[Federal Register Volume 63, Number 79 (Friday, April 24, 1998)]
[Proposed Rules]
[Pages 20340-20359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10686]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 /
Proposed Rules
[[Page 20340]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 33
[Docket No. RM98-4-000]
Revised Filing Requirements (April 16, 1998)
AGENCY: Federal Energy Regulatory Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
proposing to revise 18 CFR part 33 to update the filing requirements
for applications under part 33, including public utility mergers. The
Commission expects that, by providing applicants more detailed guidance
for preparing applications, the proposed filing requirements will
assist the Commission in determining whether applications under section
203 of the Federal Power Act are consistent with the public interest
and will provide more certainty and expedition in the Commission's
handling of such applications.
DATES: Interested entities may file comments no later than August 24,
1998.
ADDRESSES: File comments with the Office of the Secretary, Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, D.C.
20426.
FOR FURTHER INFORMATION CONTACT:
Kimberly D. Bose (Legal Matters) Office of the General Counsel, Federal
Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C.
20426, Telephone: (202) 208-2284
Wilbur Earley (Technical Matters) Office of Economic Policy, Federal
Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C.
20426, Telephone: (202) 208-0023
Michael A. Coleman (Technical Matters) Office of Electric Power
Regulation, Federal Energy Regulatory Commission, 888 First Street,
N.E., Washington, D.C. 20426, Telephone: (202) 208-1236
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission also provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in the Commission's Public
Reference Room, Room 2A, 888 First Street, N.E., Washington, D.C.
20426. The complete text on diskette in WordPerfect format may be
purchased from the Commission's copy contractor, La Dorn Systems
Corporation. La Dorn Systems Corporation is located in the Public
Reference Room at 888 First Street, N.E., Washington, D.C. 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, also provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user. CIPS can be accessed over the Internet by pointing your
browser to the URL address: http://www.ferc.fed.us. Select the link to
CIPS. CIPS also may be accessed using a personal computer with a modem
by dialing (202) 208-1397 if dialing locally or 1-800-856-3920 if
dialing long distance. To access CIPS, set your communications software
to 19200, 14400, 12000, 9600, 7200, 4800, 2400 or 1200 bps, full
duplex, no parity, 8 data bits, and 1 stop bit. The full text of this
document will be available on CIPS in ASCII and WordPerfect 6.1 format.
CIPS user assistance is available at (202) 208-2474.
I. Overview
In this notice of proposed rulemaking (NOPR), the Federal Energy
Regulatory Commission (Commission) is proposing to revise 18 CFR Part
33 by specifying clear and succinct filing requirements for
applications submitted pursuant to Sec. 203 of the Federal Power Act
(FPA),1 including public utility mergers.2
Following issuance of the Merger Policy Statement in 1996,3
Sec. 203 applications have varied widely in the quantity and quality of
information they have included, particularly with respect to
competitive market power analyses and the supporting data. The proposed
filing requirements address this problem by providing detailed guidance
to applicants. This rulemaking proceeding is intended to provide
greater certainty as to what is needed in Sec. 203 applications,
thereby helping applicants to organize and prepare their applications
more quickly and efficiently and also to better predict the outcome of
the Commission's evaluation of their applications. In providing more
certainty, the filing requirements are also intended to facilitate a
prompt, procedurally efficient and substantively accurate decision
making process by the Commission to ensure that mergers and other
jurisdictional transactions under Sec. 203 are consistent with the
public interest in rapidly changing electric power markets. In
addition, the NOPR is intended to lessen regulatory burdens on the
industry by eliminating outdated and unnecessary filing requirements,
streamlining the filing requirements for mergers that do not raise
competitive concerns, and proposing the use of a computer simulation
model to facilitate a prompt and highly accurate method of market power
analysis by both applicants and the Commission. The Commission expects
that, by assisting the Commission and applicants in determining whether
applications under Sec. 203 are consistent with the public interest and
providing more certainty and expedition in applicants' preparation and
the Commission's handling of such applications, the proposed filing
requirements can lessen overall the regulatory burden associated with
the Sec. 203 application process.
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\1\ 16 U.S.C. 824b.
\2\ When the Commission refers to a ``merger'' in this document,
it also includes ``consolidations.'' Section 203 of the FPA requires
Commission authorization for mergers or consolidations involving the
jurisdictional facilities of a public utility. It also requires
Commission authorization for the sale, lease or other disposition of
jurisdiction facilities with a value in excess of $50,000, and for
the purchase by a public utility of the securities of another public
utility.
\3\ Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, Order No. 592, FERC Stats. &
Regs. para. 31,044 (1996), order on reconsideration, 78 FERC para.
61,321 (1997) (Policy Statement).
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The Policy Statement set forth procedures, criteria and policies
for evaluating proposed mergers. The Policy Statement set out the three
factors the Commission will consider when analyzing a merger proposal:
effect on competition; effect on rates; and effect on regulation. The
Commission also stated its intention to issue a NOPR to set out
specific filing
[[Page 20341]]
requirements consistent with the Policy Statement.4 That is
the primary purpose of the NOPR we are issuing today.
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\4\ Policy Statement at 30,111 n.3.
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In the period since the issuance of the Policy Statement, the
Commission has gained valuable experience evaluating various types of
mergers using the guidelines in the Policy Statement as the framework
for our analysis. We have acted on 15 significant merger applications
since the Policy Statement was issued. Some of these were mergers of
adjacent vertically-integrated electric companies. Others involved
utilities that were not currently interconnected, but planned to
integrate their electric systems post-merger. Yet others involved
mergers of electric companies with natural gas companies. The
Commission has devoted substantial resources to considering whether a
proposed merger would significantly increase horizontal or vertical
market power, thereby indicating potential competitive concerns. As we
have gained experience in reviewing the issues related to competition
presented by these mergers, we have fine-tuned the horizontal market
power analysis set out in the Policy Statement and have adopted a
vertical market power analysis.5 From this experience, we
propose filing requirements that will enable all parties to more
efficiently address the types of issues that have arisen in the
applications filed since the issuance of the Policy Statement, as well
as issues that will undoubtedly arise as the industry continues to make
the transition to a more competitive marketplace.
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\5\ See, Enova Corporation and Pacific Enterprises, 79 FERC
para. 61,372 (1997) (Enova).
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Specifically, the NOPR addresses five areas of merger policy and
the processing of applications: (1) it reaffirms the Commission's
horizontal market power analysis and proposes specific filing
requirements for horizontal mergers consistent with the Policy
Statement's Appendix A analysis; \6\ (2) it proposes a vertical market
power analysis and accompanying filing requirements for mergers that
raise vertical market power concerns that are consistent with our
existing approach to examining vertical mergers; \7\ (3) it proposes
streamlined filing requirements and lesser information burden for
mergers that raise no competitive concerns; (4) it sets out a specific
computer simulation model for debate and discussion, and asks for
industry comment on this particular model and on the use of modeling in
general; and (5) it proposes to eliminate certain filing requirements
in Part 33 that are outdated or no longer useful to the Commission in
analyzing mergers. In the course of addressing these five areas, the
NOPR proposes to reorganize Part 33 so that users of the regulations
can quickly find those specific requirements that apply to the merger
in which they are interested.
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\6\ Policy Statement at 30,128.
\7\ PG&E Corporation and Valero Energy Corporation, 80 FERC
para. 61,041 (1997) (PG&E/Valero); and Enron Corporation, 78 FERC
para. 61,179 (1997) (Enron).
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II. Background
Part 33 of the Commission's regulations specifies the filing
requirements for applications under Sec. 203 of the FPA.8
Pursuant to Sec. 203, Commission authorization is required for public
utility mergers and consolidations and for public utilities'
acquisition or disposition of jurisdictional facilities. Section 203(a)
of the FPA provides, in pertinent part, that:
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\8\ 16 U.S.C. 824b.
No public utility shall sell, lease or otherwise dispose of the
whole of its facilities subject to the jurisdiction of the
Commission, or any part thereof of a value in excess of $50,000, or
by any means whatsoever, directly or indirectly, merge or
consolidate such facilities or any part thereof with those of any
other person, or purchase, acquire, or take any security of any
other public utility, without first having secured an order of the
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Commission authorizing it to do so.
Section 203 provides that the Commission shall approve such
transactions if they are consistent with the public interest. The
Commission's Part 33 filing requirements specify the information that
is necessary for the Commission to determine whether a proposed
transaction involving the disposition of jurisdictional facilities by a
public utility satisfies this statutory criterion.
As a general matter, Part 33 requires a description of the
corporate attributes of the party or parties to the proposed
transaction (a purchase, sale, lease, or other disposition, merger, or
consolidation of jurisdictional facilities, or purchase or other
acquisition of the securities of a public utility) and the facilities
or other property involved in the transaction. Additional information
required includes the applicants' proposed accounting treatment of the
transaction, statements as to the effect of the transaction on current
energy contracts, and the applicants' showing that the transaction will
be consistent with the public interest.
As noted previously, one of the factors the Commission considers
when analyzing whether a merger proposal is consistent with the public
interest is the effect on competition. The Policy Statement adopts the
Department of Justice (DOJ)/Federal Trade Commission (FTC) 1992
Horizontal Merger Guidelines (Guidelines) 9 as the
analytical framework for examining horizontal market power concerns.
The Guidelines set forth a five-step merger analysis: (1) define
markets likely to be affected by the merger and measure the
concentration and the increase in concentration in those markets; (2)
assess whether the merger, in light of market concentration and other
factors that characterize the market, raises concern about potential
adverse competitive effects; (3) assess whether entry could mitigate
the adverse effects of the merger; (4) assess whether the merger
results in efficiency gains not achievable by other means; and (5)
assess whether, absent the merger, either party to the merger would
likely fail, causing its assets to exit the market.10
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\9\ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, 57 FR 41,552 (1992), revised, 4 Trade
Reg. Rep. (CCH) para. 13,104 (April 8, 1997).
\10\ Policy Statement at 30,118.
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The Policy Statement also describes an analytical screen that is
intended to allow early identification of mergers that do not raise
competitive concerns. The Commission believes the screen produces a
reliable, conservative analysis of the competitive effects of proposed
mergers. As part of the screen analysis, the Policy Statement requires
generally that the applicants define product and geographic markets
that are likely to be affected by the proposed merger and measure the
concentration in those markets. The Policy Statement suggests a way of
defining geographic markets based on identifying feasible alternative
suppliers to the merged firm--the delivered price test. The
concentration of potential suppliers included in the market is then
measured by the Herfindahl-Hirschman Index (HHI) and used as an
indicator of the potential for market power.11 We describe
the Policy Statement's
[[Page 20342]]
approach to analyzing the effect on competition in more detail below.
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\11\ The Policy Statement addresses three ranges of market
concentration: (1) an unconcentrated post-merger market--if the
post-merger HHI is below 1000, regardless of the change in HHI the
merger is unlikely to have adverse competitive effects; (2) a
moderately concentrated post-merger market--if the post-merger HHI
ranges from 1000 to 1800 and the change in HHI is greater than 100,
the merger potentially raises significant competitive concerns; and
(3) a highly concentrated post-merger market--if the post-merger HHI
exceeds 1800 and the change in the HHI exceeds 50, the merger
potentially raises significant competitive concerns; if the change
in HHI exceeds 100, it is presumed that the merger is likely to
create or enhance market power.
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The Policy Statement states that the Commission will examine the
second factor, the effect on rates, by focusing on ratepayer
protections designed to insulate consumers from any harm resulting from
the merger. We directed merger applicants to attempt to negotiate such
measures with their customers before filing merger applications.
Finally, the Policy Statement sets forth a third factor for
examination, the effect on regulation, as it relates both to state
regulation and to the potential shift in regulation from the Commission
to the Securities and Exchange Commission (SEC), the latter as the
result of a merger creating a registered public utility holding
company. With respect to a merger's effect on state regulation, we
stated in the Policy Statement that where the state commissions have
authority to act on the merger, the Commission intends to rely on them
to exercise their authority to protect state interests. With respect to
shifts of regulatory authority from this Commission to the SEC, the
Policy Statement explains that, unless applicants commit themselves to
abide by this Commission's policies with regard to affiliate
transactions, we will set the issue for hearing.
Below, we propose filing requirements that are consistent with the
Policy Statement. We also propose ways to update and streamline our
current filing requirements that will help to expedite and better focus
applications and our review processes.
III. Discussion
A. General
As stated earlier, the Commission is examining its filing
requirements for transactions requiring our authorization under
Sec. 203 of the FPA in light of the fundamental changes occurring in
the electric utility industry and the regulation of the industry.
First, the Commission believes that a portion of the information that
has historically been required for all Sec. 203 applications is no
longer needed for those applications that involve routine dispositions
of jurisdictional facilities, and, accordingly, we propose to eliminate
certain filing requirements. Second, because of the proliferation of
utility mergers and the growing importance of analyzing the competitive
effects of such mergers on emerging competitive markets, the Commission
believes that more descriptive filing requirements are needed. Finally,
we propose to reorganize and clarify certain of our regulations under
Part 33 in order to enhance the usefulness of those regulations. The
goal of each of these measures is to streamline and clarify our filing
requirements, make our processing of Sec. 203 applications more
efficient and timely, and provide greater certainty to the industry
regarding the Commission's probable action on applications.
B. Proposed Revisions to Part 33--Basic Information Requirements
Part 33 currently contains twelve basic information requirements
(Sec. 33.2(a) through (l)) and nine exhibits (Sec. 33.3 Exhibits A
through I) that an applicant must file. Some of these requirements
overlap. For example, Secs. 33.2(I) and 33.3 Exhibit G both concern
applications filed with state commissions and can be consolidated.
Other information requirements are no longer relevant to our review of
applications filed under this part. An example is Sec. 33.3 Exhibit A,
which concerns resolutions by applicants' directors authorizing the
transaction for which Commission approval is requested. We do not
believe we need this information in order to determine whether a
transaction is consistent with the public interest. Also, a number of
public utilities are exempt from the record-keeping requirements of the
Commission's Uniform System of Accounts at the current Secs. 33.2(g)
and 33.3 Exhibits C, D, E and F, which relate to financial statements
and account balances. Accordingly, we are proposing to streamline our
Part 33 regulations to eliminate these unnecessary or inapplicable
information requirements, combine sections that request duplicative
information and direct our accounting requirements only to those
applicants subject to the Commission's Uniform System of Accounts.
