FTC Staff Comment Before the Federal Energy Regulatory Commission Concerning Third-Party Provision of Ancillary Services; Accounting and Financial Reporting for New Electric Storage Technologies

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UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Third-Party Provision of Ancillary 	)
Services; Accounting and Financial 	) 	Docket Nos. RM11-24-000 and AD10-13-000
Reporting for New Electric Storage 	)
Technologies 	)
Comment of the Staff of the Federal Trade Commission
September 6, 2012
I. 	Introduction
The Federal Trade Commission (FTC) staff appreciates this opportunity to comment in
response to the Federal Energy Regulatory Commission’s (FERC’s) Notice of Proposed
Rulemaking (NOPR) on Third-Party Provision of Ancillary Services; Accounting and Financial
Reporting for New Electric Storage Technologies.1 The NOPR indicates that third parties
seldom provide ancillary services outside of organized wholesale electricity markets,2 despite
procedures that allow sales of such services outside the organized markets at market-based rates.
We read the NOPR in the context of FERC’s concerns about market power and its
decision to measure market power primarily in terms of the market share of each firm (including
entrants).3 By contrast, we (and economists generally) expect that entry by innovative, lower-
1 This comment expresses the view of the FTC’s Office of the General Counsel and Bureau of
Economics. Although the comment does not necessarily represent the views of the FTC or of
any individual Commissioner, the Commission voted to authorize us to file it.
2 NOPR P 11.
3 NOPR P 6 explains that the market power concern underlying the NOPR arises because utilities
operating under cost-based rate regulation may be able to pass along to consumers the price
premiums that third-party suppliers with market power could charge: “The concern in this
situation has been that if third parties who had not been shown to lack market power were
permitted to sell to public utilities . . ., the public utility’s ability to recover such purchase costs .
. . might lead it to agree to above-market purchases . . .”
FERC’s concern may be that entry in this instance will engender unusual price effects
associated with collusion among suppliers or with corrupt or imprudent procurement behavior by
regulated utilities. We note that many independent generators outside the organized markets are
facing new requirements to obtain ancillary services from transmission utilities or to self-supply
such services. If FERC decides to order the quality-adjusted pricing of ancillary services, some

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cost firms that increases overall market supply will reduce market prices and diminish the ability
of all suppliers to exercise market power. In the present matter, potential third-party providers of
ancillary services maintain that they lack sufficient access to non-proprietary information to
determine the size of the markets for ancillary services – information that is critical to entering
with FERC’s permission to charge market-based rates.4
FERC anticipated that potential third-party providers of ancillary services would apply
for market-based rates and enter the ancillary services markets. Instead, such firms have not
entered. FERC has come to understand that its own market power screening process has become
a regulatory barrier to competition in this situation. One reason given for the lack of entry is
applicants’ reported inability reliably to determine the size of the market. Consequently,
potential suppliers of ancillary services may decide that it is too difficult, if not impossible, to
correctly complete the process of applying for market-based rates. To address this problem,
FERC proposes to change its rules to facilitate entry, with the purpose of reducing the regulatory
barrier to competition in ancillary services markets posed by the usual application of its market
share screen.
We commend FERC for making it easier for applicants to identify market participants
and estimate the size of the market, thereby reducing regulatory barriers to entry into ancillary
independent generators may find it advantageous to buy such services from third-party suppliers
– such as those discussed in the NOPR – in order to fulfill those new requirements. In all
likelihood, these independent purchasers of ancillary services will have strong incentives to
minimize costs. State regulators conducting prudency reviews may be able to use the prices that
independent purchasers pay as a yardstick to better detect supplier collusion or corrupt/imprudent
procurement behavior by regulated utilities. In this way, the components of the NOPR that we
discuss in Sections III and IV below are interrelated.
4 If an applicant for authority to charge market-based rates passes FERC’s market power screen,
FERC will undertake a process to grant such authority. FERC uses the applicant’s market share
as one of its primary initial screens for market power. (The pivotal supplier test is the other
initial screen.) To determine market share, FERC divides the applicant’s size (generally
measured in terms of capacity to provide ancillary services) by the size of the market.
In NOPR PP 4-11, FERC discusses the Avista and Ocean Vista cases, which rely on
FERC’s existing market power screens and set the framework for the NOPR. Previous
comments by the FTC and its staff have advocated market power analysis that incorporates not
only market shares but also other economically relevant indicia of market power. The revised
Horizontal Merger Guidelines that the FTC and the Department of Justice issued two years ago
(http://ftc.gov/os/2010/08/100819hmg.pdf) discuss several of these indicators of market power.
As we have done previously (see, e.g., http://www.ftc.gov/os/2011/06/1106ferchorizmarket.pdf,
infra note 8), we continue to encourage FERC to adopt a more complete approach for assessing
market power. The use of a more complete approach is likely to sharpen FERC’s ability to
gauge market power, to the benefit of consumers.

