[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Rules and Regulations]
[Pages 68595-68622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32766]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 2
[Docket No. RM96-6-000; Order No. 592]
Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act; Policy Statememt
Issued December 18, 1996.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Policy statement.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
amending its regulations to update and clarify the Commission's
procedures, criteria and policies concerning public utility mergers in
light of dramatic and continuing changes in the electric power industry
and the regulation of that industry. The purpose of this Policy
Statement is to ensure that mergers are consistent with the public
interest and to provide greater certainty and expedition in the
Commission's analysis of merger applications.
EFFECTIVE DATE: December 18, 1996.
FOR FURTHER INFORMATION CONTACT:
Jan Macpherson (Legal Matters), 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-
0921, (202) 208-2284.
Wilbur C. 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 Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and 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. CIPS is also available through the Fed World System (by
Modem or Internet). To access CIPS, set your communications software to
19200, 14400, 12000, 9600, 7200, 4800, 2400 or 1200bps full duplex, no
parity, 8 data bits, and 1 stop bit. The full text of this final rule
will be available on CIPS in ASCII indefinitely and WordPerfect 5.1
format for one year. The complete text on diskette in Wordperfect
format may also be purchased from the Commission's copy contractor,
LaDorn Systems Corporation, also located in Room 2A, 888 First Street,
N.E., Washington, D.C. 20426.
The Commission's bulletin board system also can be accessed through
the FedWorld system directly by modem or through the Internet. To
access the FedWorld system by modem:
Dial (703) 321-3339 and logon to the FedWorld system
After logging on, type: /go FERC
To access the FedWorld system through the Internet, a telnet
application must be used either as a stand-alone or linked to a Web
browser:
Telnet to: fedworld.gov
Select the option: [1] FedWorld
Logon to the FedWorld system
Type: /go FERC
or
Point your Web Browser to: http://www.fedworld.gov
Scroll down the page to select FedWorld Telnet Site
Select the option: [1] FedWorld
Logon to the FedWorld system
Type: /go FERC
Policy Statement Establishing Factors the Commission Will Consider in
Evaluating Whether a Proposed Merger Is Consistent With the Public
Interest
Issued December 18, 1996.
I. Introduction
This Policy Statement updates and clarifies the Federal Energy
Regulatory Commission's (Commission) procedures, criteria and policies
concerning public utility mergers in light of dramatic and continuing
changes in the electric power industry and corresponding changes in the
regulation of that industry. The Commission believes it is particularly
important to refine and modify its merger policy at this critical
juncture for the electric industry. The Commission recognizes that the
electric industry now is in the midst of enormous technological,
regulatory and economic
[[Page 68596]]
changes. At the heart of these changes is the transition to competitive
power supply markets, prompted in part by this Commission's open access
transmission policies. These changes are fundamental, and mergers and
consolidations are among the strategic options available for companies
seeking to reposition themselves in response to the emerging
competitive business landscape.
In this Policy Statement, the Commission has two broad goals.
First, we intend to ensure that future mergers are consistent with the
competitive goals of the Energy Policy Act of 1992 (EPAct) 1 and
the Commission's recent Open Access Rule.2 This means that the
Commission, in applying the Federal Power Act standard that mergers
must be consistent with the public interest, must account for changing
market structures and pay close attention to the possible effect of a
merger on competitive bulk power markets and the consequent effects on
ratepayers. Second, the Commission believes that as the pace of
industry change increases, market participants require greater
regulatory certainty and expedition of regulatory action in order to
respond quickly to rapidly changing market conditions. Accordingly,
this Policy Statement offers procedural innovations and more specific
information that we would expect applicants to file to facilitate the
Commission acting more quickly on merger requests. 3
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\1\ Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat.
2776, 2905 (1992).
\2\ See Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities and
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, Order No. 888, (Open Access Rule) 61 FR 21540 (May 10,
1996), III FERC Stats. & Regs. para. 31,036 (1996), reh'g pending.
\3\ In the near future, the Commission will also issue a notice
of proposed rulemaking to set forth more specific filing
requirements consistent with this Policy Statement and additional
procedures for improving the merger hearing process.
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We will generally take into account three factors in analyzing
proposed mergers: the effect on competition, the effect on rates, and
the effect on regulation. First, our analysis of the effect on
competition will more precisely identify geographic and product markets
and will adopt the Department of Justice/Federal Trade Commission
Merger Guidelines (Guidelines) as the analytical framework for
analyzing the effect on competition. The Guidelines adopt a five-step
procedure for analyzing mergers
First, the Agency assesses whether the merger would significantly
increase concentration and result in a concentrated market, properly
defined and measured. Second, the Agency assesses whether the merger,
in light of market concentration and other factors that characterize
the market, raises concern about potential adverse competitive effects.
Third, the Agency assesses whether entry would be timely, likely and
sufficient either to deter or to counteract the competitive effects of
concern. Fourth, the Agency assesses any efficiency gains that
reasonably cannot be achieved by the parties through other means.
Finally, the Agency assesses whether, but for the merger, either party
to the transaction would be likely to fail, causing its assets to exit
the market.4
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\4\ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, issued April 2, 1992, 57 FR 41552
(1992).
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By applying an analytic ``screen'' based on the Guidelines early in
the merger review process, the Commission will be able to identify
proposed mergers that clearly will not harm competition.
Second, in assessing the effect of a proposed merger on rates, we
will no longer require applicants and intervenors to estimate the
future costs and benefits of a merger and then litigate the validity of
those estimates. Instead, we will require applicants to propose
appropriate rate protection for customers. The most promising and
expeditious means of addressing this issue is for parties to engage in
a pre-filing consensus-building effort that will result in a filing
that includes appropriate rate protection. If merger applicants and
their affected wholesale customers are able to agree on appropriate
ratepayer safeguards, it should not be necessary to set this aspect of
the merger for hearing.5 Even where the parties have been unable
to come to an agreement before the merger is filed, they should
continue to attempt to negotiate a settlement. While there are several
potential mechanisms available, which we discuss herein, adequate
ratepayer protection will necessarily depend on the particular
circumstances of the merging utilities and their ratepayers. There is
no one-size-fits-all approach, and the Commission strongly encourages
parties to resolve this issue without a formal hearing. However, we
also recognize the possibility that parties may not be able to reach an
agreement on appropriate ratepayer protection and that there may be
situations in which the Commission nevertheless would be able to
approve a merger. This could occur either after a hearing or on the
basis of parties' filings if we determine that the applicants' proposal
sufficiently insulates the ratepayers from harm.
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\5\ Parties may choose to use alternative dispute resolution or
other settlement processes to reach mutually agreeable ratepayer
protection resolutions.
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Finally, with regard to the effect of the merger on regulation, we
will adopt the approach we have used in recent cases. With respect to
shifts of regulatory authority to the Securities and Exchange
Commission (SEC) where the applicants will be part of a registered
public utility holding company, they may either commit themselves to
abide by this Commission's policies with regard to affiliate
transactions, or we will set the issue for hearing. With respect to the
merger's effect on state regulation, where the state commissions have
authority to act on the merger, we intend to rely on the state
commissions to exercise their authority to protect state interests.
In order to provide more certainty and expedition in our handling
of merger applications, this Policy Statement explains how merger
applicants should address each of the three factors as part of their
case-in-chief in support of their application. For the effect on
competition factor, applicants who demonstrate that their merger passes
the market power screen established in this Policy Statement will
establish a presumption that the merger raises no market power
concerns. In that event, a trial-type hearing on this factor should not
be necessary. We are also setting forth guidance on the other two
factors and ways to resolve any concerns about these factors without a
trial-type hearing.
For mergers that do not pass the market power screen, we will
engage in a more detailed analysis, which may include a trial-type
hearing. As discussed below, if we find that a merger will have an
adverse effect on competition, and if the additional factors examined
do not mitigate or counterbalance the adverse competitive effects of
the merger, we may impose various remedies where necessary to make a
merger consistent with the public interest.
In this Policy Statement, we also provide guidance on what kind of
evidence is needed for each factor. Thus, applicants will be able to
provide the necessary information at the outset. This should provide
more certainty and help focus our review on specific issues that
require more scrutiny. We believe that the additional information that
we would expect parties to file will expedite the merger review process
and enable the Commission to act on section 203 applications more
quickly. We intend to process most merger applications within 12-15
months after
[[Page 68597]]
the applications are completed, as discussed below under
``Procedures.''
In general, we expect that a merger approved by the Commission will
satisfy each of the three factors that form the basis of our merger
review, i.e., post-merger market power must be within acceptable
thresholds or be satisfactorily mitigated, acceptable customer
protections must be in place, and any adverse effect on regulation must
be addressed. However, we recognize that there may be unusual
circumstances in which, for example, a merger that raises competitive
concerns may nevertheless be in the public interest because customer
benefits (such as the need to ensure reliable electricity service from
a utility in severe financial distress) may clearly compel approval.
Consistent with the Guidelines, the Commission would continue to
account for such circumstances and could, in a particular case,
conclude that on balance the merger is consistent with the public
interest.
Finally, the Commission recognizes that, as the industry evolves to
meet the challenges of a more competitive marketplace, new types of
mergers and consolidations will be proposed. For example, in addition
to mergers between public utilities, market participants already are
considering restructuring options that include mergers between public
utilities and natural gas distributors and pipelines, consolidations of
electric power marketer businesses with other electric or gas marketer
businesses, and combinations of jurisdictional electric operations with
other energy services.6 As a consequence, our merger policy must
be sufficiently flexible to accommodate the review of these new and
innovative business combinations that are subject to our jurisdiction
under section 203 and to determine their implications on competitive
markets. We believe that the analytical framework articulated in this
Policy Statement provides a suitable methodology for determining
whether such mergers will be consistent with the public interest.7
However, it will not be necessary for the merger applicants to perform
the screen analysis or file the data needed for the screen analysis in
cases where the merging firms do not have facilities or sell relevant
products in common geographic markets. In these cases, the proposed
merger will not have an adverse competitive impact (i.e., there can be
no increase in the applicants' market power unless they are selling
relevant products in the same geographic markets) so there is no need
for a detailed data analysis. If the Commission is unable to conclude
that the applicants meet this standard, the Commission will require the
applicants to supply the competitive analysis screen data described in
Appendix A.
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\6\ See, for example, among others, the proposed merger of Enron
Corporation with Portland General Corporation (Docket No. ER96-36-
000) and the proposed acquisition of PanEnergy Corporation by Duke
Power Company, announced November 25, 1996.
\7\ We recognize that, as some energy products possibly become
more suitable alternatives to others, or as the combination of
complementary energy services possibly affects barriers to entry,
the focus of our analysis may have to be adjusted to encompass those
products, markets, and factors that are relevant to analyzing the
exercise of market power in the future business environment.
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II. Background
Section 203(a) of the Federal Power Act (FPA) provides that no
public utility shall sell, lease, or otherwise dispose of the whole of
its facilities that are subject to the Commission's jurisdiction, or
any part thereof with a value in excess of $50,000, or by any means
whatsoever, directly or indirectly, merge or consolidate such
facilities with those of any other person, or purchase, acquire, or
take any security of another public utility without first securing the
Commission's approval.8 Section 203(a) also says that ``if the
Commission finds that the proposed * * * [merger] will be consistent
with the public interest, it shall approve the same.'' 9 Under
section 203(b), the Commission may approve a proposed merger ``in whole
or in part and upon such terms and conditions as it finds necessary or
appropriate. * * *'' This power is to be exercised ``to secure the
maintenance of adequate service and the coordination in the public
interest of facilities subject to the jurisdiction of the Commission.''
10
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\8\ While many types of transactions, including relatively minor
ones, may require section 203 authorization, this Policy Statement
focuses on mergers.
\9\ 16 U.S.C. 824b(a) (1994).
\10\ 16 U.S.C. 824b(b) (1994).
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Thirty years ago, in the Commonwealth case,11 the Commission
set forth six non-exclusive factors for evaluating mergers:
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\11\ See Commonwealth Edison Company (Commonwealth), Opinion No.
507, 36 F.P.C. 927, 936-42 (1966), aff'd sub nom. Utility Users
League v. FPC, 394 F.2d 16 (7th Cir. 1968), cert. denied, 393 U.S.
953 (1969).
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(1) the effect of the proposed merger on competition;
(2) the effect of the proposed merger on the applicants' operating
costs and rate levels;
(3) the reasonableness of the purchase price;
(4) whether the acquiring utility has coerced the to-be-acquired
utility into acceptance of the merger;
(5) the impact of the merger on the effectiveness of state and
federal regulation; and
(6) the contemplated accounting treatment. Of these factors, the
first two--the effect on competition and the effect on costs and
rates--have presented the most significant issues in recent merger
cases.
Since Commonwealth, however, both the electric utility industry and
utility regulation have changed dramatically. The Commission's Open
Access Rule 12 describes these changes at length. Advances in
technology now allow scale economies to be exploited by smaller-size
units, thereby allowing smaller new plants to be brought on line at
costs below those of the large plants of the 1970s and earlier.13
Technological advances in transmission have made possible the economic
transmission of electric power over long distances at higher
voltages.14 State public utility commissions have been relying
more on competitive contracting as the primary vehicle for adding new
generating capacity.15 This Commission has authorized market-based
rates for wholesale electricity sales when it has found that the public
utilities lack market power.
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\12\ See Open Access Rule, 61 FR at 21540.
\13\ See Id. at 21544.
\14\ See Id. at 21544-45.
\15\ See Paul L. Joskow, Regulatory Failure, Regulatory Reform,
and Structural Change in the Electrical Power Industry, in Brookings
Papers on Econ. Activity, Microeconomics 125 (1989).
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In 1992, a landmark change occurred when Congress enacted the
EPAct. That statute permitted new power suppliers, called exempt
wholesale generators, to enter wholesale power markets, and expanded
the Commission's authority to require transmitting utilities to provide
eligible third parties with transmission access. In 1996, consistent
with the competitive goals of EPAct, the Commission adopted a sweeping
regulatory policy change with the promulgation of the Open Access Rule.
That rule requires each public utility that owns, operates or controls
interstate transmission facilities to file an open access transmission
tariff that offers both network and point-to-point service. The rule is
designed to remedy the undue discrimination that is inherent when a
utility does not offer truly comparable transmission service to others,
and to promote competitive bulk power markets. Thus, EPAct and the
Commission's Open Access Rule have fundamentally changed federal
regulation of the electric utility industry. In addition, many states
are contemplating retail access, which may
[[Page 68598]]
prompt even more significant changes in the industry.
Because these changes have implications for the Commission's
regulation of mergers, 16 we issued a Notice of Inquiry (NOI)
17 soliciting comments on whether our thirty-year-old criteria for
evaluating mergers should be revised. While most commenters agree that
we should revise our merger policies, there are differences of opinions
on the general direction of the change needed. The comments are
summarized in Appendix D.18
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\16\ Many of the commenters in the Open Access Rule proceeding
suggested that the Commission reevaluate its merger policy in
concert with the open access rulemaking. See Open Access Rule at 61
FR 21555.
\17\ See Inquiry Concerning the Commission's Merger Policy Under
the Federal Power Act, Docket No. RM96-6-000, 61 FR 4596 (February
7, 1996), FERC Stats. & Regs. para. 35,531.
\18\ Appendix C sets forth the full names and acronyms of the
commenters.
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III. Discussion
A. General Comments on Revising Merger Policy
1. Direction of Change
As noted above, under section 203, the Commission evaluates mergers
to determine whether they are ``consistent with the public interest.''
Congress did not intend the Commission to be hostile to mergers.
19 We have found that the transaction taken as a whole must be
consistent with the public interest. 20 Thus, even if certain
aspects of a proposed merger are detrimental, the merger can still be
consistent with the public interest if there are countervailing
benefits that derive from the merger. 21
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\19\ Pacific Power & Light Co. v. FPC, 111 F.2d 1014, 1016 (9th
Cir. 1940) (PP&L); also see Northeast Utilities Service Co. v. FERC
(NU), 993 F.2d 937 (1st Cir. 1993).
\20\ Entergy Services Inc. and Gulf States Utilities Company
(Entergy), Opinion No. 385, 65 FERC para. 61,332 at 62,473 (1993),
order on reh'g, Opinion No. 385-A, 67 FERC para. 61,192 (1994),
appeal pending.
\21\ See NU, 993 F.2d at 945.
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Almost all commenters argue that we need to revise our merger
policies and standards in light of the changes in the industry.22
On one side, many commenters argue that mergers may prevent markets
from becoming truly competitive.23 On the other side, some
commenters suggest that the Commission should approve a merger unless
harm to the public interest is demonstrated.24 These commenters
claim that most mergers are procompetitive and should be approved
unless a problem is identified.
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\22\ See Appendix D, Section IA.
\23\ For example, APPA, NRECA at 7-8; ELCON at 12-13.
\24\ For example, Utilicorp United at 2, 7, 10.
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We do not agree either with commenters who argue that we should
actively encourage mergers or those who argue that we should discourage
them. The statutory standard is that a merger must be ``consistent
with'' the public interest. While we believe that the Commission has
broad flexibility in determining what is in the public interest,
particularly in light of changing conditions in the industry, we do not
read the statutory language as creating a presumption against
mergers.25 Nor are we prepared to presume that all mergers are
beneficial. It is the applicants' responsibility to demonstrate that
the merger is consistent with the public interest.
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\25\ In NU, 993 F.2d at 947, the court pointed out that the FPA
differs from the Bank Merger Act in that the latter contains an
``implicit presumption that mergers are to be disapproved.''
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We believe that if the Commission is to fulfill its statutory
responsibilities, it must determine what is consistent with the public
interest in light of conditions in the electric industry in general as
well as the specific circumstances presented by a proposed merger. In
an era of traditional, cost-of-service based regulation, the Commission
defined its public interest responsibilities consistent with that
structure. Today, we believe that the public interest requires policies
that do not impede the development of vibrant, fully competitive
generation markets. We are refining our analysis of the effects of
proposed mergers on competition in order to protect the public interest
in the development of such highly competitive markets, as discussed
below.
The Commission's interpretation of the public interest standard has
never been static. In the El Paso case, 26 we explained that our
view of what it takes to mitigate market power sufficiently to allow
approval of a merger had evolved over time. We pointed out that as the
industry had become more competitive, we began examining market power
in transmission more closely, and that comparable access was now
required. Moreover, we explained in El Paso that while in the past we
had focused only on increases in market power, we no longer believed
that we could find any merger to be consistent with the public
interest, whether or not the merger created increased market power,
unless the merging utilities provided open access. We adopted this
revised view of the public interest in light of EPAct's goal of
encouraging greater wholesale competition and the significant increase
in actual competition.
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\26\ El Paso Electric Company and Central and Southwest Services
Inc., 68 FERC para. 61,181 61,914-15 (1994), dismissed, 72 FERC
para. 61,292 (1995).
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2. How to Implement New Policies
We are adopting our new policies through this Policy Statement
rather than through other means, such as acting on a case-by-case basis
or through a rulemaking. While some commenters suggested other means,
27 we believe that a Policy Statement is needed. Proceeding on a
case-by-case basis would not give applicants and intervenors the
guidance needed to facilitate the presentation of the kinds of well-
focused evidence and arguments that will improve and expedite the
merger review process. On the other hand, a binding rule would be too
rigid at this time. Because the industry continues to change rapidly,
we must maintain flexibility in fulfilling our statutory
responsibilities.
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\27\ See Appendix D at Section IB.
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Commenters disagree on whether we should apply the new policy to
pending merger proposals. 28 Those proposing mergers have been on
notice since we issued the NOI that the Commission is considering
revising its criteria for evaluating proposed mergers. In several
recent merger hearing orders, we have discussed the NOI and have
indicated that we intend to evaluate pending proposals in light of any
new criteria we might adopt. 29 We do not believe that any
applicants will be seriously disadvantaged by application of this
policy to pending cases. Our analysis of the effect of a proposed
merger on competition has been evolving for some time, particularly
since the enactment of EPAct and the issuance of the Open Access Rule.
Thus, we are not applying radically new analyses or standards. The same
is true of the other two remaining factors, the effects on regulation
and on rates. We will address the specific application of the policy to
pending cases on a case-by-case basis. If necessary, we will require
the parties to supplement the record in any pending case, and we do not
expect that this will cause any substantial delay. In fact, if
anything, we expect this Policy Statement will make it easier to
resolve any remaining issues, because of our clarification of our
policies.
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\28\ Id.
\29\ Union Electric Company and Central Illinois Public Service
Company (Union Electric), 77 FERC para. 61,026 (1996), reh'g
pending; Public Service Company of Colorado and Southwestern Public
Service Company (PS Colorado), 75 FERC para. 61,325 (1996), reh'g
pending; Baltimore Gas & Electric and Potomac Electric Power
Company, 76 FERC para. 61,111 (1996).
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[[Page 68599]]
B. Effect on Competition and Remedies
1. Background
In response to the NOI, we received many comments on our market
power analysis. Commenters generally divide into two groups, one
recommending stricter scrutiny of the effect of mergers on competition,
while the other argues that less concern is warranted in today's more
competitive environment.
Those in the first group support more stringent scrutiny because
they believe that mergers can cause competitive harm, particularly in a
transitional era. Many commenters 30 argue that mergers increase
generation market power, increase monopsony buying power, encourage
self-dealing, discourage alternative suppliers under retail access, and
tend to preserve certain competitive advantages associated with
vertical integration. These commenters criticize the analysis the
Commission has been using to evaluate mergers. They argue that the
Commission has not given enough consideration to important factors,
including generation dominance, the effect of transmission constraints
on competition, the merged company's ability to exercise market power
in localized areas and in short-term energy sales, the effects on
markets in which little or no effective competition exists, and the
significant anticompetitive advantages that vertically integrated
utilities possess as a result of the long-existing statutory and
regulatory system.
