for a utility to exercise market power over 
its regulated native load for two primary reasons: 1) state 
regulation removes the ability of a utility with significant native 
load responsibilities to exercise market power; and 2) a utility 
would lack any incentive to exercise market power from its regulated 
generation because its native load pays a regulated price.
    An alternative generation market power screen that may address 
these concerns by more narrowly focusing dominance in the wholesale 
market is the Wholesale Market Share (WMS) screen. Like the Limited 
Competing Supplier Screen, this WMS screen would consider market 
share, but only for uncommitted capacity for the wholesale market. 
The intent of this model is to isolate the wholesale supply by first 
capturing the size of supply and demand for the entire relevant 
market, and then removing the supply serving retail demand and 
retail demand itself from the total (and the respective operating 
reserves.) This would isolate wholesale supplies and demand for a 
market share analysis. The WMS is calculated by measuring, on a 
monthly basis, an applicant's market share of uncommitted capacity 
relative to the market's total uncommitted capacity. Issues needing 
discussion at the technical conference are the ability of the 
applicant and vertically integrated utilities to segregate wholesale 
opportunity sales from retail sales and the reasonableness of 
seeking to isolate wholesale and retail supplies.
    In the relevant geographic market for the WMS, an applicant's 
market share is determined by dividing the applicant's uncommitted 
capacity by that of the total uncommitted capacity in the relevant 
market. The applicant's uncommitted capacity is calculated by taking 
the applicant's total installed capacity (nameplate capacity plus 
firm purchases) less planned outages, native load, long-term sales, 
and operating reserves. An applicant's uncommitted capacity 
represents its control of resources available for wholesale trade 
within the relevant market. The relevant market's uncommitted 
capacity is determined by taking the total control area installed 
capacity, plus competing supplies which could be imported from 
adjacent control areas (such imports are assumed to be the lesser of 
uncommitted capacity or TTC), less peak load (native & long-term 
sales) and operating reserve margins.
    Like the Limited Competing Supplier Screen, the WMS uses 20% to 
35% pass/fail thresholds as discussed above.

III. Alternative Models Suggested by Commenters

    Three commenters proposed alternative models to the SMA for 
consideration.
    [sbull] Reliant proposed the Supply Duration Index (SDI). The 
SDI first calculates the sum of generation available from non-
applicants, imported power, the applicant's committed forward 
contracts and new generation, and the applicant's existing 
uncommitted generation. Next, the SDI considers the firm load 
duration curve in percentage terms over the course of a year. For 
some period of time during the year, the sum of all available 
committed generation may be less than the firm load demanded. When 
this occurs, the SDI screen assumes that this firm load can

[[Page 75233]]

only be supplied by the applicant's uncommitted generation 
resources. This represents a time when the applicant may have the 
potential to exercise market power. While this model is interesting, 
the data needed to verify the applicant and control area information 
is not readily available (hourly data). However, in the alternatives 
discussed below, many of the aspects of the SDI (i.e., pivotal 
supplier concept) have been incorporated.\12\
---------------------------------------------------------------------------

    \12\ Comments of Reliant Resources, Inc., pages 5-8.
---------------------------------------------------------------------------

    [sbull] CAISO proposed the Residual Supplier Index (RSI). The 
RSI determines if a supplier is pivotal during a specified set of 
hours or all hours, i.e., without the applicant's supply the market 
demand cannot be met. Because applying a model down to the hour 
creates insurmountable data and administrative difficulties, this 
model is not practical. In particular, obtaining hourly data for 
markets outside of an organized market is not practical nor is 
monitoring such markets on an hourly basis. However, some of the 
critical concepts of the model have been incorporated into the 
Capacity Surplus Index (CSI) screen.\13\
---------------------------------------------------------------------------

    \13\ Comments of the California Independent System Operator 
Corporation, pages 13-18.
---------------------------------------------------------------------------

    [sbull] Lastly, Old Dominion Electric Cooperative proposed the 
Market Simulation Analysis. This modeling technique attempts to 
simulate market conditions using loadflow algorithms which identify 
parallel/looping power flows, and seasonal variations. While such 
models can identify load pockets, daily and seasonal variations, and 
may provide a more precise measure of generation market power, such 
models require extensive data from all market participants 
(including small merchants), could take up to 9 months or more to 
create, and it is unclear how such a model would be applied on a 
case-by-case basis. Accordingly, Staff does not consider this 
alternative to be viable as an interim generation market power 
screen.\14\
---------------------------------------------------------------------------

    \14\ Comments of Old Dominion Electric Cooperative, pages 8-10.
---------------------------------------------------------------------------

