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E-Notes provides regular briefings on new developments in global energy and
public utility law.

July 2, 2001

Market-Based Rates for Ancillary Services

 Pursuant to Order No. 888, companies with general market-based rate
authority must separately obtain market-based rate authority for ancillary
services.  See Order No. 888 at 31,720 quoting the Federal Energy Regulatory
Commission (FERC) as stating: "The fact that we have authorized a utility to
sell wholesale power at market-based rates does not mean we have authorized
the utility to sell ancillary services at market-based rates."  Accordingly,
an entity with market-based rate authority must make a separate showing with
regard to securing market-based rates for ancillary services.

 In markets that are currently administered by independent system
operators ("ISOs") - i.e., the PJM Interconnection, LLC ("PJM"), the New
York ISO ("NYISO"), ISO-New England ("ISO-NE"), and the California ISO
("Cal-ISO") - the FERC has previously permitted entities with general
market-based rate authority to sell ancillary services in those markets to
the extent that it has authorized other suppliers to sell such ancillary
services.  See Canadian Niagara Power Co., Ltd., 87 FERC ? 61,070 (1999)
(authorizing sales of ancillary services at market-based rates into the
NYISO and ISO-NE markets); Minergy Neenah, L.L.C., et al., 88 FERC ? 61,102
(1999) (authorizing sales of ancillary services at market-based rates into
the NYISO); Atlantic City Elec. Co., et al., 86 FERC ? 61,039 (1999)
(authorizing sales of ancillary services at market-based rates into PJM);
PJM Interconnection, L.L.C., 91 FERC ? 61,021 (2000) (same); see also New
England Power Pool, 85 FERC ? 61,379 (1998); Central Hudson Gas & Elec.
Corp., et al., 86 FERC ? 61,062 (1999); Connectiv Energy Supply Inc., 91
FERC ? 61,076 (2000); AES Redondo Beach, L.L.C., et al., 83 FERC ? 61,358,
order on reh'g and clarification, 85 FERC ? 61,123 (1998), order on reh'g
and clarification, 87 FERC ? 61,208, order on reh'g, 88 FERC ? 61,096
(1999), order on reh'g and clarification, 90 FERC ? 61,036 (2000).

As a general proposition, companies that have sought authority to sell
ancillary services in these ISO markets have simply requested the blanket
authorization for sales of ancillary services.  Many companies have added
that they desire the authority to be extended to additional ancillary
services and geographic markets, as the FERC may specify and authorize in
the future in orders that extend such authority to all sellers previously
authorized to sell energy and/or capacity at market-based rates.  See Edison
Mission Mktg. and Trading, Docket No. ER99-2434-000 (unpublished delegated
letter order issued May 7, 1999).

 The authority to make sales of ancillary services at market-based
rates is not, merely, limited to only those markets were established by the
FERC with operating ISOs.  The criteria for seeking such authority in
non-ISO markets is found in the Avista case.  See Avista Corp., 87 FERC -
61,223, reh'g granted, 89 FERC - 61,136 (1999) ("Avista").  The problem
associated with obtaining market-based rates for ancillary services in
non-ISO markets has centered on the difficulty (or impossibility) of
obtaining estimates of other suppliers' abilities to supply ancillary
services to support a reliable market analysis that demonstrates that the
entity seeking such authority does not have market power in the relevant
markets for ancillary services.  However, in the Avista case, the FERC
authorized the provision of Regulation and Frequency Response, Energy
Imbalance, Operating Reserve - Spinning Reserve Service, and Operating
Reserve - Supplemental Reserve Service at market-based rates in non-ISO
markets with certain conditions.

 The Avista conditions require the Company to consider: (1) the
establishment of an internet site that provides information on, and
conducts, ancillary services transactions; (2) the posting on the internet
site of the offering prices of all available services; and (3) the ability
of customers to request services and make bids for those services using the
site.  Moreover, the entity must file with the FERC one year after the
internet site is operational, and at least three years thereafter, a report
describing its activities in the relevant ancillary services markets.  The
entity must also commit not to sell ancillary services at market-based rates
to:  (i) regional transmission organizations ("RTOs") such as an ISO or
transco, i.e., where the RTO has no ability to self-supply ancillary
services but instead depends on third parties; (ii) a traditional franchised
public utility affiliated with the entity, or sales where the underlying
transmission is on the system of a public utility affiliated with the
entity; or (iii) a public utility that is purchasing ancillary services to
satisfy its own open access transmission tariff requirements to offer
ancillary services to its own customers.  Id. at 61,833, note 12.

 The terms and conditions associated with the provision of ancillary
services at market-based rates must be included in the market-based rate
schedule filed with the FERC and address the limitations on that authority
as discussed above.  For entities which have already obtained general
market-based rate authority, an amendment could be filed in their underlying
market-based rate dockets before the FERC seeking the authority to also sell
ancillary services at market-based rates consistent with the referenced FERC
precedent.

Michael J. Zimmer
John A. Cohen
____________________________________________________________________________
________
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