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\30\ These include, for example, CA Com, Joint Consumer Advoc.,
APPA, NRECA, Environmental Action et al., RUS, Salt River, Lubbock,
Wisconsin Customers, and TAPS.
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The second broad group of commenters 31 argues that mergers
are procompetitive. These commenters maintain that mergers lower costs,
create economies of scale and geographic scope, create large strong
competitors, allow rapid movement into new markets, allow
diversification to minimize shareholder exposure to business
fluctuation, and let the most efficient companies operate facilities,
among other reasons.
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\31\ Such as UtiliCorp, Southern, PanEnergy, and Southwestern.
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2. Discussion
a. The role of competition. The electric industry's rapid
restructuring, and the Commission's regulatory response to it, have
made the effect of mergers on competition, and the way the Commission
evaluates that effect, critically important.
The Open Access Rule was a watershed for electric industry
regulation. In the Rule, we recognized that, where it exists,
competition has become the best way to protect the public interest and
to ensure that electricity consumers pay the lowest possible price for
reliable service. Before the Open Access Rule, the Commission took the
approach that traditional regulation could cure many market power
problems. The size of the company, the territory it covered, and the
assets it held did not matter greatly because regulatory oversight
could hold market power in check. Indeed, the creation of larger
utilities allowed some utilities to take advantage of scale economies
and pass the cost savings on to consumers under regulatory supervision.
With the open transmission access resulting from the Open Access
Rule and the continuing evolution of competitive wholesale power
markets, we believe that competition is now the best tool to discipline
wholesale electric markets and thereby protect the public interest. But
the competition needed to protect the public interest will not be
efficient and deliver lower prices in poorly structured markets. For
example, a concentration of generation assets that allows a company to
dominate a market will dampen or preclude the benefits of competition.
In sum, as customer protection is increasingly dependent upon vibrant
competition, it is critically important that mergers be evaluated on
the basis of their effect on market structure and performance.
This means that the Commission must find ways to assess more
accurately the competitive impact of merger proposals. In doing so,
however, we must be sensitive to another pressing concern: the
industry's need for more analytic and procedural certainty from the
Commission. The increased pace of merger proposals has tested our
ability to respond in a timely way. We recognize that merger proposals
are business decisions made in response to market pressures and
opportunities. Some merger proposals may strengthen weak firms and
create stronger competitors. Some, however, may result in firms that
will dominate or manipulate electricity markets and thwart competition.
In either case, applicants are entitled to timely decisions from this
Commission. The policies and procedures adopted in this Policy
Statement are intended to promote that goal.
b. Definition of markets. An accurate assessment of the effect on
markets depends on an accurate definition of the markets at issue. The
Commission's current analytic approach defines geographic markets in a
manner that does not always reflect accurately the economic and
physical ability of potential suppliers to access buyers in the market.
This approach uses what has come to be known as a hub-and-spoke method.
It identifies affected customers as those that are directly
interconnected with the merging parties. It then identifies potential
suppliers as: (1) those suppliers that are directly interconnected with
the customer (the ``first-tier'' suppliers); and (2) those suppliers
that are directly interconnected with the merging parties and that the
customer thus can reach through the merging parties' open access
transmission tariff (the ``second-tier'' suppliers).
A drawback of this method of defining geographic markets is that it
does not account for the range of parameters that affect the scope of
trade: relative generation prices, transmission prices, losses, and
transmission constraints. Taking these factors into account, markets
could be broader or narrower than the first- or second-tier entities
identified under the hub-and-spoke analysis. For example, a supplier
that is directly interconnected with a buyer may not be an economic
supplier to that buyer if transmission capability across that
interconnection is severely constrained or if the transmission charges
are greater than the difference between the decremental cost of the
buyer and the price at which the supplier is willing to sell. In
contrast, a supplier that is three or four ``wheels'' away from the
same buyer may be an economic supplier if the sum of the wheeling
charges and the effect of losses is less than the difference between
the decremental cost of the buyer and the price at which the supplier
is willing to sell. In other words, mere proximity is not always
indicative of whether a supplier is an economic alternative.
Another concern with the approach we have used in the past is its
analytic inconsistency. It defines the scope of the market to include
the directly interconnected utilities that are accessible due to the
applicants' open access tariff, but does not expand the market to
recognize the access afforded by other utilities' tariffs. This was
acceptable before open access was established as an industry-wide
requirement for public utilities. Now that virtually all public
utilities have open access transmission tariffs on file, it is no
longer appropriate to recognize only the effect of certain entities'
tariffs on the size of the market.
In modifying our competitive analysis, we are adopting the
Guidelines as the basic framework for evaluating the competitive
effects of merger proposals. The Guidelines are a well-
[[Page 68600]]
accepted standard approach for evaluating the competitive effects of
mergers, and they received substantial support from commenters.
c. Use of the Guidelines. The Guidelines set out five steps for
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) evaluate whether the extent of concentration and
other factors that characterize the market raise concerns about
potential adverse competitive effects; (3) assess whether entry would
be timely, likely, and sufficient to deter or counteract any such
concern; (4) assess any efficiency gains that reasonably cannot be
achieved by other means; and (5) assess whether either party to the
merger would be likely to fail without the merger, causing its assets
to exit the market. We note, however, that the Guidelines are just
that--guidelines. They provide analytical guidance but do not provide a
specific recipe to follow. Indeed, applying the Guidelines to the
electric power industry is one of our biggest analytic challenges, both
because the industry is evolving very rapidly and because the industry
has some unique features, such as very limited opportunities for
storage (hence the importance of time-differentiated markets). An
analysis that follows the Guidelines still requires many assumptions
and judgments to fit specific fact situations.
While this Policy Statement provides guidance on how the Commission
intends to more sharply focus its analysis of a merger's effect on
competition, we cannot reduce this analysis to a purely mechanized
computation of the same data inputs for all merger applications.
Rather, the Commission will need to evaluate the relevant product and
geographic markets affected by each merger proposal; these markets, in
turn, depend on the specific characteristics of the merger applicants
and the products and markets in which they potentially trade.
Consequently, mergers may require analysis of different product and
geographic markets due to factors (such as the existence of constrained
transmission paths) that affect the size of a particular market or the
hours in which trade of the product is critical to determine whether
merger applicants possess market power. Such distinguishing factors
will need to be identified and analyzed on a case-by-case basis. Thus,
the analytical process explained in this Policy Statement is a
framework under which appropriate adjustments may be required to be
incorporated to take account of factors unique to a merger.
Furthermore, as noted above, this Policy Statement also is intended to
be sufficiently flexible to accommodate the kinds of new merger
proposals that will be presented to the Commission as the energy
industry evolves to meet the challenges of a more competitive
marketplace.
We note that the Guidelines contemplate using remedies to mitigate
any harm to competition. There will be mergers where, at the end of an
analysis, market power concerns persist but that could be made
acceptable with measures to mitigate potential market power problems.
We encourage applicants to identify market power problems and to
propose remedies for such problems in their merger proposals. In many
cases, such a remedy could avoid the need for a formal hearing on
competition issues and thus result in a quicker decision. As discussed
further in Section III B (2)(e), if a proposed long-term remedy is not
capable of being effectuated at the time the merger is consummated,
applicants may propose effective interim remedial measures.
d. Analytic screen. It is important to give applicants some
certainty about how filings will be analyzed and what will be an
adequate showing that the merger would not significantly increase
market power. This will allow applicants to avoid or minimize a hearing
on this issue. Consequently, we will to use an analytic screen
(described in Appendix A) that is consistent with the Guidelines. If
applicants satisfy this analytic screen in their filings, they
typically would be able to avoid a hearing on competition. We would
expect applicants to perform the screen analysis as part of their
application and to supply the Commission and the public with electronic
files of all data used in the analysis as well as other related
specified data. The Commission will need this information in order to
perform its competitive analysis. If an adequately supported screen
analysis shows that the merger would not significantly increase
concentration, and there are no interventions raising genuine issues of
material fact that cannot be resolved on the basis of the written
record, the Commission will not set this issue for hearing. Applicants
may, of course, submit an alternative competitive analysis in addition
to the screen.
The Commission believes that the screen will be a valuable
analytical tool in all cases. It is conservative enough so that parties
and the Commission can be confident that an application that clears the
screen would have no adverse effect on competition. The screen also
will be valuable in identifying potential competitive problems early in
the process. The result will be more narrowly focused issues at
hearings when they are necessary. We also note that the screen is
intended to be somewhat flexible. It sets out a general method, but we
will consider other methods and factors where applicants properly
support them.
We believe that the analytic screen will produce a reliable,
conservative analysis of the competitive effects of proposed mergers.
However, it is not infallible. In some cases, the screen may not detect
certain market power problems. There also may be disputes over the data
used by applicants or over the way applicants have conducted the screen
analysis. These claims may be raised through interventions and by the
Commission staff. However, such claims must be substantial and
specific. In other words, they should focus on errors in or other
factual challenges to the data or assumptions used in the analysis, or
whether the analysis has overlooked certain effects of the merger.
Unsupported, general claims of harm are insufficient grounds to warrant
further investigation of an otherwise comprehensive analysis developed
by the applicants. Intervenors may also file an alternative competitive
analysis, accompanied by appropriate data, to support their arguments.
The Commission realizes that the need for more rigor in intervention
showings could require additional efforts by potential intervenors. We
will therefore routinely allow 60 days from filing for intervenors and
others to comment on a merger filing.32
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\32\ Merger applicants that wish to facilitate the merger review
process should serve potential intervenors with copies of their
filing (via overnight delivery), including electronic versions, when
they file their applications with the Commission. Cf. Open Access
Rule, 61 FR 21618 n.510.
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A detailed illustrative description of the analytic screen that we
will use is in Appendix A. The following is a brief summary of the
screen. There are four steps the applicant must complete and the
Commission will follow:
(1) Identify the relevant products. Relevant products are those
electricity products or substitutes for such products sold by the
merging entities.
(2) Geographic markets: identify customers who may be affected by
the merger. Generally, these would include, at a minimum, all entities
directly interconnected to a merging party and those that historical
transaction data indicate have traded with a merging party.
[[Page 68601]]
(3) Geographic markets: identify potential suppliers that can
compete to serve a given market or customer. Suppliers must be able to
reach the market both physically and economically. There are two parts
to this analysis. One is determining the economic capability of a
supplier to reach a market. This is accomplished by a delivered price
test, which accounts for the supplier's relative generation costs and
the price of transmission service to the customer, including ancillary
services and losses. The second part evaluates the physical capability
of a supplier to reach the customer, that is, the amount of electric
energy a supplier can deliver to a market based on transmission system
capability.
(4) Analyze concentration. Concentration statistics must be
calculated and compared with the market concentration thresholds set
forth in the Guidelines.33
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\33\ The Guidelines address three ranges of market
concentration: (1) an unconcentrated post-merger market--if the
post-merger Herfindahl-Hirschman Index (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 usefulness of the screen analysis depends critically on the
data that are supplied with the application. These data are described
in Appendix A. Applicants should file in electronic format the data
specified as well as any other data used in their analysis.
If the Guidelines' thresholds are not exceeded, no further analysis
need be provided in the application. As stated earlier, if an
adequately supported screen analysis shows that the merger would not
significantly increase concentration, and there are no interventions
raising genuine issues of material fact that cannot be resolved on the
basis of the written record, the Commission will not set this issue for
hearing. If the thresholds are exceeded, then the application should
present further analysis consistent with the Guidelines. The Commission
will also consider any applicant-proposed remedies at this stage. If
none is presented, or if the analysis does not adequately deal with the
issues, we will need to examine the merger further.
The Commission will set for hearing the competitive effects of
merger proposals if they fail the above screen analysis, if there are
problems concerning the assumptions or data used in the screen
analysis, or if there are factors external to the screen which put the
screen analysis in doubt. We may also set for hearing applications that
have used an alternative analytic method the results of which are not
adequately supported. As discussed in Section III F, the Commission
will attempt to summarily address issues where possible and may use
procedural mechanisms that permit us to dispose of issues without
having a trial-type hearing.
e. Mitigation. Although a competitive analysis pursuant to the
Guidelines may show that a proposed merger would have anticompetitive
effects, the Commission may be able to approve the merger as consistent
with the public interest if appropriate mitigation measures can be
formulated. In the past, in some cases the Commission has conditionally
approved a merger if applicants agreed to conditions necessary to
mitigate anticompetitive effects. In some instances, applicants
themselves have voluntarily offered commitments to address various
concerns.34 Commenters suggested a variety of conditions that we
could impose (or remedies that applicants could adopt voluntarily) to
solve competitive problems with a merger. These include, for example,
the formation of an Independent System Operator (ISO), divestiture of
assets, elimination of transmission constraints, efficient regional
transmission pricing, and offering an open season to allow the merging
utilities' customers to escape from their contracts. Other commenters
oppose some or all of these remedies. Some commenters also argue that
we should monitor the situation after a merger and impose any new
remedies that are needed; other commenters oppose such post-merger
review.35
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\34\ E.g., Northeast Utilities Services Company/Re Public
Service Company of New Hampshire, 50 FERC para. 61,266, reh'g
denied, 51 FERC para. 61,177, clarification, 52 FERC para. 61,046
(1990), order on reh'g, 58 FERC para. 61,070 (1992), order on reh'g,
59 FERC para. 61,042 (1992), aff'd in part sub nom. Northeast
Utilities Services Company v. FERC, 993 F.2d 937 (1st Cir. 1993);
Midwest Power Systems, Inc. and Iowa-Illinois Gas & Electric
Company, 71 FERC para. 61,386 (committed to offer wholesale
requirements customers an open season).
\35\ The comments on remedies are summarized in more detail in
Appendix D, Section VI D.
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As noted, the Commission's review of merger applications has
frequently resulted in the development of particular conditions that
are designed to remedy problems associated with the merger. These
conditions are imposed as part of our approval of the merger
application. We expect that practice to continue. For example, we
expect the competition analysis to focus extensively on generation
market power and on whether a proposed merger exacerbates market power
problems. We also expect applicants to propose remedies for market
power problems identified in their analysis. It is our hope that as our
market power analysis becomes more refined to cope with changing
circumstances in the industry, applicant-proposed remedies or
mitigation strategies will also become more refined or tailored to
address the identified harm. Of course, one remedy that an applicant
could consider is to propose to divest a portion of its generating
capacity so that its market share falls below the share that poses
anticompetitive concerns under the Guidelines. This remedy is discussed
in the Appendix A section entitled ``Competitive Analysis Screen.''
Similarly, an applicant's ability to exercise generation market
power may be affected by transmission constraints and transmission
pricing. In particular, the scope of the geographic market may be
limited both by transmission constraints and by the need to pay
cumulative transmission rates in order to transmit power across the
systems of the merging utilities and neighboring utilities. It is
likely that both market concentration and the applicant's market share
would be greater within such a circumscribed geographic market. Hence,
the opportunity to exercise market power also would be greater.
Potential remedies for such market power could include the following.
First, a proposal by the applicants to turn over control of their
transmission assets to an ISO might mitigate market power. In
particular, an ISO might facilitate the implementation of efficient
transmission pricing and thereby expand the effective scope of the
geographic market. Second, an up-front, enforceable commitment to
upgrade or expand transmission facilities might mitigate market power,
because the constraint relieved by such an upgrade or expansion no
longer would limit the scope of the relevant geographic market. These
and other remedies also are discussed in Appendix A. We intend to
tailor conditions and remedies to address the particular concerns posed
by a merger on a case-by-case basis.
If an applicant does not propose appropriate remedies to mitigate
the anticompetitive impact of a merger, the Commission intends to
fashion such remedies during the course of its consideration of an
application.
We do not intend to rely on post-merger review or on new remedies
[[Page 68602]]
imposed after a merger is approved. We must find that a merger is
consistent with the public interest before we approve a merger.36
Moreover, heavy reliance on post-merger review would expose the merging
entities to too much uncertainty. However, as the Commission has noted
in past merger cases, the Commission does retain authority under
section 203(b) to issue supplemental orders for good cause shown as it
may find necessary or appropriate.37
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\36\ For example, an expansion or upgrade of facilities to
alleviate a transmission constraint would not be an acceptable
mitigation measure unless uncertainties about the utilities' ability
to complete the upgrade or expansion are resolved prior to
consummation of the merger.
\37\ See FPA section 203(b), 16 U.S.C. Sec. 824b(b) (1994).
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The Commission acknowledges that many of the solutions that would
mitigate market power or anticompetitive effects cannot be implemented
quickly and, in fact, could take an extended period to accomplish
(e.g., siting and constructing new transmission lines to alleviate a
transmission constraint, divestiture of generation assets, formation of
an ISO). While long-term remedies may be necessary to allow the
Commission to determine that a merger is consistent with the public
interest, a requirement to satisfy such conditions prior to
consummating a merger may jeopardize the ability of parties to merge.
In turn, customers will experience unnecessary delays in receiving
benefits accruing from the merger. Therefore, we will entertain
proposals by merger applicants to implement interim mitigation measures
that would eliminate market power concerns during the period that it
takes to put in place the long-term remedies necessary to address the
anticompetitive effects of their proposed merger.38 Such interim
measures must fully and effectively address the specific market power
problems identified for the merger but should not be viewed as
substitutes for the long-term remedies required by the Commission.
Applicants should implement long-term remedies as quickly as practical.
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\38\ For example, an applicant could sell its transmission
rights on congested transmission paths to third parties or not trade
in markets where it has market power until long-term remedies are
implemented.
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C. Effect on Rates
1. Background
In determining whether a merger is consistent with the public
interest, one of the factors we have considered is the effect the
proposed merger will have on costs and rates. In the past we have
considered whether the elimination of the independence of the companies
and resulting combination of the facilities of the separate entities
would be likely to lead to unnecessary rate increases or inhibit rate
reductions.39 We have also been concerned with whether the merged
companies would be able to operate economically and efficiently as a
single entity.40 In connection with these concerns, the Commission
has investigated applicants' claims about the potential costs and
benefits of their proposed mergers and weighed that information to
determine whether the costs are likely to exceed the benefits. Our
investigations have frequently required trial-type hearings. Although
we have considered the applicants' burden of proof to be met by a
generalized showing of likely costs and benefits,41 these hearings
have often been time-consuming, and there has been considerable
controversy over whether the estimates of future costs and benefits are
truly meaningful. Moreover, there has been controversy over the
position we have taken that benefits are to be ``counted'' even if they
could reasonably be obtained by means other than the merger. There also
has been controversy over the allocation of the projected merger
benefits.42
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\39\ Commonwealth, 36 FPC at 938.
\40\ Edison, 47 FERC para. 61,196 at 61,672 (1989).
\41\ Entergy Services Inc. (Entergy), 65 FERC para. 61,332, at
62,473 (1993), order on reh'g, 67 FERC para. 61,192 (1994), appeal
pending.
\42\ These benefits have included items such as fuel cost
savings; bankruptcy resolution; reducing administrative and general
costs; lowering net production costs; and eliminating or deferring
construction of new generating units.
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In more recent cases, the Commission has focused on ratepayer
protection. We have either accepted a hold harmless commitment (a
commitment from the applicant that any net merger-related costs will
not raise rates) or have set for hearing the issue of whether the
applicants' hold harmless commitment or some other proposed ratepayer
protection was adequate. For example, in Primergy, the Commission held
that wholesale ratepayers would be adequately protected if the
applicants were to commit that, for a period of four years after the
merger is consummated, the merging companies would not seek to increase
rates to wholesale requirements customers.
In PS Colorado,43 the applicants submitted evidence on costs
and benefits, but also proposed a hold harmless commitment. We noted
several concerns with the hold harmless commitment, pointing out that
it did not cover most of the merger-related costs.44 We set for
hearing the issue of whether the applicants' hold harmless commitment
provided adequate protection for ratepayers (those who receive
unbundled generation and transmission services as well as those who
receive bundled service) and, if not, what ratepayer protection
mechanisms would be sufficient. We did not set for hearing the effect
on rates as such; that is, we did not instruct the administrative law
judge to conduct a factual investigation into the alleged costs and
benefits of the merger. In Cincinnati Gas & Electric Company and PSI
Energy, Inc., the Commission modified the hold harmless provision,
stating that the applicants would have the burden of convincingly
demonstrating in future section 205 filings that their wholesale
customers had, in fact, been held harmless; that is, they would have to
show any rate increase was not related to the merger.45 The
applicants would be required to make an affirmative showing in their
initial case-in-chief that their proposed rates did not reflect merger-
related costs unless such costs were offset by merger-related
benefits.46
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\43\ 75 FERC at 62,043-44.
\44\ The commitment was not to seek an increase in base rates
for five years after the merger. We found, however, that this
provided little protection, since the five years would be over
before most of the claimed merger savings were projected to be
realized. Moreover, the applicants proposed to amortize merger-
related costs over five years, but their hold harmless commitment
covered only costs that would be ``booked to the merger'' through
the first two years.
\45\ See Cincinnati Gas & Electric Company and PSI Energy, Inc.,
64 FERC para. 61,237 at 62,714 (1993), order withdrawing
authorization of merger and instituting settlement procedures, 66
FERC para. 61.028, order denying rehearing and approving settlements
and unilateral offers as conditioned and modified, 69 FERC para.
61,005 (1994), order granting clarification, 69 FERC para. 61,088
(1994).
\46\ Id. at 62,714.
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In Union Electric,47 the applicants proposed an open season
guarantee for the first five years after the merger was consummated.
The open season guaranteed that existing wholesale customers could
terminate their contracts by giving notice on the day the applicants
filed for a rate increase affecting that customer. The Commission was
concerned that the open season commitment might not provide adequate
protection for wholesale ratepayers (those that receive bundled
generation and transmission service as well as those that receive
unbundled generation or transmission service) and set that issue for
hearing. We stated that if at hearing it was determined that the open
season
[[Page 68603]]
commitment was not adequate protection, a determination should be made
as to what ratepayer protection mechanisms might be suitable for the
proposed merger.
