Xcel Joins Industry Retreat from Market to Cost-Based Pricing of Wholesales

Xcel Energy Services recently became the latest integrated utility to abandon efforts to convince FERC that it lacks generation market power in its control area and thereby surrender its authorization to make control-area power wholesales at market rather than cost-based prices. Entergy made the same decision in July, as did AEP earlier this year. (See Entergy Will Not Renew Market-Based Rate Authority, August 2, 2005). Motivating this retreat is recognition that these large regional utilities are unlikely ever to convince regulators that they have adequately mitigated their generation market power, together with the risk of future refund liability if they are determined to possess market power and the marginal impact that forsaking market pricing will have on bottom lines. Even Southern Company, which is continuing, at least for the moment, its market power proceeding, has indicated that losing its market-based rate authority would not amount to the "death penalty" FERC intended it to be. Similarly, after FERC ordered Duke Power to revert to cost-based sales, the utility pointed out the limited financial effect the switch will have on its business.

Xcel reserved the right to reapply for market-based rates after the Southwest Power Pool ("SPP") becomes the market monitor in Xcel's Southwestern Public Service Co. and Public Service Co. of Colorado service areas. FERC's investigation into Xcel's market power revealed that, once SPP assumes its market monitor duties, the agency might be more inclined to agree that any market power Xcel possesses would be adequately mitigated. But in the meantime, Xcel's acquiescence in cost-based pricing of its wholesales demonstrates that integrated utilities are increasingly unwilling to spend resources to defend market-based rate applications, and are quite comfortable with at least partially returning to the familiar world of cost-based pricing. As a result, any leverage over utilities with market power that FERC sought to gain with the interim market power screens may become elusive and new approaches to market power may be in order.