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services markets. Nonetheless, we believe that FERC could pursue this goal even more
effectively by hewing more closely to the economic principles that underpin the
FTC/Department of Justice Horizontal Merger Guidelines. In particular, FERC’s proposed
approach likely will continue to impede competitive entry by understating the size of markets for
ancillary services and overstating the market power of applicants. By following more closely the
economic principles embodied in the Horizontal Merger Guidelines, FERC could further reduce
regulatory barriers to entry and provide benefits to consumers in terms of lower prices and
improved reliability. We discuss this recommendation in Section III of this comment.
According to the NOPR, FERC also aims to apply the key quality-adjusted pricing
reform in Order No. 755 to areas outside the organized wholesale power markets. We agree that
recognition of quality differences among ancillary service providers is likely to spur innovation
and investment that benefits consumers by reducing costs and increasing service reliability.
Section IV below elaborates on this perspective and discusses a specific application of this point.
II. 	Interest of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers, both through enforcement
of the antitrust laws and consumer protection laws and through competition policy research and
advocacy. The FTC often analyzes regulatory or legislative proposals that may affect
competition or allocative efficiency in the electric power industry. The FTC also reviews
proposed mergers that involve electric and natural gas utility companies, as well as other parts of
the energy industry. In the course of this work, as well as in antitrust and consumer protection
research, investigation, and litigation, the FTC applies established legal and economic principles
as well as recent developments in economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
antitrust enforcement and competition advocacy.5 The FTC’s competition advocacy program has
produced two staff reports on electric power industry restructuring issues at the wholesale and
retail levels.6 The FTC staff also contributed (as did FERC staff) to the work of the Electric
5 See, e.g., Opening Remarks of the FTC Chairman at the FTC Conference on Energy Markets in
the 21st Century: Competition Policy in Perspective (Apr. 10, 2007), available at
http://www.ftc.gov/speeches/majoras/070410energyconferenceremarks.pdf. 	FTC merger cases
involving electric power markets have included the DTE Energy/MCN Energy (2001) (consent
order), available at http://wwwftc.gov/os/2001/05/dtemcndo.pdf; and PacifiCorp/Peabody
Holding (1998) (consent agreement), available at
http://www.ftc.gov/os/1998/02/9710091.agr.htm.
6 FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/elec/electricityreport.pdf; FTC Staff Report, Competition and Consumer