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\47\ 77 FERC para. 61,026 at 61,107-08 (1996), reh'g pending.
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In response to the NOI, only a few commenters suggest that we
dispose of the effect on rates factor altogether.48 Most
commenters consider this factor to be essential in deciding whether to
approve a merger.49 However, commenters differ on how this factor
should be assessed.
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\48\ See Appendix D, section III(A).
\49\ Id.
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2. Discussion
We disagree with the argument presented by a few commenters that we
need not be concerned about the effect of a merger on rates in this
competitive environment because prices will be set by market forces and
customers can choose their suppliers accordingly. Also, while it may be
true that most of the rate issues in connection with the typical merger
affect retail ratepayers and are subject to state jurisdiction, the
Commission in order to ensure that a merger is consistent with the
public interest still must protect the merging utilities' wholesale
ratepayers and transmission customers from the possible adverse effects
of the merger. As mentioned in our discussion above on the effect on
competition and in our discussion in the Open Access Rule, we recognize
that even in an open access environment, markets may not work perfectly
or even well.50 This is particularly the case during the
transition from a monopoly cost-of-service market structure to a
competitive market-based industry. For instance, during the transition
some customers may be unable to take immediate advantage of competition
because of contractual commitments or because of stranded costs
obligations. Furthermore, because transmission remains effectively a
natural monopoly and will continue to be regulated on a cost-of-service
basis, the Commission has reason to be concerned that mergers do not
affect transmission rates adversely. For these reasons, we will not
abandon the effect on rates factor.51
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\50\ See Open Access Rule, 61 FR at 21553.
\51\ In the past, we have referred to this factor as the
``effect on costs and rates.'' However, the basic concern is with
the effect on rates. Accordingly, we will refer to it as the
``effect on rates.''
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Rather than requiring estimates of somewhat amorphous net merger
benefits and addressing whether the applicant has adequately
substantiated those benefits, we will focus on ratepayer protection.
Merger applicants should propose ratepayer protection mechanisms to
assure that customers are protected if the expected benefits do not
materialize. The applicant bears the burden of proof to demonstrate
that the customer will be protected. This puts the risk that the
benefits will not materialize where it belongs--on the applicants.
Furthermore, we believe that the most promising and expeditious
means of addressing ratepayer protection is for the parties to
negotiate an agreement on ratepayer protection mechanisms. The
applicants should attempt to resolve the issue with customers even
before filing, and should propose a mechanism as part of their filing.
Even if these negotiations have not succeeded by the time of filing,
the parties should continue to try to reach a settlement. What
constitutes adequate ratepayer protection necessarily will depend on
the particular circumstances of the merging utilities and their
ratepayers, and we strongly encourage parties to minimize contentious
issues and to resolve them without the time and expense of a formal
hearing. Parties may not be able to reach an agreement on an
appropriate ratepayer protection and the Commission may still be able
to approve the merger. As mentioned earlier, this could occur either
after a hearing or on the basis of parties' filings if we determine
that the applicants' proposal sufficiently insulates the ratepayers
from harm.
As described above, the Commission has accepted a variety of hold
harmless provisions, and parties may consider these as well as other
mechanisms if they appropriately address ratepayer concerns. Among the
types of protection that could be proposed are:
Open season for wholesale customers--applicants agree to
allow existing wholesale customers a reasonable opportunity to
terminate their contracts (after notice) and switch suppliers. This
allows customers to protect themselves from merger-related harm.
General hold harmless provision--a commitment from the
applicant that it will protect wholesale customers from any adverse
rate effects resulting from the merger for a significant period of time
following the merger. Such a provision must be enforceable and
administratively manageable.
Moratorium on increases in base rates (rate freeze)--
applicants commit to freezing their rates for wholesale customers under
certain tariffs for a significant period of time.\52\
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\52\ A rate freeze, however, does not insulate the merged
utility from a rate reduction if the Commission, pursuant to section
206, determines that the utility's rates are no longer just and
reasonable. Also, in circumstances in which ratepayers clearly would
be entitled to a rate reduction in the absence of the merger, e.g.,
expiration of a current surcharge or some other clearly defined
circumstance, a simple rate freeze may not provide adequate
ratepayer protection.
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Rate reduction--applicants make a commitment to file a
rate decrease for their wholesale customers to cover a significant
period of time.53
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\53\ Whether these types of proposals are appropriate in a
particular case will depend on the circumstances of the merging
companies and the customers and the details of the proposals.
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Although each mechanism provides some benefit to ratepayers, we
believe that in the majority of circumstances the most meaningful (and
the most likely to give wholesale customers the earliest opportunity to
take advantage of emerging competitive wholesale markets) is an open
season provision. We urge merger applicants to negotiate with customers
before filing and to offer an adequate open season proposal or other
appropriate ratepayer protection mechanism in their merger
applications. If intervenors raise a substantial question as to the
adequacy of the proposal, parties should continue to pursue a
settlement. If no agreement can be reached, we may decide the issue on
the written record or set the issue for hearing.
D. Effect on Regulation
When the Commission in Commonwealth referred to impairment of
effective regulation by this Commission and appropriate state
regulatory authorities, its concern was with ensuring that there is no
regulatory gap.\54\ The potential for impairment of effective
regulation at the Federal level has been increased by the Ohio Power
decisions.\55\ That case holds that if the SEC approves a contract for
sales of non-power goods or services between affiliates in a registered
holding company, this Commission in its rate review may not disallow
any part of the payment under the contract in order to protect
ratepayers against affiliate abuse.\56\
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\54\ Cinergy, 64 FERC at 61,710 n. 278; Commonwealth, 36 FPC at
931.
\55\ Ohio Power Company v. FERC, 954 F.2d, 779, 782-86 (D.C.
Cir. 1992), cert. denied, 498 U.S. 73 (1992) (Ohio Power).
\56\ Cf. AEP Power Marketing, Inc., 76 FERC para. 61,307 at
62,515 (1996).
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In recent cases, the Commission has developed its policy regarding
the effect of proposed mergers on both state and Federal regulation.
For instance, PS Colorado involved the creation of a new multistate
registered holding company. On the question of a shift of regulation
from the state commissions to this Commission, we declined to order a
[[Page 68604]]
hearing, noting that the state commissions had authority to disapprove
the merger and that they did not argue that their regulation would be
impaired. On the question of a shift of authority from this Commission
to the SEC, we pointed out that pre-merger, we had authority to review
for rate purposes all the costs the companies incurred, but if the
merger were approved, under Ohio Power we would lose that authority if
the SEC approved an inter-affiliate transaction. Thus, the costs could
be flowed through to ratepayers, even if the goods or services were
obtained at an above-market price or the costs were imprudently
incurred. To guard against this possibility, we gave the applicants two
options.\57\ They could either choose to have the issue set for
hearing, or they could agree to abide by our policies on intra-system
transactions.\58\
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\57\ 75 FERC at 62,045-46.
\58\ Accord, Union Electric, 77 FERC at 61,108-09 (state
expressed concern over shift of regulatory authority from itself and
this Commission to SEC; Commission noted that state had authority to
disapprove merger).
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In response to the NOI, commenters generally argue that it is
important for the Commission to continue to look at the effect of a
merger on the effectiveness of state and Federal regulation.59
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\59\ Appendix B at Section IV.
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2. Discussion
We will continue to examine the effect on regulation as a factor in
our analysis of proposed mergers and will use the approach adopted in
PS Colorado and subsequent cases. Thus, in situations involving
registered public utility holding companies, we will require the
applicants to choose between two options and to make that choice clear
in their filing. They may commit themselves to abide by this
Commission's policies with respect to intra-system transactions within
the newly-formed holding company structure, or they may go to hearing
on the issue of the effect of the proposed registered holding company
structure on effective regulation by this Commission. If applicants
choose the first option, we will set the issue for hearing only if
intervenors raise credible arguments that because of special factual
circumstances, the commitment will not provide sufficient protection.
With respect to the effect of a merger on state regulatory
authority, where a state has authority to act on a merger, as in
PSColorado, we ordinarily will not set this issue for a trial-type
hearing. The application should tell us whether the states have this
authority. If the state lacks this authority and raises concerns about
the effect on regulation, we may set the issue for hearing; we will
address these circumstances on a case-by-case basis.
E. Other Commonwealth Factors
The other Commonwealth factors are evidence of coercion, the
proposed accounting treatment, and the reasonableness of the purchase
price.
These three factors elicited very little comment. As to evidence of
coercion, a few commenters suggest that this should be evaluated by the
marketplace rather than by the regulatory process.60 Several
commenters say that this factor should be considered only if someone
demonstrates that it is relevant.61 OK Com is among the few
commenters who favor retaining this factor. It suggests that coercion
is a means by which some companies will try to gain oligopolistic
control of the market in the coming competitive environment.
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\60\ East Texas Coop., EEI, PaineWebber, and Southern Company.
\61\ Florida and Montaup.
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As to accounting treatment, some commenters support elimination of
accounting concerns as a factor.62 PaineWebber notes that most
recent mergers were mergers of equals, involving minimal premiums over
current market prices. It suggests that a similar market discipline
would likely cause shareholders to reject merger transactions involving
large merger premiums and excessive amortization. Florida and Montaup
argue that the accounting treatment of a merger should not be an issue
for hearing unless an applicant seeks treatment different from the
Commission's standards. Southern Company contends that the Commission's
analysis of this factor should be subsumed within the analysis of the
merger's impact on costs and rates.
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\62\ East Texas Coop, EEI, and PaineWebber. Although they do not
support keeping this factor, EEI and PaineWebber suggest that in
light of broad industry changes, this may be the right time for a
generic re-examination of accounting concerns, of which accounting
for mergers could be a part.
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NY Com and OK Com are concerned about the accounting consequences
of mergers. OK Com favors keeping the historical cost approach to
accounting for plant acquisitions during mergers and business
combinations until competitive market structures are achieved at the
national, regional, and state levels. NY Com also urges the Commission
to continue to require unrestricted access to all books and records of
newly merged entities.
We also received a few comments on looking at the reasonableness of
the purchase price as a factor. A number of commenters 63 urge
that the Commission not substitute its judgment for the workings of
market forces, which will determine the reasonableness of the purchase
price. Others 64 believe that this issue should be examined only
if its relevance is raised. However, OK Com argues that purchase price
still has some relevance in this era of diversification. It is
concerned that the purchase price may be based on expected returns on
non-regulated investments, which, if they fail to materialize, may
dilute the value of utility stock.
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\63\ CINergy, East Texas Coop, EEI, PaineWebber, and Southern.
\64\ Florida and Montaup.
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We will no longer consider these three matters as separate factors.
Any evidence of coercion will be considered as part of our analysis of
the effect of the merger on competition. We have treated the
reasonableness of the purchase price as an issue only insofar as it
affects rates, so this issue is subsumed in the effect on rates factor.
As for the proposed accounting treatment, this is not really a factor
to be balanced along with other factors; proper accounting treatment is
simply a requirement for all mergers.65
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\65\ See, e.g., Public Service Company of Colorado and
Southwestern Public Service Company, 75 FERC para. 61,325 (1996);
Entergy Services, Inc. and Gulf States Utilities Company, Opinion
No. 385, 65 FERC para. 61,332 (1993), order on reh'g, 67 FERC para.
61,192 (1994).
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If a merger application seeks to recover acquisition premiums
through wholesale rates, we will address the issue in post-merger rate
applications. However, the Commission historically has not permitted
rate recovery of acquisition premiums.
F. Procedures for Handling Merger Cases
We received many suggestions as to how to improve our procedures
for handling merger cases. The commenters focused particularly on the
need for certainty and the need to expedite the process, at least for
some mergers. They suggested various screens or hold harmless
provisions. Some suggested that we set forth filing requirements. There
were also many comments on coordination with other agencies that are
reviewing the merger.66
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\66\ Appendix D, Section VI.
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Although we plan to issue a Notice of Proposed Rulemaking in the
near future to set forth more specific filing requirements consistent
with this Policy Statement and additional procedures for improving the
merger hearing process, we have determined that the best way to improve
the Commission's handling
[[Page 68605]]
of merger proposals is to update our merger review policy. As outlined
in this Policy Statement, we will generally limit the number of factors
we examine in order to determine whether a merger is in the public
interest.
The principal area that will require a fact-based review is the
effect of a proposed merger on competition. By using the Guidelines as
a screen and by informing applicants of the type of information we
expect them to file with us when they apply, we hope to expedite our
review of applications considerably.
As discussed above under ``Effect on Competition,'' ``Effect on
Rates,'' and ``Effect on Regulation,'' we are setting forth for each
factor guidance to enable merger applicants ordinarily to avoid a
trial-type hearing or to have a hearing focused on limited issues.
Moreover, we have set forth above under ``Effect on Competition'' and
in Appendix A the information that we think we need at this point to
determine whether a merger would impair competition. We have also
discussed ways to mitigate anticompetitive effects. Our consideration
of the other two factors, the effect on rates and the effect on
regulation, should not require a lot of data or analysis, since we will
be relying primarily on the applicants' commitments. This should make
it possible for applicants to make filings that can be processed more
quickly. The Commission intends to propose a rule to set forth detailed
filing requirements.
Another step that can make our processing of merger applications
more efficient is to discourage redundant or irrelevant pleadings. We
agree with commenters who argue that we should not consider extraneous
issues, and we will not consider interventions that raise matters
unrelated to the merger. Moreover, in the past, the process has been
bogged down by repetitive filings such as answers to answers. We will
not consider such filings, nor will we consider ``new'' information
unless it is genuinely new and relevant.
With all the streamlining changes discussed above, we believe that
we will be able to act on mergers more quickly after a complete
application is filed. A complete application is one that adequately and
accurately describes the merger being proposed and that contains all
the information necessary to explain how the merger is consistent with
the public interest, including an evaluation of the merger's effect on
competition, rates, and regulation.67 We expect applicants to be
able to provide all the necessary information, given the guidance in
this Policy Statement. We also emphasize that applicants should not
expect speedy action if their merger proposals change, as has
frequently happened in the past. The Commission cannot be expected to
act quickly on a moving target. If applicants change the mechanism or
terms under which they intend to merge or supplement the supporting
information in their application, the Commission's review process will
restart.
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\67\ The information would include all applicable exhibits and
accompanying testimony and other data that will constitute
applicants' showing that the merger is consistent with the public
interest. In addition, a copy of all applications or other
information filed with other regulatory bodies regarding the merger
must be provided to the Commission to initiate our review process.
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Once we have a complete application, we will make every reasonable
effort to issue an initial order 60-90 days after the comment period
closes. An initial order could take any of several actions, including:
requesting additional information from the applicants or intervenors;
setting some or all issues for a trial-type or paper hearing; approving
the merger; or rejecting the merger. If we determine in the initial
order that further procedures are necessary, we will choose among the
available procedural options based on the completeness of the record
before us, the types of issues that need to be resolved (factual,
policy or legal), and the need to give parties adequate due process.
However, we are hopeful that the guidance in this Policy Statement will
result in more complete applications and more focused and detailed
interventions and that we will be able to act summarily on many (or in
some cases all) issues in the initial order.
If the Commission determines in an initial order that trial-type or
paper hearing procedures are necessary, we believe that we will be able
to issue a final order on most applications within 12-15 months from
the date that the completed application was filed. We emphasize that
this assumes no significant changes in the proposal; any such changes
will start the process over and will require that a new notice be
issued. Of course, some applications will take more time than others.
For example, if a merger raises extraordinarily complex factual
disputes, or if the development of competitive remedies or hold
harmless agreements is entirely deferred to the hearing, case
processing may take longer. On the other hand, if a merger falls below
the HHI screen, the applicants propose adequate ratepayer protection
mechanisms, and the applicants make the commitments necessary to
assuage our concerns about the effect on regulation, we should be able
to act much more quickly.
The Commission believes that in order to meet routinely the target
dates we have set forth in this Policy Statement, it is appropriate to
reexamine whether our procedures for processing merger applications,
including hearing procedures, can be tailored better to meet the
specific needs of participants in merger proceedings. To that end, in
the proposed rulemaking on information filing requirements (see note
3), we will also request public comment on merger processing
procedures.
We will not delay our processing of merger applications to allow
the states to complete their review, as some commenters suggest.
However, we will be willing to consider late interventions by state
commissions where it is practicable to do so. In cases where a state
commission asks us to address the merger's effect on retail markets
because it lacks adequate authority under state law, we will do so.
In response to commenters who are concerned that our decisions be
consistent with those of other agencies, we note that since we are
adopting the Guidelines as a framework for our analysis of the effect
on competition, our analysis should be generally consistent with the
DOJ's and the FTC's analyses.
G. Other Issues
According to FERC Policy Project, recent changes in the industry
may make mergers financially unattractive without planning and
operational changes; these changes can harm the environment. FERC
Policy Project argues that we should revise our rule that provides that
merger applications will not generally require preparation of an EIS or
EA. The rule ``categorically excludes'' mergers unless circumstances
indicate that the action may be a major Federal action significantly
affecting the qualify of the human environment.68 FERC Policy
Project also argues that the effect on the environment should be
considered as a factor in deciding whether to approve a merger.
Moreover, it believes we should require applicants to provide with
their applications information on the environmental effects of the
merger and that we should require mitigation of environmental effects
through various means.
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\68\ 18 CFR 380.4 (a)(16) and (b).
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The Commission has recognized that a particular merger can have
environmental effects and has been willing to study the issue in an
[[Page 68606]]
individual case where it is justified.69 We do not see the need to
change our regulation, which explicitly addresses the possibility that
an EA or EIS may, on rare occasions, be needed. However, both our
categorical exclusion rule and the absence of environmental concerns
from the list of three factors in this Policy Statement reflect the
simple fact that most mergers do not present environmental concerns.
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\69\ See Southern California Edison Company, 47 FERC para.
61,196 (1989), order on reh'g, 49 FERC 61,091 (1989).
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Low-Income Representatives argues that the ``public interest''
standard requires us to consider matters such as the need for service
to all households, the need for consumer input into the decisions made
by utilities, and other matters. We clarify that the three factors
discussed in this Policy Statement are not necessarily the only factors
that make up the public interest, and, if appropriate, we will consider
other matters that are under our jurisdiction. However, we believe such
matters as the need for service to all households are more
appropriately the concern of the states.
IV. Administrative Effective Date and Congressional Notification
Under the terms of 5 U.S.C. 553 (d)(2), this Policy Statement is
effective immediately. The Commission has determined, with the
concurrence of the Administrator of the Office of Information and
Regulatory Affairs of the Office of Management and Budget, that this
Policy Statement is not a major rule within the meaning of section 351
of the Small Business Regulatory Enforcement Act of 1996.70 The
Commission is submitting the Merger Policy Statement to both Houses of
Congress and to the Comptroller General.
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\70\ 5 U.S.C. 804 (2).
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List of Subjects in 18 CFR Part 2
Administrative Practice and Procedure, Electric power, Natural gas,
Pipelines, Reporting and recordkeeping requirements.
By the Commission.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the Commission amends Part 2,
Chapter I, Title 18 of the Code of Federal Regulations as set forth
below.
PART 2--GENERAL POLICY AND INTERPRETATIONS
1. The authority citation for Part 2 continues to read as follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 792-825r,
2601-2645; 42 U.S.C. 4321-4361, 7101-7352.
2. Part 2 is amended by adding Sec. 2.26, to read as follows:
Sec. 2.26 Policies concerning review of applications under section
203.
(a) The Commission has adopted a Policy Statement on its policies
for reviewing transactions subject to section 203. That Policy
Statement can be found at 77 FERC para. 61,263 (1996). The Policy
Statement is a complete description of the relevant guidelines.
Paragraphs (b)-(e) of this section are only a brief summary of the
Policy Statement.
(b) Factors Commission will generally consider. In determining
whether a proposed transaction subject to section 203 is consistent
with the public interest, the Commission will generally consider the
following factors; it may also consider other factors:
(1) The effect on competition;
(2) The effect on rates; and
(3) The effect on regulation.
(c) Effect on competition. Applicants should provide data adequate
to allow analysis under the Department of Justice/Federal Trade
Commission Merger Guidelines, as described in the Policy Statement and
Appendix A to the Policy Statement.
(d) Effect on rates. Applicants should propose mechanisms to
protect customers from costs due to the merger. If the proposal raises
substantial issues of relevant fact, the Commission may set this issue
for hearing.
(e) Effect on regulation. (1) Where the merged entity would be part
of a registered public utility holding company, if applicants do not
commit in their application to abide by this Commission's policies with
regard to affiliate transactions, the Commission will set the issue for
a trial-type hearing.
(2) Where the affected state commissions have authority to act on
the transaction, the Commission will not set for hearing whether the
transaction would impair effective regulation by the state commission.
The application should state whether the state commissions have this
authority.
(3) Where the affected state commissions do not have authority to
act on the transaction, the Commission may set for hearing the issue of
whether the transaction would impair effective state regulation.
Note: These Appendices will not appear in the Code of Federal
Regulations.
Appendix A--Competitive Analysis Screen
The analytic screen provides applicants with a standard analytic
method and data specification to allow the Commission to quickly
determine whether a proposed merger presents market power concerns.
Some past merger cases were delayed or set for hearing because an
adequate analysis was not part of the application or because
sufficient data that would allow the Commission to corroborate or
independently check applicants' conclusions was not provided in the
application. This is especially true regarding the effect that
transmission prices and capability may have on the scope of the
geographic market. The chances for hearings and delays will be
reduced if the screen analysis and data described below are filed
with the application.
