Market Manipulation, Market Power, and the Authority of the Federal Energy Regulatory Commission

By Kelliher, Joseph T. | Energy Law Journal, January 1, 2005 | Go to article overview

Market Manipulation, Market Power, and the Authority of the Federal Energy Regulatory Commission


Kelliher, Joseph T., Energy Law Journal


"Of the Commission's primary task there is no doubt, however, and that is to guard the consumer from exploitation by non-competitive electric power companies."1

"Give us the tools and we will finish the job."2

I. INTRODUCTION

For years, the Federal Energy Regulatory Commission (Commission) has promoted competition in wholesale power markets subject to its jurisdiction. It has done so in response to dramatic changes that occurred in the electricity industry over the past twenty-five years. Those changes greatly expanded competition in wholesale power markets, and the Commission made a policy decision to rely increasingly on competition to lower wholesale power prices.

Although the Commission's policy has evolved in response to changes in electricity markets, the goal of Agency policy has remained constant: assuring just and reasonable rates. The Commission has certain legal duties under the Federal Power Act, perhaps the most important of which is assuring that wholesale power rates are just and reasonable. However, the Commission has discretion on what policies it can pursue to assure such rates. The Agency has chosen to rely on competition to achieve that end.

The courts have upheld that approach, in large part, because the Commission has not relied solely on market forces. In fact, the Commission's policies have relied on both competition and regulation to assure just and reasonable rates. The Commission has struggled to find the right balance between competition and regulation.

As the industry has changed, the Commission's role has evolved from setting rates for individual sellers to setting rules of general application that govern electricity markets. Among the most important market rules are those that prevent market manipulation. This article reviews the Commission's authority to prevent market manipulation and finds it wanting.

This article also reviews the Commission's authority to prevent the accumulation and exercise of generation market power3 or horizontal market power. The accumulation of generation market power is a greater concern as the Commission relies on competitive forces to assure just and reasonable prices. Under traditional cost-of-service rate regulation, the accumulation of generation market power is a lesser concern, since the exercise of market power can be controlled by setting individual rates. As the Commission has evolved from setting rates to regulating markets, the accumulation of generation market power is more problematic. This article finds the Commission's authority to prevent accumulation of generation market power to be insufficient.

The Federal Power Act was enacted into law nearly seventy years ago. Much has changed since then. It is unremarkable that the passage of time and the nature of the changes that have swept across the industry created the need for fundamental reforms to the Federal Power Act. This article concludes with a call for legislative action by Congress to bolster the Commission's authority in several key areas in order to strengthen the ability of the Commission to discharge its legal duty to assure just and reasonable rates in the context of competitive wholesale electricity markets.

Part II of this Article reviews the legal duties of the Commission with respect to the regulation of wholesale power sales and disposition of jurisdictional facilities. Part III discusses the dramatic changes that have occurred in the electricity industry over the past twenty-five years and how the Commission's policy evolved in response to these changes. Part IV examines the authority of the Commission to prevent market manipulation and the accumulation of generation market power, concluding that the Commission's current legal authority is insufficient in both areas. Finally, Part V discusses the need for legislative reforms to the Federal Power Act and offers some specific recommendations for such reform.

II. …

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