Re: FEDERAL ENERGY REGULATORY COMMISSION, Investigation of Terms and Conditions of Public Utility Market-Based Rate Authorizations,
Docket No. EL01-118-000

Dear Secretary Boergers:

Enclosed for filing in the referenced docket the Public Advocate, State of Maine hereby submits electronically the Comments of the National Association of State Utility Consumer Advocates on the terms and conditions of public utility market-based rate authorizations.

If there are any questions concerning this filing, please call me at 207-287-2445.

Very truly yours,

Stephen G. Ward

Stephen G. Ward
Public Advocate
State of Maine

Attachments: Comments of the National Association Utility Consumer Advocate
Certificate of Service

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION

FEDERAL ENERGY REGULATORY )
COMMISSION )
Investigation of Term and Conditions of Public ) Docket No. EL01-118-000
Utility Market-based Rate Authorizations )

CERTIFICATE OF SERVICE

Pursuant to Rule 2010 of the Commission’s Rules of Practice and Procedure, I hereby certify that I have this day served a copy of the foregoing document on all persons designated on the official service list compiled by the Secretary in this proceeding.

Dated at Augusta, Maine this 5th day of December, 2001.

Stephen G. Ward

____________________________
Stephen G. Ward
Public Advocate, State of Maine

UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Investigation of Terms and Conditions
of Public Utility Market-based Rate
Authorizations
Docket No. EL01-118-000

COMMENTS OF THE NATIONAL ASSOCIATION OF STATE UTILITY
CONSUMER ADVOCATES WITH RESPECT TO MARKET-BASED
RATES AND AUTHORIZATIONS FOR WHOLESALE TRANSACTIONS

Pursuant to the Commission's authorization for filing comments and reply comments in the above-captioned docket, as stated in the Commission's order issued November 20, 2001, the National Association of State Utility Consumer Advocates hereby submit initial comments on the proposal presented in that order. The National Association of State Utility Consumer Advocates (NASUCA) is an association of state agencies and other entities that are designated by statute in their respective states as the representative of consumer interests in matters within the jurisdiction of that state's public utility commission or affecting the price, reliability or quality of utility services. Currently there are 44 offices in 41 states that are NASUCA members. For many years, NASUCA and its members have actively participated in matters pending before this Commission including proceedings relating to natural gas pipeline regulation, wholesale electric markets, the formation of Regional Transmission Organizations and the formation and operation of Independent System Operators in several regions of the country.

As is the case with many membership-based organizations, NASUCA typically acts by means of resolutions adopted at meetings of its membership. In the case of the market-based rate authorizations which are the subject of the instant proceeding, NASUCA has adopted a number of resolutions that touch on, or indeed directly address, this topic. The most recent such resolution is captioned "Resolution: Urging that the FERC Employ Price Regulation and/or Other Mitigation Measures Where Effective Wholesale Competition Does Not Exist And Where Market-based Pricing Therefore Does Not Produce Just and Reasonable Rates". This resolution was adopted without dissent at NASUCA's mid-year meeting in Santa Fe, New Mexico on June 19, 2001. The resolution is attached to these comments for the Commission's convenience. Previous NASUCA resolutions dating back to 1996 have addressed the appropriate characteristics of independent transmission corporations, of market power mitigation measures, of independent system operator authority and of the prerequisites for vibrant wholesale competition.

The most recent NASUCA resolution (2001-01, adopted June 19, 2001) specifically endorses the type of mitigation that the Commission proposes in its November 20,2001 order. Its final clauses read as follows: "Therefore Be It Resolved, that NASUCA urges the FERC [Federal Energy Regulatory Commission] to use the powers vested in it by Congress and assure just and reasonable rates by ordering cost-based price regulation and/or other appropriate means of mitigation in any wholesale market where rates are not demonstrably and reliably just and reasonable; Be It Further Resolved, that the FERC should use the powers vested in it by Congress to act to identify revenues secured as a result of the exercise of market power and in violation of the FPA [Federal Power Act] and order these revenues be refunded to customers; Be It Further Resolved, that NASUCA urges the FERC to expand its market power analysis beyond the hub-and-spoke methodology..."

In each of these respects NASUCA's June 19 Resolution is fully consistent with the Commission's November 20 order, and in particular with the Commission's proposal to mandate the revision of market-based authorizations to incorporate a prohibition against "engaging in anti-competitive behavior or the exercise of market power" and to establish a condition for the retention of such authority that a public utility is "subject to refunds or other remedies as may be appropriate..." (Order, p.5).

NASUCA strongly supports establishing these conditions and making explicit this prohibition against anti-competitive behavior and the exercise of market power. The experience to date both in electricity auction markets and academic research casts doubt on the assumption that customary market power screens, perhaps suitable for other industries, or “soft cap” limits on extreme bidding behavior, are sufficient to prevent subtle exercise of market power in the new wholesale electricity markets. Therefore, regulators need fallback measures to generate reasonable rates. We regard the Commission’s review of market based rate policies as precisely the type of action that assurance of just and reasonable wholesale rates compels. We therefore agree with the statement in the Commission's November 20 order that: "...our proposal herein is necessary to ensure that rates which are market-based remain just and reasonable, and to ensure that the Commission can adequately remedy any anti-competitive behavior or the exercise of market power ... and protect customers through refunds or other remedies where appropriate." We further applaud the Commission’s actions in applying its newly announced policy in the course of reviewing requests for continued market-based sales authority by various public utilities subject to the Commission’s oversight.