We are further proposing to eliminate entirely the current
Sec. 33.10. The 45 day time limit set forth in that section for
Commission action, which is not a requirement under the statute, is no
longer feasible in light of the increasing complexity of Sec. 203
applications being filed, especially merger and other industry
restructuring transactions.\12\ In addition, proposed Sec. 33.6
incorporates the requirement of the current Sec. 33.2(l) to file a form
of notice and would require submission of the notice in electronic
format. In addition to these modifications, discussed below are other
proposed basic information requirements under Part 33 that reflect our
current way of analyzing Sec. 203 applications.\13\
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\12\ Although we are proposing to eliminate this section of our
Part 33 regulations, the Commission intends to continue to process
Sec. 203 applications as expeditiously as practicable. As stated in
the Policy Statement, the Commission continues to believe that, for
most mergers, we can issue an initial order within 150 days of a
completed application.
\13\ In this preamble, we will not note the sections that do not
have proposed revisions. However, these sections are set forth in
the attached regulatory text.
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Proposed Sec. 33.1--applicability--revises the current Sec. 33.1 to
state succinctly that the requirements of Part 33 apply to public
utilities seeking authority for any transaction requiring Commission
authorization under Sec. 203.
No change is proposed in Sec. 33.2(b)--authorized representative--
except that the phone and fax numbers of the person authorized to
receive communications regarding the application, which are already
voluntarily provided by nearly all applicants, would be required. This
subsection also proposes that E-mail addresses be provided.
Proposed Sec. 33.2(c)--description of the applicant--incorporates
the requirements of current Sec. 33.2(c) and (k) and Exhibit B and
requires a description of the applicant's business activities,
corporate affiliations, common officers with other parties to the
transaction, and jurisdictional customers. Organizational charts are
not specifically required under our current regulations; the narrative
descriptions currently required to be filed generally are more clearly
depicted in chart form. As a result, we propose that organizational
charts be filed.
Proposed Sec. 33.2(d)--description of the jurisdictional
facilities--requires a general description of the applicant's
jurisdictional facilities.
Proposed Sec. 33.2(e)--description of the proposed transaction--
incorporates the requirements of current Sec. 33.2(d), (e), (f) and (h)
requiring a description of the proposed transaction for which
Commission authorization is sought, including all parties to the
transaction, the jurisdictional facilities involved or affected by the
transaction, the consideration for the transaction,\14\ and the effect
of the transaction on the applicant's jurisdictional facilities.
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\14\ Policy Statement at 30,125-26 (we no longer consider the
reasonableness of purchase price as a factor and consider it
subsumed by the effect on rates factor).
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Proposed Sec. 33.2(f)--contracts related to the proposed
transaction--incorporates the requirements of current Exhibit H. No
other change is proposed.
Proposed Sec. 33.2(g)--the applicant's public interest statement--
includes the requirements for applicants to address the factors that
the Commission considers in determining whether a
[[Page 20343]]
transaction is consistent with the public interest, as set forth in the
Policy Statement.
Proposed Sec. 33.2(h)--maps--incorporates the requirements of
current Exhibit I and would be applicable only if the proposed
transaction involves a disposition of physical facilities.
Proposed Sec. 33.2(I)--other regulatory approvals--incorporates the
requirements of current Sec. 33.2(I) and Exhibit G. In addition, copies
of relevant orders, if any, obtained by the applicant from other
regulatory bodies would be required. However, we are proposing to
eliminate a requirement that copies of the applications filed with
those bodies be filed with the Commission, as this information largely
duplicates the information required in our Part 33 regulations.
Proposed Sec. 33.8--number of copies--includes the information
required in the current Sec. 33.6 and also would require that the
applicant file electronic as well as paper copies of any competitive
screen analysis filed pursuant to proposed Secs. 33.3 and 33.4.
Proposed Sec. 33.9--protective orders--would require an applicant
to include a proposed protective order if it seeks privileged treatment
for any information submitted. The protective order would enable the
parties to review any of the data, information, analysis or other
documentation relied upon by the applicant to support its application
and for which privileged treatment is sought.
C. Proposed Filing Requirements Applicable to Merger Filings
1. Applicability
The following filing requirements apply to merger applicants which
are defined as any public utility that either: (a) Would have control
of the jurisdictional facilities transferred to another entity, whether
the transfer of control is effectuated, directly or indirectly, by
merger, consolidation or other means; or (b) would acquire control over
facilities of another entity, whether the transfer of control is
effectuated, directly or indirectly, by merger, consolidation or other
means.\15\ We are proposing that for any corporate transaction that
results in a direct or indirect merger of public utilities, the
applicant must file certain additional information. If the merger
transaction involves a horizontal combination of facilities which
results in a single corporate entity obtaining ownership or control
over generating facilities of unaffiliated parties, the applicant must
file the information set forth in Sec. 33.3. If the merger transaction
involves a vertical combination of facilities resulting in a single
corporate entity obtaining ownership or control over businesses that
provide inputs to electric generation and electric generation products
that were previously unaffiliated, the applicant must file the
information set forth in Sec. 33.4.\16\
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\15\ Policy Statement at 30,113. See also, Duke Power Company
and PanEnergy Corporation, 79 FERC para. 61,236 (1997) (Duke); Noram
Energy Services, Inc., 80 FERC para. 61,120 at 61,379 and n.13
(1997)(NORAM); Morgan Stanley Capital Group Inc., et al., 79 FERC
para. 61,109 at 61,503-04 (1997)(Morgan Stanley); and Boston Edison
Company and BEC Energy, 80 FERC para. 61,274 (1997).
\16\ We noted in Enova that a merger of jurisdictional
facilities can be effected by a change in control over a public
utility's facilities. Public utilities (or their parent companies)
can effect a merger by combining their businesses through the
formation of a new holding company that will own or control, either
directly or indirectly, previously unaffiliated entities. See Enova,
79 FERC ] 61,107 at 61,491-96 (1997).
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2. Effect on Competition
The Commission's competitive concern in any type of merger
involving jurisdictional electric utilities is whether the merger will
result in higher prices or reduced output in electricity markets. This
may occur if the merged firm is able to exercise market power, either
alone or in coordination with other firms. Therefore, we are now
proposing filing requirements, consistent with Appendix A to our Policy
Statement, that will address this concern in a predictable and
expedited fashion.
a. Proposed Analytic Requirements. In Appendix A to our Policy
Statement, we outlined a standard analytic framework for evaluating
mergers as well as a competitive screen analysis and data
specifications to allow the Commission to quickly identify proposed
mergers that are unlikely to present competitive concerns. Since the
Policy Statement was issued, we have gained valuable experience
analyzing mergers and are now proposing filing requirements regarding
the screen and the data needed for it.
The Commission emphasizes that the screen is not meant to be a
definitive test of the competitive effects of a proposed merger.
Instead, it is intended to provide a standard, conservative check to
allow the Commission and potential applicants to identify mergers that
are unlikely to present competitive problems. A standardized screen
approach allows applicants, intervenors and the Commission to have a
common starting point from which to evaluate proposed mergers. A
conservative screen also allows us to quickly approve mergers that pass
if they are otherwise consistent with the public interest. Failing the
initial screen does not necessarily mean that the Commission will not
eventually approve the merger. Rather, it means only that the
Commission must take a closer look at the competitive impacts of the
proposed merger.
When a proposed merger fails the screen and further evaluation is
necessary, the Commission will determine what procedures are
appropriate. The Commission recognizes that these procedures, whether
trial-type evidentiary hearings or paper hearings, should not delay the
processing of mergers unnecessarily and should address the competitive
impact of the proposed merger. We solicit comments on alternative
procedures for investigating mergers that do not pass the initial
screen.17
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\17\ In the Policy Statement, we stated that we would request
public comment in this rulemaking on merger processing procedures
and how they can be better tailored to meet the specific needs of
participants in merger proceedings. Policy Statement at 30,125.
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As we propose these filing requirements, the Commission recognizes
the tension between the need for providing standardization regarding
how proposed mergers will be evaluated and the need for flexibility,
given the changing nature of the electric power industry and the likely
evolution of analytic techniques and capabilities. The competitive
screen analysis that we require provides for standardization. However,
applicants are free to provide an alternative analysis, if they believe
the additional information would aid the Commission's decision
making.18 The Commission solicits comment on whether the
proposed approach strikes the proper balance between standardization
and flexibility.
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\18\ See Sec. 33.3(b)(2) of the proposed regulations.
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Finally, we recognize that some types of data, or data for some
market participants, may not be available to the applicants. Where that
is the case, we propose that applicants make their best efforts to
provide accurate substitute data.19 Applicants would have to
identify such instances, and explain how specific data deficiencies are
addressed and the effect on their analysis. We also encourage
applicants to provide corroborating data and to explain how such
additional data corroborates the results of the screen analysis.
Corroborating information and analysis will provide the Commission with
confidence that the results of the
[[Page 20344]]
analysis would not change materially if certain assumptions or input
data were changed in reasonable ways.
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\19\ The specific filing requirements are set forth in
Sec. 33.3(b)(1) of the proposed regulations.
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i. Data and format. If circumstances warrant, the Commission must
have the ability to perform, within a reasonable time, an independent
verification of the screen analysis presented in the application. To do
so, we (and intervenors) must have the basic input data in a useful
format. Thus, the proposed rule would require that the data needed to
complete the competitive screen analysis, and any additional data that
are used, be filed electronically.20 Specific proposed data
requirements for the various components of the competitive screen
analysis are discussed below.
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\20\ The specific filing requirements are set forth in Sec. 33.8
of the proposed regulations.
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ii. Horizontal Screen Analysis. As noted earlier, the Guidelines
set out five steps for merger analysis: Assess (1) whether the merger
would significantly increase concentration; (2) whether the merger
would result in adverse competitive effects; (3) whether entry would
mitigate the adverse effects of the merger; (4) whether the merger
would result in efficiency gains not achievable by other means; and (5)
whether, absent the merger, either party would likely fail, causing its
assets to exit the market.21
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\21\ Policy Statement at 30,118.
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The competitive screen analysis 22 focuses on the first
step: whether the merger would significantly increase concentration.
Concentration statistics indicate that a merger may have adverse
competitive effects, but they are not the end of the analysis. If the
applicants' competitive screen analysis indicates that the merger would
significantly increase concentration, the applicants must either
address the other steps in the Guidelines or propose measures that
would mitigate the adverse competitive effects of the proposed
merger.23 If applicants propose mitigation measures, the
screen analysis should also take into account the effect of the remedy
on market concentration to the extent possible.
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\22\ These specific filing requirements are set forth in
Sec. 33.3 of the proposed regulations.
\23\ The specific filing requirements for applicants addressing
other factors and mitigative measures are set forth in
Sec. 33.2(g)(4) and Sec. 33.2(g)(3), respectively.
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The competitive screen analysis is made up of four steps: (1)
Identify the products sold by the merging firms; (2) Identify the
customers affected by the merger; (3) identify the suppliers in the
market; and (4) analyze the merger's effect on concentration. Below we
discuss the proposed filing requirements for each step.
a. Products. Applicants must identify the wholesale electricity
products sold by the merging firms. At a minimum, such products would
include non-firm energy, short-term capacity (or firm energy) and long-
term capacity. Products should be grouped together when they are
reasonable substitutes for each other from the buyer's perspective. The
supply and demand conditions for particular electricity products may
vary substantially over time and, if so, the market analysis should
take this into account. Periods with similar supply and demand
conditions should be aggregated. Thus, applicants must define and
describe all products sold by the firms, explain and support the market
conditions and groupings, and provide all data relied upon for product
definition. The specific proposed filing requirements are set out in
Sec. 33.3(c)(1) of the proposed regulations.
As restructuring in the wholesale and retail electricity markets
progresses, short-term markets appear to be growing in importance. The
role of long-term capacity markets appears to be diminishing. We seek
comments on the assessment of long-term capacity markets in merger
analysis.
The delivered price test, which we require applicants use to
identify suppliers in a market, addresses the ability of suppliers to
deliver energy to relevant markets as measured by their short-term
variable costs. However, there is no good measure for long-term
capacity prices per se. Therefore, we seek comment on the appropriate
analytic framework for evaluating long-term capacity products.
b. Geographic markets: Customers (Destination Markets). As
discussed in the Policy Statement, identifying the customers likely to
be affected by a merger is one part of defining the geographic scope of
the relevant market. At this time, we believe that, at a minimum,
affected customers would include all entities that are directly
interconnected to any of the applicants or that have purchased
wholesale electricity from any of the applicants in the past two years.
The Commission solicits comment on whether two years is the appropriate
period of purchases for deciding to include purchasers as affected
customers.24 Customers considered to be affected by the
merger and included in the analysis are referred to as ``destination
markets.'' To simplify the analysis, customers that have the same
supply alternatives, as identified in the competitive screen analysis,
could be aggregated into a single destination market.
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\24\ The Policy Statement states that entities in addition to
those directly interconnected with applicants would be included if
historical transaction data indicate that they recently have been
trading partners with any of the applicants. Policy Statement at
30,130.
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Applicants would be required to provide all data used in
determining the affected customers. The specific proposed filing
requirements associated with identifying affected customers are set out
in Sec. 33.3(c)(2) of the proposed regulations.
c. Geographic markets: Suppliers. Defining the relevant geographic
market also requires identifying the sellers that can compete to supply
a relevant product. Suppliers must be able to reach the destination
market both economically and physically.
In some cases, potential suppliers may be parties to mergers that
have been announced but not yet consummated. Without presupposition,
the Commission seeks comments on whether those suppliers should be
treated in the competitive screen analysis as if their merger has been
consummated or whether they should be treated as independent
rivals.25
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\25\ The specific filing requirements are set out in
Sec. 33.3(c)(3) of the proposed regulations.
