FTC Staff Comments on FERC's Efforts to Develop Standard Market Design for Wholesale Electric Power

In comments submitted last week, the staff of the Bureau of Economics and the Office of the General Counsel of the Federal Trade Commission presented its views concerning the Federal Energy Regulatory Commission's (FERC) Working Paper regarding FERC's efforts to develop a Standard Market Design (SMD) for wholesale electric power markets. Currently, there is no single set of rules governing the transmission of electricity in wholesale markets, and an SMD would harmonize electricity spot market operations and the rules governing transmission pricing. An SMD also would harmonize the rules across geographic regions for operating the transmission grid.

In its comment, FTC staff supported the efforts of FERC to increase competition in wholesale electric power markets through creation of regional transmission organizations (RTOs) in all areas of the country. The FTC staff offered two suggestions for the general development of an SMD.

First, implementation of pricing signals for transmission services through the use of locational marginal pricing (LMP) and after-the-fact market monitoring by RTOs are unlikely to be sufficient to prevent harm to customers from the exercise of generation market power. A stable, forward-looking framework established to address market power through structural remedies that apply during pertinent periods, and that preserves incentives to invest in efficient new generation and transmission capacity, is likely to serve customers best over time, according to FTC staff. This framework should be established as part of the SMD, staff recommended. If FERC finds that concerns other than efficiency (e.g. existing market power in generation markets) cause it to adopt policies that reduce generation entry and other supply expansion incentives, FERC may wish to consider policies to supplement generation investment incentives. One such approach, according to the FTC staff, would be to require load-serving entities to secure a substantial portion of the capacity to meet future peak demand levels.

Second, the FTC staff comment emphasized that RTO governance issues are likely to be critical in addressing subsequent RTO policy issues. In particular, FERC's most important RTO governance decision is likely to be whether an RTO: 1) internally sets market rules as well as performs market operations (such as balancing, settlement, and scheduling); or 2) restricts itself to establishing market rules while contracting with an independent entity for market operations. This decision, according to the comment, likely will have wide-ranging consequences for how RTOs need to be regulated and how they are likely to perform. According to the FTC staff, "our review of the interrelationships between governance and transmission rights below indicates that the second approach to governance has distinct advantages."

The staff comment then discussed four specific suggestions that related to these two themes: 1) performing market power assessments as part of the standard market design; 2) ensuring efficiency incentives within RTO operations; 3) avoiding customer risk if RTOs offer financial transmission rights (FTRs); and 4) providing incentives to expand transmission and generation capacity efficiently.

These comments represent the views of the staff of the Bureau of Economics and the Office of the General Counsel of the Federal Trade Commission. They are not necessarily the views of the Federal Trade Commission or any individual Commissioner. The Commission has, however, voted 5-0 to authorize the staff to submit these comments.

(FTC File No.: V020018)