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Energy Market Competition Task Force, which issued a Report to Congress in the spring of 2007
(available at http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-fina-rpt.pdf). In addition, the
FTC has held public conferences on energy topics, the most recent of which was Energy Markets
in the 21st Century on April 10-12, 2007.7
The FTC and its staff have filed numerous competition advocacy comments with FERC
and participated in FERC technical conferences on market power issues. For example, in March
2007, the Deputy Director for Antitrust in the FTC’s Bureau of Economics served as a panelist
for a technical conference in Docket No. AD07-2-000 on FERC’s merger and acquisition review
standards under FPA Section 203. The FTC submitted comments in July 2004 and January 2006
in FERC’s proceeding in Docket No. RM04-7-000 on its FPA Section 205 standards for market-
based rates. FTC Staff commented on FERC’s Analysis of Horizontal Market Power under the
Federal Power Act (Docket No. RM11-14-000) in June 2011.8 The FTC also has commented on
FERC’s initiatives to promote wholesale electricity competition and on various state issues
associated with restructuring the electric power industry.9
III. 	Refining the Identification of Market Participants Based on Analysis of Entry
FERC proposes that the screens for assessing market power in sales of energy also serve
as the market power screens for two ancillary services – Energy Imbalance and Generator
Imbalance. FERC reaches this conclusion because “[u]nits capable of providing Energy
Imbalance and Generator Imbalance do not appear to require any different technical equipment
or suffer from any different geographical limitations compared to units that provide energy or
Protection Perspective on Electric Power Regulatory Reform (July 2000), available at
http://www.ftc.gov/be/v000009.htm (compiling previous comments that the FTC staff provided
to various state and federal agencies).
7 Conference materials are available at
http://www.ftc.gov/bcp/workshops/energymarkets/index.shtml. Other programs have included
the FTC’s public workshop on Market Power and Consumer Protection Issues Involved with
Encouraging Competition in the U.S. Electric Industry, held on Sept. 13-14, 1999 (workshop
materials available at http://www/ftc.gov/bcp/elecworks/index.shtm); and the Department of
Justice and FTC workshop on Electricity Policy, held on April 23, 1996.
8 FTC Staff, Comment Before the Federal Energy Regulatory Commission on Analysis of
Horizontal Market Power Under the Federal Power Act (June 1, 2011), available at
http://www.ftc.gov/os/2011/06/1106ferchorizmarket.pdf.
9 See, e.g., Federal Trade Commission, Comment Before the Federal Energy Regulatory
Commission on Wholesale Competition in Regions with Organized Electric Markets (Apr. 17,
2008), available at http://www.ftc.gov/be/v070014b.pdf. A listing, in reverse chronological
order, of FTC and FTC staff competition advocacy comments to federal and state electricity
regulatory agencies is available at http://www.ftc.gov/opp/advocacy_date.shtm.

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capacity.”10 By contrast, FERC observes that “[t]here appear to be significant technical
requirements or limitations that apply to the provision of ancillary services other than Energy
Imbalance and Generator Imbalance such that the existing market-based rate screen may not be
adequate to capture the potential horizontal market power of sellers of these other ancillary
services.”11 This is FERC’s stated reason for limiting the use of its traditional energy market
power screens to Energy Imbalance and Generator Imbalance and not extending those screens to
other ancillary services.
The NOPR’s discussion of technical requirements or limitations lumps together two
different concepts that we recommend FERC consider separately. One concept involves changes
in system conditions that may give rise to transmission congestion from time to time.
Geographic markets may become smaller when transmission is congested, and the number of
suppliers may decrease when this occurs. The second concept is that a lack of equipment or
software may prevent a generation facility from providing specific ancillary services. FERC
proposes to exclude some potential suppliers from the roster of market participants based on such
a lack of necessary equipment. We discuss these distinct concepts separately.
Changes in System Conditions Can Result in Fluctuations in the Relevant Geographic Markets
In P 21 of the NOPR, FERC observes that changes in system conditions can determine
whether an ancillary service provided at one location can effectively satisfy the demand for that
service at a second location. This is one of the essential inquiries in determining the relevant
geographic market(s) within which to conduct a market power analysis. FERC’s observation is
consistent with the FTC’s position in prior comments and cases about electricity geographic
markets more generally (e.g., the PacifiCorp matter referenced in note 5, supra).
Although we believe that P 21 of the NOPR accurately describes the fluctuations in the
scope of geographic markets for ancillary services, this important insight does not appear to
permeate the NOPR more generally. For example, NOPR P 15 confirms that FERC’s general
approach is to rely on default assumptions about the scope of geographic markets. We
encourage FERC to recognize that temporal considerations – i.e., changes in the scope of the
market stemming from fluctuations in system conditions – are an important element pervading
the entire determination of relevant geographic markets in the electric power industry.
Recognition of how geographic markets for electric power can fluctuate in size could help
10 NOPR P 19.
11 Id. P 21.