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(1) Delivered Price Test
To determine the suppliers that can economically supply a
destination market, applicants must conduct a delivered price
test.26 In the delivered price test, a supplier is
considered to be able to economically serve destination markets only to
the extent it has generating capacity that can be supplied and
delivered to the market at a price, including paying for transmission
and ancillary services needed to deliver power to a destination market,
that is no more than 5 percent above the pre-merger market
price.27 Applicants must then adjust, if necessary, the
capacity of each supplier identified in the delivered price test
consistent with the physical transmission capacity available to reach
the destination market.
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\26\ The specific filing requirements are set forth in
Sec. 33.3(c)(3)(i) of the proposed regulations.
\27\ Policy Statement at 30,130-31.
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The Commission proposes to require that a supplier's ability to
economically serve a destination market be measured by the generating
capacity controlled by the supplier rather than historical sales data.
Since merger analysis should, to the extent possible, be forward-
looking, capacity is a better indicator of future market supply
alternatives. Information about current or past sellers may not
identify those participants whose generation capacity could discipline
[[Page 20345]]
future price increases. Moreover, data on sales made in a past
environment that was characterized by monopoly and cost-based rates may
not be a good indicator of how firms will behave in an environment that
is increasingly characterized by generation competition and open access
transmission.\28\
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\28\ Baltimore Gas & Electric Company and Potomac Electric Power
Company, Opinion No. 412, 76 FERC para. 61,111 (1996), 79 FERC para.
61,027 at 61,120-21 (1997) (BG&E/PEPCO). This is not to say,
however, that sales data are irrelevant to market analysis. If sales
data indicate that certain participants actually have been able to
reach the market in the past, it is appropriate to consider whether
they are likely candidates to be included in the market in the
future. BG&E/PEPCO at n.72. It is for this reason that we propose to
require a ``trade data check'' as part of the competitive screen
analysis.
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In the Policy Statement, we discussed two generating capacity
measures that are appropriate for the competitive screen analysis:
economic capacity and available economic capacity. We propose that the
competitive screen analysis filed by applicants use both measures to
gauge supplier presence. The starting point for calculating economic
capacity is the supplier's own generation capacity with low enough
variable costs that energy from it could be delivered to a market,
after paying all necessary transmission and ancillary service costs
(including losses), at a price that is 5 percent or less above the pre-
merger market price. This capacity must be decreased to reflect the
capacity committed to long-term firm sales and increased to reflect the
capacity acquired by long-term firm purchases.\29\ Capacity that is
under the operational control of a party other than the owner should be
attributed to the party for whose economic benefit the unit is
operated. The resulting amount is the capacity that should be counted
as a supplier's economic capacity.
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\29\ Long-term firm contracts are those with a remaining
commitment of more than one year.
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The other measure of supplier presence relevant to the competitive
screen analysis is available economic capacity. Available economic
capacity is calculated as economic capacity less the capacity needed to
serve native load customers.\30\ We propose that applicants include
this measure in their screen analysis for all suppliers that have
native load commitments. This measure presumes that the lowest-cost
capacity is used to serve native load and is thus not available to
compete in wholesale power markets. However, restructuring in the
electricity industry, including regional independent systems operators
(ISO) and bid-based power exchanges and retail access, may well affect
this presumption. The Commission seeks comments on the role of native
load and the weight that the available economic capacity measure should
be given, in market analyses.
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\30\ Native Load Customers are defined as the wholesale and
retail power customers on whose behalf a utility, by statute,
franchise, regulatory requirement, or contract, has an obligation to
construct and operate the system to meet the reliable electric needs
of such customers.
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Applicants may include additional capacity measures, such as total
capacity and uncommitted capacity, as they see fit.\31\
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\31\ Uncommitted capacity is total capacity less the capacity
needed to serve native load and contractual commitments and to cover
reserve margins. In contrast to economic capacity, this measure, as
well as total capacity, does not take into account whether the
capacity can economically serve a market.
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Determining which suppliers may economically serve the relevant
destination markets requires data regarding generation costs,
transmission prices, and transmission limitations. To facilitate the
Commission's analysis, these data should be filed electronically and
presented in a standard format. Discussed below are the proposed
general data requirements that we believe are needed to determine the
suppliers in the relevant market for a competitive screen analysis.
Generating capacity and variable cost: The basic determinants of a
supplier's presence in a market are the generating capacity that the
supplier controls and the variable costs associated with that capacity.
For each potential supplier to a relevant market, applicants must file
the publicly available generation capability and variable cost data for
each generating plant or unit. Aggregate plant level data from plants
with units that burn different fuels can result in average plant
variable costs that inaccurately state the units' economic ability to
sell into a market.\32\ For such plants, cost data at the unit level
are preferable to cost data at the plant level, and applicants should
file disaggregated plant data to the extent it is publicly available.
The specific filing requirements for generating unit data are set out
in Sec. 33.3(d)(1) of the proposed regulations.
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\32\ We have noted such inaccuracies in our analysis in a prior
case. See B&GE/PEPCO at 61,119-120.
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Purchase and sales data adjustments: Data regarding the long-term
purchases and sales of suppliers should be filed with the application.
These data would, to the extent available, include the buyer, the
seller, the contract duration, the degree of interruptibility, the
quantity (MW), the capacity and energy charge. Applicants must show the
adjustments made to suppliers' capacity due to the long-term contracts.
The specific filing requirements for purchase and sales data are set
out in Sec. 33.3(d)(2) of the proposed regulations.
Native load commitment adjustments: If applicants use the available
economic capacity measure in the competitive screen analysis, they must
file historical data regarding hourly native load commitments for the
most recent two years, if such data are publicly available.\33\ The
Commission seeks comment on whether two years is the appropriate period
for requiring native load data. The specific filing requirements for
reporting native load commitments are set out in Sec. 33.3(d)(3) of the
proposed regulations.
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\33\ Hourly data are available in electronic format from the
FERC Form 714, Annual Electric Control and Planning Area Report.
---------------------------------------------------------------------------
Other adjustments to supplier capacity: Other adjustments to
reflect a supplier's competitive ability to serve a destination market
may be appropriate. Applicants must support any such adjustments with
adequate analyses and set out all data and assumptions used. The
specific filing requirements are set forth in Sec. 33.3(c)(3)(ii) of
the proposed regulations.
There may be instances where a generation supplier's ability to
participate in markets is limited by statutory restrictions. For
example, the tax-exempt status of municipal generators can be
jeopardized if they sell more than a certain percentage of their tax-
exempt financed generation to private utilities. Another example is the
geographic limitations placed on the Tennessee Valley Authority's
wholesale sales activities. Failing to recognize such restrictions
could overstate the ability of such generation suppliers to compete and
thereby to discipline prices in a market. Applicants must describe any
statutory restrictions that may apply to generation suppliers included
in their competitive screen analyses.
Another adjustment that may be needed to accurately represent a
supplier's ability to sell into markets is reserve requirements for
reliability or other reasons. Generation capacity that must be held in
reserve is not available to be sold into markets on a firm basis to
respond to price increases, and therefore should not be attributed to
the supplier in the competitive screen analysis. Applicants must
describe reserve requirements and discuss how those requirements affect
the availability of each unit included in the competitive analysis.
Finally, we note that one type of adjustment that applicants have
proposed is to limit a supplier's
[[Page 20346]]
capacity, for purposes of calculating market shares, to the demand of
individual destination markets. The Commission found that such an
adjustment is not appropriate because it is inconsistent with the
Commission's concern with the relative ability of suppliers to dominate
a market.\34\ We seek comments on this approach.
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\34\ Ohio Edison Company, et al., 80 FERC para. 61,039 at 61,104
(1997) (FirstEnergy).
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Transmission prices and loss factors: An important factor in
determining whether capacity can serve a destination market is the
transmission costs that would be incurred in delivering generation
services to a destination market. The Policy Statement recognizes that
prices paid for transmission and ancillary services should be added to
the variable costs of a supplier's capacity.\35\ For purposes of the
competitive screen analysis, applicants must use the maximum tariff
rates in public utilities' open access tariffs on file with the
Commission. Where a non-public utility's transmission system is
involved, the maximum tariff rates under its non-jurisdictional (NJ)
open access reciprocity tariff would be used. If an NJ tariff for an
entity has not been submitted to the Commission, applicants should use
their best efforts to obtain or estimate transmission and ancillary
services rates.\36\ Transmission and ancillary service prices used in a
competitive screen analysis, that are not found in publicly-available
tariffs or rate schedules, would have to be adequately supported.
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\35\ Policy Statement at 30,131.
\36\ Non-public utilities that are members of Regional
Transmission Groups (RTGs) are required to file transmission tariffs
with the RTG. Maximum rates may be found in the RTG tariffs. Such
information also may be available on a non-public utility's OASIS.
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Consistent with the conservative nature of the competitive screen
analysis, the Commission proposes to require that the transmission
prices used be the maximum tariff rates in the open access tariffs.
Applicants could present, in addition to the required screen analysis,
a separate analysis using lower discounted transmission rates if
applicants can demonstrate that discounted lower rates have been
generally available and that discounting is likely to be available in
the future.\37\
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\37\ For public utilities (and non-public utilities with OASIS),
evidence should be available from OASIS archives. OASIS database
transaction data must be retained and made available upon request
for three years after they were first posted. See 18 CFR 37.7.
---------------------------------------------------------------------------
Restructuring efforts in some regions may result in transmission
pricing regimes that depart from traditional system-specific, average
cost prices. We propose to require that the transmission pricing used
in the competitive screen analysis and the data presented in the filing
reflect the transmission pricing regime in effect in the relevant
geographic markets.
For each transmission system that a supplier must use to deliver
energy to a relevant destination market, applicants must provide
specific data, including the transmission provider's name, the firm and
non-firm point-to-point rates as well as the ancillary services rates,
loss factors and an estimate of the cost of supplying energy losses.
Where tariff rates that are expressed as $/MW are converted to $/MWH,
applicants would have to explain the conversion. Applicants must also
explain how suppliers are assigned transmission contract paths to the
destination markets. The specific filing requirements for transmission
rate and loss factor data are set out in Sec. 33.3(d)(4) of the
proposed regulations.
Market price: As discussed in the Policy Statement, a supplier's
capacity may be included in a relevant market, for purposes of the
competitive screen analysis, if it can be delivered into the market at
a price that is no more than 5 percent above the pre-merger market
price.38 We therefore propose that the application present
and support market prices for each relevant destination market under
various significant market conditions. Significant market conditions
include, for example, those characterized by periods of high (peak) or
low (off-peak) demand and by transmission constraints.39
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\38\ Policy Statement at 30,131.
\39\ Delmarva at 61,408.
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As discussed in the Policy Statement, the Commission does not
believe that all electricity markets have matured sufficiently to
exhibit single market-clearing prices for various products. Therefore,
applicants may estimate market prices using surrogate measures. The
Commission seeks comments on whether there are appropriate criteria for
determining when surrogate price measures are needed. We do not propose
at this time a specific method for estimating market prices. However,
the results must be supported and consistent with what one would expect
in a competitive market. For example, we would expect prices to vary
little from customer to customer in the same region during similar
demand conditions (if there are no transmission constraints), but we
would expect prices to vary between peak and off-peak
periods.40 Where results that are at odds with those that
would be expected under competitive market conditions are shown,
applicants would explain such results. We also encourage applicants to
use more than one approach to estimating market prices in order to
demonstrate that the market price estimates are valid.
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\40\ FirstEnergy, 80 FERC at 61,105-106.
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To support the market price estimates, applicants must file any
cost or sales data relied upon in estimating the price, as well as an
explanation of how the data were used to determine the estimates. The
specific filing requirements for market price data are set out in
Sec. 33.3(d)(5) of the proposed regulations.
(2) Transmission Capability
The capacity of suppliers that is determined to be economic in a
relevant destination market (that is, capacity that can be delivered at
a cost that is no more than 5 percent above the pre-merger market
price) may be included in a relevant market, for purposes of the
competitive screen analysis, only to the extent that transmission
capability is available to the supplier. Such capacity is calculated as
the sum of available transmission capability (ATC) and any firm
transmission rights held by the supplier that are not committed to
long-term transactions. Thus, the extent of transmission capability and
the allocation of the rights to use that capability are the important
factors in determining a supplier's ability to physically reach a
market. This section discusses the data and analyses that we propose to
require to allow us independently to estimate each economic supplier's
ability to reach a market.
Physical capability: For those suppliers determined to be able to
economically serve a relevant destination market, applicants must
present data on transmission capability for each transmission system a
supplier must use to deliver energy to relevant destination markets. To
the extent available, these data would include total transfer
capability (TTC) and firm ATC, and must be consistent with values
posted on the OASIS. We are, however, concerned that the sum of
transfer capabilities reported on OASIS sites could exceed the
simultaneous transfer capability. We therefore propose that the
transmission capability be reported as simultaneous transfer capability
to avoid attributing more generating capacity to a market than could
actually reach it under actual operating conditions. The Commission
understands, however, that simultaneous transfer capability data may
not be generally available. Where that is the case, applicants must use
the
[[Page 20347]]
best data available to avoid overestimating transfer capability. For
example, the analysis should not add together the capabilities of
several interfaces if the transfer capability into a market is limited
by the same facility.41
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\41\ FirstEnergy at 61,104.
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Applicants must also identify the hours when transmission
constraints have been binding and the levels at which they were
binding. The application would also present data regarding whether and
how the proposed merger would change line loadings and the consequent
effect on transfer capability. To the extent possible, applicants would
provide maps showing the location of transmission facilities where
binding constraints currently occur or are expected to occur as a
result of the merger. The Commission seeks comment regarding the
parameters that determine when a binding constraint is significant
enough to cause competitive concern. For example, is there a minimum
number of hours that a constraint must last to be of concern?
The Commission understands that applicants must depend on publicly-
available information regarding transmission capability for systems
other than their own, and that some of the information discussed above
may not be generally available for all systems. Applicants should file
the best available data regarding systems other than their own.
However, all of the data discussed in this section regarding
applicants' systems is available to the applicants, and such data must
be filed, even if it is not available for all other systems. An
accurate representation of transmission conditions on or close to the
applicants' systems, where the merger's effects are likely to be
greatest, is important. The specific filing requirements for
transmission capability data are set out in Sec. 33.3(d)(7) of the
proposed regulations.