A. Consistency With DOJ Guidelines
In this policy statement, the Commission has adopted the DOJ
Merger Guidelines (the Guidelines) 1 as the basic framework for
evaluating the competitive effects of proposed mergers. The analytic
screen applies the Guidelines. Before describing the screen, the
Guidelines are briefly summarized so that the screen's consistency
with them is clear.
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\1\ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, 57 FR 41552 (1992).
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In general, the Guidelines set out five steps for merger
analysis: (1) assess whether the merger would significantly increase
concentration; (2) assess whether the merger could result in 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 would likely fail, causing
its assets to exit the market.
The analytic screen focuses primarily on the Guidelines first
step. This step can be broken down into two components:
Defining product and geographic markets that are likely to be
affected by a proposed merger and measuring concentration in those
markets. The products to consider are those sold by the merging
parties. The Guidelines suggest a way of defining geographic markets
based on identifying the suppliers that are feasible alternative
suppliers to the merged firm from a buyer's perspective: the
hypothetical monopolist test. Essentially, if a hypothetical and
unregulated monopoly that owned all the supplies inside the
geographic market being tested could profitably sustain a small but
significant price increase (i.e., suppliers external to the market
are not, by definition, sufficiently good substitutes for the buyers
in the market), then the limit of the geographic market has been
reached.2 The sustainability of a price increase depends on
both sellers entering the market and the response of buyers to the
increase. The concentration of suppliers included in the market is
then measured (by summary statistics such as the Herfindahl-
Hirschman Index, or HHI, and single seller market share)
[[Page 68607]]
and used as an indicator of the potential for market power.
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\2\ The Guidelines suggest that a 5% price increase be used for
the test, but allow that larger or smaller price increases may also
be appropriate. DOJ Guidelines at 41555.
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Evaluating the change in concentration using the Guidelines'
thresholds to indicate problematic mergers. The Guidelines address
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.3
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\3\ DOJ Guidelines at 41558.
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If the concentration analysis indicates that a proposed merger
may significantly increase concentration in any of the relevant
markets, the Guidelines suggest examination of other factors that
either address the potential for adverse competitive effect or that
could mitigate or counterbalance the potential competitive harm.
Such factors include the ease of entry in the market and any
efficiencies stemming from the merger.4 If the additional
factors examined do not mitigate or counterbalance the adverse
competitive effects of the merger, remedial conditions would be
explored at this stage.
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\4\ In assessing market concentration, the Guidelines state ``*
* * market share and concentration data provide only the starting
point for analyzing the competitive impact of a merger.'' DOJ
Guidelines at 41558 .
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B. Analytic Screen Components
There are four steps to the screen analysis.
1. Identify the Relevant Products
The first step is to identify one or more products sold by the
merging entities. Products may be grouped together when they are
good substitutes for each other from the buyer's perspective. If two
products are not good substitutes, an entity with market power can
raise the price of one product and buyers would have a limited
ability to shift their purchases to other products. In the past, the
Commission has analyzed three products: non-firm energy, short-term
capacity (firm energy), and long-term capacity.5 These remain
reasonable products under the prevailing institutional arrangements,
and applicants should recognize such products in their analysis.
Other product definitions may also be acceptable. For example, the
lack of on-site buyer storage creates products differentiated by
time. Thus, peak and off-peak energy (seasonal and daily) may be
distinct products.
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\5\ See Baltimore Gas & Electric and Potomac Electric Power
Company, 76 FERC para. 61,111 (1996) at 61,572. The factor that is
considered in evaluating long term capacity markets is the effect of
a merger on barriers to entry into those markets.
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The Commission encourages parties to propose even more precise
definitions of relevant products where appropriate. Indeed, we would
expect to see greater precision in product differentiation as market
institutions develop.
2. Geographic Markets: Identify Customers Who May Be Affected by the
Merger
This is the first of a two-step process of determining the
geographic size of the market. To identify customers potentially
affected by a merger, at a minimum, applicants should include all
entities directly interconnected to either of the merging parties.
Additional entities should be included in the analysis if historical
transaction data indicates such entities have been trading partners
with a merging party. Applicants and others may argue either that
there are other customers to be included as relevant buyers or that
identified customers are not relevant buyers. Intervenors also may
argue that other customers not identified by the applicants will be
affected by the merger.
3. Geographic Markets: Identify Potential Suppliers to Each Identified
Customer
This second, and key, step in determining the size of the
geographic market is to identify those suppliers that can compete to
serve a given market or customer and how much of a competitive
presence they are in the market. Alternative suppliers must be able
to reach the market both economically and physically. There are two
parts to this analysis. One is determining the economic capability
of a supplier to reach a market. This is accomplished by a delivered
price test. The second part evaluates the physical capability of a
supplier to reach a market, i.e., the amount of the defined product
a supplier can deliver to a market based on transmission capacity
availability.
Supply and demand conditions in electricity markets vary
substantially over time, and the market analysis must take those
varying conditions into account. Applicants should present separate
analyses for each of the major periods when supply and demand
conditions are similar. One way to do this is to group together the
hours when supply and demand conditions are similar; for example,
peak, shoulder and off-peak hours. There may even be smaller
groupings to reflect periods of significantly constrained
transmission capability available for suppliers to reach a market.
The screen analysis also examines historical trade data as a
check on which suppliers should be included in the relevant markets.
a. Delivered price test. The screen analysis should first
identify those suppliers with the potential to economically supply
power to the destination market or customer. The merging companies
as well as non-traditional suppliers should be included in this test
to identify potential suppliers. Basically, suppliers should be
included in a market if they could deliver the product to a customer
at a cost no greater than 5% above the competitive price to that
customer.6 The delivered cost of the product to the relevant
market for each potential supplier is found by adding the potential
supplier's variable generation costs and all transmission and
ancillary service charges that would be incurred to make the
delivery.7 Thus, the farther away a supplier, the more
transmission and ancillary service prices that must be added to its
power costs. Suppliers that would have to traverse a non-open access
system can be included as potential suppliers only to the extent
they have firm access rights. The analysis should also take into
account the effect of line losses on the economics of trade with a
distant supplier.
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\6\ The Guidelines suggest a 5% price threshold but acknowledge
that others may be appropriate. Applicants have the burden of
justifying a different price threshold.
\7\ This would include the unbundled transmission rates of a
seller that is a vertically integrated public utility.
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If a supplier can deliver the product to the market at a cost no
more than 5% above the market price,that supplier should be included
in the geographic market. Applicants are expected to provide
product-specific delivered price estimates for each destination
market or customer.
The delivered price test uses the following data. Applicants
should provide in electronic format these data and any other data
relied upon in their analysis.
Transmission prices. Applicants should use the ceiling
prices in utilities' open access tariffs on file with the
Commission. Where a non-jurisdictional entity's transmission system
is involved, the ceiling price in its ``NJ'' tariff should be used.
If the entity has not filed an ``NJ'' tariff, applicants should use
their best efforts to secure or estimate transmission ceiling
prices. Prices that are not found in a tariff on file with the
Commission should be adequately supported. While we are aware that
ceiling prices are frequently discounted, this screen analysis is to
be conservative. Applicants may present an additional alternative
analysis using discounted prices if they can support it with
evidence that discounting is and will be available.
Potential suppliers' generation costs. The Commission
will consider various measures of costs. Applicants are free to use
any appropriate cost data as long as it is verifiable and supported
with reasoned analysis. Possibilities include generating plant cost
data from the FERC Form 1 annual reports or unit specific data.
Another is system lambda data. Either of these data can be used to
calculate a potential supplier's costs at various time periods.
Other measures or data sources may also be appropriate. The
Commission has not reached a firm conclusion on a specific cost
measure.
Competitive market price. Electricity markets have not
sufficiently matured yet to exhibit single market clearing prices
for various products. In addition, price discovery is difficult
because the reporting of actual transaction prices is still in its
formative stage. Until market institutions mature enough to reveal
single market clearing prices, applicants may use surrogate measures
as long as they are properly supported. For example, a buyer's
system lambda may be used because a buyer is not likely to purchase
from a supplier that is more costly than its own costs of production
[[Page 68608]]
at specific times.8 Another possibility might be the price at
which the affected customer has been purchasing power.
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\8\ System lambda data are usually reported by control area. For
smaller entities that are within a control area, the area's system
lambda may be a reasonable proxy for the cost of energy from the
marginal resource.
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For each supplier, the screen analysis should then show the
amount of each product the supplier could supply to the market.
Generation capacity measures are appropriate for this showing.9
Different capacity measures should be used, as appropriate, for
different products. It is also appropriate, even desirable, to use
several measures for one product. Given that competitive analysis is
an inexact science and that electricity markets are changing
rapidly, using several measures for a particular product will
corroborate the result of the analysis. While the Commission has not
firmly decided on specific measures for analyzing products, the
following discussion of capacity measures is intended to offer
guidance on this matter. These are some ways to measure a supplier's
ability to supply a particular product to a market. They are not
product definitions.
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\9\ The DOJ Guidelines support using capacity measures in
industries with homogenous products, such as electricity. DOJ
Guidelines, at 41557. We note that energy measures (MWH) may also be
appropriate.
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Economic capacity. This is the most important of the
measures because it determines which suppliers may be included in
the geographic market. Economic capacity is that from generating
units whose variable costs are such that they could deliver energy
to a relevant market, after paying all necessary transmission and
ancillary service costs, at a price close to the competitive price
in the relevant market. For example, if the average competitive
price in the wholesale market is 2.2 cents/kWh during a particular
period, all capacity that can sell into the market at 2.3 cents/kWh
(5% above the competitive price) should be included in the market.
If a seller has no economic capacity, it should not be considered in
the market at this stage of the analysis. The economic capacity
measure provides a sense of which suppliers own or control the
largest shares of low cost generating capacity that has a pronounced
competitive advantage over higher cost capacity in the
market.10
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\10\ Economic capacity and similar measures were recommended by
the DOJ and FTC. See FTC comments at 10 and DOJ comments, Appendix
at 8.
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Available economic capacity. This measure indicates how
much economic capacity a supplier identified in the previous step
might actually have available to sell into a market. It includes
capacity from generating units that are not used to serve native
load (or are contractually committed) and whose variable costs are
such that they could deliver energy to a market at a price close to
the competitive price in the market. The presumption underlying this
measure is that the lowest running cost units are used to serve
native load and other firm contractual obligations and would not be
available for other sales. As competition develops, this presumption
may not be valid.11 Because of its focus on variable costs,
available economic capacity is useful for evaluating energy (in
contrast to capacity) markets.
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\11\ For example, in a market with full retail access and a bid-
based power exchange, all generation units would be in the market.
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Uncommitted capacity. This traditional measure is
useful for evaluating intermediate-capacity markets. For each
supplier included in the relevant market, this measure is computed
by subtracting native load and firm contractual obligations from
total capacity.
Total capacity. Total capacity has traditionally been
used by the Commission and others to analyze markets. While this
measure does not account for native load obligations and does not
capture the availability or cost of generation, and thus is not
useful for a delivered price analysis, it does provide a sense of
the overall size of a supplier that is included in the relevant
market.
b. Accounting for transmission capability. Once the suppliers
that might economically supply the product to a market or customer
are identified, and the relevant capacity measures are calculated,
each supplier's capacity measures should be adjusted to account for
how much of the product that seller can physically deliver to that
market. The extent of transmission capability determines the extent
of a supplier's ability to physically reach a market.
The flows on a transmission system can be very different under
different supply and demand conditions (e.g. peak vs. off-peak).
Consequently, the amount and price of transmission available for
suppliers to reach wholesale buyers at different locations
throughout the network can vary substantially over time. If this is
the case, the analysis should treat these narrower periods
separately and separate geographic markets should be defined for
each period.
It is important to assess accurately the amount of transmission
capability available for each supplier's use. The key to
incorporating transmission limitations into the merger analysis is
to include each supplier in the relevant market only to the extent
of the transmission capability available to them. This would be
calculated as the combination of the available transmission
capability (ATC) 12 and any firm transmission rights held by
the supplier that are not committed to long-term transactions.
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\12\ As used by the industry, ATC is a measure of the transfer
capability remaining in the physical transmission network for
further commercial activity over and above already committed uses.
See for example, NERC, Available Transfer Capability Definitions and
Determination, June 1996 at page 2. In hours when ATC is zero, a
transmission constraint is said to be binding. This prevents the
dispatcher from scheduling any additional transactions between the
two points in the constrained direction.
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In many cases, multiple suppliers could be subject to the same
transmission path limitation to reach the same destination market
and the sum of their economic generation capacity could exceed the
transmission capability available to them. In these cases, the ATC
must be allocated among the potential suppliers for analytic
purposes. There are various methods for accomplishing this
allocation. Applicants should support the method used.
Applicants should also present evidence regarding how
transmission capability will be affected by the merger. Transmission
line loadings are likely to change as a result of the merging
parties'' combined operations. These changes are likely to result in
transmission availability that is different from historical
experience. Applicants should include in their application the
following data: hourly TTC 13 and hourly firm and non-firm ATC,
and firm transactions between relevant control areas. The ATC and
TTC data should come directly from the OASIS systems once they are
implemented. Until then, applicants should file estimates of TTC and
ATC with data or other background material that will allow the
Commission to verify that the estimates are reasonable. Given these
data, the Commission will be able to assess independently the amount
of generation capacity that may be available to the market by each
supplier.
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\13\ As used by the industry, total transmission capability
(TTC) is the amount of electric power that can be transferred over
the interconnected network in a reliable manner while meeting all of
a specific set of defined pre- and post-contingency conditions.
NERC, id. at page 2.
---------------------------------------------------------------------------
c. Trade data check. It would be expected that there be some
correlation between the suppliers included in the market by the
delivered price test and those actually trading in the market. As a
check, actual trade data should be used to compare actual trade
patterns with the results of the delivered price test. For example,
it may be appropriate to include current trading partners in the
relevant market even if the above analysis indicates otherwise.
Alternatively, if there has been little or no trade between a
customer and a specific supplier, it may be appropriate to exclude
that supplier from the market, unless the applicants can show why it
should be included prospectively. The lack of open access in the
past may have prevented trade between the entities but trade may be
more likely in an open access environment. Applicants should file
historical trade data showing transactions between potential
suppliers identified in the steps discussed above and the customers
in question. The trade data filed should identify the supplier,
customer, and characteristics of the transactions (duration,
firmness, etc.). Any adjustments to the suppliers included in the
market under the delivered price test must be fully supported.
4. Analyze concentration. The final step in the screen analysis
is to analyze the effect of the proposed merger on market
concentration and competition. To do so, concentration statistics
should be calculated using the capacity measures discussed above for
each relevant market identified. In cases where limited transmission
capability during certain time periods results in a number of time
differentiated markets, concentration statistics should be
calculated for each. Both HHIs and single firm market share
statistics should be presented for both pre- and post-
[[Page 68609]]
merger conditions.14 In calculating HHIs and market shares, the
relevant generation capacity of the customers in each market should
be included in the denominator of the ratio statistics. For example,
if the economic capacity measure is being used, then the customer's
economic capacity should be included. Such capacity would be
available and turned to as a response to a significant price
increase by external suppliers.
---------------------------------------------------------------------------
\14\ Post-merger geographic markets could include more or fewer
suppliers than the pre-merger markets due to the effect of combining
transmission rates. In cases where the merged company will charge a
single system wide transmission rate, the merger will result in just
one transmission rate where there were two before the merger. Thus,
after the merger, some suppliers that were excluded from some
destination markets could be included if the elimination of one of
the transmission charges allows them to economically reach the
market. While a stable geographic market would be preferable for
analytic reasons, the effect described here reflects the reality of
current transmission pricing policy and market organization. A buyer
inside the transmission area of one of the merging companies could
see higher transmission rates as a result of a single system rate
for the merged company thereby decreasing the competitive options
available to it. We also note that a decrease in transmission prices
paid could result in increased demand, congestion, and no increase
of suppliers in some markets.
---------------------------------------------------------------------------
The HHI measures should be compared with the thresholds given in
the DOJ Merger Guidelines. The Guidelines address three ranges of
market concentration: (1) an unconcentrated post-merger market--if
the post-merger HHI is below 1000, the merger is unlikely to have
adverse competitive effects regardless of the change in HHI; (2)
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) 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.15
---------------------------------------------------------------------------
\15\ DOJ Guidelines, at 41558.
---------------------------------------------------------------------------
If the Guidelines' thresholds are not exceeded, no further
analysis need be provided in the application. We emphasize, however,
that the Guidelines are just that: guidelines. There will
undoubtedly be instances where concentration statistics may fall
just above or just below the thresholds for concern and some
additional analysis or judgement is needed.16 For example, if a
proposed merger's effect on concentration falls just below a
threshold, the Commission might still want to see further analysis
if intervenors have raised significant concerns regarding the
proposed merger. It is reasoned analysis, not blind faith in the
thresholds, that must carry the day.
---------------------------------------------------------------------------
\16\ The Guidelines state that the HHI statistics provide a
useful framework for merger analysis but they suggest ``greater
precision than is possible with the available economic tools and
information. Other things being equal, cases falling just above and
just below a threshold present comparable competitive issues.''
Guidelines, at 41558.
---------------------------------------------------------------------------
Instances where high concentration is indicated in markets that
are defined by fairly short-lived periods of low transmission
capability will require additional analysis. The concern with high
concentration in a market is that firms will be able to raise prices
substantially and adversely impact the market. Relatively short
periods of high concentration could be significant if the
concentration is high enough. The factors that affect whether such a
situation is problematic are the degree of concentration, as
measured by HHI statistics, and how long that concentration lasts.
High concentration is an indicator for how easy it would be for
firms to behave strategically (e.g., collude, or if concentration is
high enough, act unilaterally) to raise prices. It is a proxy
measure for the degree to which prices could be raised. This,
together with the length of time the concentration lasts, gives some
idea of the potential severity of anticompetitive impact.
The Commission has insufficient experience to adopt at this time
specific thresholds for the various possible combinations of HHI and
length of time at which the constrained periods would be
problematic. Applicants and other parties are strongly encouraged to
analyze short-lived periods of high concentration using the
framework discussed above and to support the conclusions drawn from
it. There may be cases in which the applicant may be able to show
that the anticompetitive effect of constrained transmission
availability is de minimis. While the Commission has insufficient
experience to establish a specific de minimis test in this policy
statement, applicants may argue in a specific case that the
anticompetitive effect of a constraint is de minimis. We offer the
following general guidance to applicants that seek to make such a
showing regarding short-lived transmission constraints. First, peak
periods may be more problematic than other periods, because the
opportunity to exercise market power likely would lead to
significantly higher prices during those hours. Second, some level
of market concentration above the DOJ threshold may be acceptable if
the applicant can show that there are multiple sellers in the
constrained area and/or that there are multiple holders of capacity
into the constrained area. And finally, our concern with short-lived
periods of high concentration is greater if the merged firm will
have market-based pricing authority. Without such authority, the
firm may not be able to substantially raise prices.
If the DOJ Guideline concentration thresholds are exceeded,
including instances where short-lived periods of high concentration
are indicated to be problematic, then the application should present
further analysis consistent with steps 2 to 5 in the Guidelines. The
additional analysis could address the potential for adverse
competitive effects, the potential for entry in the market and the
role entry could play in mitigating the increased market power, any
efficiency gains that reasonably could not be achieved by other
means, and whether, but for the merger, either party would likely
fail causing its assets to exit the market.
If entry is considered as a potential mitigating factor,
applicants should address entry barriers, such as the time needed to
install any necessary transmission capacity. All entry barriers
should be addressed, even if they are not controlled by the
applicants. Good market structure can be stymied by entry barriers,
regardless of the source, e.g., transmission constraints on a
neighboring utility's system.
C. Data
The usefulness of this screen depends on the quality and
comprehensiveness of the data filed with the application. The data
needed for the screen generally are publicly available. It is
important for applicants to file electronically all data used for
the screen analysis, including supporting data, and the data
specified in this policy statement.17 The Commission must be
able to check on the applicants' analysis independently. To do so,
the Commission must have ready access to the data. Otherwise, data
requests could result in delay. If there are problems in obtaining
or understanding the data, the Commission is interested in
developing informal means, such as technical conferences, to gather
additional needed data or resolve questions or misunderstandings
concerning the screen analysis, before the Commission addresses the
merger. This approach could reduce the time needed to get useable
data and perhaps reduce the need to set a merger for evidentiary
hearing.
---------------------------------------------------------------------------
\17\ The data that should be electronically filed in an
application is listed in Appendix B.
---------------------------------------------------------------------------
D. Other Considerations
We note that the above description of the analytic screen
focuses only on monopoly (seller) power. This is not intended to
exclude monopsony (buyer) power as a relevant consideration. An
analysis of monopsony power should be developed if appropriate.
Long-term purchases and sales data for interconnected entities are
already collected and could be used to assess buyer concentration in
the same way that seller concentration is calculated. In any event,
intervenors may raise this issue if it is a concern.
The Commission understands that the screen analysis described in
this policy statement will evolve with industry restructuring and
market maturation. For example, as unbundling occurs, companies may
have market power for sales from individual generating units (e.g.,
``must-run units''). In addition, markets are developing in response
to competition and are spawning new products and increasingly short
term exchanges. Markets will probably be differentiated by product
(e.g., firm and non-firm energy and reactive power), by time (e.g.,
peak, off-peak) or by geography (e.g., markets separated by
transmission constraints). The definition of relevant geographic and
product markets must account for these new realities. Further,
methods for trading and information availability are changing. As
regional institutions, such as ISOs, and regional markets develop,
transmission services may no longer be a series of transactions
based on utility-by-utility corporate boundaries, but rather single
regional transactions. This will
[[Page 68610]]
have important implications for entry, customer response to price
changes, and the number of suppliers that have competitive delivered
prices.