We welcome the opportunity to submit these comments and anticipate submitting reply comments in this docket at a later date.

Respectfully submitted,

Stephen G. Ward

Stephen Ward, President
National Association of State Utility Consumer Advocates
Public Advocate, State of Maine

Attachment: NASUCA Resolution 2001-01

2001-01
NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES
RESOLUTION
Urging That The FERC Employ Price Regulation and/or Other Mitigation Measures Where Effective Wholesale Competition Does Not Exist, And Where Market-Based Pricing Therefore Does Not Produce Just And Reasonable Rates
WHEREAS, A workable wholesale market structure is vital to ensure reasonable prices in electric markets and long-term reliability of electric delivery to retail and wholesale consumers;
WHEREAS, Existing electricity markets face limitations with respect to supply availability, transmission adequacy and effective, broadly accessible demand-response;
WHEREAS, These unique problems create opportunities for anti-competitive behavior and economic inefficiency through strategic withholding of capacity or energy, opportunistic withholding during times of shortage, or deferral of construction or interconnection.
WHEREAS, Market abuses in interstate markets by large interstate utility holding companies led Congress to enact consumer protection standards in the Public Utilities Holding Company Act and Federal Power Act in 1935;
WHEREAS, The extensive consolidation of control over generation by marketers and generation owners may once again lead to a risk of abusive control of the wholesale electric supply market unless enforcement of market protections is dependable and firm;
WHEREAS, The Energy Policy Act of 1992 authorizes FERC, in Section 205 of the FPA, to establish market-based rates for a competitive wholesale power market;
WHEREAS, The distinction between market-based rates and cost-based rates is a matter of means rather than end – both mechanisms are expected to produce prices that reflect the suppliers’ marginal costs plus a reasonable return and to satisfy the just and reasonable requirement of the FPA;
WHEREAS, Prerequisites for effective competition in wholesale markets include (a) a sufficient number of buyers and sellers, (b) transparent prices, (c) reasonable costs and terms of entry, (d) buyers who can control their demand in response to price, and (e) implementation of appropriate transmission policies;
WHEREAS, Congress has, in adopting the Federal Power Act, declared that unjust and unreasonable wholesale electricity rates and charges are unlawful and vested in the Federal Energy Regulatory Commission (FERC) the authority in Section 205 to ensure that wholesale electricity rates and charges are just and reasonable;
WHEREAS, Congress in 1988 adopted the Regulatory Fairness Act that gave the FERC the authority to determine not only that rates are just and reasonable but are also subject to refund;
WHEREAS, The failure of western wholesale markets to function properly has resulted in unreasonable and unstable prices, which have created a state of turmoil, thereby placing unacceptable impacts on consumers and the public;
WHEREAS, The FERC’s use of a hub and spoke analysis is not effective in determining whether a participant is in a position to exercise market power;
WHEREAS, Offerings of market based rates under the FERC’s interpretation of Section 205 of the FPA leave the burden to consumers to prove that markets are dysfunctional and are harming consumers.
WHEREAS, State government officials and others have requested and petitioned the FERC to review the structure and pricing of markets in the western region and New York to determine whether rates in those markets are just and reasonable;
WHEREAS, The FERC has not appropriately exercised its authority to review these markets in totality, instead choosing to evaluate a small time segment of the market;
WHEREAS, The FERC has also not appropriately exercised its authority to correct flaws in wholesale markets where it has found that market-based rates are not just and reasonable;
WHEREAS, NASUCA Resolution 98-12 ("Resolution 98-12) urged Federal and State policymakers to protect the interests of consumers in setting policies to create an effective market structure for competitive utility services;
WHEREAS, Resolution 98-12 warned policymakers that the individual characteristics of utility markets present anti-competitive problems in the transition from regulated monopolies to competitive markets;
WHEREAS, The failure of existing wholesale markets could set a dangerous precedent for regional wholesale markets throughout the Nation;
WHEREAS, Consumers face serious harm if the wholesale power markets result in unjust or unreasonable rates;
THEREFORE BE IT RESOLVED, that NASUCA urges the FERC to use the powers vested in it by Congress and assure just and reasonable rates by ordering cost-based price regulation and/or other appropriate means of mitigation in any wholesale market where rates are not demonstrably and reliably just and reasonable;
BE IT FURTHER RESOLVED, that the FERC should use the powers vested in it by Congress to act to identify revenues secured as a result of the exercise of market power and in violation of the FPA and order that these revenues be refunded to customers;
BE IT FURTHER RESOLVED, that NASUCA urges the FERC to expand its market power analysis beyond the hub and spoke methodology;
BE IT FURTHER RESOLVED, that NASUCA authorizes its Executive Committee to develop specific positions and to take appropriate actions consistent with the terms of this resolution. The Executive Committee shall advise the membership of any proposed action prior to taking action if possible. In any event the Executive Committee shall notify the membership of any action pursuant to this resolution.