Firm transmission rights: Transmission capacity along transmission
paths between suppliers and destination markets that is reserved under
a long-term firm transmission contract by suppliers should be presumed
to be available to other suppliers unless the capacity is committed to
a long-term power transaction. Applicants must identify such
transmission capability and provide supporting information, including
the FERC rate schedule numbers if the transmission provider is a public
utility. The specific filing requirements for firm transmission rights
data are set out in Sec. 33.3(d)(8) of the proposed regulations.
Allocation of transmission capability: Transmission capability that
is not subject to existing firm reservations by others may be presumed
for purposes of the competitive screen analysis to be available to
economic suppliers to reach the relevant markets. However, this would
not be the case for transmission capability on interfaces that would
become internal to the merged firm after the merger. If, after a
merger, the merged firm would have either generating resources or load
on both sides of the interface, and would have ownership or entitlement
interests in the interface on both sides, the transmission capability
on that interface could be used to serve native load. Since native load
generally would have a higher reservation priority than most third
party uses, it could preclude access by other suppliers to that
interface.42 Consistent with past decisions, the Commission
proposes that, for purposes of the competitive screen analysis, it
would be inappropriate to allocate to competing sellers unreserved
capability over interfaces internal to the merged company unless the
applicants demonstrate that: (a) the merged company would not have
adequate economic generating capacity to use the interface capability
fully, (b) the applicants have committed that the portion of the
interface capability allocated to third parties actually will in fact
be available to such parties, or (c) alternate suppliers have purchased
the transmission capability on a long-term basis.43 Any
allocation of internal transfer capability to third parties consistent
with the above guidance must be adequately explained and supported.
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\42\ Wisconsin Electric Power Company, et al. (Primergy), 79
FERC para. 61,158 at 61,694 (1997), and FirstEnergy at 61,107.
\43\ FirstEnergy at 61,103-04.
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In many cases, multiple suppliers could be subject to the same
transmission path limitation to reach the same market, and the sum of
their economic generation capacity could exceed the transmission
capability available to them. Where this situation arises, the
competitive screen analysis would have to allocate the transmission
capability among the suppliers' generating capacity. There are a number
of methods for accomplishing this. Applicants must describe and support
the method used and show the resulting transfer capability allocation.
The Commission is not proposing a single method at this time, but we
invite comments on the merits of various approaches to allocating
transmission capability in the competitive screen analysis.
Summary of supplier presence. The Commission proposes to require
that applicants provide a table summarizing supplier presence in each
of the relevant destination markets. The table would include the market
designation, the product, the name of each supplier, and the amount of
generation capacity that each supplier can economically deliver to the
market after accounting for available transmission capability. The
specific filing requirements for this summary of supplier presence are
set out in Sec. 33.3(d)(9) of the proposed regulations.
(3) Historical Data
The Commission proposes that applicants file certain historical
data that can be used to corroborate the results of the competitive
screen analysis. We understand that applicants must depend on publicly-
available information for the vast majority of the screen analysis and
that some detailed data may not be generally available for all market
participants. However, certain important data regarding applicants'
transactions and transmission systems are available to the applicants
and should be filed.
Trade data. The Commission proposes to require that applicants file
actual trade data regarding sales and purchases in which applicants
participated for the most recent two years for which data are
available. These data will be used to corroborate the suppliers
identified as participating in the relevant destination market and the
extent of their participation. We would expect some correlation between
the results obtained by the competitive screen analysis and recent
trade patterns. Applicants must provide an explanation of any
significant differences.
We propose to require applicants to file trade data regarding all
electricity sales and purchases in which they participated, identifying
the seller, the buyer, the characteristics of the product traded and
the price. The specific filing requirements for this historical trade
data are set out in Sec. 33.3(d)(10).
Transmission service data. The competitive screen analysis
evaluates the ability of suppliers to access relevant markets
economically and physically. One of its critical components is the
availability of transmission capacity. While applicants would be
required under the proposed rule to file estimates of ATC and TTC used
in the competitive screen analysis, historical transmission service
[[Page 20348]]
information would be valuable to corroborate the results of the
analysis that use ATC and TTC estimates. The Commission therefore
proposes to require that applicants submit a description of all
instances in the two years preceding the application in which
transmission service on their systems has been denied, curtailed or
interrupted. This description should, to the extent such data are
available from OASIS sources, identify the requestor, the type,
quantity and duration of service requested, the affected transmission
path, the period of time covered by the service requested, the
applicants' response, the reasons for the denial and the reservations
or other use anticipated by the applicants on the affected transmission
path at the time of the request. The specific filing requirements for
this transmission service data are set out in Sec. 33.3(d)(11).
d. Concentration Statistics. The final step of the competitive
screen analysis is to assess market concentration. Applicants must file
pre- and post-merger market concentration statistics calculated in
accordance with the preceding sections. Both HHIs and single-firm
market share statistics should be presented. The specific filing
requirements for concentration statistics are set out in
Sec. 33.3(c)(4) of the proposed regulations.
The HHI statistics would be compared with the thresholds given in
the Guidelines.44 If the thresholds are not exceeded, no
further analysis need be provided in the application. If an adequately
supported screen analysis shows that the merger would not significantly
increase concentration, and there are no interventions raising
substantial concerns regarding the merger's effect on competition which
cannot be resolved on the basis of the written record, the Commission
would not look further at the effect of the merger on competition. If,
however, the HHI statistics exceed the thresholds, the applicants must
either propose mitigation measures that would remedy the merger's
potential adverse effects on competition or address the other DOJ
merger analysis factors.
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\44\ See n.11 supra.
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e. Mitigation Measures and Analysis of Other Factors. In lieu of
addressing the additional factors that would lessen concern regarding
the adverse competitive impact of a proposed merger, applicants may
propose mitigation measures. Proposals must be specific, and the
applicant must demonstrate that proposed measures adequately mitigate
any adverse effects of the merger.
Some mitigation measures can be shown to directly lower market
concentration. Examples of such measures are generation divestiture and
transmission rate reforms (such as the elimination of pancaked rates)
that broaden the geographic market. A properly structured ISO or other
regional transmission entity can lower concentration by both
eliminating the pancaking of rates and encouraging new entrants. Where
such measures are proposed, the application must also include, to the
extent possible, a separate analysis demonstrating the effect of the
proposal on market concentration. Other measures may not be directly
linked to decreases in market concentration. Where such other measures
are proposed, the application must include an analysis demonstrating
how the proposed measure will ensure that the merger will not adversely
affect competition in markets where the screen analysis shows a
significant adverse effect on concentration. The specific filing
requirements concerning mitigation measures are set out in
Sec. 33.2(g)(3).
Where the competitive screen analysis indicates concentration
results that exceed the thresholds but mitigation measures are not
proposed, applicants must provide additional analysis. The Guidelines
describe four additional factors to examine in situations where merger-
induced concentration exceeds specified thresholds.45 These
factors provide additional information that can be used to determine if
a merger raises significant competitive concerns and, if so, if there
are countervailing considerations. Based on the Guidelines, the
Commission proposes that applicants evaluate the following four factors
if the results of the screen analysis show that the concentration
thresholds are exceeded: the potential adverse competitive effects of
the merger; whether entry by competitors can deter anticompetitive
behavior or counteract adverse competitive effects; the effects of
efficiencies that could not be realized absent the merger; and whether
one or both of the merging firms is failing and absent the merger the
failing firm's assets would exit the market.
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\45\ These factors are those discussed in steps two through five
of the DOJ Guidelines.
---------------------------------------------------------------------------
Applicants' analysis of these additional factors must be consistent
with the standards discussed in the Guidelines. For example, the
Guidelines require that entry must be timely, likely and sufficient in
magnitude to deter or counteract the adverse competitive effects of
concern in order to be considered an effective mitigating
factor.46 The Guidelines suggest that entry must occur
within two years of the merger to be considered timely, and that all
phases of entry must occur within the two-year period, including
planning, design, permitting, licensing and other approvals,
construction and actual market impact.47 Given the current
lead times for bringing new generation or transmission capacity on
line, it may be unlikely that entry can be a mitigating factor unless
facilities are already in the planning or construction stages at the
time of the application.48 The specific filing requirements
for these additional factors are set out in Sec. 33.2(g)(4) of the
proposed regulations.
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\46\ Guidelines, 57 FR at 41,561.
\47\ Id. at 41,561-562.
\48\ For example, we found in Primergy that timely entry would
not occur and thus was not a mitigating factor to the
anticompetitive effects of the proposed merger. 79 FERC 61,158 at
61,695-696.
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f. Merger applications that are exempt from filing a competitive
screen analysis. There are mergers where the filing of a full-fledged
horizontal or vertical screen analysis may not be warranted because it
is relatively easy to determine that such merger proposal will not have
an adverse impact on competition (e.g., one of the merging parties
operates entirely on the East Coast and the other merging party
operates entirely on the West Coast). The Commission applied the policy
of not always requiring a full competitive screen analysis in its
approval of the Duke/PanEnergy merger, finding that even though
applicants had not performed a complete Appendix A analysis,
nevertheless the generating facilities of PanEnergy are so small and
are located at such a great distance from Duke Power Company's market
that consolidating them is likely to have a negligible effect on market
concentration.49
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\49\ Duke, 79 FERC at 62,037 (1997).
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Similarly, some mergers that only incidentally involve public
utilities would not require a rigorous competitive screen analysis. An
example is when major financial firms change their ownership structure
in some way and one or both have a power marketing subsidiary. In this
case, the principal interest in jurisdictional facilities would be the
market-based power sales tariff of the power marketer since it would
not own or control any generation.
Therefore, with regard to horizontal mergers, we propose that a
merger applicant need not provide the full competitive screen analysis
otherwise required under Sec. 33.3 if the applicant
[[Page 20349]]
affirmatively demonstrates that the merging entities do not operate in
the same geographic markets or, if they do, the extent of such
overlapping operation is de minimis. The Commission seeks comment
regarding the appropriate threshold for the de minimis test.
iii. Vertical Screen Analysis. The previous section describes the
filing requirements for the analytic framework for evaluating the
competitive effects of horizontal mergers, that is, mergers involving
two or more jurisdictional electric utilities. However, we noted in the
Policy Statement that we intended to apply the same analytic framework
to mergers between electric utilities and firms that provide inputs for
electricity generation, for example, ``vertical'' mergers.50
Mergers may have both horizontal and vertical aspects.
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\50\ Policy Statement at 30,113.
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Since the Policy Statement was issued, the Commission has acted on
seven vertical mergers.51 In analyzing these cases, the
Commission developed a basic approach for assessing whether a vertical
merger is likely to adversely affect competition in electricity
markets. The framework used by the Commission was informed by the DOJ/
FTC approach to evaluating vertical mergers and drew from the analytic
framework described in the Policy Statement.
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\51\ See Enova, LILCO, NORAM, Duke/PanEnergy, PG&E Corporation
and Valero Energy Corporation, 80 FERC para. 61,041 (1997) (PG&E/
Valero); Destec Energy, Inc. and NGC Corporation, 79 FERC, para.
61,373 (1997) (Destec/NGC); Enron Corporation, 78 FERC, para. 61,179
(1997) (Enron).
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We are now formally proposing an analytic framework and the filing
requirements to support that framework to evaluate the competitive
effects of vertical mergers. This proposed analytic framework is
consistent with the basic approach used by the Commission to evaluate
vertical aspects of prior mergers.
The Commission has streamlined this vertical analytic framework and
proposes certain abbreviated filing requirements and limitations on the
scope of our review.52 This should greatly reduce the number
of applications that will require a complete analysis of the vertical
aspects of a proposed merger involving a jurisdictional public utility.
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\52\ These specific filing requirements are set forth in
Sec. 33.4 of the proposed regulations.
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For example, a merger cannot impair competition in ``downstream''
electricity markets if it involves an input supplier (the ``upstream''
merging firm) that sells: (1) a product that is used to produce only a
de minimis amount of the relevant product in the downstream geographic
market or (2) no product into the downstream electricity geographic
market. If such a showing is made, an applicant will not be required to
file additional information regarding the vertical aspects of a
proposed merger. We believe these proposed abbreviated filing
requirements will result in the expeditious processing of mergers that
clearly present no vertical competitive concerns.
In cases where more complete information is necessary for the
Commission to determine the competitive effects of a vertical merger,
we propose an analytic framework comprising four elements: (1) define
the relevant products traded by the upstream and downstream merging
firms; 53 (2) define the relevant downstream and upstream
geographic markets; (3) evaluate competitive conditions using market
share and concentration HHI statistics in the downstream and upstream
geographic markets; and (4) evaluate the potential adverse effects of
the proposed merger in relevant downstream and upstream geographic
markets and, if appropriate, other factors that can counteract such
effects, including the ease of entry into either the upstream market or
the downstream market and merger-related efficiencies.
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\53\ There may be several relevant upstream input products (such
as fuel transportation and turbine manufacturers).
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We propose establishing the same filing requirements for the
components of the proposed vertical analytic framework that have
counterparts in the horizontal screen analysis, such as defining
relevant downstream geographic markets using a delivered price test.
Filing requirements for other parts of the vertical analysis, such as
defining upstream geographic markets, would be only generally
specified. Our proposed analytic framework for analyzing the
competitive effects of vertical mergers and associated filing
requirements are explained more fully below. We solicit comments on
both the reasonableness of the framework and the adequacy of the
information required to analyze vertical competitive issues.
a. Vertical Analytic Framework. As discussed earlier, the
Commission's competitive concern in any merger involving jurisdictional
electric utilities is whether the merger will affect competition in
electricity markets through higher prices or reduced output. Horizontal
mergers can cause this by eliminating a competitor from the market and
by the exercise of market power by the merged firm. Vertical mergers do
not directly eliminate a competitor from the market but may create or
enhance the incentive for the merged firm to adversely affect prices
and output in the downstream electricity market.\54\ This effect on
prices and output can occur in a number of ways, including: (i)
foreclosure/raising of rivals' costs; (ii) facilitating coordination;
and (iii) evasion of regulation.\55\
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\54\ Horizontal mergers may give rise to a higher market share
for the merged entity and increase concentration in the market.