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improve the quality of FERC’s analysis and decision-making, both in market-based rate matters
and in merger reviews.12
Firms that Lack the Specific Equipment Necessary to Serve a Market Should Nonetheless Be
Considered Market Participants if They Would Enter Profitably and in Timely Reaction to
Supracompetitive Prices
As discussed in the NOPR, FERC concludes that market power screens used for energy
markets are not appropriate for assessing market power in some ancillary services markets.
NOPR P 17 provides several examples in which a particular generation resource is unlikely to be
able immediately to supply a specific ancillary service. As we noted above, P 21 states that
“[t]here appear to be significant technical requirements or limitations that apply to the provision
of ancillary services other than Energy Imbalance and Generator Imbalance such that the existing
market-based rate screen may not be adequate to capture the potential horizontal market power
of sellers of these other ancillary services.” P 23 appears to indicate that non-traditional,
asynchronous generation resources should not be considered as existing suppliers of Reactive
12 Because electricity demand and supply conditions in one time period are largely independent
of those in other periods (due to the lack of storage and inventories), each period can have a
different geographic market associated with it. For analytical convenience, periods with similar
demand and supply conditions may be analyzed together. Exceptional demand and supply
conditions can serve as extremes to use in the analysis of the conditions most and least likely to
allow the exercise market power. FERC may then wish to take into consideration the changes in
consumer welfare expected to occur under these different conditions. This process involves
estimating potential market power under different conditions and the probability that these
conditions will occur. Structural or other remedies could be limited to periods when the exercise
of market power is likely.
States already use this perspective as a routine matter when they seasonally adjust retail
rates to reflect the higher prices caused by transmission congestion (which, among other things,
impedes access to lower-priced power from other areas). States can reasonably insist on
seasonal differences in rates because similar patterns of transmission congestion recur during
certain seasons each year. An example regarding conditional market power mitigation has arisen
in an area within the Electric Reliability Council of Texas (ERCOT). Staff of the Public Utility
Commission of Texas (with review by the ERCOT market monitor) proposed a voluntary market
power mitigation settlement that applies only when specific supply and demand conditions are
present. Under the settlement plan, the Public Utility Commission will not allege that NRG
Energy has exercised market power (stemming from withholding behavior) if NRG follows
specified bidding and selling practices. These “safe harbor” provisions of the settlement pertain
to periods in which ERCOT is most concerned about NRG’s role as a pivotal supplier in the
Houston area – periods when demand or supply conditions create transmission congestion and
narrow the relevant geographic market. The settlement agreement is available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/40488_1_728838.PDF.

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Supply and Voltage Control services if they have not installed the electronic controls required to
supply these services.
Based on economic research as well as FTC litigation experience, the fact that a potential
entrant has not installed a particular piece of equipment may not be a sufficient reason to exclude
it from the range of potential suppliers to which customers can turn in response to a price
increase (or a non-price diminution of competition). In appropriate circumstances, these
potential suppliers should be considered existing market participants.13 The key question is
whether such a firm, even though not currently producing, likely would begin meaningful
production in a timely fashion in the face of incumbent suppliers’ exercise of market power. At
one temporal extreme, there could be a very short lag between incumbents’ imposition of
supracompetitive pricing and meaningful new entry if a potential entrant (a generator) has
already nearly installed all of the equipment needed to provide an ancillary service, and the
additional cost to enter could be de minimis. Similarly, the ranks of existing market participants
could swell if one or more enterprising equipment manufacturers could offer quick construction
of turnkey facilities on a rental basis in the relevant geographic market(s). FERC’s proposed
approach counts only incumbent firms’ contributions to the size of the market. Where potential
entrants participating in the market have a substantial presence individually or in the aggregate,
FERC’s approach – by understating the size of the market – could significantly overstate
entrants’ market shares (and presumed market power).
We encourage FERC to refine its analysis to distinguish potential third-party providers of
ancillary services that should be viewed as existing market participants from those that should
not. In general, a potential entrant that is likely to enter rapidly and profitably should be
13 Section 4 of the Horizontal Merger Guidelines (Market Definition). Section 9 of the
Horizontal Merger Guidelines discusses factors bearing on market entry, focusing on the
timeliness, likelihood, and sufficiency of entry. Section 5.1 discusses circumstances in which
potential entrants should be viewed as present market participants. Where entry by third-party
providers of ancillary services would be timely, likely, and sufficient (as described in Section 9
of the Horizontal Merger Guidelines), FERC also may wish to consider granting market-based
rates because of the low risk that incumbents could exercise market power. See, e.g., J. Hilke
and P. Nelson, The Economics of Entry Lags: A Theoretical and Empirical Overview, 61
Antitrust L.J. 365 (1993).
We recognize that FERC may be concerned that viewing some potential entrants as
current market participants would allow some incumbent suppliers to pass FERC’s market power
screens, even though they would fail those screens if the potential entrants were disregarded.
The present situation, however, may be even more detrimental to competition because it creates a
barrier to entry. Such entry likely would expand supply and diminish the profitability of
incumbents’ efforts to raise prices. A pilot program applicable to a limited geographic area
could test the tradeoff between a more restrictive market power screen and the benefits fostered
by lower barriers to entry.

