[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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \47\ 77 FERC para. 61,026 at 61,107-08 (1996), reh'g pending.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \48\ See Appendix D, section III(A).
    \49\ Id.
---------------------------------------------------------------------------

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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \59\ Appendix B at Section IV.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \60\ East Texas Coop., EEI, PaineWebber, and Southern Company.
    \61\ Florida and Montaup.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \63\ CINergy, East Texas Coop, EEI, PaineWebber, and Southern.
    \64\ Florida and Montaup.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \66\ Appendix D, Section VI.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \69\ See Southern California Edison Company, 47 FERC para. 
61,196 (1989), order on reh'g, 49 FERC 61,091 (1989).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 804 (2).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1\ U.S. Department of Justice and Federal Trade Commission, 
Horizontal Merger Guidelines, 57 FR 41552 (1992).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \3\ DOJ Guidelines at 41558.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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 .
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \10\ Economic capacity and similar measures were recommended by 
the DOJ and FTC. See FTC comments at 10 and DOJ comments, Appendix 
at 8.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    \11\ For example, in a market with full retail access and a bid-
based power exchange, all generation units would be in the market.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \11\ E.g, Madison G&E and CINergy.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \19\ E.g., EEI, FTC, Industrial Consumers, and Centerior.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \21\ E.g., East Texas Coop and Wisconsin PSC.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \24\ E.g., Lubbock and Low-Income Representatives.
    \25\ E.g., Com Ed and CINergy.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \26\ E.g., FTC, East Texas Coop, and Industrial Consumers.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \29\ E.g., APPA, NRECA, Enviromental Action et al., Joint 
Consumer Advoc., and Colorado Municipals.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \30\ E.g., CINergy, TDU Systems, IN Com, DOJ, and Centerior.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \32\ E.g., NV Com, NRECA, Joint Consumer Advoc., and TX Com.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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
---------------------------------------------------------------------------

    \37\ Industrial Consumers, East Texas Coop, and RUS.
    \38\ Open Access Rule, 61 FR at 21662.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \60\ E.g., NARUC, APPA, KS Com, Environmental Action, et al.
    \61\ KS Com, Environmental Action, et al.
---------------------------------------------------------------------------

    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
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    \63\ E.g., Southwestern.
    \64\ Southern, NY Com, and OH Com.
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    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.
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    \65\ 15 U.S.C. Sec. 18a (Supp. 1996).
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    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