FERC's new affiliate rules could harm competition, observers say

FERC's new affiliate rules could harm competition, observers say

Washington (Platts)--29Jul2004


Rules approved Wednesday by the US Federal Energy Regulatory Commission aimed
at ensuring electric utilities consider all competitive options before seeking
agency approval of a transaction with an affiliate could harm competition in
certain areas, industry analysts said Thursday. In its order, FERC outlined
new standards it will use to determine whether an affiliate transaction--such
as moving an unregulated plant into native-load ratebase or signing a
power-purchase agreement with an unregulated affiliate--would harm the
wholesale market. In order to win commission approval for such a transaction,
the utility must prove that it conducted an open process fair to all bidders,
included standardized product definitions and was overseen by an independent
third party. But while FERC believes the rules will promote wholesale
competition and bring efficiencies to end-use customers, some observers said
the new rules could encourage utilities to simply bypass the FERC process in
general and build their own plants.

"If there are disagreements between a state and FERC" on whether an affiliate
transaction is beneficial for customers, "the state is just going to tell the
utility to build a plant and put it in rate base," one utility source said,
adding that competition could ultimately end up being harmed. "Some utilities
[will] decide that its not worth the hassle" to meet the FERC guidelines,
another utility executive said. Competitive power suppliers, however,
applauded the new standards and say they are optimistic the rules will result
in stronger wholesale markets. In a statement released late Wednesday,
Electric Power Supply Assn President Lynne Church said the rules demonstrate
FERC's "intention to more closely scrutinize affiliate-related transactions by
subjecting them to a stricter evidentiary standard and the type of fair and
open competitive solicitation process for which EPSA has vigorously
advocated."

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