The means of our analysis may also change. For example, flow
based network models that include constraints on transmission
networks are likely to be needed for the screen analysis. In the
future, the Commission will have to rely less on methods that use
costs to assess markets. Generation cost data will become
increasingly sensitive, market participants will be less willing to
report them, and accounting costs will be increasingly irrelevant to
market behavior. The Commission will rely more on actual transaction
prices because they will be more available as market institutions
such as ISOs and power exchanges produce this information and
because they are a better measure of market boundaries. New market
institutions will change the ability to exercise market power. High
transactions costs of trading tend to exclude competitors.
Transactions costs include the costs of obtaining information,
searching for trading partners, and completing a transaction.
Further, the improved ability of buyers to respond quickly to price
changes can significantly reduce market power. ISOs provide one
vehicle for reducing transactions costs and making information
available to traders via such means as the OASIS. Real-time pricing
provides buyers with an improved ability to respond quickly to price
changes.
We note that we intend to apply the analytic screen to mergers
between firms that are not solely engaged in electricity markets,
e.g., electric-gas mergers. However, it will not be necessary for
the merger applicants to perform the screen analysis or file the
data needed for the screen analysis in cases where the merging firms
do not have facilities or sell relevant products in common
geographic markets. In these cases, the proposed merger will not
have an adverse competitive impact (i.e., there can be no increase
in the applicants' market power unless they are selling relevant
products in the same geographic markets) so there is no need for a
detailed data analysis. If the Commission is unable to conclude that
the applicants meet this standard, the Commission will require the
applicants to supply the competitive analysis screen data described
in Appendix A.
D. Remedy
A problematic merger may be made acceptable if certain remedial
actions are taken. In some cases, the Commission may recommend them
if we determine that a proposed merger will cause significant
adverse effects on competition without a remedy. In other cases, the
applicants may propose certain actions to be taken if the Commission
approves the proposed merger. We offer the following guidance
concerning standards for remedies and specific remedial options.
1. Standards
Any remedies proposed by the applicants or relied upon by the
Commission to mitigate the anticompetitive effect of a proposed
merger should meet the following standards.
Nexus. Remedies should be clearly designed to mitigate the
specific competitive problems identified in the analysis.
Approval of other authorities. Full and effective mitigation
must be in place at the time the merger is consummated. Some, and
maybe all, of the possible remedies to market power require the
approval of other Federal, state and local authorities. For example,
local authorities must approve many aspects of transmission line
siting and construction and state commissions would surely have to
approve any divestiture of generating plants also used to provide
retail service. Promises to the Commission that such actions will be
taken in exchange for merger approval are empty if not accompanied
by all approvals necessary. We recognize, however, that final
approvals may require quite some time to secure. In such cases, we
will consider interim mitigation measures that can be implemented
more quickly so as not to unduly delay a merger's consummation. We
will require, however, that any interim measure must be fully
effective in mitigating the identified market power problems.
Specificity. Remedial commitments must specify exactly which
facilities are affected by the commitment, e.g., which generating
unit(s) will be divested.
2. Remedial options
The remedies discussed in this section are intended to mitigate
the market concentration problem caused by the merger. We stress
that the options discussion is meant only as guidance and not as an
exhaustive list of potentially acceptable remedies.
(a) Require transmission expansion. Limitations on available
transmission capability that prevent competitors from participating
in a market can give substantial market power to incumbents in the
market. Conditioning merger approval on eliminating a known
constraint could help to mitigate this type of market power. Where
constraints on other systems are a problem, the applicants would
also be required to seek transmission expansion on those systems. As
with relieving constraints on their own system, applicants should
show that all necessary approvals have been secured before the
Commission could approve the merger. This process does not need to
wait for the Commission to identify a problem. Applicants wanting
fast approval could include this as part of the application.
(b) No trade over constrained paths. If constrained paths are
responsible for market concentration problems and they cannot be
relieved for any reason, the company could agree to not use those
paths for its own off-system trade when other transmission service
requests are pending. This condition would keep the merged company
from exercising market power in trade in the constrained areas.
(c) Generation plant divestiture. In concentrated markets,
including those subject to severe and long lasting transmission
limitations, splitting up different generating units into
independent and separately owned companies could reduce horizontal
market power. Where there are only a few generating units in the
market area, divesting those units to just a few owners may not
mitigate the market power problem. In such a case, one alternative
might be to divest the ownership rights to each unit's energy and
capacity to a number of owners. The unit could then be operated as a
competitive joint venture and parts of its output could be bid or
sold independently.
(d) Defer to an ISO's analysis and mitigation efforts. Although
ISOs are just now in their formative changes, they hold some promise
of playing a part in mitigating certain sources of market power.
Applicants' membership in, or commitment to join, an ISO with the
authority necessary to mitigate market power could allow the
Commission to rely on the ISO to identify and remedy market power
problems. The ISO would have access to more information than does
the Commission and would possess greater technical expertise to
assess problems. More importantly, the ISO would have the proper
incentives to mitigate the problems if the ISO's governing body is
broadly comprised of market participants. This potential role for
ISOs highlights the critical importance of balanced ISO governance.
An ISO would also be a mitigating influence on market power to
the extent that it attracts new entrants into a market. An ISO
assures comparable and independent access to all customers. These
institutional guarantees will serve both to attract new entrants and
to encourage continued participation in markets that would otherwise
be dominated by vertically integrated utilities.
ISOs are generally thought to be the proper vehicle for dealing
with vertical market power, e.g., ensuring transmission expansion or
preventing the strategic manipulation of generation dispatch. An ISO
would be able to deal with horizontal market power issues to the
extent it has the ability to control the dispatch or prices paid to
generators. For example, an ISO could identify units with market
power (such as must-run units) and those units could be subject to
contracts that mitigate those units' ability to raise prices
excessively. To take advantage of this option, applicants would be
expected to show that: (1) the ISO meets the Commission's standard
for independence; (2) already exists or will come into existence
before the merger is completed; (3) has a mandate to identify both
vertical and horizontal market power issues; and (4) has the
authority to either remedy any problems it finds or bring those that
it cannot remedy to the Commission.
(e) Real-time pricing. Real-time pricing, when combined with
other mitigation measures, could help constrain the ability of a
firm to raise prices excessively. Buyers who can see the higher
prices in real time can respond by conserving. This makes demand
more elastic, thereby making it more difficult to exercise market
power.
[[Page 68611]]
Appendix B.--Data Used for Competitive Analysis Screen
------------------------------------------------------------------------
Analysis and data element Sources\1\
------------------------------------------------------------------------
Delivered Price Test:
Hourly System Lambda............... FERC Form No. 714.
Plant Generation Costs/Capability.. FERC Form No. 1.
Unit Generation Costs:
Heat Rates..................... EIA Form 860.
Fuel Costs..................... FERC Form 423.
Transmission Rates................. Filed tariffs, Applicants'
filing.
Transmission Capability Test:
Hourly Capability (ATC)............ OASIS, Applicants' filing.
Total Capability................... OASIS, NERC Reports.
Developing Capacity Measures:
Hourly System Lambda............... FERC Form No. 714.
Plant Generation Costs/Capability.. FERC Form No. 1.
Unit Generation Costs:
Heat Rates..................... EIA Form 860.
Fuel Costs..................... FERC Form 423.
Transmission Rates................. Filed tariffs, Applicants''
filing.
Adjusting for LT Sales, Purchases, and
NUGS:
Trade Data (Firm Capacity ales).... FERC Form No. 1, OE-411, NERC
Reports, Applicants' filing.
Adjusting for Tx Capability:
Hourly/Total Capability (ATC, TTC). OASIS, NERC Reports Applicants'
filing.
------------------------------------------------------------------------
\1\ Most of the data listed is publicly available, however the
Applicants should assemble the data and file it electronically with
their merger application.
Appendix C.--Commenters on Merger Notice of Inquiry
------------------------------------------------------------------------
Short name Commenter
------------------------------------------------------------------------
APPA.............................. American Public Power Association.
Attorneys General et al........... Attorneys General of the States of
Iowa, Maine, Maryland, Minnesota,
Oklahoma and Wisconsin.
CA Com............................ California Public Utilities
Commission.
Carolina Association.............. Carolina Utility Customers
Association, Incorporated.
Centerior......................... Centerior Energy Corporation.
Central and South West............ Central and South West Corporation.
CINergy........................... CINergy Corporation.
Colorado Municipals............... Colorado Association of Municipal
Utilities.
Com Ed............................ Commonwealth Edison Company.
Competitive Coalition............. Coalition for a Competitive Electric
Market.
Diamond and Edwards............... Diamond, Joseph and Edwards, Jon D.
DOE............................... U.S. Department of Energy.
DOJ............................... U.S. Department of Justice.
East Texas Coop................... East Texas Electric Cooperative,
Incorporated.
Economists........................ Economists Incorporated (Mark W.
Frankena).
EEI............................... Edison Electric Institute.
EGA............................... Electric Generation Association.
Environmental Action et al........ Environmental Action Foundation and
Consumer Federation of America.
FERC Policy Project............... Project for Sustainable FERC Energy
Policy.
Florida and Montaup............... Florida Power Corporation and
Montaup Electric Company.
FTC............................... Bureau of Economics of the Federal
Trade Commission.
Georgia Municipal................. Municipal Electric Authority of
Georgia.
Hawes and Behrends................ Hawes, Douglas W. and Behrends, Sam
(IV).
Illinois Industrials.............. Illinois Industrial Energy
Consumers.
IN Com............................ Indiana Utility Regulatory
Commission.
Industrial Consumers.............. Electricity Consumers Resource
Council, American Iron and Steel
Institute, and Chemical
Manufacturers Association.
International Brotherhood......... International Brotherhood of
Electrical Workers.
Joint Consumer Advoc.............. Joint Consumer Advocates of Maryland
People's Counsel.
KS Com............................ Kansas Corporation Commission.
Low-Income Representatives........ Consolidated Low-Income
Representatives.
Lubbock........................... Lubbock Power & Light.
Madison G&E....................... Madison Gas and Electric Company.
MidAmerican....................... MidAmerican Energy Company.
Missouri Basin.................... Missouri Basin Municipal Power
Agency.
MN Public Service................. Minnesota Department of Public
Service.
MO Com............................ Missouri Public Service Commission.
NARUC............................. National Association of Regulatory
Utility Commissioners.
NIEP.............................. National Independent Energy
Producers.
NM Industrials.................... New Mexico Industrial Energy
Consumers.
NRECA............................. National Rural Electric Cooperative
Association.
NRRI.............................. National Regulatory Research
Institute.
[[Page 68612]]
NV Com............................ Public Service Commission of Nevada.
NY Com............................ Public Service Commission of the
State of New York.
OH Com............................ Public Utilities Commission of Ohio.
OK Com............................ Oklahoma Corporation Commission.
OK Industrials.................... Oklahoma Industrial Energy
Consumers.
Otter Tail........................ Otter Tail Power Company.
PA Com............................ Pennsylvania Public Utility
Commission.
PaineWebber....................... PaineWebber Incorporated.
PanEnergy......................... PanEnergy Corporation.
PP&L.............................. Pennsylvania Power & Light Company.
PS Colorado....................... Public Service Company of Colorado.
RUS............................... Rural Utilities Service.
Salt River........................ Salt River Project.
Sierra Pacific.................... Sierra Pacific Power Company.
Southern Company.................. Southern Company Services,
Incorporated.
Southwestern Electric............. Southwestern Electric Cooperative,
Incorporated.
Southwestern PS................... Southwestern Public Service Company.
TAPS.............................. Transmission Access Policy Study
Group.
TDU Systems....................... Transmission Dependent Utility
Systems.
Texas Industrials................. Texas Industrial Energy Consumers.
Texas Utilities................... Texas Utilities Electric Company.
TX Com............................ Public Utility Commission of Texas.
UtiliCorp......................... UtiliCorp United Incorporated.
WI Com............................ Public Service Commission of
Wisconsin.
Wisconsin Customers............... Wisconsin Wholesale Customers.
Wisconsin PS...................... Wisconsin Public Service
Corporation.
------------------------------------------------------------------------
Appendix D--Summary of Comments on Merger Policies
I. General Comments on Revising the Commission's Merger Policy
A. Direction of Change
Almost all commenters argue that we need to revise our merger
policies and standards in light of the changes in the industry.
However, they do not agree on the direction of the change. On one
side, many commenters argue that mergers may prevent markets from
becoming truly competitive. 1 On the other side, some
commenters suggest that the Commission should approve a merger
unless harm to the public interest is demonstrated.2 These
commenters claim that most mergers are procompetitive and should be
approved unless a problem is identified.
---------------------------------------------------------------------------
\1\ For example, APPA, NRECA at 7-8; ELCON at 12-13.
\2\ For example, Utilicorp at 2, 7, 10.
---------------------------------------------------------------------------
Commenters 3 who argue that moving to a more competitive
market warrants stricter merger approval criteria are concerned that
the recent wave of mergers threatens the development of competitive
markets. For example, Industrial Consumers and TAPS believe that the
Commission's current policy is too lax. These commenters offer
numerous reasons for opposing mergers, including the detrimental
effects of large ``mega-utilities'' and diversion of management's
attention from cost minimization. RUS fears that mega-utilities
could have market power in generation and political power at the
state and federal levels that could suppress competition in
transmission and distribution. Madison G&E is also concerned about
the challenge mega-utilities pose to effective state regulation.
UtiliCorp notes that the need for efficient dispositions and
transfers of capital, which are critical to the transition from a
regulated to a competitive industry, warrant a revised merger
policy.
---------------------------------------------------------------------------
\3\ Among others, APPA, NRECA, EEI, Texas Utilities, Southern,
East Texas Coop (endorsing the joint petition of APPA/NRECA and
comments of NRECA), NIEP, Colorado Municipals (endorsing the views
of APPA), IN Com, DOJ, Joint Consumer Advoc., TAPS, TX Com, and NY
Com.
---------------------------------------------------------------------------
Many of these commenters criticize the ``consistent with''
standard as we have interpreted it--that is, as a ``do no harm''
standard. They argue that this approach, which was developed in an
era of tight regulation, is inconsistent with the public interest in
the transition to a competitive environment.4 Joint Consumer
Advoc. suggests that a merger is not consistent with the public
interest unless dollars invested in a merger could not have been
used otherwise to lower costs more.
---------------------------------------------------------------------------
\4\ East Texas Coop, Joint Consumer Advoc., and TAPS.
---------------------------------------------------------------------------
Numerous commenters 5 argue that we should revise our
merger criteria because of general industry restructuring due to
open access or new state and federal laws and policies that provide
incentives to merge.
---------------------------------------------------------------------------
\5\ These commenters include Texas Utilities, Southern, DOJ,
TAPS, TX Com, NARUC, and APPA.
---------------------------------------------------------------------------
On the other hand, commenters who support more relaxed merger
criteria argue that the marketplace can best decide the future path
of the industry. They argue that the Commission's current policy is
simply too stringent; 6 we should recognize that the
transformation to a competitive industry requires a certain amount
of industry reshuffling, best accomplished without the Commission's
intervention.
---------------------------------------------------------------------------
\6\ UtiliCorp, PaineWebber, Texas Utilities, Southwestern, and
Southern.
---------------------------------------------------------------------------
For example, CINergy believes that consolidation may be a
necessary step toward industry rationalization and disaggregation as
companies seek critical mass to spin off generation. This suggests
that we should monitor the merger process closely, but not try to
predict or dictate the path of industry restructuring. Similarly,
Central and South West says that the nearly 150 control areas and
the utilities that operate them will not survive competitive
restructuring and that mergers may allow market forces to bring
about a competitive and workable market structure. UtiliCorp notes
that mergers and acquisitions are likely to increase as utilities
act to improve their ability to compete in increasingly competitive
markets. Some of these commenters argue for automatic approval of a
merger if no harm to the public interest is demonstrated. PanEnergy
and Hawes and Behrends believe that certain types of mergers are
either procompetitive or have no effect on competition and warrant a
streamlined approval process.
The Commission also received comments from parties that neither
favor nor oppose mergers but suggest a revised approach, for a
variety of reasons. For example, NIEP and Diamond and Edwards
believe that as markets become more competitive and the Commission
reduces some aspects of its regulatory scrutiny, merger standards
should be adjusted so that they more closely track traditional
antitrust principles. On the other hand, PA Com and KS Com support a
``wait and see'' approach. PA Com comments that reevaluating merger
policy may be premature at this time because the Open Access Rule is
being reviewed by the industry and power pools do not have to file
their open access tariffs until December 31, 1996. KS Com believes
that the public interest and state and federal review processes will
benefit if a
[[Page 68613]]
consistent view of the appropriate markets and regulatory framework,
designed to achieve an efficient and sustainable generation market,
is developed before merger evaluation standards.
Project argues that our merger policies must ensure that the
market functions under rules that promote environmental quality and
economic efficiency; specifically, a policy of sustainability.
B. How to Implement New Policies
We received a few comments on whether to adopt our new policies
on a case-by-case basis, through a policy statement, or through a
rulemaking.7
---------------------------------------------------------------------------
\7\ For example, DOJ, East Texas Coop, OH Com, NRECA, and
Southwestern Electric suggest a rulemaking as the vehicle to
implement the Commission's new merger policy; CINergy advocates a
case-by-case approach; APPA suggests a combination of various
methods; DOJ suggests that we convene a technical conference
immediately to delineate the relevant geographic markets for the
electric utility industry for the entire U.S. DOJ says that this
would greatly facilitate the Commission's (and DOJ's) review of
merger applications and enable the Commission quickly to establish
safe harbors or screens for any merger application based upon
changes in market concentration for a known geographic market.
---------------------------------------------------------------------------
Commenters also expressed differing views on whether our new
policies should be applied to pending mergers. Lubbock urges the
Commission evaluate all pending mergers under the new merger
standards. Wisconsin Customers recommend, however, that the new
merger policy be applied only to mergers filed after the date of
issuance of the NOI.
Enviromental Action et al. recommends that mergers be prohibited
until the Commission's new merger policy is established through a
NOPR process. However, if mergers are not prohibited during this
period, there should be a moratorium on unconditional approvals; any
mergers approval should be conditional and required to conform to
the merger final rule.
The Pennsylvania Commission urges the Commission to let
competitive wholesale restructuring develop before approving mergers
among the members of power pools.
On the other side, Florida and Montaup argue that any new rule
resulting from this proceeding should apply only to merger
applications filed after the effective date of a final rule. Merger
applications filed before that date should be considered under the
filing requirements and standards in effect at the time of their
filing. EEI and UtiliCorp request that the Commission move quickly
to review those merger applications already before it without
waiting to develop a new merger policy.
II. Comments Concerning Effect on Competition
A. Defining the Relevant Markets
1. Defining Product Markets
Some commenters emphasize that relevant product markets should
be established from the buyer's perspective, that is, in terms of
the delivered product.8 Such an approach would examine
generation and transmission in combination, since neither is of use
to a customer by itself. They add that in an open access
environment, where transmission rates will remain regulated,
transmission should be viewed as a substitute for local generation,
rather than as a separate market.9
---------------------------------------------------------------------------
\8\ For example, EEI, UtiliCorp, and Centerior.
\9\ These include, for instance, EGA, Low-Income
Representatives, NIEP, and TAPS.
---------------------------------------------------------------------------
Commenters suggest that the Commission examine two or more
product markets. However, there is little consensus on which markets
to consider. For example, Environmental Action, et al. suggests
existing generation, new generation, transmission, retail
aggregation and sales, physical distribution, demand side management
services, ancillary services associated with generation transmission
and distribution, and fuels. Industrial Consumers suggests firm and
non-firm bulk power, short-term capacity, short-term energy, long-
term capacity, and energy and transmission services. To minimize
opportunities for affiliate abuse, RUS recommends examining at least
markets for generation, transmission, and ancillary services. For
applying the Guidelines to the electric power industry, DOJ and FTC
suggest that we look at four product markets: short-term energy,
intermediate-term energy, long-term capacity, and ancillary
services. FTC notes that sales to differently situated customers may
constitute separate markets if differential pricing is feasible.
APPA proposes similar markets, but suggests considering short-term
energy or capacity. EEI proposes a short-term energy and capacity
market (up to about two years) and a medium-term (two- to five-year)
capacity contract market involving capacity and associated energy
sales from excess capacity from existing facilities. MO Com suggests
focusing on the commodities market (hourly energy from existing
generation facilities) and the contracts market (capacity and energy
from existing and new generation). NIEP proposes two broad product
markets, generation sales and retail sales. Several commenters
suggest that the Commission consider ancillary services as a product
market.10
---------------------------------------------------------------------------
\10\ These include, for example, Industrial Consumers, DOJ,
Enviromental Action et al., CA Com, CINergy, and UtiliCorp.
---------------------------------------------------------------------------
Other commenters argue that long-term product markets should not
be subject to market power analysis. For example, EEI says that the
long-term capacity market where sales from new capacity compete with
long-term contracts for sales from existing capacity should not be
subject to the analysis. APPA makes the same argument for long-run
sales from new capacity, since such capacity represents potential
entry. Similarly, UtiliCorp argues that we should disregard the
long-run generation product market because of our finding in the
Open Access Rule that long-run markets are generally competitive.
CINergy believes that open access, the absence of artificial
impediments to expansion of generation capacity by existing
suppliers, and the prospect of entry into the generation business by
new suppliers preclude market power in the long run. However, DOJ
questions the presumption that utilities do not have market power
over long-run energy and capacity.
Com Ed argues that the Commission should disregard short-term
energy markets because these markets involve buyers who are able to
make purchases to replace energy otherwise available at a higher
cost, such as from the buyer's own installed capacity. The cost of
energy from such otherwise available capacity effectively limits the
price at which short-term energy is offered.