Market share and concentration are not directly affected by a solely
vertical merger.
\55\ See Enova, 79 FERC para. 61,372 at 62,560.
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Foreclosure/Raising Rivals' Costs: A merger between an entity
owning downstream electric generation and an entity owning an upstream
input supplier to competitors of that generation may create the
incentive for the upstream firm to exclude the merged firm's downstream
generation competitors from access to inputs. The upstream merging firm
can accomplish this through pricing, marketing and operational actions
that would raise the input costs of suppliers competing with the
downstream merging firm or by otherwise restricting such suppliers'
input supply.\56\ This behavior can also deter entry by rival
generators in the downstream market.\57\
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\56\ Foreclosure can also result from a vertical merger if the
downstream merging firm refuses to purchase from input suppliers
other than its upstream affiliate.
\57\See Enova, 79 FERC para. 61,372 at 62,560.
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A vertical merger can create or enhance the ability of the merged
firm to adversely affect electricity prices or output in the downstream
market by raising rivals' input costs if the upstream and downstream
geographic markets are susceptible to the exercise of market power.
Under these circumstances in the upstream market, generators purchasing
from the upstream merging firm could not turn to alternative suppliers
to avoid an increase in input prices. Similarly, customers of the
merging downstream firm would not be able to turn to alternative
electricity suppliers to avoid an increase in electricity prices. The
Commission requests commenters to address the extent to which vertical
mergers in the energy industry could result in foreclosure or raising
rivals' costs problems.
Facilitating Anticompetitive Coordination: Vertical mergers can
also facilitate anticompetitive ``coordination.'' \58\ A vertical
merger can
[[Page 20350]]
facilitate anticompetitive coordination in either the upstream or
downstream markets if, in either case, the merger: (1) Creates or
enhances the ability of competing firms to agree to raise prices or
restrict output or (2) dampens the incentive for firms to compete
aggressively on price or service. Whether anticompetitive coordination
results in higher electricity prices or lower output depends on the
competitive conditions in the upstream and downstream geographic
markets. In addition, anticompetitive coordination can be increased if
information, useful for coordinated behavior and not available
elsewhere, must be shared between the upstream firm and its customers,
and there are substantial transactions between the upstream merging
firm and non-affiliated customers.\59\
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\58\ Anticompetitive coordination refers generally to the
exercise of market power through the concurrence of other (non-
merging) firms in the market or on coordinated responses by those
firms. See supra n.9. We emphasize that in the electric utility
industry, the terms ``coordination'' or ``coordinating activities''
apply in a specific context. For example, coordinating with other
firms in downstream electricity markets in the creation of
independent system operators would not raise competitive concerns.
The Commission has also long encouraged technical coordination in
order to promote reliability.
\59\ There are many examples of potential anticompetitive
coordination. One possibility is if the downstream merging firm
obtains price quotes and other sensitive competitive information
from other (non-merging) upstream suppliers and transfers it to its
upstream merging partner. The exchange of such information among
upstream input suppliers can be potentially useful in agreeing to
raise prices or restrict output to all downstream customers.
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The Commission is aware that the potential mechanisms through which
a vertical merger could facilitate anticompetitive coordination and the
conditions under which such coordination would result in competitive
harm are complex and subject to some debate. In a later section, we
solicit general comment on anticompetitive coordination and how, or if,
it should be addressed in an analytic framework.
Regulatory Evasion: We solicit comment on the potential for
vertical mergers involving jurisdictional electric utilities to result
in regulatory evasion. For example, after merging with an upstream
input supplier, a downstream electric utility's input purchases would
be ``internal'' to the firm. The merger, therefore, may create the
incentive for the merging upstream input supplier to inflate the
transfer prices of inputs sold to the downstream regulated utility to
the extent it can evade regulatory scrutiny. Profits would increase for
the vertically-integrated firm as a result of such a strategy but would
accrue to the unregulated affiliate. Higher electricity prices could
result from such a strategy.
The Commission notes that regulatory evasion is a behavior that
potentially affects retail electricity prices.\60\ Consistent with our
position taken in the Merger Policy Statement, the Commission does not
propose to address regulatory evasion concerns that affect retail
electricity prices unless specifically asked to do so by a state
regulatory authority.\61\
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\60\ Regulatory evasion could affect requirements service
customers in wholesale electricity markets. However, we believe this
is less likely to be a concern if wholesale markets are competitive.
\61\ Policy Statement at 30,128.
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We also solicit comment on our proposed treatment of mergers in
which regulatory evasion may be a concern, and how ongoing changes in
the industry, such as ISO development and retail access, might affect
our proposed approach.
b. Products supplied by the upstream merging firm are used to
produce a de minimis amount of the relevant downstream products. As
discussed earlier, the Commission is proposing certain instances under
which only minimal information and analysis would be necessary to
confirm that a vertical merger poses no competitive concern. One such
instance is when the upstream merging firm sells a product that is used
to produce only a de minimis amount of the relevant product in the
downstream geographic market.
The Commission expects that vertical consolidations that fall into
this category will be relatively easy to identify. We therefore propose
that applicants would need to supply only minimal information to make
an affirmative showing that a vertical merger does not require further
analysis in order to determine if it would have an adverse effect on
competition in downstream electricity markets.
If the products sold by the upstream merging firm are used to
produce a de minimis amount of the relevant products in the downstream
geographic market, a vertical merger should pose no competitive
concern.\62\ An example is when the upstream merging firm supplies gas
transportation but almost all of the energy in the downstream market is
produced from coal-fired generating capacity.
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\62\ See, Duke/PanEnergy, 79 FERC, para. 61,236 at 62,039.
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The Commission proposes that applicants desiring to make such a
showing would have to: identify products sold by the upstream and
downstream merging firms and identify the suppliers (by type of
generation, e.g., gas-fired, coal-fired, that could compete with the
downstream merging firm in providing downstream products. The second
part of this analysis, that is, identifying the downstream suppliers,
is necessary to determine whether customers affected by the merger
could potentially turn to alternative suppliers in the event of a post-
merger price increase. The Commission proposes that applicants may
provide an approximate definition of the downstream geographic market.
At this time, we will not propose thresholds for the proportion of
output in the downstream geographic market that is accounted for by the
inputs sold by the upstream merging firm or other ``bright line'' tests
for such de minimis determinations.
c. The upstream merging firm does not sell products in the
geographic market in which the downstream merging firm resides. A
vertical merger involving an upstream firm that does not sell into the
downstream geographic market would not affect competition in that
market. Such a merger would involve an electric utility in a different
geographic market from that served by the upstream firm and would raise
no competitive concerns.
The Commission proposes that applicants desiring to make such a
showing would have to identify: (1) Products sold by the upstream and
downstream merging firms; and (2) downstream suppliers who purchase
inputs from the upstream merging firm and determine if those customers
compete with the downstream merging firm to supply downstream products.
The second part of this analysis, that is, identifying the downstream
suppliers, is necessary to determine whether customers affected by the
merger could potentially turn to alternative suppliers in the event of
a post-merger price increase. The Commission proposes that applicants
could provide an approximate definition of the downstream geographic
market.
For both of these abbreviated showings, applicants should explain,
justify and document their analyses and provide all supporting data and
documentation. The abbreviated filing requirements are set forth in
Sec. 33.2(g)(2)(ii) of the proposed regulations. We solicit comments:
on the reasonableness and efficacy of the proposed abbreviated filing
requirements provisions; approaches to approximating the downstream
geographic market; and appropriate de minimis thresholds for the amount
of downstream output produced by inputs sold by the upstream merging
firm.
d. Components of the Analytic Framework. Described in more detail
below are the components of the proposed analytic framework for
vertical mergers.
[[Page 20351]]
1. Relevant Products
a. Downstream Market
Applicants must identify and define the relevant products sold in
the downstream electricity market affected by the business activity of
the upstream merging firm. The proposed requirement for this aspect of
the vertical analytic framework is the same as that proposed for the
horizontal screen analysis, as set forth in Sec. 33.3(c)(1) of the
proposed regulations. We seek comments on how, if at all, our proposed
approach for defining relevant products in the downstream market should
differ from that required for horizontal mergers. We also seek comments
on any alternative approaches.
b. Upstream Market
Applicants must identify the products produced by the upstream
merging firm and used by the downstream merging firm and/or its
competitors in the production of relevant downstream electricity
products. Relevant upstream products could be grouped together when
they are good substitutes for each other from the buyer's perspective.
Also, the supply and demand conditions might vary over time, creating
discrete, time-differentiated products.
Accordingly, the relevant products identified by the applicant
should be fully explained, justified and documented. The specific
filing requirements for identifying and defining relevant upstream
products are set out in Sec. 33.4(c)(1)(ii) of the proposed
regulations. The Commission seeks comments on the proposed approach and
any alternative approaches to defining relevant input products, and how
such approaches should vary for different types of inputs.
2. Relevant Geographic Markets
a. Downstream Market
Defining the downstream geographic market consists of identifying
the customers potentially affected by the merger and the suppliers that
can compete with the merging firm to supply a relevant electricity
product. In the proposed regulations for the horizontal screen
analysis, relevant geographic electricity markets are defined using the
delivered price test. Under the delivered price test, a supplier would
be considered in the market if it has generating capacity from which
energy can be made available and delivered to the market at a price,
including transmission and ancillary services, no more than five
percent above the market price.
The Commission proposes that the relevant downstream geographic
market in a vertical merger would be defined similarly, as set out in
Sec. 33.3(c)(3) of the proposed regulations for the horizontal analytic
framework. However, we seek comment on the appropriateness of a
delivered price test analysis for analyzing downstream markets in
vertical mergers. We also solicit comments on any alternative
approaches to defining downstream geographic markets in a vertical
merger context.
b. Upstream market
The Commission will not at this time propose precise filing
requirements for defining upstream geographic markets. One reason is
that the Commission has not yet acted upon an application for a merger
with vertical aspects that required a rigorous definition of the
upstream geographic market. Another reason is that the types of
analysis and data needed to define geographic upstream markets may vary
from input to input. The Commission expects to better understand the
data and analysis needed to define geographic input markets--if such
analysis proves necessary--as we evaluate proposed vertical mergers.
Until such time, the Commission is proposing that applicants would
approximate the upstream geographic market for each relevant upstream
product and submit data and documentation necessary to support their
analysis. Such approximate definitions of the upstream geographic
market could be based, perhaps, on historical trade data. Applicants
should define the smallest reasonable geographic markets.
Applicants should fully explain, justify and document their
analysis, including all supporting data and documentation. The filing
requirements for this aspect of the analytic framework are set forth in
Sec. 33.4(c)(2) of the proposed regulations. We seek comment on
appropriate approaches to defining upstream geographic markets in
vertical mergers.
3. Evaluating Competitive Conditions in Geographic Markets
a. Downstream Market
Once the downstream geographic market has been defined, applicants
would assess competitive conditions in the downstream market. To do so,
applicants would calculate market shares for the suppliers identified
in the delivered price test and downstream market concentration using
the HHI statistic.
The Commission proposes that for a vertical merger, downstream
market share statistics reflect the ability of buyers in the downstream
market to switch--in response to a price increase--from generation
served by the upstream merging firm. Specifically, we propose that
applicants would identify the upstream suppliers who sell or deliver
inputs to each generating unit or plant in the downstream geographic
market. All generation capacity served by the same input supplier would
be considered together and therefore be given a market share, i.e.,
treated as if it was owned or controlled by a single firm.\63\
---------------------------------------------------------------------------
\63\ See Enova, 79 FERC para. 61,372 at 62,562. If multiple
upstream suppliers serve a single generating plant or unit,
applicant's analysis would take this into account.
---------------------------------------------------------------------------
The Commission proposes that applicants calculate downstream market
concentration using the HHI statistic. While the Commission has not
explicitly reported HHI statistics for relevant geographic markets in
prior vertical merger cases, the HHI statistic is, along with market
share, a generally accepted indicator of competitive conditions in a
relevant market.\64\ As a general matter, therefore, the Commission
proposes that markets that are ``highly concentrated'' under the
Guidelines standard (i.e., an HHI of 1800 or above) are considered to
be conducive to the exercise of market power and therefore should
warrant additional analysis.\65\
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\64\ The DOJ 1984 Merger Guidelines address vertical mergers and
discuss both market share and HHI statistics. See DOJ 1984 Merger
Guidelines at 46.
\65\ The DOJ 1984 Merger Guidelines use as a threshold for
further investigating the competitive effect of a vertical merger a
``highly concentrated'' market. See DOJ 1984 Merger Guidelines at
46. Because concentration thresholds are indicators of cases in
which additional investigation into the possibility of competitive
harm might be warranted, the Commission would look further at
mergers with an HHI near 1800 or above.
---------------------------------------------------------------------------
The specific filing requirements for assessing the competitive
conditions in the downstream market are set forth in Sec. 33.4(c)(3)(i)
of the proposed regulations. We solicit comments on this approach to
assessing market shares and concentration in the downstream market, and
any alternative approaches.
b. Upstream Market
The Commission proposes that Applicants would assess competitive
conditions in the upstream market by calculating market shares for each
supplier identified in the delivered price test and market
concentration using the HHI statistic. The Commission proposes that
upstream geographic markets that are ``highly concentrated''
[[Page 20352]]
under the Guidelines standard (i.e., an HHI of 1800 or above) are
considered to be conducive to the exercise of market power and
therefore should warrant additional analysis.
The specific filing requirements for assessing the competitive
conditions in the upstream market are set forth in Sec. 33.4(c)(3)(ii)
of the proposed requirements. We solicit comments on this approach to
assessing market shares and concentration in the upstream market, and
any alternative approaches.
4. Mitigation Measures and Analysis of Other Factors
Where applicants' analysis indicates concentration results that
raise concerns regarding the competitive effect of the merger, the
Commission proposes that applicants would evaluate additional factors
that could provide insight into whether a proposed merger would be
likely to harm competition in electricity markets. Applicants need
evaluate these factors only if competitive conditions in the upstream
and downstream markets support the possibility that the merger could
raise rivals' costs or facilitate coordination, as described in the
following sections. In lieu of addressing the additional factors that
would lessen concern regarding the adverse competitive impact of a
proposed merger, applicants may propose mitigation measures. Proposals
must be specific, and the applicant must demonstrate that proposed
measures adequately mitigate any adverse effects of the merger.