IV. Possible Revisions to the SMA Mitigation

    With respect to the SMA mitigation measures, among other things, 
many commenters object to the spot market energy sales mitigation, 
and in particular to the split-the-savings requirement. Commenters 
also oppose as ineffective and harmful to the competitive market the 
requirement to post incremental/decremental cost information.
    Set forth below are alternative mitigation approaches for 
discussion at the technical conference that address many of the 
concerns expressed by commenters. In each approach, Staff proposes 
that the mitigation being considered be applied seasonally.\15\ If 
the applicant fails any month of a season, it would thus be 
mitigated for the entire season (but only that season).
---------------------------------------------------------------------------

    \15\ The four seasons considered are: Summer (June/July/August); 
Fall (September, October, November); Winter (December/January/
February), and Spring (March/April/May).
---------------------------------------------------------------------------

    In addition, to address some commenters' concerns, applicants 
that fail the screen, to the extent necessary, could be required to 
file incremental and decremental cost information only with the 
Commission on a confidential basis.

 A. Traditional Cost-based Rate

    This alternative would require mitigated sellers to have on file 
an up to rate or a cost-based rate for periods when they are 
mitigated. The cost-based rate could be based on an average cost of 
the units expected to run to meet peak demand with an annual revenue 
cap, or an average system or regionwide rate could be established.

B. Single Market Clearing Price

    Under the single market clearing price approach, all 
transactions of the failing applicant would be executed at a single 
market clearing price instead of at multiple split-the-savings 
prices. The applicant would still be required to provide its own 24 
hourly incremental and decremental energy costs by noon for the 
following trading day.\16\ The incremental costs would represent 
offers to sell and the decremental costs would represent bids to buy 
energy during each hour of the trading day. All additional requests 
to purchase and offers to sell energy that are received by 6 p.m. 
for the following trading day would, in combination with the 
applicant's bids and offers, be used to determine a market clearing 
price for energy in each hour of the trading day. The market 
clearing price for any hour would be a price that corresponds to a 
total quantity of energy that just balances the accepted supply 
offers with the accepted purchase bids. That is, it is a price that 
is at least as great as any accepted supply offer and is no higher 
than any accepted purchase bid. It is also a price at which no 
entities whose bids and offers were not accepted would be willing to 
transact.
---------------------------------------------------------------------------

    \16\ In lieu of disclosing this information publicly, the 
mitigated applicant could be required to provide the Commission on a 
confidential basis with all relevant information that supports the 
clearing price.
---------------------------------------------------------------------------

Appendix A--Data Definitions

    The following definitions are recommended for use in the 
proposed generation market power screens.
    Applicant's Peak Demand--Represents the largest electric power 
requirement (based on net energy for load) during a specific period 
of time, usually integrated over one clock hour and expressed in 
megawatts, for the Native Load and Firm Sales that the applicant has 
an ``obligation to serve''.
    Applicant's Total Capacity--Represents the applicant's and their 
affiliate's installed generation nameplate capacity, adjusted for 
seasonal deratings, plus firm purchases.
    Applicant's Uncommitted Capacity--This calculation takes the 
applicant's installed capacity and subtracts the applicant's planned 
outages and the peak demand and operating reserves; which then 
isolates the amount of capacity that is available for wholesale 
competition. The calculation follows:

Total Applicant Capacity (including imports)
--Planned Outages
--Peak Demand
--Operating Reserves
-----------------------------------------------------------------------
--Applicant Uncommitted Capacity

    Control Area Peak Demand--For the control area, this represents 
the largest electric power requirement (based on net energy for 
load) during a specific period of time, usually integrated over one 
clock hour and expressed in megawatts, for the native load and firm 
sales that are under an ``obligation to serve''.
    Control Area Uncommitted Capacity--This calculation takes the 
total control area capacity, adds imports and subtracts the planned 
outages and the peak demand and operating reserves; which then 
isolates the amount of capacity that is available for wholesale 
competition. The calculation follows:

Total Control Area Capacity
-Planned Outages
+Imports
-Peak Demand
-Operating Reserves
-----------------------------------------------------------------------
Control Area Uncommitted Capacity

    Imports--The lesser of either the uncommitted capacity 
(Installed capacity less peak load and operating reserves) from each 
adjacent control area or the total transfer capability between each 
Adjacent Control Area.
    Installed Capacity--Total generating resources (installed 
generation plus firm purchases).
    Operating Reserves--Any operating reserves the applicant is 
required to carry by NERC regional reliability councils or by their 
state utility regulatory commissions to ensure system reliability. 
To accommodate this operating requirement, each applicant will 
submit and support the amount of operating reserves that are 
mandated.
    Planned Outages--Refers to generators that are normally in an 
operating or stand-by status, but are derated or unavailable due to 
routine service or planned maintenance.
    Relevant Geographic Market--The control area in which the 
applicant owns the bulk of its generation and the interconnected 
control areas adjacent to that control area.
    Total Control Area Capacity--Total capacity capability for the 
control area, includes installed generation and firm purchases.

 [FR Doc. E3-00652 Filed 12-29-03; 8:45 am]
BILLING CODE 6717-01-P