Several commenters cite the need to consider the temporal
characteristics of product markets. For example, Florida and Montaup
suggest dividing them into short-term and medium-term markets and
further dividing these into various product markets as appropriate
to the area. Others 11 suggest that delivered capacity and
energy be analyzed under market conditions during peak and off-peak
hours and summer and winter conditions.
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\11\ E.g, Madison G&E and CINergy.
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As to whether the Commission should examine only the wholesale
market, leaving concerns over retail competition to the states,
Southern says yes. Several commenters believe that we should also
examine the impact on retail competition.12 They suggest that
the Commission has both the authority 13 and the responsibility
to examine the impact of mergers on actual or potential retail
competition.
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\12\ These include PP&L, DOJ, and TAPS.
\13\ Citing FPC v. Conway, 426 U.S. 271 (1976).
---------------------------------------------------------------------------
2. Defining Geographic Markets
We received a significant response from commenters on various
aspects of defining relevant geographic markets. Most of these
comments relate to the approaches (such as generic versus case-by-
case) to defining markets, factors that are important to consider in
defining markets, and the use of modeling.
DOJ and others 14 define the relevant geographic market as
the area in which the seller operates and to which the purchaser can
turn for supplies. They suggest that the best way to determine which
suppliers are in the relevant market is to look at the physical
location of the generating unit (as opposed to disposition of power
from the unit). DOJ suggest that we could determine the geographic
markets immediately for the electric utility industry for the United
States through a rulemaking or technical conference.
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\14\ E.g., EEI, Wisconsin Customers, APPA, and TX Com.
---------------------------------------------------------------------------
Some commenters urge the Commission to recognize the effects of
open access on the extent of geographic markets.15 For example,
the Commission should revise its current two-tier analysis because
open access will broaden the relevant geographic market beyond two
tiers. EEI suggests that the Commission first define the smallest
geographic area (under the trading patterns existing before open
access) and then broaden the market as choices available to the
purchasers increase under open access.
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\15\ E.g., Industrial Consumers, RUS, UtiliCorp, EEI, Wisconsin
Customers, Texas Utilities, TDU Systems, and CINergy.
---------------------------------------------------------------------------
However, some commenters are skeptical that defining the
geographic market to include suppliers two or more tiers away is
[[Page 68614]]
a wise approach. For example, RUS warns that defining the market too
broadly can understate the problems in sparsely populated areas. It
argues that the Commission must allow competitors to present
evidence that the market is narrower than the first or second tier.
TDU Systems question whether suppliers two tiers away can put
competitive pressure on the merging utilities. It explains that a
seller two transmission charges away incurs transmission costs of
approximately 15 to 20 percent of the product price, which is
significantly higher than the 5 percent price increase used by the
antitrust agencies. Wisconsin Customers argue that the Commission's
method of defining the geographic market results in markets that are
too large because all first-tier utilities are included, which leads
to underestimates of the true market power of the merged entity. RUS
emphasizes that the price increase test in the Guidelines is
inadequate in an industry emerging from a monopoly situation and in
which mega-utilities could rapidly acquire excessive market power.
Other commenters suggest various approaches to defining
geographic markets. For example, NIEP proposes that Electric
Reliability Council areas be used. Many commenters emphasize the
importance of the actual behavior of the grid in defining relevant
markets. RUS recommends that a separate geographic market for each
state be defined for mergers involving utilities or holding
companies operating in more than one state. TX Com argues that we
must consider the future geographic scope of markets.
MO Com suggests three models of competition in defining relevant
markets: the utility, the wholesale, and the retail direct access
models. The utility model considers utility/non-utility generator
competition to meet jurisdictional loads with no retail access. The
wholesale model expands the utility model to consider direct access
to all wholesale customers, and the retail model expands the
wholesale model to reflect direct access to all end-use customers.
Many commenters list factors to consider in defining relevant
geographic markets. The most significant factors discussed are
transmission constraints and transmission pricing. There is a wide-
spread view that we must take account of transmission constraints,
particularly because constraints can lead to shifting geographic
markets over time and the ability to wield market power in local
markets.16 For example, DOJ, EGA, and TAPS argue that the
Commission should give great emphasis to transmission constraints,
since they can be exacerbated by mergers and can lead to significant
market power in localized areas. Wisconsin PS and Madison G&E note
the importance of assessing transmission constraints both alone and
together with strategically located generation to give an advantage
to a merging entity's own power sales.
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\16\ Industrial Consumers, FTC, Lubbock, EEI, Wisconsin PS, DOJ,
TAPS, NY Com, Enviromental Action et al., Southern, TX Com, RUS,
Centerior, CINergy, UtiliCorp, MO Com, and CINergy all support this
view.
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CINergy emphasizes that the extent to which transmission
constraints are binding is critical for accurately assessing market
conditions. It will be necessary to develop market concentration
statistics that account for the distribution of capacity beyond a
binding constraint and that include only realistically available
supplies inside the area bounded by the constraints. MO Com
emphasizes the importance of determining whether constraints will
prevent alternative suppliers from having access to the customers of
the merged utilities. If available transfer capability is reduced as
a result of the merger, the merger increases market power. Even if
the merger expands transfer capability as the number of alternative
generation sources decreases, the increase in transfer capability
may be of little value unless it increases access to generation
alternatives. MO Com believes that the burden should be on the
applicants to show that limits on transfer capability would not
allow them to exercise market power. Further, the Commission should
require applicants to have sufficient transfer capability available
to meet the net import requirements for base-load power that might
be requested by current customers.
On the other hand, Southern cautions the Commission against
over-emphasizing transmission constraints, noting that isolated or
short-term constraints should not affect the definition of the
relevant geographic market. Constraints should be considered only if
they impede wholesale trade. Moreover, Southern questions our
authority to order the construction of transmission facilities to
alleviate constraints. In assessing the significance of transmission
constraints, the Commission should consider the ability of new
generation to locate in the region, mitigating the problem; the
feasibility of alternative transactions (such as transmission
capacity resale or arrangements with brokers) to bypass the
constraint; and the possibility that new power sales would simply
displace existing sales, reducing the likelihood that the constraint
would occur.
Finally, various commenters recognize that constraints depend on
time and location, which may make defining the relevant market
difficult.17 For example, constraints may be affected by line
loadings on a system that vary over the course of a day, week, or
year. As a result, increases in congestion on transmission lines
under high load conditions can change the boundaries of the relevant
geographic market. EEI makes similar arguments, suggesting that
time-differing transmission use patterns lead to similarly differing
relevant geographic markets if constraints arise during peak
periods. DOJ and TAPS note that constraints are affected by how the
transmission system is operated in terms of, for example, dispatch,
decisions on which utilities to make sales to or purchases from,
equipment ratings, maintenance outage scheduling, and decisions
concerning equipment sizing and locations. Thus, we should
investigate the possibility of operational manipulation of
transmission systems that gives merging utilities a competitive
advantage.
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\17\ E.g., DOJ, EGA, Enviromental Action et al., TX Com, and
TAPS.
---------------------------------------------------------------------------
Enviromental Action et al. suggests that the extent of the
geographic market may be unclear because transmission constraints
are physical or economic barriers to electricity sales in many
locations. DOJ and TX Com caution the Commission not to rely too
heavily on historical patterns of trade in determining transmission
constraints because open access could create very different
constraints in the future.
The second factor mentioned by many commenters as significant in
defining the geographic market is transmission costs.18 For
example, Madison G&E believes that pancaking of transmission rates
can influence the extent of the market; moreover, postage stamp
rates and distance-sensitive rates will lead to different numbers of
competitors. FTC believes that geographic markets defined in terms
of distance-sensitive rates would correspond to underlying cost
conditions more accurately than markets defined in terms of postage
stamp pricing. The MO Com proposes that merging utilities be
required to specify the market region where they have a strong
competitive influence and file a study showing both short- and long-
run marginal transmission costs for the region. Industrial Consumers
notes that transmission costs include stranded costs.
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\18\ E.g., DOJ, FTC, TAPS, NY Com, TDU Systems, EEI, Industrial
Consumers, CINergy, Centerior, TDU Systems, MO Com, Madison G&E, and
Com Ed. DOJ argues that it is vital that the Commission quickly
replace its case-by-case approach to transmission pricing with a
general rule to avoid a merger policy that is inconsistent,
inefficient, and inequitable.
---------------------------------------------------------------------------
Commenters mention various other factors as important in
defining geographic markets. Some note that institutional
arrangements can affect the extent of the market.19 FTC notes
that differences in the degree and sources of geographic competition
may arise from temporal distinctions between product markets such as
existing transmission and generating obligations.
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\19\ E.g., EEI, FTC, Industrial Consumers, and Centerior.
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FTC suggests that computer models of transmission systems be
used to simulate the effects of a small, non-transitory price
increase imposed by groupings of power suppliers over various
alternative geographic areas. This would allow us to determine
whether the price increase would be profitable for a hypothetical
monopolist and, therefore, which of the areas are relevant
geographic markets. FTC also suggests that the Commission consider
developing sufficient data and system modeling tools to be able to
screen mergers expeditiously, examining the likely relevant
geographic market under different assumptions about future
transmission rates, different projected transmission improvements,
and different generation siting assumptions. However, Madison G&E
opposes the use of models. It says that models do not address
conditions in the market for delivered capacity and are inherently
incapable of taking into account strategic behavior or the potential
effectiveness of threats.
Some commenters offer their views on the merits of a generic
verses case-by-case
[[Page 68615]]
approach to defining markets. For example, Southern believes that
the Commission should perform case-specific analyses in which it
weighs the effects of significantly reduced entry barriers and open
access. Diamond and Edwards disagree, suggesting that this approach
is not consistent and that a better approach would be to look at a
large area and determine subregions based on trade patterns.
Wisconsin Customers warn that using theoretical bases to determine
the boundaries of the relevant markets can be misleading because
market power can be exercised even on an hourly basis.
B. Determining the Effect on Competition
Many commenters recommend that once the relevant markets have
been defined, the Commission determine the effect of a merger on
competition by examining market shares, market concentration, and
ease of entry.
1. Market Shares
Commenters offer various views on how to measure market shares
and how frequently to do so. They generally argue for more frequent
calculation of market shares, particularly for energy products.
DOJ suggests that market shares can be assigned based on
production, sales, or capacity. It favors capacity because
electricity is a homogenous product and because the capability of
producing can be readily translated into actual sales. FTC suggests,
similarly, that market shares may reflect either output or capacity.
It argues that in homogeneous product markets, capacity is a better
measure, while in differentiated product markets, output-based
measures are usually a better indicator of firms' future competitive
significance. The structure of intermediate and long-term markets is
reasonably measured by capacity, and the structure of short-term
markets is reasonably measured by output if differentiating factors
such as reliability and access are important. Madison G&E suggests
that market shares for delivered firm capacity be measured by
uncommitted capacity, while market shares for energy be measured by
the amount of deliverable energy at competitive prices during the
time period in question. EEI suggests examining market shares
associated with installed capacity and uncommitted capacity or
energy that are excess to the capacity committed to serve native
load customers, existing contracts, and other obligations. Southern
Company believes that excess capacity is a better indicator of a
merging entity's ability to exercise market power than is total
capacity.
Others also suggest that when calculating market shares, we
exclude contractually-obligated capacity; for example, FTC
emphasizes that capacity or output that is contractually obligated
may not be relevant to calculating market shares of potential
suppliers for other customers. For instance, supply that is
contractually obligated to local load is unlikely to be a part of
the market for short-term capacity. Similarly, Southern Company
claims that capacity committed to serve native load, wholesale
requirements service, or sales outside the relevant market should
not be considered.
As to the frequency with which market shares should be
calculated, several commenters note that generation dominance can
create anticompetitive effects in localized markets during certain
times (daily, seasonally) due to transmission constraints. Madison
G&E would calculate market shares beginning with the year in which
the merger is expected to be consummated and several years into the
future. It believes that market shares for energy should be
calculated for peak and off-peak periods. Similarly, CINergy
proposes examining market conditions monthly for energy markets to
address problems of market power in particular periods.
As a final word of caution, DOJ states that not all market
shares are equal. For example, a utility may possess market power
that is disproportionate to its market share if the marginal costs
of that utility's generators are closest to the market-clearing
price for electricity in that market.
2. Measuring Market Concentration
There is wide support among the commenters for using HHI
analysis to measure concentration in relevant markets, but many
suggest modifications. For example, EEI suggests that considerable
judgment is needed to arrive at the combination of HHIs that best
reflects an appropriate structural analysis of market power. If
several suppliers have enough excess capacity to meet anticipated
incremental market requirements, the Commission can treat each as
having an equal contribution to market concentration. EGA suggests
that we consider reasonably predictable effects of recent or ongoing
changes in market conditions, such as the creation of ISOs, in
interpreting market concentration and market share data.
Several commenters suggest that HHI analysis be used as a
``screen'' for market power to create some sort of ``safe harbor''
allowing mergers to be quickly approved if they meet certain
tests.20 For example, Southern Company believes that the
Commission should establish threshold HHI levels that would be safe
harbors in the merger review process. It contends that increases in
market concentration resulting from mergers often do not pose a
significant threat to competition, and that mergers are a means by
which industries and individual firms adjust to market change to
maximize efficiency and consumer welfare. Similarly, UtiliCorp
endorses HHI screens, but suggests that we consider the transitional
circumstances of the electric utility industry in designing the
screens. The Commission should analyze the effects of the merger
under criteria similar to those contained in the Guidelines if the
merger does not pass the screen.
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\20\ This ``safe harbor''-type issue is discussed further below
under ``Procedures for Handling Merger Cases.''
---------------------------------------------------------------------------
EEI and APPA argue that the Commission need not be concerned
about mergers with a post-merger HHI at or below 2000 (that is, five
equal-sized firms). However, EEI emphasizes that selection of a
particular threshold value is based upon judgment, not science. The
Commission may want to consider specifying more refined thresholds
based on experience in wholesale power markets. Precise numerical
HHI thresholds are less important than how these thresholds are
used, that is, as screening devices to distinguish mergers that are
clearly benign from those requiring further scrutiny. The Commission
should be mindful that HHI analyses are based on historical data and
that changing regulation and market developments that increase
competition may allow the use of higher HHI thresholds or a more
liberal interpretation of results. On the other hand, Central and
South West proposes that where HHI values are up to 2500, there
should be a rebuttable presumption that the region is workably
competitive. It believes that the market will eventually encompass
all synchronously connected regions under the Commission's
jurisdiction.
Some commenters caution against putting too much emphasis on HHI
analysis, suggesting that the Commission look at additional
factors.21 For example, Wisconsin PSC asserts that HHIs
(incorporating transmission constraints) can be used as a screen but
should not substitute for the Commission identifying potential
discriminatory practices in areas such as maintenance, planning,
system modeling, equipment ratings, system design, operation
control, and use of generation, all of which Wisconsin PSC asserts
affect transmission constraints.
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\21\ E.g., East Texas Coop and Wisconsin PSC.
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Other commenters suggest standards other than HHI analysis for
determining if market power would result from a merger.22 Some
would require having at least five reasonably comparable suppliers,
no single dominant supplier, and reasonably free entry to all
segments of the relevant market. Diamond and Edwards opposes this
view, stating that the number of firms and level of competition are
only loosely related; competition can be intense with only two firms
or nonexistent with many firms. It suggests that the Commission
entertain the possibility that in the intermediate term, competition
among the few (such as between regions), with appropriate market
power mitigation measures such as ISOs, retail access, or
divestiture, may be necessary as the industry moves toward
``workable competition.''
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\22\ For example, IN Com, Industrial Consumers, and Enviromental
Action et al.
---------------------------------------------------------------------------
NIEP argues that a merger should be presumed to be
anticompetitive if the merged entity would have a 20 percent market
share, based on either generation sales or retail sales within a
reliability council area. Com Ed disagrees, contending that for an
undifferentiated product like electric power, the Guidelines suggest
a higher figure of 35 percent. NIEP further argues that mergers not
presumptively anticompetitive would still be scrutinized on the
basis of whether the merged firm could sustain a 5 percent price
increase.
Centerior and Com Ed oppose HHI analysis. Centerior believes
that HHI measures are inadequate to measure market dominance.
Rather, an assessment of market power should be based on the number
and characteristics of a customer's options. For example, if a
customer could look at several generation options and combine them
with
[[Page 68616]]
available transmission, so that there are several ``delivered
power'' options, a proposed merger should be acceptable. Centerior
notes that EEI's criteria do not account for the potential loss of
native load customers, which could create excess capacity that,
under HHI analysis, could lead to a finding of market power. An
adequate market power screen could be based on regional
concentration of competing utilities in the relevant market and/or
market shares, as proposed by EEI.
Com Ed objects to any market concentration ratio for energy or
even capacity markets based on a capacity measure because the
capacity that utilities have available to make economy energy sales
fluctuates constantly, depending on system conditions. Only
generating units operating on the margin are capable of conferring
any degree of market power, and identification of those units
requires a rigorous analysis of the mix of generating units
controlled by all utilities who could participate in the market.
This leads Com Ed to conclude that generating capacity is not a
meaningful indicator of market power in the markets for either
capacity or energy. As an alternative to looking at market
concentration ratios, Com Ed suggests that we review actual
competitive conditions and assess the potential for anticompetitive
behavior by determining whether there are feasible market
manipulation mechanisms that are likely to succeed. Com Ed argues
that for the Commission must recognize as a competitive issue the
likely effects of a proposed merger on the operations and costs of
neighboring utility systems, including effects on the loadings of
their transmission systems. EGA shares a similar view, specifically
recommending that the Commission focus on whether the merger will
increase the transmission costs of potential competitors.
3. Ease of Entry
The Commission received a number of comments on considering the
possibility of entry by new competitors in assessing market power.
These comments address both the types of entry barriers that might
exist in the industry and the importance of entry analysis.
Commenters suggest that there are various barriers to entry in
this industry.23 These include existing law and regulation and
economic incentives created by a utility's role as monopolist and
competitor; regulatory approval requirements; the amount of time it
takes to move from planning to operation of new facilities; the
existence of excess capacity in the relevant market; economies of
scale and capital requirements; favorable location and access to raw
materials; and access to distribution channels (including access to
transfer capability of the transmission system and pancaked
transmission pricing).
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\23\ These commenters include, e.g., Enviroment Action et al.,
FTC, Madison G&E, MO Com, IN Com, and NY Com.
---------------------------------------------------------------------------
Some commenters believe that entry is a critical factor in
merger analysis. For example, Joint Consumer Advoc. and TAPS argue
that careful analysis will indicate significant barriers to entry.
TAPS notes that measures of market dominance such as concentration
indicate whether a utility currently can dictate price levels, while
analysis of barriers to entry indicates whether a utility can
foreclose competition prospectively. NY Com urges the Commission to
focus its analysis of barriers to entry on factors such as
transmission power flow analyses, availability of generation plants,
reserve margins, load pocket constraints, and system stability.
Several commenters are skeptical that entry analysis, as done in
the Guidelines, makes sense for the electric utility industry; they
argue that entry will not mitigate market power. For example,
Industrial Consumers notes that the Guidelines recognize that market
power can be defeated if entry is ``easy,'' that is, timely, likely,
and sufficient to deter or counteract the anticompetitive effects.
However, Industrial Consumers believes that entry into the
transmission and distribution business is not easy--nor
accomplishable in two years--given the nature of monopoly
franchises, obstacles to siting, and ``need justification'' standard
for regulatory approval. Stranded cost recovery also raises a
significant barrier to entry by a new participant into the market,
even under open access.
DOJ notes that market entry is not likely to mitigate the
anticompetitive effects of a merger when there is chronic excess
capacity because a new entrant would have to recover both operating
and fixed costs, while the merged entity would need to recover only
operating costs until excess supply is eliminated. FTC doubts that
entry is significant for most electric power merger cases because it
may take more than two years to complete new generation and
transmission facilities (due to lags in regulatory approvals and
construction). These forms of entry are unlikely to respond to an
anticompetitive merger in time to deter or constrain the exercise of
market power. APPA also believes that potential entry is not an
effective restraint where existing capacity is concentrated.
On the other hand, CINergy suggests that even in the short run,
pricing behavior can be constrained by potential entry because
customers can make long-term commitments to purchase from developers
of new generation resources and incumbent suppliers will account for
potential long-term load losses in setting their prices in the short
run. Southern Company argues that with open access, entry is now
easy.
4. Factors Affecting the Market Analysis That Can Change Over Time
There is substantial support among the commenters for the use of
dynamic standards, at least to some degree, rather than static
standards that may become obsolete as competitive energy markets
develop. Some 24 recommend that we consider both immediate and
long-range effects of mergers. Others 25 believe that any
anticompetitive consequences should be evaluated not only in the
context of the industry as it is structured today (vertically-
integrated utilities serving both at wholesale and retail), but also
as to how the industry may evolve. UtiliCorp argues that we should
also consider the current state of transition in the industry when
we examine merger applications that do not satisfy the market
concentration and competition screen. It notes that requirements
contracts currently in effect impede competition, but will cause the
potential anticompetitive effects of mergers to be exaggerated
because more alternatives will be available when the contracts
expire.
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\24\ E.g., Lubbock and Low-Income Representatives.
\25\ E.g., Com Ed and CINergy.
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Most commenters argue that, although open access may enlarge
geographic markets and lower entry barriers, we should not expect
that market power problems will disappear so that merger analysis
will not be needed in the future. They believe that factors such as
transmission constraints and lack of true comparability in the use
of open access tariffs will continue to warrant market power and
merger analysis.26
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\26\ E.g., FTC, East Texas Coop, and Industrial Consumers.