If applicants choose not to propose mitigation, the factors that we
propose applicants evaluate in this stage of the analytic framework are
those set out in Sections 2 through 5 of the Guidelines: potential
adverse competitive effects, ease of entry, merger-related
efficiencies, and whether one of the merging firm's assets would exit
the market, but for the merger. The second, third and fourth of these
factors (entry, merger-related efficiencies and a failing firm
rationale) can counteract any potential competitive harm indicated by
market share and concentration statistics. Regarding entry, the
Commission seeks comments on the circumstances under which entry into
either the upstream or downstream markets would be sufficient to
mitigate the potential competitive harm of a proposed merger and the
circumstances under which entry into both markets would be
necessary.\66\ The first of these factors looks more specifically at
the circumstances under which potential adverse competitive effects
would materialize. Below, we discuss the proposed requirements for
evaluating such circumstances for mergers posing foreclosure/raising
rivals' costs and anticompetitive coordination concerns.
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\66\ See DOJ 1984 Merger Guidelines Secs. 4.211 and 4.212.
---------------------------------------------------------------------------
a. Foreclosure/Raising Rivals' Costs
If both the upstream and downstream markets are conducive to the
exercise of market power, there is the potential for the merger to harm
competition in the downstream geographic market by raising the input
costs of rival downstream suppliers. As such, we propose that
applicants demonstrate that raising rivals' costs would be difficult,
even if the merger creates or enhances the ability of the merged firm
to adversely affect prices or output in the downstream market.
For example, we propose that applicants provide adequate
information, supported by data and documentation, regarding how the
merged firm could raise its rivals' costs. We propose that such
information could include, but is not limited to: (1) Types of products
or services sold by the upstream firm to each downstream competitor;
(2) terms of contracts under which products or services are sold and
the duration of such contracts; (3) a description of the prices,
availability quality and input delivery points of inputs sold to
downstream competitors; and (4) information on generation unit
scheduling, impending technological improvements, and marketing that is
provided by customers to the upstream firm, particularly any market-
sensitive information that may be subject to confidentiality
provisions.\67\ We seek comment on how such data can be made available
to intervenors under protective order procedures.
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\67\ See, Vastar Resources, Inc., et al., 81 FERC para. 61,135
at 61,633.
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We also propose that applicants would evaluate whether customers of
the upstream input supplier can readily switch to alternative inputs to
avoid a price increase by the upstream merging firm. If switching to
alternative inputs is possible, the merger may not create or enhance
the ability of the merging firm to affect output and prices in the
upstream market.
We propose that applicants would have to provide data and
documentation supporting how regulatory requirements governing the
conduct of upstream input suppliers (such as open-access provisions
applicable to gas pipelines under Order No. 636) \68\ could counteract
any competitive harm posed by a merger.
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\68\ See Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing Transportation Under Part
284 of the Commission's Regulations, and Regulation of Natural Gas
After Partial Wellhead Decontrol, Order No. 636, FERC Stats. and
Regs. para. 30,939 (April 8, 1992), order on reh'g, Order No. 636-A,
FERC Stats. & Regs. para. 30,950 (August 2, 1992), order on reh'g,
Order No. 636-B, 61 FERC para. 61,272 (November 27, 1992), reh'g
denied, Order No. 636-C, 62 FERC para. 61,007 (January 8, 1993),
order aff'd in part and remanded in part, United Distribution
Companies, v. FERC, 88 F.3d 1105 (D.C. Cir. 1996); order on remand,
Order No. 636-C, 78 FERC para. 61,186 (1997); rehearing pending.
---------------------------------------------------------------------------
Finally, a raising rivals' costs strategy is unlikely to harm
competition unless such behavior is profitable. Therefore, we propose
that applicants would provide data and documentation supporting an
assessment of the profitability of a raising rivals' costs strategy if
this data could materially affect a conclusion that a proposed merger
could harm competition.
The filing requirements for this aspect of the analytic framework
are set forth in Sec. 33.2(g)(4) of the proposed regulations. The
Commission seeks comment on the foregoing, and other pertinent
considerations that may materially affect a finding that a proposed
vertical merger would be likely to impair competition in electricity
markets and how such considerations should be analyzed.
b. Facilitating Anticompetitive Coordination
There is a possibility that a vertical merger could harm
competition in the downstream market by facilitating anticompetitive
coordination in either the upstream or downstream market. As discussed
earlier, whether anticompetitive coordination results in higher
electricity prices or lower output depends on the competitive
conditions in the upstream and downstream geographic markets. However,
since we have not described the ways in which a vertical merger could
facilitate coordination, it would be premature to specify the market
conditions under which increased coordination would warrant applicants
proceeding to evaluate additional factors.
Therefore, we solicit comments on how a vertical merger could
facilitate anticompetitive coordination; the conditions under which
such coordination would impair competition in electricity markets; and
the significance of coordination problems as they relate to the
industries likely to be affected by the vertical mergers in which the
Commission would take an interest.
5. Remedy
In the event a vertical merger poses competitive concerns after
accounting
[[Page 20353]]
for the additional factors described in the previous section, the
Commission proposes that the merger may be made acceptable if certain
remedial actions are taken. For example, in Enova the Commission
specified certain remedies that would address the competitive concerns
presented by that merger. The remedies included a code of conduct,
restrictions on affiliate transactions and an electronic gas
reservation and information system.69 We solicit comments on
the types of remedial action that would effectively address such
competitive concerns.
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\69\ Enova, 79 FERC para. 61,372 at 62,565 (1997).
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3. Effect on Rates--Proposed Requirements for Ratepayer Protections
The Commission has previously determined that ratepayer protection
mechanisms are necessary to protect the wholesale customers of merger
applicants (e.g., open seasons to allow early termination of existing
service contracts or rate freezes) if the contemplated benefits of the
merger do not materialize. If the proposed merger raises substantial
issues of fact with regard to its impact on rates, the Commission has
stated that it will consider further investigation of the matter or set
it for hearing.70 Therefore, all merger applicants would be
required to demonstrate how wholesale ratepayers will be protected, and
applicants would have the burden of proving that their proposed
ratepayer protections are adequate. Specifically, each proposed
ratepayer protection mechanism would clearly identify what customer
groups are covered (e.g., requirements customers, transmission
customers, formula rate customers), what types of costs are covered,
and the time period for which the protection will apply. This
information should be included in the applicants' explanation of the
effect of the transaction on rates required in Sec. 33.2(g)(i) of the
proposed regulations.
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\70\ Policy Statement at 30,111, 30,121-24, and n.5. See also,
Morgan Stanley, 79 FERC at 61,504-05; Duke/PanEnergy, 79 FERC at
62,039-41; Enova, 79 FERC at 62,566; Destec, 79 FERC at 62,574-75;
LILCO, 80 FERC at 61,079-80; FirstEnergy, 80 FERC at 61,098; NORAM,
80 FERC at 61,382-8-12.
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4. Effect on Regulation--Proposed Requirements Concerning the Impact on
State and Commission Regulatory Jurisdiction
The Commission has previously stated that, in merger filings
involving public utility subsidiaries of registered holding companies,
applicants must either commit to abide by the Commission's policies
with respect to intra-system transactions within the holding company
structure or be prepared to go to hearing on the issue of the effect of
the proposed registered holding company structure on effective
regulation by the Commission.71 Consistent with this policy,
we propose that, for all merger applications involving public utility
subsidiaries of registered holding companies, applicants include such a
commitment.
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\71\ Policy Statement at 30,112 and 30,124-25. See also, Duke/
PanEnergy, 79 FERC at 61,041-42; Morgan Stanley, 79 FERC at 61,505;
Enova, 79 FERC at 62,566-67; Destec, 79 FERC at 62,575; LILCO, 80
FERC at 61,080; FirstEnergy, 80 FERC at 61,098-99; NORAM, 80 FERC at
61,383; and Delmarva, 80 FERC at 61,412-13 and n.60.
---------------------------------------------------------------------------
Since regulatory evasion can also result, for example, from passing
higher input prices through to the retail customers of a regulated
affiliate, we further propose that merger applicants, in all cases,
state whether the affected state commissions have authority to act on
the proposed merger. Where the affected state commissions have such
authority, the Commission would not set for further investigation or
hearing the matter of whether the transaction will impair effective
regulation by the affected state commissions. However, if the affected
state lacks authority over the merger and raises concerns about the
effect on regulation, we will consider, on a case-by-case basis,
whether to set this issue for hearing.72 This information
should be included in the applicants' explanation of the effect of the
transaction on regulation required in Sec. 33.2(g)(1) of the proposed
regulations.
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\72\ Policy Statement at 30,125.
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D. Emerging Issues
1. Computer Modeling
The use of computer models--specifically, computer programs used to
simulate the electric power market--has been raised in comments on the
Policy Statement and also in specific cases. In comments on the Policy
Statement, DOJ recommended using computer simulations to delineate
markets and also noted that these simulations could be helpful in
gauging the market power of the merged firm.73 The
Commission believes that use of a properly structured computer model
could account for important physical and economic effects in an
analysis of mergers and may be a valuable tool to use in a horizontal
screen analysis. For example, a computer model might prove particularly
useful in identifying the suppliers in the geographic market that are
capable of competing with the merged company. It could provide a
framework to help ensure consistency in the treatment of the data used
in identifying suppliers in a geographic market.
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\73\ Appendix to DOJ Merger NOI Comments at A-11, n12.
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Therefore, we are issuing a notice of request for written comments
and intent to convene a technical conference concurrently with this
NOPR. This notice requests comments on the use of computer models in
merger analysis and intends to convene a public conference to discuss
this matter. As more fully explained in the notice, the purpose of this
inquiry is to gain further input and insight into whether and how
computer models can be useful to our competitive screen analysis set
forth in Appendix A of the Policy Statement.
2. Other Emerging Issues
The 1996 Policy Statement primarily addresses horizontal mergers,
but shortly after it was adopted a number of vertical electric-gas
mergers were filed with the Commission. For this reason, we request
comments now on whether we should expect other new types of corporate
groupings involving public utilities to emerge, what form they might
take, and how we should analyze the competitive effects if such
combinations are in fact presented. We seek comments on new kinds of
mergers that may lead to the blurring of traditional utility services
and other business lines. Should our market concentration analysis
extend to new products that may result from such a convergence of
business lines, even if these products are principally concerned with
end-use markets? For example, a combination involving a public utility
and a telecommunication business could offer new products and services,
such as sophisticated interactive electric metering, real-time pricing,
automatic utility control of customer machinery and appliances to
minimize electricity costs, and computerized shopping for the most
economical power supplier. Are our proposed vertical merger filing
requirements adequate for review of this form of public utility merger,
to the extent such mergers are jurisdictional?
We also request comment on how the structural changes occurring in
the electric industry should be considered in our analysis of the
effect that public utility mergers may have on competition. For
example, the Commission is aware that as retail markets evolve into
regional power markets, it may become more difficult for individual
states to adequately examine a merger's impact on such
[[Page 20354]]
regional markets.74 We seek comment on whether it is
feasible to address competition only at the wholesale level and ignore
changes in the market that arise in the context of state retail choice
programs and transform retail franchise service territories into
multistate supplier markets. Where merger applicants are members of a
multistate ISO or regional power exchange, should we modify our
analysis and criteria and, if so, how?
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\74\ See, Atlantic City/Delmarva, 81 FERC 61,173 at 61,755
(1997).
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IV. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) 75 requires that
rulemakings contain either a description and analysis of the effect the
proposed rule will have on small entities, or a certification that the
rule will not have a substantial economic effect on a substantial
number of small entities. The entities that would be required to comply
with the proposed rule are public utilities disposing of jurisdictional
facilities, merging such facilities with such facilities owned by
another person, or acquiring the securities of another public utility.
These entities do not fall within the RFA's definition of small
entities.76 Thus, the Commission certifies that this rule
will not have a ``significant economic impact on a substantial number
of small entities.''
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\75\ 5 U.S.C. 601-612.
\76\ 5 U.S.C. 601(3) (citing Sec. 3 of the Small Business Act,
15 U.S.C. 632). Section 3 of the Small Business Act defines a
``small-business concern'' as a business which is independently
owned and operated and which is not dominant in its field of
operation. 15 U.S.C. 632(a).
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V. Environmental Statement
The Commission concludes that promulgating the proposed rule would
not represent a major federal action having a significant adverse
impact on the human environment under the Commission's regulations
implementing the National Environment Policy Act.77 The
proposed rule falls within the categorical exemption provided in the
Commission's regulations for approval of actions under Secs. 4(b), 203,
204, 301, 304, and 305 of the Federal Power Act relating to issuance
and purchase of securities, acquisition or disposition of property,
merger, interlocking directorates, jurisdictional determinations and
accounting.78 Consequently, neither an environmental
assessment nor an environmental impact statement is required.
---------------------------------------------------------------------------
\77\ 18 CFR Part 380.
\78\ 18 CFR 380.4(a)(16).
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VI. Information Collection Statement
The following collection of information contained in this proposed
rule has been submitted to the Office of Management and Budget for
review under Sec. 3507(d) of the Paperwork Reduction Act of 1995, 44
U.S.C. 3507(d). Comments are solicited on the Commission's need for
this information, whether the information will have practical utility,
the accuracy of the provided burden estimates, ways to enhance the
quality, utility, and clarity of the information to be collected, and
any suggested methods for minimizing respondents' burden, including the
use of automated information techniques.
Estimated Annual Burden:
----------------------------------------------------------------------------------------------------------------
Number of Number of Hours per Total annual
Data collection respondents responses response hours
----------------------------------------------------------------------------------------------------------------
FERC-519.................................... 100 1 80 8,000
----------------------------------------------------------------------------------------------------------------
Total Annual Hours for Collection:
(Reporting + Recordkeeping, (if appropriate)) = 8,000
Although most of the discussion in this document focuses mainly on
the Commission's merger policy, the NOPR does address the filing
requirements for all data filed under the FERC-519 form. This data
collection is relevant to a small number of mergers as well as numerous
less complex corporate applications. The hours per response is a
weighted average time estimate based on the projected number of merger
filings and other corporate applications.