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regarded as an existing market participant, and its anticipated capacity, output, or sales volume
should be included in the corresponding figures for the entire market. By contrast, for firms
unlikely to accomplish such timely and meaningful entry, it is often inappropriate to include their
anticipated capacities or sales numbers in calculating total market data.14
IV. 	Expansion of Quality-Adjusted Pricing for Ancillary Services to Areas Outside
Organized Markets
FERC Order No. 755, which recognized that higher-quality ancillary services provide
greater system benefits per unit of service, requires that compensation for ancillary services
reflect the quality differences among different sources of such services.15 Order No. 755,
however, applies only to organized wholesale markets regulated by FERC. In NOPR PP 47-54,
FERC proposes to extend the same concept to wholesale power markets outside the organized
markets.
We support this extension. Given that uniform pricing – i.e., pricing that makes no
adjustments for differences in quality – constitutes a form of discrimination against quality-
enhancing innovations, we favor quality-adjusted pricing of ancillary electricity services. A one-
size-fits-all pricing approach favors the technology with the lowest price per unit, even if use of
that technology results in higher costs and lower quality in the aggregate. We see strong reasons
to expand the application of quality-adjusted pricing to areas outside the organized markets,
leading to increased innovation and consumer welfare.
In NOPR P 53, FERC focuses on a particular form of discrimination against quality-
enhancing innovations. It concerns the level of reserves required of transmission customers that
elect to supply some of their own ancillary services – namely, Regulation and Frequency
Response services. If a transmission customer chooses to self-supply an ancillary service, the
transmission service provider can require the customer to maintain reserves for such service.
Reportedly, transmission service providers outside of organized wholesale power markets
typically do not adjust these reserve requirements to reflect differences in the quality of the
reserves that the transmission customers maintain. When the reserve requirement is inflexible, a
transmission customer lacks the incentive to develop innovations that lead to higher-quality
14 Contributions to competition by potential entrants that are not considered current market
participants should be evaluated in a separate entry analysis. See Sections 5.1, 5.2, and 9 of the
Horizontal Merger Guidelines for a discussion of distinctions between entrants and current
market participants.
15 It is critical to ensure that quality adjustments to prices are justified. Inaccurate quality
adjustments can cause inefficiencies that harm consumers. They also can bias innovations and
investments toward one or more specific technologies.

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Regulation and Frequency Response services. This effect may be particularly pronounced when
the higher-quality service happens to cost more per unit, even if the innovation reduces costs in
the aggregate. This form of discrimination is likely to deny to transmission customers (and
ultimately consumers) the benefits associated with this form of innovation. A system of setting
customized reserve requirements that recognizes quality differences among reserves is likely to
benefit consumers through increased innovation that lowers aggregate costs and improves
reliability. Consequently, we support FERC’s proposal to insist that transmission providers
adjust reserve requirements for transmission customers to reflect the quality of the reserves
maintained by those customers.
In summary, we agree that expanding the coverage of FERC Order No. 755 is warranted.
Such expansion is likely to provide incentives in more areas to undertake innovations and
investments that will lower system costs and increase system reliability to the benefit of
consumers. Thus, we support the proposals in PP 47-53 designed to broaden the geographic
reach of the quality-adjusted pricing reforms for ancillary services contained in FERC Order No.
755.