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UtiliCorp recommends that the Commission consider the
contingencies of retail competition and restructuring as we analyze
the future impacts on competition of market concentration, market
power and mergers. Southern Company contends that the Commission
should not consider retail competition issues because state
regulators are effective watchdogs who protect the interests of
retail customers and assess the impact of mergers on competition in
retail markets.
Wisconsin PS argues that opening retail markets to competition
will result in substantial uncommitted capacity on the systems of
merging utilities and will put pressure on them to market capacity
through a more intense use of their transmission systems. Centerior
suggests that the market analysis may need to consider the effect of
competition policies promulgated by the state at the retail level in
the future. Excess capacity may increase if retail customers get the
right to select a new supplier based solely on lower rates.
Therefore, a utility that did not have market power in the past may
find that it has increased excess capacity and may thus acquire
market power.
CINergy suggests that restructuring should be considered in the
review of mergers only if there is a plan already approved by the
state regulator, with a set implementation schedule beginning within
three years of the consummation of the proposed merger. Future
potential changes in the basic structure or regulation of the
industry should be addressed by exercising the continuing authority
to supplement merger orders under section 203(b), including the
possibility of requiring divestiture.
5. Consideration of the Separate Effects of a Merger of Transmission
and Distribution Facilities
A horizontal merger of vertically integrated utilities can be
viewed as a generation merger, a transmission merger, and a
distribution merger. A merger of transmission-owning utilities may
have various effects on the grid, such as better planning,
coordination, fewer pancaked rates, and strategic control of
regional
[[Page 68617]]
transmission grids. NIEP urges the Commission to recognize that
mergers of entities that own only transmission should not raise
substantial competitive concerns if the transmission is operated by
an ISO. CA Com and DOJ intimate that mergers may occur in order to
avoid pancaked rates. CA Com recommends that the Commission use the
open access tariffs to remove the anticompetitive factor of
pancaking and thus make mergers less attractive.
Several commenters address the effects of mergers at the
distribution level.27 Some argue that the consolidation of
distribution assets and the creation of large retail monopsonists
are competitive concerns that we should address. IN Com believes
that physical and economic interactions blur the distinction between
the wholesale and retail sectors, requiring that the effects on the
retail market be considered to analyze the merger implications in
the wholesale market. It would reject a merger that has negative
retail effects even if the merger has positive effects in the
wholesale market.
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\27\ E.g., CCEM and NIEP.
---------------------------------------------------------------------------
Other commenters fault the Commission for disregarding market
power in the distribution sector of the industry. They suggest that
mergers are likely to increase barriers to entry into the
distribution market and monopsony power over sellers of
generation.28 As larger distribution systems are created
through mergers, smaller, independent generators may be
disadvantaged because they lack the resources required to meet
thousand-megawatt solicitations with complicated delivery
requirements. Environmental Action et al. also contends that the
larger distribution systems created by vertical mergers heighten the
opportunity for anticompetitive self-dealing between the
distribution and generation arms and diminish the prospect for
effective retail competition.
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\28\ E.g., Joint Consumer Advoc, Enviromental Action et al.
---------------------------------------------------------------------------
6. Vertical Mergers
Com Ed suggests that, in the future, vertical or conglomerate
mergers rather than horizontal mergers may offer strategic
opportunities to utilities. It recommends that our merger policy be
flexible enough to deal with differences in the concerns raised by
such mergers and horizontal mergers.
7. Application to Electric Power Purchases
A few commenters raised the issue of monopsony power stemming
from mergers. Joint Consumer Advoc. points out that a utility may
exercise monopsony power over sellers of generation, obtaining power
at a lower price than its competitors.
8. Linked Consideration of Contemporaneous Mergers That Have
Interdependent Market Effects
Several commenters argue that the Commission should consider
such mergers on a cumulative basis.29 Some argue that one
merger may alter the boundaries of the relevant geographic market in
which the other merger occurs; that is, transmission constraints in
one market may be altered by new economy energy transactions
associated with a merger in a neighboring market. APPA suggests
consolidating contemporaneous proceedings that have interdependent
market effects. Colorado Municipals notes that regulating the
cumulative effect of contemporaneous mergers may be difficult.
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\29\ E.g., APPA, NRECA, Enviromental Action et al., Joint
Consumer Advoc., and Colorado Municipals.
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III. Comments Concerning the Effect on Costs and Rates Factor
A. General Comments
Many commenters consider the effect on costs and rates to be a
critical factor in deciding whether to approve a merger.30 In
fact, DOJ notes that the Guidelines recognize that some otherwise
anticompetitive mergers may be justifiable because they produce
important net efficiencies that, on balance, benefit competition and
consumers (for example, through rate decreases).
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\30\ E.g., CINergy, TDU Systems, IN Com, DOJ, and Centerior.
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However, commenters supporting this approach differ on how the
costs and rates standard should be applied in cases where
competitive harm is shown. For example, TDU Systems suggests that
when a merger lessens competition, the Commission should not give
substantial weight to cost savings and other benefits that could be
achieved absent the merger. Moreover, the burden should be on the
applicants to show that benefits not attainable without the merger
outweigh the harm. IN Com recommends that applicants be required to
show a low probability of harm to competition and to show
significant, quantifiable net benefits to consumers. CINergy
believes that the consideration of benefits should be limited to
ratepayer protection and that applicants should be allowed to make
an affirmative showing that such benefits will flow back to the
ratepayers.
Other commenters argue that the costs and rates factor should be
abandoned. For instance, Com Ed suggests that analysis of costs and
rates has no place in an emerging competitive arena as long as
mergers do not harm the competitive market, because prices will be
set by market forces and customers can choose their suppliers based
on price. Southwestern PS supports this view, arguing that most
regulatory cost and rate issues that remain relevant are retail-
related and under state jurisdiction; the Commission should defer to
state commissions on such matters.
Others state that the analysis of the effect of the merger on
rates is one of the most costly components of a merger
analysis.31 They assert that in a competitive environment,
there will be little need for the Commission to speculate about
future costs, as utility managers will be reluctant to enter into
mergers that would increase costs.
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\31\ E.g., CINergy, PaineWebber.
---------------------------------------------------------------------------
EEI argues that elimination of the costs and rates analysis
would substantially reduce the time to prepare a merger application
and the Commission's time to process it. Although merger
efficiencies can be substantial, their measurement and allocation
serve a limited purpose in the Commission's analysis. Merger
applicants should not be required (but can volunteer) to demonstrate
merger efficiencies as part of a filing.
B. Determining the Net Benefits
We received a variety of comments on how to determine the
benefits of a merger, the costs of the merger, and the degree to
which one offsets the other. Many parties stress the importance of
rate reductions.32 International Brotherhood contends that in
an era when customers should be able to anticipate rate reductions
from competition, rate freezes are not sufficient. Com Ed agrees
that consideration of cost and rate impacts may still be appropriate
for segments of the industry that are not competitive (transmission
and distribution). The KS Com asserts that cost savings from
combining the merging companies' stand-alone transmission and
distribution systems should be evaluated and that we should require
assurances that efficient transactions cannot be arbitrarily
discouraged in favor of the merged entity. Some contend that we
should look at the effect of a merger on the costs and rates of
competitors; however, they admit that this may be another way of
assessing the effect of the merger on competition.
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\32\ E.g., NV Com, NRECA, Joint Consumer Advoc., and TX Com.
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Many commenters 33 assert that no weight should be given to
efficiencies and benefits that can be obtained by means other than
the merger. CA Com suggests that formation of ISOs may provide many
of the transmission operational and efficiency benefits typically
claimed by merger applicants. Others suggest that the Open Access
Rule will facilitate coordination among utilities so that in some
cases, mergers will not be required to achieve economies.34
Some argue that we should refuse to count as a merger benefit the
substitution of efficient practices for inefficient practices that
could be achieved without a merger.35 Personnel reductions may
be one example, as many businesses are downsizing without merging.
OK Com contends that many of the efficiencies proposed to be passed
along to customers through lower rates may actually reflect
unavoidable cost reductions forced upon the merging utilities by
competition.
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\33\ Including APPA, EA & CF of A, IN Com, East Texas Coop,
Otter Tail, and Industrial Consumers.
\34\ E.g., Enviromental Action et al., IN Com.
\35\ E.g., Industrial Consumers and Enviromental Action et al.
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However, Southern Company cautions that, in assessing what
merger savings could be achieved through coordination without a
merger, the Commission must consider section 1 of the Sherman Act,
which prohibits certain joint actions as anticompetitive and
restricts the sharing of information between competitors. What
appear to be benefits achievable outside the merger may only be
achievable if the companies illegally collude.
NY Com proposes that, instead of relying on claimed merger
benefits related to scale economies, the Commission should look at
the results of the merger: how the merger will affect price, ease of
competitive entry, and quality of service (for example, closings of
customer service centers). Environmental Action et. al. believes
that, in comparing
[[Page 68618]]
costs and benefits, the acquisition cost and its rate treatment
should be considered; it suggests that the Commission reject a
merger if the merged company intends to seek recovery of the
acquisition premium from captive customers. OK Com is concerned that
mergers may require utilities to incur costs such as construction of
transmission lines to meet the integration requirement.
Some commenters contend that the Commission should not count
claimed savings if the applicants are not willing to bear the risk
of not achieving the savings.36 They say that the level of
claimed savings is typically insignificant compared to total company
costs. Industrial Consumers argues that the concept of savings from
``deferral'' of capacity is meaningless.
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\36\ E.g., Joint Consumer Advoc., TX Com, and Enviromental
Action et al.
---------------------------------------------------------------------------
With respect to how net benefits of a merger should be
calculated, some commenters maintain that claimed savings should be
discounted to present value, as cost savings tomorrow are worth less
than cost savings today.37 RUS recommends that the Commission
calculate the ``revenues gained'' by the prospective merged entity,
adapted from the revenues lost approach set forth in Open Access
Rule for determining stranded cost exposure on a net present value
basis.38
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\37\ Industrial Consumers, East Texas Coop, and RUS.
\38\ Open Access Rule, 61 FR at 21662.
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Several commenters contend that the savings claimed for
previously approved mergers did not materialize. They urge the
Commission to scrutinize claimed savings more carefully.39
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\39\ Joint Consumer Advoc., TX Com, Industrial Consumers, and
NRECA.
---------------------------------------------------------------------------
Low-Income Representatives recommends that the Commission
carefully scrutinize claimed savings to ensure that cost reduction
does not mean service or quality reduction. Enviromental Action et
al. notes that despite the vigorous efforts made by merging
companies to win merger approvals with promises of rate reductions,
little time is spent in Commission proceedings reviewing the effects
on rates. It believes that more scrutiny on rates in the merger
proceeding will establish more clearly, before final commitments are
made, who is bearing what risk. It also explains that there are good
reasons to be skeptical about savings from a proposed consolidation
of generating assets because studies suggest that unit scale
economies are reached at 400 MW and multi-unit plant economies at
1600 MW. Similarly, NRRI states that for the majority of firms in
the industry, average costs would not be reduced through the
expansion of generation, numbers of customers, or the delivery
system.
C. Allocation of Benefits and Costs
Several commenters raise the issue of how net benefits should be
allocated between investors and customers. East Texas Coop says that
net benefits should not include any part of the benefits allocated
to shareholders; benefits not allocated to ratepayers cannot be
claimed as a benefit to the public interest. APPA and NRECA want the
Commission to develop standards for allocating cost savings and
other benefits among customers, ratepayers, and shareholders. NY Com
further proposes that requiring merger applicants to share claimed
savings between customers and shareholders would discourage
utilities from overstating the claimed benefits of a merger.
Some commenters argue that an acquisition premium is a cost of
the merger that should not be recoverable from ratepayers if it
would lead to an increase in rates.40 NY Com contends that
allowing recovery of such premiums from ratepayers may inflate
purchase prices and result in exaggerated claims of merger savings
to increase chances of approval, rewarding the purchaser. OK Com
would give rate consideration to an acquisition adjustment for
mergers determined to be consistent with the public interest, and
says that states should have a role in defining the public interest.
Enviromental Action et al. would prohibit the merger if the merged
utility has a retail sales monopoly and the state does not have a
policy of excluding the acquisition premium from retail rates.
---------------------------------------------------------------------------
\40\ E.g., Joint Consumer Advoc. and NY Com.
---------------------------------------------------------------------------
Enviromental Action et al. also believes that the proper cost
allocation arrangement for a merging company, where the customer
groups have different cost histories associated with different
assets, is to have the price charged by the seller in inter-
affiliate transactions be a market price. In this manner, the
``buying'' customers will take the power only if it is the best
price on the market, and the ``selling'' customers will receive a
reward commensurate with their risk. If the merging companies
cannot, under this treatment, come up with sufficient benefits to
satisfy the acquired company, the merger does not meet market
standards and should not be approved. Enviromental Action et al.
claims that any other approach makes the acquiring company's
ratepayers unwilling donors to the financial success of an expansion
strategy.
IV. Comments Concerning the Effect on Regulation Factor
Most commenters agree that regulatory impact continues to be
relevant and important. EEI argues that mergers could affect
regulatory effectiveness either through impacts arising from the
transfer of authority from one regulatory jurisdiction to another or
problems associated with cost allocation. EEI notes that merger does
not change the Commission's authority over transmission in
interstate commerce and sales for resale nor state commission
authority over retail rates. Neither does merger affect the
Commission's ongoing jurisdiction to determine cost allocation and
to specify proper accounting treatment of cost allocations
generically.
Several commenters stress that mergers resulting in multi-
jurisdiction utilities and creating possible federal preemption
deserve special attention.41 OK Com also argues that regional
regulatory bodies may be necessary in the future and is concerned
that mergers can interfere with their effectiveness and formation.
---------------------------------------------------------------------------
\41\ NV Com, WI Com and NRECA.
---------------------------------------------------------------------------
CINergy dismisses the relevance of the effect on regulation,
given that the Commission has held that a transfer of jurisdiction
from one regulatory body to another in no way implies that
regulation will be any less effective.42 CINergy agrees with
the Commission's holding and suggest that the regulatory
effectiveness criteria be eliminated.
---------------------------------------------------------------------------
\42\ Entergy Services, Inc. and Gulf States Utilities Company,
62 FERC para. 61,073 at 61,373-74, order on reh'g, 64 FERC para.
61,001 (1993), appeal pending, 94-1414 (D.C. Cir).
---------------------------------------------------------------------------
Others commenters stress the importance of this factor, but link
it to other factors. Southern Company recommends that analysis of
this factor should be subsumed within analysis of the merger's
impact on costs and rates. APPA believes that the analysis of the
merger's impacts on regulation should be linked to a requirement
that merger produce affirmative public benefits, including
structural changes that enhance competition and reduce the need for
regulation. It also argues that the Commission should give deference
to state action when assessing the impact on state regulation,
although the Commission must make the final call on this factor.
V. Comments Concerning the Other Commonwealth Factors
The other Commonwealth factors are evidence of coercion, the
proposed accounting treatment, and the reasonableness of the
purchase price. These factors elicited very little comment. As to
evidence of coercion, a few commenters suggest that this should be
evaluated by the marketplace rather than by the regulatory
process.43 Several commenters say that this factor should only
be considered if someone demonstrates that it is relevant.44 OK
Com is among very few commenters who favor the retention of coercion
as a criterion. It suggests that coercion is a means by which some
companies try to gain oligopolistic control of the market in the
coming competitive environment.
---------------------------------------------------------------------------
\43\ East Texas Coop., EEI, PaineWebber, and Southern.
\44\ Florida and Montaup.
---------------------------------------------------------------------------
As to the accounting treatment, some commenters support
elimination of accounting concerns as a factor.45 PaineWebber
notes that most recent mergers were mergers of equals, involving
minimal premiums over current market prices. It suggests that a
similar market discipline would likely cause shareholders to reject
merger transactions involving large merger premiums and excessive
amortization. Florida and Montaup argue that the accounting
treatment of a merger should not be an issue for hearing unless an
applicant seeks treatment different from the Commission's standards.
Southern Company contends that the Commission's analysis of
[[Page 68619]]
this factor should be subsumed within the analysis of the merger's
impact on costs and rates.
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\45\ East Texas Coop., EEI, and PaineWebber. Although they do
not support keeping this factor, EEI and PaineWebber suggest that in
light of broad industry changes, this may be the right time for a
generic re-examination of accounting concerns, of which accounting
for mergers could be a part.
---------------------------------------------------------------------------
NY Com and OK Com are concerned about the accounting
consequences of mergers. OK Com favors retention of the historical
cost approach to accounting for plant acquisitions during mergers
and business combinations until competitive market structures are
achieved at the national, regional, and state levels. NY Com also
urges the Commission to continue to require unrestricted access to
all books and records of newly merged entities.
We also received a few comments on looking at the reasonableness
of the purchase price as a factor. A number of commenters46
urge that the Commission should not substitute its judgment for that
of market forces, which will determine the reasonableness of the
purchase price. Others 47 believe this issue should be examined
only if its relevance is raised. However, OK Com argues that
purchase price retains some relevance in this era of
diversification. It is concerned that the purchase price may be
based on expected returns on non-regulated investments, which, if
they fail to materialize, may dilute utility stock.
---------------------------------------------------------------------------
\46\ CINergy, East Texas Coop, EEI, PaineWebber, and Southern.
\47\ Florida and Montaup.
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VI. Procedures for Handling Merger Cases
A. Comments Concerning Filing Requirements
Some commenters 48 urge the Commission not only to spell
out the precise standards it will use to review merger applications,
but also to establish understandable filing requirements that
clearly identify the necessary information on the effects of the
proposed merger on competition and on rates. East Texas Coop says
that having more substantive filing requirements and early access to
computer studies and simulations would benefit all parties and the
Commission. Low-Income Representatives believes that a merger
applicant should be required to show that there is workable
competition for each customer class in any market in which it
participates. NY Com proposes that the Commission require merger
applicants to submit estimates of the price elasticity of both
supply and demand in the relevant markets, and an analysis of entry
barriers to new supply. Southern Company advocates the adoption of
filing requirements designed to support use of the Guidelines, as
modified for the electric power industry.
---------------------------------------------------------------------------
\48\ Missouri Basin, NIEP, Centerior, Florida and Montaup, APPA,
and Southern.
---------------------------------------------------------------------------
Commenters also recommend that the Commission adopt new filing
requirements to enhance and expedite our analysis of the rate
impacts of merger applications. Florida and Montaup argue that the
Commission should set out filing requirements related to merger cost
and savings, which would have to be met only if the applicants claim
that the merger results in consumer savings. International
Brotherhood asks the Commission to require merger applicants to file
an economic impact statement analyzing the effect of the proposed
savings (many achieved through layoffs) on the economy of the
communities served.
Project proposes that the Commission require merger applicants
to include an assessment of the environmental and related economic
impacts of the planning and operational changes that are expected to
result from the merger. The required information would include
changes in dispatch, resource planning procedures, and resource
acquisition plans; changes in emissions of SO2, NOX,
CO2, and particulates; and changes in resources devoted to
research and development, DSM programs, and renewable technology
investments.
Many utility commenters want a faster merger consideration
process.49 Some claim that delays in processing merger
applications harm the public interest in various ways: utilities
lose the ability to respond to market forces quickly (thereby
retarding procompetitive restructuring efforts); benefits to
consumers are postponed; investors experience uncertainty (creating
problems in capital markets and the efficient flow of capital);
utility employees lose productivity as doubts linger about their
future roles; and the public loses confidence in the regulatory
process. Some commenters argue that we could act faster if we looked
at any one or two of the Commonwealth factors.50
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\49\ E.g., Texas Utilities, Southwestern PS, Sierra Pacific,
Southern Company, UtiliCorp, and EEI.
\50\ E.g., Southwestern, Southern, and PS Colorado.
---------------------------------------------------------------------------
Com Ed believes that in the coming competitive marketplace, it
will be important for the Commission not to allow the merger
approval process to become captive to intervenors, who allegedly are
often seeking merely to gain a competitive advantage through delay.
Noting that the DOJ and FTC initial review process can be completed
within 30 days, Com Ed and others question why the Commission's
review needs to take significantly longer.
Some commenters ask for faster merger consideration for certain
types of mergers,51 particularly for uncontested applications;
mergers between a utility and a non-utility firm; mergers between
affiliates; and mergers between small, non-dominant utilities. Haves
and Brehrenda also advocate expedited treatment for: a
disaggregation (an internal disaggregation within a holding company,
a spin-off to shareholders, and a disaggregation coupled with a
merger); a merger of a jurisdictional electric utility with a gas
utility; a combination of non-interconnected electric utilities; and
a merger of a jurisdictional utility with a company that is not an
electric utility, even if the latter owns a power marketer.
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\51\ UtiliCorp, PaineWebber, PanEnergy, Com Ed, Centerior,
Southern, APPA, NRECA.
---------------------------------------------------------------------------
Some utility commenters 52 recommend that we identify
specific time frames or themselves suggest time frames for the
Commission either to rule on the application or to request further
information. Florida and Montaup argue that we should not routinely
set all merger cases for hearing. The Commission should use
procedures that would allow intervenors to conduct voluntary
discovery before an application is set for full hearing and refer
the proceeding to an Administrative Law Judge (ALJ) for the limited
purpose of resolving discovery issues. Another suggestion is that we
streamline discovery and coordinate the activities of parties with
similar positions during the hearing and the briefing phases of
cases set for hearing by working the ALJ.53
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\52\ E.g., Sierra Pacific, UtiliCorp, MidAmerican, and PP&L.
\53\ PP&L.
---------------------------------------------------------------------------
On the other hand, some commenters argue that mergers that
create large utilities are being processed too quickly.54 They
say that intervenors do not have time to obtain information and
develop a case. Some of these commenters urge the Commission to
lengthen the time period for interventions in merger proceedings,
and to permit intervenors to conduct discovery during this period.