Information Collection costs: The Commission seeks comments on the
costs to comply with these requirements. It has projected the average
annualized cost per respondent to be the following:
Annualized Capital/Startup Costs
------------------------------------------------------------------------
------------------------------------------------------------------------
Annualized Costs (Operations & Maintenance)................ $4,210.31
------------
Total Annualized Costs................................. 4,210.31
------------------------------------------------------------------------
The Office of Management and Budget's (OMB) regulations,\79\
require OMB to approve certain information collection requirements
imposed by agency rule. The Commission is submitting notification of
this proposed rule to OMB.
---------------------------------------------------------------------------
\79\ 5 CFR 1320.11 (1996).
---------------------------------------------------------------------------
Title: FERC-519, Disposition of Facilities, Mergers and Acquisition
of Securities.
Action: Proposed collection.
OMB Control No.: 1902-0082.
Respondents: Business or other for profit, including small
business.
Frequency of Responses: On occasion.
Necessity of the information: The proposed rule revises the
requirements contained in 18 CFR Part 33 which implements Sec. 203 of
the FPA. This proposed rule revises 18 CFR Part 33 by providing
applicants with more detailed guidance for preparing applications and
is consistent with the policies set forth in the Policy Statement. The
proposed rule is intended to lessen regulatory burdens on the industry
by eliminating outdated and unnecessary filing requirements, clarifying
existing requirements, and streamlining the filing requirements for
mergers that do not raise competitive concerns.
The implementation of these proposed filing requirements will help
the Commission carry out its responsibilities under the FPA in
accordance with the objectives of the Commission's Open Access Rule
\80\ and in consideration of the changing market structures in the
electric industry. The Commission will use the data received as a
result of the proposed filing requirements: (1) In the review of the
proposed merger of jurisdictional facilities to ascertain whether the
merger is in the public interest; (2) for general industry oversight;
and (3) to expedite the corporate application review process.
---------------------------------------------------------------------------
\80\ See Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Services by Public Utilities;
Recovery of Stranded Costs by Public Utilities, Order No. 888, 61
Fed. Reg. 21,540 (May 10, 1996), FERC Stats. & Regs. para. 31,036
(1996), order on reh'g, Order 888-A, 62 Fed. Reg. 12,274 (March 14,
1997), FERC Stats. & Regs. para. 31,048 (1997), order on reh'g,
Order 888-B, 81 FERC para. 61,248 (1997).
---------------------------------------------------------------------------
Internal Review: The Commission has reviewed the requirements
pertaining to the merger of jurisdictional facilities of public
utilities and determined that the proposed revisions are necessary
because of continuing changes in the electric power industry. Requiring
such filing information, as set forth in this NOPR, would assist the
Commission in
[[Page 20355]]
determining whether proposed mergers are consistent with the
competitive goals of the FPA, the Energy Policy Act of 1992 \81\ and
the Commission's Open Access Rule. These requirements conform to the
Commission's plan for efficient information collection, communication,
and management within the electric power industry. The Commission has
assured itself, by means of its internal review, that there is
specific, objective support for the burden estimates associated with
the information requirements.
---------------------------------------------------------------------------
\81\ Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat.
2776, 2905 (1992).
---------------------------------------------------------------------------
Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, N.E., Washington, D.C. 20426, [Attention:
Michael Miller, Division of Information Services, Phone: (202) 208-
1415, fax: (202) 273-0873, email:michael.miller@ferc.fed.us].
For submitting comments concerning the collection of information(s)
and the associated burden estimate(s), please send your comments to the
contact listed above and to the Office of Management and Budget, Office
of Information and Regulatory Affairs, Washington, D.C. 20503
[Attention: Desk Officer for the Federal Energy Regulatory Commission,
phone: (202) 395-3087, fax: (202) 395-7285].
VII. Public Comment Procedures
The Commission invites comments on the proposed rule from
interested persons. An original and 14 copies of written comments on
the proposed rule must be filed with the Commission no later than
August 24, 1998.
In addition, commenters are requested to submit a copy of their
comments on a 3\1/2\ inch diskette formatted for MS-DOS based
computers. In light of our ability to translate MS-DOS based materials,
the text need only be submitted in the format and version that it was
generated (i.e., MS Word, WordPerfect, ASCII, etc.). It is not
necessary to reformat word processor generated text to ASCII. For
Macintosh users, it would be helpful to save the documents in Macintosh
word processor format and then write them to files on a diskette
formatted for MS-DOS machines. All comments should be submitted to the
Office of the Secretary, Federal Energy Regulatory Commission, 888
First Street, NE, Washington, DC 20426, and should refer to Docket No.
RM98-4-000.
All written comments will be placed in the Commission's public
files and will be available for inspection in the Commission's public
reference room at 888 First Street, NE, Washington, DC, 20426, during
business hours.
List of Subjects in 18 CFR Part 33
Electric utilities, Reporting and recordkeeping requirements,
Securities.
By the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.
In consideration of the foregoing, the Commission proposes to
revise Part 33, Chapter I, Title 18 of the Code of Federal Regulations,
as set forth below.
PART 33--APPLICATION FOR ACQUISITION, SALE, LEASE, OR OTHER
DISPOSITION, MERGER OR CONSOLIDATION OF FACILITIES, OR FOR PURCHASE
OR ACQUISITION OF SECURITIES OF A PUBLIC UTILITY
Sec.
33.1 Applicability.
33.2 Contents of application--general information requirements.
33.3 Additional information requirements for applications resulting
in a single corporate entity obtaining ownership or control over
generating facilities of unaffiliated parties.
33.4 Additional information requirements for applications resulting
in a single corporate entity obtaining ownership or control over
businesses that provide inputs to electric generation and electric
generation products that were previously unaffiliated.
33.5 Proposed accounting entries.
33.6 Form of notice.
33.7 Verification.
33.8 Number of copies.
33.9 Protective order.
33.10 Additional information requests by the Commission.
Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352.
Sec. 33.1 Applicability.
The requirements of this part will apply to public utilities
seeking authority for any transaction requiring Commission
authorization under section 203 of the Federal Power Act.
Sec. 33.2 Contents of application--general information requirements.
Each applicant shall include in its application, in the manner and
form and in the order indicated, the following general information with
respect to such applicant and each entity whose jurisdictional
facilities or securities are involved:
(a) The exact name of the applicant and its principal business
address.
(b) The name and address of the person authorized to receive
notices and communications regarding the application, including phone
and fax numbers, and E-mail address.
(c) A description of the applicant, including:
(1) All business activities of the applicant, including
authorizations by charter or regulatory approval, even if not currently
engaged in such activity;
(2) Organizational charts depicting the applicant's current and
proposed post-transaction corporate structures (including any pending
authorized but not implemented changes) indicating all parent
companies, subsidiaries, affiliates and associate companies, unless the
applicant demonstrates that the proposed transaction does not affect
the corporate structure of any party to the transaction;
(3) A description of all joint ventures, strategic alliances, or
other business arrangements to which the applicant or its parent
companies, subsidiaries, affiliates and associate companies is a party,
unless the applicant demonstrates that the proposed transaction does
not affect any of its business interests;
(4) The identity of common officers or directors of parties to the
proposed transaction;
(5) A description of any authorizations, licenses, or other
approvals received from the Commission; and
(6) A description and location of wholesale power sales customers
and unbundled transmission services customers served by the applicant
or its parent companies, subsidiaries, affiliates and associate
companies.
(d) A description of jurisdictional facilities owned, operated, or
controlled by the applicant or its parent companies, subsidiaries,
affiliates, and associate companies.
(e) A narrative description of the proposed transaction for which
Commission authorization is requested, including:
(1) The identity of all parties involved in the transaction;
(2) All jurisdictional facilities and securities associated with or
affected by the transaction;
(3) The consideration for the transaction; and
(4) The effect of the transaction on such jurisdictional facilities
and securities.
(f) All contracts related to the proposed transaction together with
copies of all other written instruments entered into or proposed to be
entered into by the parties to the transaction.
(g) A statement explaining the facts relied upon to demonstrate
that the proposed transaction is consistent with the public interest.
The applicant must
[[Page 20356]]
include a general explanation of the effect of the transaction on:
(1) Competition;
(2) Rates; and
(3) Regulation of the applicant by the Commission and state
commissions with jurisdiction over any party to the transaction. The
applicant should also file any other information it believes relevant
to the Commission's consideration of the transaction.
(h) If the proposed transaction involves physical property of any
party, the applicant must provide a general or key map showing in
different colors the properties of each party to the transaction.
(i) If the applicant is required to obtain licenses, orders, or
other approvals from other regulatory bodies in connection with the
proposed transaction, the applicant must identify the regulatory bodies
and indicate the status of other regulatory actions, and provide a copy
of each order of those regulatory bodies that relates to the proposed
transaction.
Sec. 33.3 Additional information requirements for applications
resulting in a single corporate entity obtaining ownership or control
over generating facilities of unaffiliated parties.
(a) If, as a result of the proposed transaction, a single corporate
entity obtains ownership or control over the generating facilities of
two or more of the previously unaffiliated parties to the transaction
or their parent companies, subsidiaries, affiliates and associate
companies (collectively merging entities), the applicant must file the
horizontal Competitive Screen Analysis described in paragraphs (b),
(c), (d), (e) and (f) of this section, unless the applicant
affirmatively demonstrates that:
(1) The merging entities do not conduct business in the same
geographic markets or
(2) The extent of the business transactions in the same geographic
markets is de minimis.
(b) All data, assumptions, techniques and conclusions in the
horizontal Competitive Screen Analysis must be accompanied by
appropriate documentation and support.
(1) If the applicant is unable to provide any specific data
required for this section, it must identify and explain how the
requested data submission was satisfied and the suitability of the
substitute data.
(2) The applicant may provide other analyses in addition to the
horizontal Competitive Screen Analysis.
(3) The applicant may use a computer model to complete one or more
steps in the horizontal Competitive Screen Analysis. The applicant must
fully explain, justify and document any model used and provide
descriptions of model formulation, mathematical specifications,
solution algorithms, as well as the annotated model code, and any
software needed to execute the model. The applicant must explain and
document how inputs were developed, the assumptions underlying such
inputs and any adjustments made to published data that are used as
inputs. The applicant must also explain how it tested the predictive
value of the model, for example, using historical data.
(c) The horizontal Competitive Screen Analysis must be completed
using the following steps:
(1) Define relevant products. Identify and define all wholesale
electricity products sold by the merging entities during the two years
prior to the date of the merger application, including but not limited
to: non-firm energy, short-term capacity (or firm energy), and long-
term capacity (a contractual commitment of more than one year). If
supply and demand conditions for a product vary substantially between
time periods, those periods must be identified by time of day and/or
load level, and analyzed separately.
(2) Identify destination markets. Identify each wholesale power
sales customer or set of customers (destination market) affected by the
proposed transaction. Affected customers are, at a minimum, those
entities directly interconnected to any of the merging entities.
Affected customers also should include those entities that have
purchased electricity at wholesale from any of the merging entities
during the two years prior to the date of the application. If the
applicant does not identify an entity to whom the merging entities have
sold electricity during the last two years as an affected customer, the
applicant must provide a full explanation for each such exclusion.
(3) Identify potential suppliers. A seller may be included in a
geographic market to the extent that it can economically and physically
deliver generation services to the destination market. The applicant
must identify potential suppliers to each destination market using the
delivered price test.
(i) Delivered price test. For each destination market, the
applicant must calculate the amount of relevant product a potential
supplier could deliver to the destination market from owned or
controlled capacity at a price, including applicable transmission and
ancillary services costs, that is no more than five (5) percent above
the pre-transaction market clearing price in the destination market.
(ii) The applicant must measure each potential supplier's presence
in the destination market in terms of generating capacity, using at
least economic capacity and available economic capacity measures.
Additional measures, such as total capacity, may be presented.
(A) Economic capacity means the amount of generating capacity owned
or controlled by a potential supplier with variable costs low enough
that energy from such capacity could be economically delivered to the
destination market. Prior to applying the delivered price test, the
generating capacity meeting this definition must be adjusted by
subtracting capacity that is committed under long-term firm sales
contracts and adding capacity that is acquired under long-term firm
purchase contracts (i.e., contracts with a remaining commitment of more
than one year). In addition, any generating capacity of the potential
supplier that is under the operational control of a third-party must be
attributed to the party for whose economic benefit the capacity is
operated; generating capacity may also be attributed to another
supplier for other reasons deemed necessary, but the applicant must
explain the reasons for doing so.
(B) Available economic capacity means the amount of generating
capacity meeting the definition of economic capacity less the amount of
generating capacity needed to serve the potential supplier's native
load, i.e., the capacity needed to serve wholesale and retail power
customers on whose behalf the potential supplier, by statute,
franchise, regulatory requirement, or contract, has undertaken an
obligation to construct and operate its system to meet their reliable
electricity needs.
(C) Each potential supplier's economic capacity and available
economic capacity (and any other measure used to determine the amount
of relevant product that could be delivered to a destination market)
must be adjusted to reflect available transmission capability to
deliver each relevant product. The allocation to a potential supplier
of limited capability of constrained transmission paths internal to the
merging entities' systems or interconnecting the systems with other
control areas must recognize both the transmission capability not
subject to firm reservations by others and any firm transmission rights
held by the potential supplier that are not committed to long-term
transactions. For each such instance where limited transmission
capability must be
[[Page 20357]]
allocated among potential suppliers, the applicant must explain the
method used and show the results of such allocation.
If the proposed transaction would cause an interface that
interconnects the transmission systems of the merging entities to
become transmission facilities for which the merging entities would
have a native load priority under their open access transmission tariff
for use of those facilities, all of the unreserved capability of the
interface must be allocated to the merging entities for purposes of the
horizontal Competitive Screen Analysis, unless the applicant
demonstrates one of the following: the merging entities would not have
adequate economic capacity to fully use such unreserved transmission
capability; the merging entities have committed a portion of the
interface capability to third parties; or suppliers other than the
merging entities have purchased a portion of the interface capability.