East Texas Coop also requests that the Commission not allow answers
to protests and not allow merger applicants to have a formal right
to ``the last word.''
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\54\ E.g., International Brotherhood, Joint Consumer Advoc.,
East Texas Coop, and Enviromental Action et al.
---------------------------------------------------------------------------
APPA and East Texas Coop both oppose the adoption of strict time
schedules for Commission action. Many commenters urge the Commission
not to approve a merger before it can assess adequately the effects
of increased concentration in the industry.
B. Safe Harbor Suggestions
DOJ and EGA urge the Commission to ``refine and sharpen'' the
focus of its merger review analysis so that mergers are processed
more efficiently, with desirable mergers receiving swift approval,
while undesirable mergers are set for hearing.
Other commenters 55 suggest that we use a two-stage process
allowing a merger passing a safe harbor test to be approved quickly.
EEI proposes detailed regulations covering pre-filing consultation,
initial filing requirements, a two-step review process based on an
initial market power screen (consisting of an initial filing and an
initial finding order), the hearing process, appeal, and interests
to be balanced by the proposed regulations.
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\55\ E.g., Texas Utilities, Southern, EGA, DOJ, CINergy, East
Texas Coop, and NRECA.
---------------------------------------------------------------------------
Commenters generally suggest that the first stage analysis be
simple, with basic filing requirements and, if the applicants pass
certain merger screens, approval would be automatic or quick,
perhaps with a paper hearing. Applications that do not pass the
merger screen would face additional, more detailed filing
requirements and a more in-depth second stage analysis, probably
with a trial-type hearing. Some would allow ample opportunity to
settle, however, and so avoid a lengthy hearing.
EEI urges that if a merger does not pass the initial merger
review screen, it should not be rejected; rather, this merely
indicates that the Commission needs to consider other evidence
regarding the merger's impact on the competitive market.
East Texas Coop's two-stage procedure has a slight variation:
the opportunity for an intervenor to show that a proposed merger
will result in the strategic control of
[[Page 68620]]
transmission assets, even if the merger application passes the
Commission's stage-one screens.
Some commenters 56 propose that if the safe harbor screens
are satisfied, the merger should be approved automatically, either
by the Commission's staff under delegated authority or under a
``limited review'' procedure. Under the ``limited review''
procedure, the case would be referred to an ALJ with a short time
schedule to render a decision, after which approval would be granted
by staff through delegated authority unless the ALJ or staff
determines that the issue should be considered by the Commission.
PanEnergy also argues that an unopposed merger should be approved by
delegated authority without a hearing.
---------------------------------------------------------------------------
\56\ E.g., Hawes and Behrends.
---------------------------------------------------------------------------
Various factors were suggested for setting the screens.
Commenters suggest that the Commission consider the merged company's
absolute size, its market share, its ownership or control of
transmission, its affiliation with suppliers of competing forms of
energy (such as natural gas), absolute market concentration, the
effect of the merger on market concentration, whether a small group
of firms could act in a collusive or coordinated manner, whether the
acquisition is by a new entrant, and the existence of barriers to
entry in the wholesale generation market in which the merged entity
would participate, among other factors.
A number of commenters 57 recommend that the Commission use
market concentration screens similar to those adopted by DOJ and
FTC. With regard to the HHI screen used in the Guidelines, DOJ uses
two HHI screens for a horizontal merger: (1) the increase in the HHI
caused by the merger, and (2) the post-merger HHI. The Guidelines
indicate that a merger falls within a safe harbor if the post-merger
HHI for the relevant market is no higher than 1,000 or the increase
in the HHI is no more than 50. (The HHI approaches 0 if there is a
large number of small competitors, and is 10,000 if there is just
one firm.) APPA would screen from full analysis any merger for which
the market's post-merger HHI is less than 1000.
---------------------------------------------------------------------------
\57\ E.g., Utilicorp.
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Other commenters 58 oppose a safe harbor or two-stage
screening process to expedite merger approval. Some argue that this
proposal would not give the Commission enough time to closely
scrutinize the effects of the merger on such important factors as
barriers to entry and short-term monopoly rates. PP&L argues that
the Commission should not use merger screens until it has more
experience with analyzing mergers in a more competitive electric
market.
---------------------------------------------------------------------------
\58\ E.g., PP&L, Joint Consumer Advoc.
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C. Coordination With Other Agencies
Many commenters say that the Commission should coordinate its
consideration with that of other state or federal agencies. The New
York Commission calls for improved coordination between the
Commission and the states in order to give the industry clear
regulatory guidance on the treatment of mergers during the
transition to competition. NARUC, CA Com, and IN Com suggest several
alternative coordination options. Commenters offered the following
specific proposals on how the Commission could coordinate better its
merger review with those of the states.
First, several commenters support having a ``scheduling
conference'' with the Commission and all state regulatory agencies.
NARUC suggests that, when the Commission receives a merger
application, we should convene a scheduling conference with
representatives of the relevant state commissions to coordinate the
schedules for the federal and state reviews of the merger
applications. Such an arrangement would permit each agency to
consider the merger proposal fully, while also providing state
regulators with the means of conveying their views to the
Commission. Sierra Pacific urges us to rely more frequently on joint
conferences with state regulators.59 Such an approach would
expedite the processing of mergers, limit unnecessary duplication of
procedures, and produce more uniform federal-state results.
---------------------------------------------------------------------------
\59\ Citing Subpart M of our Rules of Practice and Procedure
(sections 1301, et seq.)
---------------------------------------------------------------------------
Second, several commenters recommend that the Commission let
state regulatory commissions complete their review and then comment
in the Commission's proceeding.60 NARUC and others observe
61 that during the state proceeding, state regulators cannot
take a position in a Commission proceeding without prejudging the
outcome of the state proceeding. They ask that the Commission defer
its decision until after state proceedings have been concluded, or
that we give states a reasonable opportunity to conclude their
proceedings before they must file testimony here. Similarly, APPA
argues that the Commission should give deference under FPA section
201(b) to state determinations by adapting our procedures to allow
states to intervene after state review is completed. The Commission
could distinguish between two kinds of state intervenors: state
consumer advocates or executive branch representatives, who must
meet the same intervention requirements as do other parties; and
state commissions acting in parallel on the same merger application,
who would file later.
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\60\ E.g., NARUC, APPA, KS Com, Environmental Action, et al.
\61\ KS Com, Environmental Action, et al.
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Third, a number of commenters say that there should be some
joint federal-state vehicle to coordinate merger consideration with
state regulators, such a joint filing requirement, a joint record,
or a joint proceeding.62 Environmental Action et al. suggests
that a merger application should be filed as one document with the
Commission and relevant state regulatory commissions at the same
time. PP&L asks that we require any state applications to be filed
simultaneously with and attached to the Commission application.
NARUC suggests that a joint record be developed by the Commission
and the states. It also suggests that the Commission consider a
joint proceeding. However, PP&L opposes this, arguing that because
state commission issues and procedures might differ considerably
from those before the Commission, joint or concurrent hearings
probably would not save any resources and could complicate the
hearing process. Accordingly, PP&L argues that we should continue to
process mergers separately from the states.
---------------------------------------------------------------------------
\62\ NARUC and Sierra Pacific.
---------------------------------------------------------------------------
Fourth, some parties say that the Commission should defer to
state commissions on certain matters. Some argue for deference
regarding a merger's effect on retail costs and rates.63
PaineWebber argues that the responsibility for determining the
effects of a merger on retail customers is not subject to this
Commission's review. NARUC, however, says that both state and
federal regulatory agencies should evaluate a merger's effect on
rates, as well as on generation competition and on access to
transmission facilities. Similarly, some parties argue that the
Commission should generally defer to state commissions regarding the
impact of mergers on competition in retail markets.64
---------------------------------------------------------------------------
\63\ E.g., Southwestern.
\64\ Southern, NY Com, and OH Com.
---------------------------------------------------------------------------
Another suggestion is raised by the Ohio PUC, which proposes a
specific new process for federal-state coordination of merger
consideration. The purpose is to analyze market power in unbundled
electric service markets, with the Commission assessing the merger's
effect on transmission market power and the state commissions
assessing the merger's impact on generation and distribution market
power. The proposal contains five steps: (1) the applicants file
their applications simultaneously at both the federal and state
levels; (2) each state commission determines whether the merging
utility operating in the state has pre-merger market power (with the
several states sharing their data resources, methodologies, and
modeling capabilities, and possibly undertaking a joint review); (3)
the Commission analyzes the transmission systems affected by the
merger, relying on a Guideline-type analysis to assure that
transmission constraints do not create barriers to entry by
competing generators; (4) all regulators then collaborate to
determine if the merging entities will likely possess any regional
post-merger market power; and (5) the merger is either approved
outright, approved with conditions, or set for hearing by the
various regulators. Whether it is set for hearing would depend on
whether there is agreement among the state regulators that the
applicants will possess no local or regional generation market
power, and whether the Commission determines that no transmission
barriers to market entry can be identified.
DOJ urges the Commission to adopt the Guidelines so that there
will be consistency between DOJ and the Commission. As discussed
above, many others echo this view. PP&L urges the Commission
routinely to obtain the views of DOJ and the FTC about each merger
application. Further, PP&L suggests that the Commission could
require an evidentiary hearing if DOJ or the FTC suggests that a
hearing is necessary or opposes the merger. PP&L also proposes that
the Commission require the filing of the Premerger Notification
forms that merging
[[Page 68621]]
parties must file with the DOJ and the FTC under the Hart-Scott-
Rodino Antitrust Improvements Act.65 PP&L claims that the
information in these forms would be useful to the Commission in
evaluating mergers.
---------------------------------------------------------------------------
\65\ 15 U.S.C. Sec. 18a (Supp. 1996).
---------------------------------------------------------------------------
Several commenters argue that we should limit the scope of
merger proceedings to issues that are directly related to the merger
and not allow intervenors to raise extraneous issues or extract
concessions.66 Moreover, we should not use merger proceedings
as an alternative means of promoting or requiring the generic
restructuring of the electric industry.67
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\66\ E.g., Southwestern, Com Ed.
\67\ E.g., Southwestern, Southern.
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D. Remedies
No commenter says that a merger must be rejected if it fails
initially to satisfy the public interest test. Commenters recommend
certain courses of action to remedy the initial failure. These
include items such as: settlement; a merger condition closely
related to the difficulty (i.e., divestiture, releasing wholesale
customers); and voluntary mitigation measures.
Several commenters ask the Commission to monitor the effects of
a merger after it is approved either to verify claimed benefits or
to detect anticompetitive effects that escaped the analysis.68
We could grant relief from negative effects or impose new
conditions.69 APPA recommends that approval of a merger be
conditioned on a post hoc review of market performance, including
consideration of the effect on rates. EGA suggests that the
Commission should impose ``provisional'' or ``contingent''
conditions on a merger; that is, conditions that the merged
companies must comply with if certain future circumstances occur.
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\68\ E.g., APPA, Joint Consumers Advoc., NRECA.
\69\ E.g., APPA, EGA, NRECA.
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CINergy suggests post-merger analysis as an alternative to
extensive pre-merger analysis. It urges the Commission not to burden
merger applicants with a requirement to forecast potential merger
effects under various industry and state restructuring scenarios.
Such a requirement would paralyze the merger application process and
yield only speculative results. CINergy suggests that, if the
Commission does ask for such an extensive analysis, we should offer
merger applicants the alternative of filing a new market analysis
every three years for ten years after merger approval; as a
condition of merger approval, the applicants would agree that if the
Commission finds too much market power in a new market analysis,
they will implement any necessary mitigation measures, including
generation divestiture.
On the other hand, some commenters advise against post-merger
reviews and conditions.70 They argue that ongoing Commission
review or a suggestion that approval may be reversed would introduce
uncertainty in the market and prevent the proper pricing of a
merger.
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\70\ Among others, PaineWebber.
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Most commenters do not deny that the Commission has authority
under section 203 to impose conditions on its approval of a merger.
Rather, some commenters debate the scope of such conditions.71
Several say that the Commission has the authority to impose
conditions only if there is a detriment to the public interest, and
then only in ways related to the specific detrimental effects.
Florida and Montaup asserts that there is no authority to order
divestiture as a condition.
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\71\ For example, FTC, PS Colorado, Southwestern, and Southern.
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Project recognizes that NEPA does not expand our powers under
the FPA. However, it says that the Commission has ample authority
under the FPA, given its NEPA obligations, to condition its approval
of mergers to promote NEPA goals and policies.
Several commenters urge the Commission to impose a particular
condition on its approval of all or most mergers. Their principal
argument is that mergers generally have a negative effect on
competition. Recently, the Commission counterbalanced this effect by
requiring open transmission access, which enhanced competition. The
Commission should replace the open access condition with a new
condition that enhances competition to ensure that the merger is
procompetitive. TAPS, for example, supports this view.
Other commenters would impose a condition only to remedy a
specific problem. For example, EGA and DOJ argue that the Commission
should impose a procompetitive condition only to prevent harm to
competition. TDU Systems suggests that the Commission consider
mitigation of harm to competition only after it has assessed the
likely competitive consequences of an unconditioned merger on the
market structure. TDU Systems also believes that we should remedy
each likely anticompetitive effect of a merger, even in cases in
which the merger overall seems likely to have public benefits.
Enviromental Action et al. would approve mergers with
anticompetitive effects only if the Commission can impose conditions
that will mitigate the anticompetitive effects of the merger.
Some commenters distinguish imposing a condition on a merger
(for example, an open access tariff that must be filed for the
merger to be approved) from conditional approval of a merger (the
merger is approved for now but if it has a negative effect, the
approval can be revoked or made subject to a new condition). Several
commenters (e.g., NRECA, PP&L and RUS) caution the Commission to use
only sparingly its authority to approve mergers on a conditional
basis. While this ``reach-back'' authority may be appropriately used
in ``fast-track'' merger approvals, it should not be routinely
relied upon as a substitute for either the rejection or mitigation
of mergers that are likely to have significant anticompetitive
effects.
Centerior argues that conditioning authority should be used
sparingly and only in those situations where the Commission finds
that there is a high possibility of specific harm to competition.
Commenters offer several arguments against imposing a generic merger
condition or having a low threshold for imposing a condition.
Not all mergers are alike, so it is not appropriate to impose
the same condition on all merger approvals, according to
others.72 A condition should be related to the effects of a
specific merger.
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\72\ For example, Southern, DOJ, FTC, and Wisconsin PS.
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Southern argues that any generic merger conditions would go far
beyond the approach of the Guidelines, which are aimed merely at
preventing mergers that would ``create or enhance market power or
facilitate its exercise.'' Generic merger conditions are typically
designed to require merger applicants to establish positive merger
benefits, contrary to FPA and antitrust precedent. Some argue that
we should not use merger approval as a tool for achieving an
unrelated policy goal. They say that this would discourage
procompetitive mergers.73
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\73\ For example, Com Ed, Southwestern, DOJ, FTC, Paine Webber,
EEI, Wisconsin PS, and Florida and Montaup.
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Commenters proposed over a dozen specific conditions for merger
approval. Some conditions are proposed for all mergers and others to
remedy a problem with a specific merger. Most of the suggested
conditions are designed to mitigate market power or to ensure that
rates do not increase as a result of the merger. The proposals are
to require the merged company to:
(a) Form an ISO. Some urge the Commission to require merging
parties to form an ISO or to participate in a regional ISO,
resulting in single-system, regionwide, nonpancaked transmission
rates.74 For instance, the WI Com would require an ISO or
transmission divestiture where the merging companies own a major
transmission bottleneck. Otter Tail and Industrial Consumers view
the ISO as one possible way to mitigate market power.
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\74\ TAPS, Wisconsin Customers, WI Com, and APPA.
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(b) Divest generation or transmission assets. Some commenters
support generation divestiture as a remedy for an anticompetitive
merger. 75 The FTC believes that this remedy would remove the
anticompetitive effect of the merger without hampering its
procompetitive or efficiency-enhancing aspects. Wisconsin PS would
impose divestiture only if it would prevent the exercise of market
power. Project would require all merging companies to separate their
distribution assets and functions from the generation business
within a reasonable time, creating legally and functionally separate
entities to provide the different services.
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\75\ For example, FTC, PP&L, Wisconsin Customers, and Lubbock.
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Wisconsin Customers appear to advocate divestiture of
transmission from generation and distribution as a condition of all
merger approvals. It sees divestiture as preferable to an ISO
because the Commission would not have to perpetually construct rules
to avoid unfair use of the transmission system and then monitor
compliance.
Both Southern and Centerior oppose divestiture as a drastic
action that would probably kill efficient mergers or limit the
ability of the merged company to compete.
(c) Reform transmission pricing. Several commenters argue that
elimination of rate
[[Page 68622]]
pancaking should be a condition for all mergers.76
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\76\ For example, OK Com, NV Com, CCEM, and TDU Systems.
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APPA and TDU Systems urge the Commission to codify or apply as a
general condition its current requirement of single system
transmission pricing for all merged systems, unless the applicants
show a public interest basis for different treatment. TDU Systems
also suggests that all merging parties be prevented from reducing
the transmission capacity presently available for use by
transmission customers. Environmental Action et al. would prohibit
market pricing for power transactions among affiliates of merged
companies in regions lacking regional transmission pricing.
(d) Eliminate transmission constraints. Some commenters state
that transmission constraints should be addressed by conditioning
the approval of the merger on the applicants' building facilities to
alleviate the constraints or taking other measures to eliminate
local market power.77
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\77\ For example, Florida and Montaup and Wisconsin PS.
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Competitive Coalition and TDU Systems suggest that where two
constrained systems are merging, divestiture of transmission assets
should always be considered.
Southern Company cautions against becoming overly concerned with
remedying transmission constraints by imposing conditions or by
market definition, since other potential remedies or alternatives
exist.
(e) Have retail access. Competitive Coalition realizes that the
Commission's authority does not extend to ordering direct access at
the retail level, but suggests that the concerns over monopsony
would be eliminated if merging parties offered open-access
distribution. Industrial Consumers, supported by Otter Tail,
recommend that, where necessary to avoid anticompetitive effects, we
condition approval of mergers by adjacent suppliers on their
agreement to provide nondiscriminatory direct access or a finding
that a state's adoption of a direct access initiative avoids
anticompetitive concerns.
(f) Forego stranded cost recovery. Several commenters see a need
to require all merging parties to forego stranded cost recovery in
order to mitigate market power.78
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\78\ Industrial Consumers, Otter Tail, TAPS, and Wisconsin
Customers.
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(g) Reform contracts. Commenters argue that all merging
utilities should be required to offer an open season for all of
their wholesale requirements contracts and transmission contracts.
UtiliCorp argues that many utilities and wholesale customers remain
bound to requirements contracts that impede their ability to take
advantage of the benefits of the recent competitive influences in
the market.79
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\79\ For example, UtiliCorp, CCEM, Wisconsin Customers, and
Southwestern Electric.
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To achieve unrestricted wholesale competition, Competitive
Coalition calls for the complete unbundling of transmission services
to be required of all merger applicants, including the transmission
services contained in existing requirements contracts. It would also
extend the unbundling requirement to the transmission services
embodied in pooling or bilateral coordination and joint transmission
agreements to which merger applicants are parties.
(h) Eliminate affiliate advantage. APPA urges the Commission to
adopt standard conditions for utility mergers to govern affiliate
transactions.
(i) Monitor achievement of claimed benefits. Joint Consumer
Advoc. argues that there should be a mechanism to monitor whether
claimed benefits are actually achieved, but does not offer any
specific proposals.
(j) Freeze or reduce rates. Several commenters advocate
guaranteed cost reductions to be passed on to consumers or rate
freezes by the merger applicants.80 This would be a condition
to overcome the potentially anticompetitive effects of the merger
and to ensure that claimed benefits of the merger are received.
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\80\ Joint Consumer Advoc., Industrial Consumers, Otter Tail,
CINergy, Illinois Industrials, and Texas Industrials.
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Environmental Action et al. believes that a better approach than
rate freezes is to simply set rates appropriately.
Florida and Montaup argues that the Commission should not
require rate freezes as a condition of approving a merger or a
condition to avoiding a hearing on a rate freeze. WI Com discounts
the value of a four-year rate freeze if a utility will no longer
have restrictions on its pricing other than the market by the year
2000. It prefers a market structure that ensures that customers have
access to many suppliers, none of which will be able to exercise
significant market power over the long term.
CINergy, with support from OK Com, argues that rather than
debating claims of net benefits, the Commission should protect
customers by requiring all merging companies to commit not to
recover merger-related costs from ratepayers. Low-Income
Representatives would condition all mergers to: (1) continue
existing rates, payment programs, protections regarding customer
service, and shut-offs for low-income consumers; and (2) assure no
impact on attaining or maintaining universal service.
(k) Retain generation reserve sharing and other coordination
arrangements. TAPS and TDU Systems believe that the Commission
should consider imposing a requirement that all merged utilities
engage in joint planning and joint ownership of future facilities,
continue to offer basic reserve sharing and coordination services,
and continue to offer cost-based firm full requirements and partial
requirements service.
(l) Maintain reliability and the quality of service.
International Brotherhood would require every merger application to
contain a plan to maintain or improve reliability and the quality of
service.
(m) Eliminate economic impacts. International Brotherhood would
require every merger application to demonstrate a lack of adverse
economic impact on the economy of the communities served.
(n) Eliminate environmental impacts. Project would condition
mergers to mitigate significant adverse environmental impacts
identified in an environmental assessment. It would require
applicants to bring existing generation units up to standards
comparable to the environmental restrictions on their competitors,
in effect, to hold the environment harmless from merger-related
impacts.
[FR Doc. 96-32766 Filed 12-27-96; 8:45 am]
BILLING CODE 6717-01-P