(4) Calculate market concentration. Using the amounts of generating
capacity (i.e., economic capacity and available economic capacity, and
any other relevant measure) determined in paragraph (c)(3) of this
section, for each product in each destination market, the applicant
must calculate the market share, both pre-and post-merger, for each
potential supplier, the Herfindahl-Hirschman Index (HHI) statistic for
the market, and the change in the HHI statistic. (The HHI statistic,
which is a measure of market concentration and is a function of the
number of firms in a market and their respective market shares, is
calculated by summing the squares of the individual market shares,
expressed as percentages, of all potential suppliers to the destination
market.)
(5) Historical transaction data. To corroborate the results of the
horizontal Competitive Screen Analysis, the applicant must provide
historical trade data and historical transmission data. Such data
should cover the two-year period preceding the filing of the
application. The applicant may adjust the results of the horizontal
Competitive Screen Analysis, if supported by historical trade data or
historical transmission service data. Any adjusted results must be
shown separately together with an explanation of all adjustments to the
results of the horizontal Competitive Screen Analysis.
(d) Data to support the delivered price test. In support of the
delivered price test required by paragraph (c)(3) of this section, the
applicant must provide the following data and information used in
calculating the economic capacity and available economic capacity that
a potential supplier could deliver to a destination market. The
transmission data required by paragraphs (d)(6) through (d)(8) of this
section must be supplied for the merging entities' systems. Such
transmission data must also be supplied for other relevant systems, to
the extent data are publicly available.
(1) Generation capacity and variable cost. For each generating
plant or unit owned or controlled by each potential supplier, the
applicant must provide: supplier name; name of the plant or unit;
primary and secondary fuel-types; nameplate capacity; summer and winter
total capacity; summer and winter capacity adjusted to reflect planned
and forced outages and other factors, such as fuel supply and
environmental restrictions; and variable cost components, including, at
a minimum, variable operation and maintenance, including both fuel and
non-fuel operation and maintenance, and environmental compliance. To
the extent costs are allocated among units at the same plant,
allocation methods must be fully described.
(2) Long-term purchase and sales data. For each sale and purchase
of capacity, the applicant must provide the following information:
purchasing entity name; selling entity name; duration of the contract;
provisions regarding renewal of the contract; priority or degree of
interruptibility; FERC rate schedule number, if applicable; and
quantity and price of capacity and/or energy purchased or sold under
the contract.
(3) Native load commitments (i.e., commitments to serve wholesale
and retail power customers on whose behalf the potential supplier, by
statute, franchise, regulatory requirement, or contract, has undertaken
an obligation to construct and operate its system to meet their
reliable electricity needs). For each time period, if time-
differentiated relevant products are analyzed, the applicant must
provide: supplier name and hourly native load obligations for the most
recent two years. If data on native load obligations are not available,
the applicant must fully explain and justify any estimates of native
load obligations.
(4) Transmission and ancillary service prices, and loss factors.
The applicant must use in the horizontal Competitive Screen Analysis
the maximum rates stated in the transmission providers' tariffs. If
necessary, those rates should be converted to a dollars-per-megawatt
hour basis and the conversion method explained. If a regional
transmission pricing regime is in effect that departs from system-
specific transmission rates, the analysis should reflect the regional
pricing regime. The following data must be provided for each
transmission system that would be used to deliver energy from each
potential supplier to a destination market: supplier name; name of
transmission system; firm point-to-point rate for each system; non-firm
point-to-point rate; scheduling, system control and dispatch rate;
reactive power/voltage control rate; and transmission loss factor.
(5) Destination market price. The applicant must provide, for each
relevant product and destination market, market prices for the time
periods corresponding to the time-differentiated products being
analyzed for the most recent two years. The applicant may provide
suitable proxies for market clearing prices if actual market prices are
unavailable. Estimated prices must be supported and the cost or sales
data used to estimate the prices must be included with the application.
(6) Transmission capability. The applicant must provide transfer
capability data for each of the transmission paths, interfaces, or
other facilities used by suppliers to deliver to the destination
markets on an hourly basis for the most recent two years. The applicant
must report simultaneous transfer capability, if it is available.
Transmission capability data must include the following information:
transmission path, interface, or facility name; total transfer
capability (TTC); and firm available transmission capability (ATC).
(7) Transmission constraints. For each existing transmission
facility that affects supplies to the destination markets and that has
been constrained during the most recent two years or is expected to be
constrained within the planning horizon, the applicant must provide the
following information: name of all paths, interfaces, or facilities
affected by the constraint; locations of the constraint and all paths,
interfaces, or facilities affected by the constraint; hours of the year
when the transmission constraint is binding; and the system conditions
under which the constraint is binding. The applicant must include
information regarding expected changes in loadings on transmission
facilities due to the proposed transaction and the consequent effect on
transfer capability. To the extent possible, the applicant should
provide system maps showing the location of transmission facilities
where binding constraints have been known or are expected to occur.
(8) Firm transmission rights. For each potential supplier to a
destination market that holds firm transmission rights on a
transmission path, interface,
[[Page 20358]]
or facility necessary to deliver energy from a potential supplier
(including the supplier itself) to that market, the applicant must
provide the following information: supplier name; name of transmission
path interface, or facility; the FERC rate schedule number, if
applicable, under which transmission service is provided; and a
description of the firm transmission rights held (including, at a
minimum, quantity and remaining time the rights will be held, and any
relevant time restrictions on transmission use, such as peak or off-
peak rights).
(9) Summary of potential suppliers' presence. The applicant must
provide a summary table with the following information for each
potential supplier for each destination market: potential supplier
name; the supplier's total amount of economic capacity (not subject to
transmission constraints); and the supplier's amount of economic
capacity from which energy can be delivered to the destination market
(after adjusting for transmission availability). A similar table must
be provided for available economic capacity, and for any other
generating capacity measure used by the applicant.
(10) Historical trade data. The applicant must provide data
identifying all of the merging entities' wholesale sales and purchases
of electric energy for the most recent two years. For each transaction,
the applicant must include the following information: type of
transaction (such as non-firm, short-term firm, long-term firm, peak,
off-peak, etc.); name of purchaser; name of seller; date; duration and
time period of the transaction; quantity of energy purchased or sold;
energy charge per unit; megawatthours purchased or sold; price; and the
delivery points used to effect the sale or purchase.
(11) Historical transmission data. The applicant must provide
information concerning any transmission service denials, interruptions
and curtailments on the merging entities' systems, for the most recent
two years, to the extent the information is available from OASIS data,
including the following information: name of the customer denied,
interrupted or curtailed; type, quantity and duration of service at
issue; the date and period of time involved; reason given for the
denial, interruption or curtailment; the transmission path; and the
reservations or other use anticipated on the affected transmission path
at the time of the service denial, curtailment or interruption.
(e) Any remedies proposed by the applicant (including, for example,
divestiture or participation in an independent system operator) which
are intended to mitigate the adverse effect of the proposed transaction
must, to the extent possible, be factored into the horizontal
Competitive Screen Analysis as an additional post-transaction analysis.
Any mitigation commitments that involve facilities (e.g., in connection
with divestiture of generation) must specify which facilities are
affected by the commitment.
(f) Additional factors. If the applicant does not propose
mitigation measures and does not otherwise demonstrate that the
proposed transaction will not adversely affect competition, the
applicant must address: the potential for entry in the market and the
role that entry could play in mitigating adverse competitive effects of
the transaction; the efficiency gains that reasonably could not be
achieved by other means; and whether, but for the transaction, one or
more of the merging entities would be likely to fail, causing its
assets to exit the market.
Sec. 33.4 Additional information requirements for applications
resulting in a single corporate entity obtaining ownership or control
over businesses that provide inputs to electric generation and electric
generation products that were previously unaffiliated.
(a) If, as a result of the proposed transaction, a single corporate
entity obtains ownership or control over a party to the transaction or
its parent companies, subsidiaries, affiliates and associate companies
that provides inputs to electric generation and another party to the
transaction or its parent companies, subsidiaries, affiliates and
associate companies that currently is unaffiliated with the party that
provides inputs to electric generations and that provides electric
generation products, the applicant must file the vertical Competitive
Screen Analysis described in paragraphs (b), (c), (d) and (e) of this
section, unless the applicant affirmatively demonstrates that the
parties do not provide inputs to the generation of electric energy and
electric generating capacity products in the same geographic markets or
the extent of the inputs to the generation of electric energy (i.e.,
upstream relevant products) provided by the party to potential
suppliers of electric generating capacity products (i.e., the
downstream relevant products) to the relevant destination markets, as
defined in paragraph (c)(2) of Sec. 33.3, is de minimis.
(b) All data, assumptions, techniques and conclusions in the
vertical Competitive Screen Analysis must be accompanied by appropriate
documentation and support.
(c) The vertical Competitive Screen Analysis must be completed
using the following steps:
(1) Define relevant products.
(i) Downstream relevant products. Consistent with paragraph (c)(1)
of Sec. 33.3, the applicant must identify and define all relevant
products sold by a party to the transaction or its parent companies,
subsidiaries, affiliates, and associate companies in relevant
downstream geographic markets.
(ii) Upstream relevant products. The applicant must identify and
define all relevant inputs to the generation of electricity provided by
an upstream business of any of the parties to the transaction or its
parent companies, subsidiaries, affiliates and associate companies in
the most recent two years.
(2) Define geographic markets.
(i) Downstream geographic markets. Consistent with paragraphs
(c)(2) and (c)(3) of Sec. 33.3, the applicant must identify all
geographic markets in which it or its parent companies, subsidiaries,
affiliates and associate companies sells the downstream relevant
products identified in paragraph (c)(1)(i) of this section.
(ii) Upstream geographic markets. The applicant must identify all
geographic markets in which it or its parent companies, subsidiaries,
affiliates and associate companies provides the upstream relevant
products identified in paragraph (c)(1)(ii) of this section.
(3) Analyze competitive conditions.
(i) Downstream geographic market. The applicant must compute market
share for each supplier in each relevant downstream geographic market
and the HHI statistic for the downstream market. The applicant must
provide a summary table with the following information for each
relevant downstream geographic market: the economic capacity of each
downstream supplier (specify the amount of such capacity served by each
upstream supplier); the total amount of economic capacity in the
downstream market served by each upstream supplier; the market share of
economic capacity served by each upstream supplier; and the HHI
statistic for the downstream market. A similar table must be provided
for available economic capacity and for any other measure used by the
applicant.
(ii) Upstream geographic market. The applicant must provide a
summary table with the following information for each upstream relevant
product in each relevant upstream geographic market: the amount of
relevant product provided by each upstream supplier; the total amount
of relevant product in the market; the market share of each
[[Page 20359]]
upstream supplier; and the HHI statistic for the upstream market.
(d) Any remedies proposed by the applicant (including, for example,
divestiture or participation in an independent system operator) which
are intended to mitigate the adverse effect of the proposed transaction
must, to the extent possible, be factored into the vertical Competitive
Screen Analysis as an additional post-transaction analysis. Any
mitigation commitments that involve facilities must specify which
facilities are affected by the commitment.
(e) Additional factors. If the applicant does not propose
mitigation measures and does not otherwise demonstrate that the
proposed transaction will not adversely affect competition, the
applicant must address: the potential for entry in the market and the
role that entry could play in mitigating adverse competitive effects of
the transaction; the efficiency gains that reasonably could not be
achieved by other means; and whether, but for the transaction, one or
more of the parties to the transaction would be likely to fail, causing
its assets to exit the market. The applicant must address each of the
additional factors in the context of whether the proposed transaction
is likely to present concerns about raising rivals' costs or
anticompetitive coordination.
Sec. 33.5 Proposed accounting entries.
If the applicant is required to maintain its books of account in
accordance with the Commission's Uniform System of Accounts (part 101
of this chapter), the applicant must present proposed accounting
entries showing the effect of the transaction with sufficient detail to
indicate the effects on all account balances (including amounts
transferred on an interim basis), the effect on the income statement,
and the effects on other relevant financial statements. The applicant
must also explain how the amount of each entry was determined.
Sec. 33.6 Form of notice.
The applicant must file a form of notice of the application
suitable for issuance in the Federal Register, as well as a copy of the
same notice in electronic format in WordPerfect 6.1 (or other
electronic format the Commission may designate) on a 3\1/2\'' diskette
marked with the name of the applicant and the words ``Notice of
Application.'' The Commission may require the applicant to give such
local notice by publication as the Commission in its discretion may
deem proper.
Sec. 33.7 Verification.
The original application shall be signed by a person or persons
having authority with respect thereto and having knowledge of the
matters therein set forth, and shall be verified under oath.
Sec. 33.8 Number of copies.
An original and five copies of application under this part shall be
submitted. If the applicant must submit information specified in
paragraphs (b), (c), (d), (e) and (f) of Sec. 33.3 or paragraphs (b),
(c), (d) and (e) of Sec. 33.4, the applicant must submit all such
information in electronic format along with a printed description and
summary. The electronic version of all text documents shall be
submitted in WordPerfect Version 6.1, and the electronic version of all
spreadsheet documents shall be submitted in either Lotus, QuattroPro
Version 6.0 or Microsoft Excel Version 4.0 (or other electronic format
the Commission may designate). The printed portion of the applicant's
submission must include documentation for the electronic submission,
including all file names and a summary of the data contained in each
file. Each column (or data item) in each separate data table or chart
must be clearly labeled in accordance with the requirements of
Sec. 33.3 and Sec. 33.4. Any units of measurement associated with
numeric entries must also be included.
Sec. 33.9 Protective order.
If the applicant seeks to protect any portion of the application,
or any attachment thereto, from public disclosure pursuant to
Sec. 388.112 of this chapter of the Commission's regulations, the
applicant must include with its request for privileged treatment a
proposed protective order under which the parties to the proceeding
will be able to review any of the data, information, analysis or other
documentation relied upon by the applicant for which privileged
treatment is sought.
Sec. 33.10 Additional information requests by the Commission.
The Director of the Office of Electric Power Regulation, or his
designee, may, by letter, require the applicant to submit additional
information as is needed for Commission analysis of an application
filed under this part.
[FR Doc. 98-10686 Filed 4-23-98; 8:45 am]
BILLING CODE 6717-01-P
